Rachel Carroll – VP, Corporate Communications
Charles Gassenheimer – Chairman and CEO
Jerry Herlihy – CFO
Cyrus Ashtiani – Chief Technology Officer, EnerDel
Ulrik Grape – EVP, Sales and Marketing
Jeff Seidel – VP, Corporate Strategy
Paul Clegg – Jefferies
Michael Lew – ThinkEquity
Raj Seth – Cowen & Co.
Louis Corrigan – Kingsford Capital
Ener1, Inc. (HEV) Q4 2008 Earnings Call Transcript March 12, 2009 5:00 PM ET
Good day, ladies and gentlemen, and welcome to Ener1 2008 fourth quarter and year-end results conference call. Today’s call is being recorded; if you have any objections, you may disconnect at this time. Your lines have been placed on a listen-only mode until the question and answer segment of today’s conference call. I would now like to turn the call over to Rachel Carroll, VP of Corporate Communications for Ener1, Inc.
Thank you. Good afternoon and welcome to the Ener1 management call to discuss fourth quarter and year end results for 2008.
There is an accompanying presentation to today’s call being streamlined from the Ener1 website at www.ener1.com. The slides and a replay of this call will be made available on the Ener1 website one hour from the conclusion of the call.
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 would like to introduce the speakers for today’s call in order of appearance. They will be
Charles Gassenheimer, Chairman and CEO of Ener1; Jerry Herlihy, Chief Financial Officer of Ener1; Cyrus Ashtiani, Chief Technology Officer of EnerDel, the lithium ion battery subsidiary of Ener1; Ulrik Grape, Executive Vice President for Sales and Marketing of Ener1, who is also the CEO of our Lithium ion battery subsidiary, EnerDel; and Jeff Seidel, VP of Corporate Strategy for Ener1. Naoki Ota, Chief Operating Officer for EnerDel, will also be available to answer any questions in the Q&A segment of the call. Summary biographies for each speaker may be found on slide three of the accompanying presentation.
I will now turn the call over to Charles Gassenheimer, Chairman and CEO of Ener1 for opening remarks.
Thanks, Rachel. 2008 was a great year for Ener1. We laid the foundation for rapid growth within the company and within an industry that is poised to take off. Our commitment to building shareholder value demonstrated the shareholders equity of 103 million which is an all-time high for Ener1 has increased from negative 80 million over the last three years since I have been with the company.
In terms of customer traction, since completing the Enertech acquisition, Ener1 and its subsidiaries now have the largest global installed base of manufacturing for energies – for the large format energy storage market. Our EV cells are our most mature product, which matches what our customers are looking for. Additionally, Ulrik will cover this in more detail, but we are now in vehicle testing programs for different car programs.
President Obama has obviously had a huge impact on this industry and he highlighted this in his address to Congress in February in which he said that he wants the plug in electric vehicle batteries to be made in the United States. Clearly EnerDel has and will continue to be very well positioned to help the current administration reach their goal and this is also leading to the acceleration of multiple strategic partnership discussions given Ener1's unique location of its plant here Indianapolis, Indiana.
What we will also try to achieve today is to improve the level of transparency on our business model so that the public markets can more appropriately value our long-term business prospects. We strongly believe that the long-term strategic value of our assets are worth considerably more than what the public market currently reflects.
With that, I would like to go through the agenda for today's call. We will give a fourth-quarter and year end financial review, we will give an update on EnerDel's technology roadmap, we will give current and future manufacturing capability roadmap. Ulrik will cover the business development including new customer developments. We will cover our federal funding opportunities, and then finally I will give an overview of our financial model and strategic goals for the company for 2009.
With that, I would like to turn the call over to Jerry Herlihy, Ener1’s Chief Financial Officer to cover the financial highlights of the call.
Thank you, Charles. We filed our form 10-K containing our audited financial statements this evening prior to the call. Please turn to slide six, which contains our highlight from our fourth-quarter and the year 2008 which I will summarize as follows.
Revenues for 2008 were $6.8 million compared to $280,000 in 2007. Our financial results now include the operations of Enertech International since the acquisition in October 2008. Revenues and gross profit at Enertech for the two months of November and December were $5 million and $1 million respectively.
Fourth-quarter 2008 revenues were $6.3 million for the consolidated operations. Cash at year end was $14 million. Ener1 Inc. has a $30 million loan facility with Ener1 Group to finance operations during 2009 of which $5 million has been drawn into Q1 2009. Our newly acquired subsidiary, Enertech, has additional adequate operational funding and also has access to loan facilities from a Korean bank in the amount of approximately $9 million for short term working capital. Cash used by operations was $24.5 million in 2008 compared to $26.7 million in 2007. Depreciation was $2 million for 2008.
Ener1 purchased $21.3 million of equipment during 2008, of which $7 million was financed through capital leases. Net loss per share was $0.42 in 2008 compared to $0.85 in 2007. Weighted shares outstanding were 103.3 million in 2008 compared to 72.9 million in the prior year. The current shares outstanding are 113.5 million. Shareholders equity now stands at 103 million compared to negative 7 million at the end of 2007. Our total assets now are $142 million compared to $31 million at the end of 2007.
Now, I will turn it back to Charles Gassenheimer.
Thanks, Jerry. Now I would like to turn it over to Cyrus Ashtiani, our Chief Technology Officer at EnerDel who is going to update you on our technology road map for EnerDel products. Cyrus?
Thanks, Charles. As a former chairman and a member of the USABC technical committee, I was often asked the question how do you differentiate various battery chemistries and battery technologies, and in particular what attracted me to the solution that EnerDel offers. And I have tried to sum it up on slide eight of the presentation.
EnerDel has the most mature large format lithium ion cell technology for both EV and the PHEV battery market. Based on transitional metals, it has got oxides of nickel, manganese and cobalt, and hard carbon. At 150 watt hour per kilogram of specific energy, and as high as four kilowatts per kilogram of specific power, it is one of the highest ratings in the market today, designed and developed based on stringent automotive manufacturing practices such Design FMEA, Design Validation Process and Reporting and similar.
While most of our competitors have placed their bets on one chemistry or another, EnerDel has the capability and manufacturing know-how for developing multiple chemistry products. On the anode side, we have developed hard carbon, graphite, and titanate anodes. On the cathode side, we have mixed metal oxides, manganes-spinel and iron phosphate. We have a strategic alliance with Argonne National Lab for materials research and development that allows us to push the boundaries of energy not just by getting more capacity per unit weight of the material, but also pushing into high voltage for cathodes and electrolytes.
And finally I would like to say a few words about our markets. The personal transportation sector, as everybody knows, is financially stressed. The commercial transportation sector, the buses, trucks, and delivery vans, they have ripened. The technology we’ve developed for Think city [ph] EV is also transferable to these heavy duty applications.
There is also a huge untapped potential in military applications and I am not talking about laser guns and similar but the fact that the price of the gasoline on the battlefield is several hundred times more than that available to us in the city, so there is the potential for hybridization of the military fleet is huge, and the US Department of Defense has recognized lithium ion battery as a key national security technology.
My final point is that there is also stationary power applications, both at homes and at the utility level where the requirement is far less stringent than those of the automotive. The emphasis on the renewable energies such as wind and solar has also placed a premium on storing energy at homes and at the utility level, and we could use exactly same kind of cells we developed for the EV market for those kind of applications.
And with that I would like to turn it over to Charles.
Thanks, Cyrus. Now, I would like to ask Ulrik to walk us through our current manufacturing capability as well as update us on the business development and customer side of things. Ulrik?
Thank you, Charles, and good afternoon everyone.
I would like to draw your attention immediately to slide number 10 and specifically the photo. The photo shows our newly installed coating mission in Indianapolis. I believe the photo does not do the machine a justice in terms of its size as it is over 40 meters long and this is the latest generation coater with the highest specification that we can have. It is now installed and operational in Indianapolis along with the other electrode manufacturing equipment. It represents cells coating capacity of over 300 million watt hours. We have the same 300 million watt hours electrode coating capacity at our plants in Korea at Enertech.
In addition, we have over the last few months installed cell assembly equipment and also a complete pack assembly line at EnerDel in Indiana. The pack assembly line can make both PV and PHEV packs. We can with the equipment that we have installed today fulfill our contractual obligations to Think under the PO we have without any additional capital expenditure.
If I take you to slide number 11, we have the most sophisticated plant and machinery for lithium iron battery manufacturing for automotive in the United States, where we can actually manufacture cells and complete battery pack solutions for EVs, PHEVs and HEV applications. With an additional capital expenditure on equipment of about $50 million in Indiana, we expect we can generate about $450 million of revenue on an annual basis. This represents about 30,000 EV packs or 300,000 HEV packs or some combination of the two.
In Korea, an additional $20 million to $30 million of capital expenditure on cell manufacturing equipment would represent an additional $250 million of annual revenue representing sales of about 15,000 EV packs or 150,000 HEV packs.
I would now like to take you to slide number 13 and give you some view into the business development process and traction we are experiencing in the market. Some initial prospects, so far we have about 90 customers covering both small as well as large OEMs and tier 1s that we have been interacting with. This is a combination of prospective customers that we go out ourselves and take and others that approach us directly as they have heard about our reputation. From there we have worked to determine their requirements and worked as a initial group, a prospect sponsor group of over three dozen active customers or prospective customers at this time.
Out of these we have answered over 30 requests for information or what we call RFIs or requests for quotes, RFQs. These range from brand OEMs to tier one suppliers to smaller outfits spanning from light to heavy duty vehicles and also in a few energy storage applications mixed in. 35 of these companies have done extensive technology reviews and visited our plants in Indianapolis and/or Korea. This has lead to 15 awards of active programs spanning development contracts with the USABC, the DOE, and DOD, and deliveries of prototype packs to automotive customers such as Think and a brand, a European brand automotive OEM, and a leading tier one.
Today we have our battery packs in several vehicles. We have delivered batteries to Think that in vehicles, we have just delivered two packs that are being installed in PHEV vehicles with a well-known European OEM and one EV pack in a vehicle with a multi-national tier one, all demonstrating that we are getting our batteries into vehicles, we are on the road testing, a crucial step forward.
On slide 14, we show you some of the main prospects that we are working. These are the top prospects that we are working with. We of course have the other two dozen that we at least are working with. These represents as you can see on the left hand column both PV, PHEV and HEV applications, and spans light as well as heavy duty applications and show the global interest in our technology and products.
About half of these present top 10 prospect each represents potential revenue opportunities in the hundreds of millions of dollars of production contract life, while others are attractive development contracts that have modest initial value but offer exciting future prospects.
As a final comment, from the business development side, I would just like to note that we are experiencing significantly higher level of customer activities than we even saw during the second half of last year which we already found increasingly hectic and busy, and all of this considering that we are in difficult economic times.
I will pass it now back to Charles. Thank you.
Thanks, Ulrik. Now, I would like to turn the call over to Jeff Seidel, Ener1’s VP of Corporate Strategy to give you an update on our government financing programs. Jeff?
Thanks, Charles. And for investors on the call, I am on slide 16 of the online presentation. Since the middle of 2008, there have been three government financing initiatives with direct and significant implications for the lithium ion battery manufacturing industry. The first program entitled to Federal Loan Guarantee was issued in July 2008 and offered to guarantee up to 10 billion in debt for projects employing energy efficiency, renewable energy and advanced transmission and distribution technologies that constitute new or significantly improved technology.
The interim final rule for the second program entitled the Advanced Technology Vehicle Manufacturing incentive program or ATVM was issued in November of 2008 with funding of 25 billion in direct loans to eligible participants for the cost of re-equipping, expanding and establishing facilities in the United States to produce advanced technology vehicles and components for such vehicles. The latest program targets a 2 billion grant program for an electric drive vehicle battery and component manufacturing initiative.
This program may be more familiar to some as the ABMI or Advanced Battery Manufacturing Initiative. To date we have only seen a notice of intent to issue a funding opportunity announcement but we are acutely aware of the program and we will look to benefit from grant funding in the near future.
If you move to the next slide, as of this call, Ener1 has applied for 480 million in ten-year financing under the ATVM program to finance current plant expansion and building additional campus for the first large-scale lithium ion cell manufacturing and pack assembly facility in the United States for automotive and stationary power applications.
As a result of the ATVM process, I would just like to give you some background on the program, as we know it. There were 75 initial application applicants under the ATVM program. The first applications were due December 31, 2008. Of the 75, 25 are deemed to be substantially complete. I'm happy to report that Ener1’s application was deemed substantially complete on January 22, 2009.
If you can move to the next slide, there is a significant review process under the ATVM program comprised of four major steps. Stage one entails the initial screening of the application and its intention to answer in the interim final rule. This is a substantially complete phase that we passed in January. Stage two involved additional due diligence on the part of the Department of Energy in terms of financial viability and technical viability. Ener1 is currently responding to DOE request as they pertain to this validation.
Stage three involves deeper due diligence and really assesses the merit of application. The question will be asked is the project strategic to warrant funding from DOE. And stage four moves the process towards conclusion with the negotiation of loan terms and submission to the Secretary of Energy for final approval and closing of the loan.
If we can move to the next slide, of the 480 million requested, we face our loan draw in three general phases. Our first draw will enable the purchase of production equipment to maximize our productive capacity at our existing Indianapolis location. It will also provide construction dollars to begin building an additional site location.
Shortly thereafter, we will draw funds to build 2 of the 4 primary manufacturing facilities at the new campus with production equipment to raise our US productive capacity to the equivalent of 1.56 billion watt hours or the equivalent of 60,000 EV packs per year. We estimate completion of this phase in 24 months to 36 months.
Our second draw complete the necessary buildings and equipment to create productive capacity of 2.34 billion watt hours and the final draw will collect funds for production equipment only and will increase capacity to the equivalent of 3.12 billion watt hours, thereby creating the largest lithium ion manufacturing facility in the United States.
Assuming we receive funding in 2009, we expect project completion in the 2015 timeframe. We like to phased approach to the financing and construction as it gives us and the federal government a good look at the development of the electric vehicles and the stationary power market. As demand increases at a faster rate, we would hope to accelerate the build and clearly we will maintain the flexibility to slow capacity if demand takes longer to develop.
If you can move to the last slide, this final slide is an artist rendering of the proposed new campus. You can see the four primary manufacturing plants from right to left, so coating, cell assembly, cell formation and the final building, the pack assembly and an outside ware house. Our buildings also include an engineering and R&D facility, safety and evaluation center, tool room and an energy management building. There are alternatives to this campus in terms of the existing plant in Indiana, which we will investigate as appropriate.
I will now return the presentation back to Charles.
Thanks, Jeff. If you turn to the slide entitled financial model, what we have tried to do here is to give you some insight into the depth and complicity of the financial model and why we feel that the hard work that Ener1 has already done. And what I mean by that is that we have established or built out the hard to be developed, to be able to now scale our business. I have often said that the demand is not the issue, but the ability to supply the battery is going to be the issue to stand up this industry in the United States.
On slide 22, what we’ve tried to show you is the required capital and resulting revenue of our U.S. based expansion. And as you can see, when you look at the annual revenue and the scale to get to $2 billion or $2.11 billion which is the green line in the third year development, we believe that by 2015, we could be at 2.11 billion, which only represents about 5% to 10% market share of the US market which we think is extremely conservative for EnerDel. Under President Obama, he has the plan to put over 1 million electric cars on the road by 2015. That is a $20 billion to $40 billion market for the battery, which we think is both doable and worthwhile.
I think a couple of important points to note on this slide, first of all, the funding to build out will be completely non-dilutive to equity shareholders. When you look at that and when you look at the availability of both the grant loan programs that Jeff mentioned, we think that that is an incredibly attractive proposition.
The second point is that I don't believe demand is an issue. It only takes one to two customers to fully scale up not only our current, but our doubled capacity footprint, and even to get to 2 billion in revenues, which I will address on our next slide, slide 23, really is not that much in terms of actual vehicle volume. When you look at getting, using $3 billion of – excuse me, when you look at using 3 billion watt hours on an annual basis, it is only 120,000 EV packs per year. Even on a reduced overall base of 9 million to 10 million units sold in the US annually on the passenger vehicle unit numbers, passenger fleet vehicle numbers, you're talking about a very small percentage of the actual overall market.
We also don't think that when you refer back to Ulrik’s presentation, you look at the robust customer framework; capacity has always been our biggest challenge. One positive example I would like to make is that our customer traction has tripled since completing the Enertech acquisition in Korea. Ener1 has been taken as a very, very serious and credible threat, competitive threat, in the market since completing that acquisition.
On slide 24, if you look at our fixed cost base and our turn to free cash flow breakeven, the number is about 130 million in revenues, that number has not changed. That equates to about 7600 packs per year in terms of actual production. Obviously, this slide depends on the price per pack and the size of the pack. We have modeled this slide off of the Think pack which is a 26 kilowatt hour pack, but we do expect the average pack in the United States to be substantially smaller than the 26 kilowatt hour, principally because the plug-in hybrid vehicle market will require a much smaller pack.
In terms of our 2009 milestones, I think one of the things that is pretty clear is that as we start to use and optimize our current plants and footprint, near term revenues will materialize dramatically in 2009. We often hear about contracts that have been announced in our space, and in fairness there has been only one material contract that has been announced in our space, and that is the LG Chemical win for the Chevy Volt program. It took LG three years to win that from start to finish in terms of validation and testing. And when I look at that Ener1 and EnerDel is in their lifecycle, really we’ve started in earnest to test and sample our products to customers in the beginning of 2007. So 2009 is nearly year three in the three year cycle that we believe will cause revenues to materialize in size and scale and you can see that the customer traction has really been dramatic of late.
In terms of other goals, establishing leadership early leadership in industry from significant volume order contracts is a substantial goal. We do expect to be able to give the market transparency and to specifically who we are working with and what cars we have been designed into. Some of these announcements could come in the next few months. Obviously, ultimately, when you look at our long-term business plans, we believe we will be able to show you visibility towards revenues of scale.
Finally, we plan to continue to explore strategic partnerships. As many of you know, we purchased Delphi’s 19.5% stake in EnerDel in August of 2008. This was a catalytic event that we believe could lead to additional strategic partnership conversations with either tier ones or automotive car suppliers or both. I am pleased to report that these conversations have heightened in terms of their sense of urgency on the part of our potential customers because of the large amount of government funds available and because of EnerDel's strategic locations of its U.S.-based manufacturing plants.
Finally, before I turned it over to question and answers, I would like to give our investors a quick update on the Think Global. As many of you know, Think has been unable to finalize their next round of capital and are currently operating in what they call debt consolidation process in the Norwegian courts, which is the equivalent of Chapter 11 here in the United States.
Think has made very good progress on their business plans in terms of cutting costs. The initial amount that they needed to raise to get to free cash flow positive was 80 million. I'm pleased to report that after a lot of hard work on the part of Think management and its creditors, they have lowered the amount needed to get to free cash flow positive to $42 million. I believe that we have some very positive momentum from our customer Think, but as you can see, Think success while we believe is opportunistic and exciting, is not essential to Ener1 continuing to build out its business plan.
With that Rachel, I would like to open it up to questions and answers. Itisha, if you can open up the lines for Q&A.
(Operator instructions) Your first question comes from the line of Paul Clegg with Jefferies. Please proceed.
Paul Clegg – Jefferies
Hi, guys. Thanks for taking my question, and thanks for the detail this quarter. On ATVM, you mentioned 2009 possibly being a first funding date, are you confident of that kind of timeframe for the program moving forward, or is it still a pretty wide-open question on timing?
Hi Paul. Thanks for your question. It’s Charles. I will give a general answer and if you need more specifics, Jeff will jump in. Generally, as I'm sure you are aware, the Obama administration and Secretary Chu have been under tremendous amount of pressure to get the money out the door. You have seen a tremendous amount of news on this, both in terms of the ABMI, which is the 2 billion stimulus money, and the $25 billion ATVM program that you're just asking about.
We believe that the grant money, the ABMI which is the $2 billion money that was allocated in the stimulus bill, we are now in a position where we believe that money could move as early as summer, maybe even June, July timeframe. So we believe that program could be accelerated much more dramatically.
As to the ATVM loan program, based on what we are hearing and seeing, we are also seeing a tremendous amount of acceleration in terms of wanting to get that money out the door. But because of the much more detailed review process that ATVM has in place, we are now expecting that money to move before the end of 2009, so call it fourth quarter of 2009. So only if the money moves faster than that that will be very exciting but right now those are the two things that we are looking at in terms of time tables for the grant money and then ultimately for loan money of which we both expect money to move in 2009.
Paul Clegg – Jefferies
Okay. How much would you request actually for ABMI?
Well, ABMI is a $2 billion grant program. It would be fair to say that this is a program – this is an extension of the USABC program. If you look at the USABC program, which as you know was a government grant program that was funded by DOE with management and technical assistance from GM, Ford and Chrysler, that program allocated grant money to four companies that are now in phase 2, LG Chemicals, A123, Johnson Controls–Saft and EnerDel.
If you look at the ABMI as an extension of that program and you drop LG Chemicals out because they are not U.S.-based, you really have three companies that are going to be vying for the $2 billion. Clearly there will be other interest groups and other fundings that become part of that, mainly because it is a political process, but I think it would be fair to say that those three companies are going to do quite well under the grant program given the success the DOE has had with the USABC program.
So perhaps as a guidance tool, if you take maybe half of the $2 billion and allocate that amongst the three companies in whatever way you see fit, I think that would be a very good guide to how I think that money would be allocated.
Paul Clegg – Jefferies
Okay. And maybe just a quick follow-up for Jerry actually, you disclosed in the press release some gross margin information on Enertech, basically about 20% for the two months reported, is that going to be pretty typical going forward until you start to transition some of that capacity?
Yes. That also had $400,000 of depreciation in that number, so on a cash basis, it is higher than that, and they did have a positive EBITDA number for the two months. But commercial batteries, small cells that they manufacture, their margins are 15% to 20%. They don't get to higher margins that we would expect in large format batteries.
Paul Clegg – Jefferies
Okay. But you mentioned the depreciation, you are not expecting you to change, the depreciation amount?
That was a two-month depreciation number that is in that cost of sales number is what I was trying to say.
Paul Clegg – Jefferies
I see. Got you. Okay, thank you.
All right, thanks.
Your next question comes from the line of Michael Lew with ThinkEquity. Please proceed.
Michael Lew – ThinkEquity
Hi. Thanks for taking my questions. Yes, Charles, in the – I guess in the press release you had highlighted eight initiatives that are being worked on, which are the ones we should expect to hear progress updates on in the near term? I guess in other words, which could turn into production contract in 2009?
Well – I mean, Michael, thanks for your question. I think what we have tried to do is give you as much guidance as we can. Obviously we would like nothing more than to be able to publicly announce all the programs we are in and et cetera. But again I don't feel responsible way to run a company to announce that we may win a contract and then of course lose it. And I think that would be sort of what we are trying to avoid here.
So without getting into too much detail, I think it would be fair to say that the programs we are most excited about are the recent EV conversion program that we are in the process of validating with a national postal service. As many of you know, some of the low hanging fruit here isn’t just going to be design wins into new vehicles, but it is going to be in retrofitting and converting vehicles.
The fleet vehicles we believe are the low hanging fruit. For example, President Obama has talked about taking the 1.8 million vehicles in the federal fleet and converting those over to plug in and electric vehicles by 2015 as one of the means to achieve his goal. That 1.8 million vehicles does not include the 300,000 vehicles that are in the U.S. Postal Service fleet as an example. I can tell you that the National Postal Service reconversion project we are working on is non-US.
That is also I think one of the other reasons why I think our business model has been so robust and why the customer traction has been picking up is because a meaningful amount of our customer traction is from Europe and Asia right now. And that market continues to be I think moving on a much more rapid pace than even here in the US. It is quite interesting because clearly the US market is the one that’s sowing the most amount of money in this, but that money is really to help the US catch-up.
So we expect the US market in terms of being in this catch-up mode to start to really take off in the 2011, 2012 timeframe, but some of the more immediate revenue programs that I already mentioned will be from the European and Asian car and Tier 1 suppliers.
Michael Lew – ThinkEquity
Okay. And also with regard to Think, Think Global, today Think Global announced that they announce plans to open a plant in the United States, could you – I know you talked about the financing but couldn't comment on that and also the implications to the $34 million purchase order in place?
Sure. Well I'm sure if you saw the press release, you saw what was quoted in it, so I hope I can talk about it. But I guess the long story short is that Think had a very complicated capital structure, and what the press release didn't go into is the details to simplify the capital structure. And one of the things we did was to buy out RockPort and Kleiner Perkins and moved them off the Think Global from an entity that was called Think North America.
So now all of a sudden Think owns 100% of Think North America which allows them to do things like apply for $350 million of federal loans under the ATVM program, which they plan to do by the end of this month, as well as to locate it on here in the US and speed up the location of that plant here in the US.
Clearly we are very, very excited about the potential to have Think here in the United States, especially in places like Michigan or Indiana, which would be very close to our domestic supply chain. Their ability to do that and their ability to stand up production and have vehicles produced even long before the Volt or other programs hit the road, we think is an attractive asset that the US government would take a lot of interest in.
Early as I said Michael it is a little bit early days, but we are starting to feel and see some of the momentum for Think that we think is very positive in terms of restructuring their business plan and making long-term viable.
As to the $34 million purchase order, or more appropriately the $70 million supplier agreement with the $34 million purchase order, there have been no changes to that as of now. Think continues to operate under the guise of Chapter 11 or what they call debt consolidation process in Norway. And the supply chain remains their critical and crucial issue in terms of making sure that they can keep their supply chain happy and active and ready to go because Think still expects to be back in volume production within the next two months to three months.
Michael Lew – ThinkEquity
Okay. Thank you.
Thanks for the questions.
(Operator instructions) Your next question comes from the line of Raj Seth with Cowen & Co. Please proceed.
Raj Seth – Cowen & Co.
Thank you very much. Charles or Ulrik, can you talk may be a little bit more about the in vehicle test programs that you mentioned in the script, who else is competing for that business, of is that even how these evaluations work, and is there any more you can say about the timing of what the milestones are? I mean when are you successful there, when do you think that happens, or by implication if you might get some announcement soon, does that mean that those come to conclusion in the near term?
Hi, Raj. Thanks. I am going to turn the question over to Ulrik as he has obviously been the point person on these negotiations.
Hi, Raj. Yes, I mean I think you of course know the situation there, and I think Charles has alluded to that one, but we are continuing to test and evaluate our batteries in Think vehicles. In terms of the other programs, those are going to go into some vehicles that are going to be operated and one of those would be also with a utility company. So I think there’s going to be a number of on the road in real life testing event. I think we will be monitoring and seeing how that progresses over the duration of this year.
And the other one is when the EV pack is going into to a MULE vehicle that is going to be tested internally with that tier one. And I think it is fair to say that in both cases we are in very close dialogue with them and monitoring this and having our engineers on the ground on a regular basis as well as myself interfacing with them on a regular basis. So it will be a lot of testing and evaluation ongoing throughout this year on those programs.
Raj Seth – Cowen & Co.
And are you in competition with others directly in these programs or maybe you can just comment on who generally you think of as your primary competition in some of the more advanced engagements that you have?
You know, in both of these, I would say of course there was – I'm assuming there was some competition. We did not see too much of it. They seem to be very single-minded in adopting and evaluating our technology in these vehicles. So in general I think the competitor list or colleagues in the industry remains the companies that we have spoken of before, Johnson Controls, and A123, LG, of course. These are some of the companies that we of course meet on a regular basis. Charles wants to add some more comments to the competitive situation.
Yes, Raj, if I may, obviously I can just add a little bit more color there. I think to be fair, one of the things that we are seeing and it is becoming quite clear is that the prismatic or as we call the flat stacked design of the cell is becoming the industry standard in automotive. So those who favor the cylindrical or round design cell format like the A123s and Johnson Controls-Safts of the world are having a very, very hard time competing at the highest levels.
There is no doubt that LG chemicals is a very real and very serious competitor as well as the Japanese firms that continue to invest huge dollars in standing up production. The other thing I would add to whatever I said and just buttress a little bit is keep in mind that one of the things that is part of this program, one of the things that, one of the reasons why these extensive testing programs and protocols we are going through, whether it be for a MULE vehicle or others, is that one of the things that we are doing in parallel as well as obviously in vehicle testing is strategic partnership discussions.
And as people get more and more comfortable with our technical capabilities and our global manufacturing footprint, strategic partnership conversations are a natural conversation, especially because so many of these strategic or JVs have been formed before people realized really what needed to happen, and now a lot of these guys realize, oh, we need to get into volume production and actually put a bunch of these cars on the road, and the firm we JV-ed with was the wrong firm for whatever reason.
And so there is a lot of noise but when you boil it down, what we are seeing is the separation of the wheat and the chaff were the haves and have-nots. Those who have the capabilities and the global manufacturing footprint are going to do extremely well in 2009 and you may see some big surprises here in 2009 from companies who thought they have the right answer and don't.
Raj Seth – Cowen & Co.
Thank you for that. One last one if I might, can you talk to us a little bit about Enertech, just the strategy there? Are you going to continue servicing the consumer market, whatever that looks like in Q1 and beyond and maybe you can comment on the trends there, or you just sort of shift that over and keep the capacity oriented towards the applications in autos and the other large format kind of applications you have talked about?
Okay, sure. I will take a stab at that. Well, as you know, Enertech has a 200,000 ft.² plant in Korea. I think it would be fair to say that our goals for Enertech this year would be to make sure that that plant runs either cash flow or neutral or cash flow positive. So we certainly don't want to do anything to affect this business in the near term because we have got a very, very cheap coal option on transition that facility over from the small format prismatic to the large format prismatic, i.e. from consumer products to automotive.
That being said, there is actually a very robust and nice group of customers there as well. It is a nice little business, double-digit growth and EBITDA margins. So I think we are sort of as we get to know Enertech a little bit better, which we have been doing over the last three months in terms of integration, there is actually some nice business in there, with some very, very healthy Fortune 500 customers.
So I think we will continue to evaluate it, Raj, to be fair. I think we have always said as you can see that this business really takes of in 2011 is the year where this thing goes really mainstream in terms of hundreds of millions of revenues. So we have a little bit of time too in terms of figuring out what to do. But clearly the plant is the crown jewel asset; we couldn’t be any happier with the fact that we bought a facility that has the top electrode manufacturing capability in the world today, and that really is the crucial asset that we did acquire, and the fact that we also got a very nice cash flow generating business out of it as well is I guess the cherry on top.
Raj Seth – Cowen & Co.
I mean I guess so do you think in this environment that you have a good shot of not having that drain and you can continue to operate it at breakeven or better?
Enertech this year will operate at cash flow breakeven or better.
Raj Seth – Cowen & Co.
Just to add to that, the EBITDA for the two months that we owned Enertech was $460,000 for two months.
Raj Seth – Cowen & Co.
Okay, thank you, Jerry.
Your next question comes from the line of Louis Corrigan with Kingsford Capital, please proceed.
Louis Corrigan – Kingsford Capital
Hi. I had a question about the government grants, on government loans. My understanding is that there is some language in the bill that essentially is looking at financial economic viability of the company and obviously in the current environment where all of the big three are struggling and all that, I would assume that the Obama administration will look at that with a bit of laxative [ph] but I wonder if you have gotten feedback from the DOE in terms of sort of do you surely qualify for that or what are the criteria they are going to be using?
Louis, it is Charles. I will take a shot at that. I think you may be – let’s provide you a little bit of color on that. One thing you need to be aware of is the financial viability as it is written within the loan program, ATVM, is not a traditional financial liability test.
We would imagine that it was written specifically because the auto manufacturers are in distress. And what it says specifically is within the project finance program, so i.e. within the – let’s say for us, within the ten years, is there a good chance that Ener1 can first of all spend the 480 million, use it in a way that generates cash flow sufficient that the net present value on the project itself is positive, meaning in year ten, if we take back 480 million, is the whole program positive? That is what they mean by financial viability.
Clearly it does not hurt Ener1's case that we have little to no debt, we have a strong equity market cap, and therefore Ener1 in itself is financially viable, and that certainly doesn't, that can only be a helpful patch pattern as they evaluate our application. But I just wanted to make sure you understood that distinction, because they don't look to the parent company.
For example even if General Motors were to file for Chapter 11, that would not, in any meaningful way, in our opinion based on our read of the ATVM application, affect their ability to get the DOE loan, as long as the project finance – the project that they plan to finance with this money had a positive net present value within the life of the loan. Jeff, I don’t know if you want to add anything to that?
No. I mean that is fine.
Okay. Louis, does that answer your question?
Louis Corrigan – Kingsford Capital
Yes. That is very helpful. Does the same criteria apply for the grant program?
So the grant program is obviously very difficult. To be fair, Louis, the solicitation has not yet dropped for the grant program, so I can only speculate as to what that is going to look like, but I can’t say with actual certainty of fact, because I don't know and no one knows at this point. We do expect to receive the solicitation within the next few days, and when we do, obviously we will study it with a fine tooth comb, and will be able to better answer that question.
But remember that the grant program is not alone; it is an actual cost share program, similar to the USABC. The USABC happened to be a 50-50 cost share where we put up $0.50 of every dollar and the government put up $0.50 of every dollar. We do expect the ABMI, the grant program to be a higher cost share on the part of the government. We don't know precisely what that final number is just yet. But obviously if it is in the $0.60 or $0.70 range for the government share.
So this would be less focused on financial viability and more focused on is there a real chance that these guys can stand up production. So it will be more of a technical review of whether we can stand up production. And as I mentioned earlier in the script part of the call, I think in advance participation – or excuse me, really EnerDel, EnerDel’s participation and success within the USABC program is a huge good housekeeping seal of approval in our opinion in terms of moving forward on the grant side. So I think that will help our case a lot.
Louis Corrigan – Kingsford Capital
Okay, great. Thank you.
Thanks for your questions. Operator, is there any more questions?
We have no further questions in queue.
Okay. Well, we're coming up on the top of the hour. I appreciate all of your ongoing interest in the Ener1 story. We are looking forward to a very exciting 2009. I know that stands in contrast to the challenges and difficulties of the overall market but we strongly believe in our mission. We strongly believe in the diversity and strength of our team, and most importantly we strongly believe we have the right assets at the right time.
Once again, thanks for your continued and ongoing support of Ener1 and we look forward to speaking to you on our first quarter earnings conference call, if not before.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.
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