Ener1, Inc. Q3 2009 Earnings Call Transcript

| About: Ener1 Inc (HEV)

Ener1, Inc. (NASDAQ:HEV)

Q3 2009 Earnings Call

November 9, 2009 5:00 pm ET


Rachel Carroll - Vice President of Corporate Communications

Charles Gassenheimer - Chairman & Chief Executive Officer

Gerard Herlihy - Chief Financial Officer

Cyrus Ashtiani – Chief Technology Officer

Bob Lawson - Vice President of North American Business Development

Richard L. Stanley - President of EnerDel

Jeffrey Seidel - Vice President of Corporate Strategy

Naoki Ota - Chief Operating Officer


Dan [Gowz] – Deutsche Bank

Michael Lew – Think Equity Partners

Steven Milunovich - Merrill Lynch

Dilip Warrier - Thomas Weisel Partners

Analyst for Raj Seth – Cowen and Company


Good day ladies and gentlemen and welcome to the Ener1 2009 third quarter conference call. Today's call is being recorded. If you have any objections you may disconnect at this time. Your line has 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 Incorporated.

Rachel Carroll

Thank you. Good afternoon and welcome to the Ener1 management call to discuss third quarter results for 2009. Participants on today's call will be Chairman and CEO of Ener1, Charles Gassenheimer; Chief Financial Officer, Gerard Herlihy; Chief Technology Officer, Cyrus Ashtiani; Vice President of North American Business Development, Bob Lawson; President of EnerDel, Rick Stanley; and Vice President of Corporate Strategy Jeff Seidel. Chief Operating Officer, Naoki Ota, will also be available in the question-and-answer section.

Management bios for all officers may be found in the accompanying presentation to this earnings call which can be downloaded from the Investor Relations portion of the Ener1 website as www.ener1.com.

Prior to the call, I'd 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, Chairman and CEO of Ener1 for opening remarks.

Charles Gassenheimer

Thanks, Rachel. Thank you for taking the time to join us today. We have a packed agenda for today's call with six speakers including two new senior members of our management team who I'll be introducing for the first time.

The primary focus of the quarter has been rapidly expanding our North American business development team who has been dealing with a substantial uptick in customer inquiries. As a data point, the 15 active programs we announced on our Q4 '08 earnings conference call has now more than doubled to 34 programs.

The other focus of the quarter has been preparation for the largest capital [inaudible] ramp in the company's history, precipitated by the award of $118.5 million in federal grants in August of 2009, which we believe will be supplemented by a further larger amount in federal loans that we anticipate announcing to the market before the end of the year.

I would like to hold the company presentation to approximately 30 minutes to leave time for questions and answers at the end of the call. Gerard Herlihy will now begin with a brief summary of the financial highlights for the quarter.

Gerard Herlihy

Thank you, Charles. Revenue for the 2009 third quarter was $8.1 million compared to $7.5 million in the second quarter of 2009 and $39,000 in the third quarter of 2008. Nine months sales were $23.8 million. EnerTech sales were $7.7 million in the third quarter compared to $6.8 million for the second quarter. Nine month sales at EnerTech were $22.4 million

Third quarter operating expenses were $13.2 million compared to $12.5 million in the second quarter of 2009 and compared to $8.7 million in the third quarter of 2008 as EnerTech operations were included for a full quarter in 2009.

Research and development expenses were $7.6 million and general and administrative expenses were $4.3 million in the third quarter of 2009. Basic loss per share was $0.14 in 2009 compared to $0.08 in 2008. Capital expenditures were $8.2 million which includes $4.2 million at EnerTech related to the planned expansion of sell production.

Under the open market sales program from May 26 through its conclusion Ener1 sold common stock of $40 million at an average price of $6.72 per share. Weighted average shares outstanding for the quarter were $117.2 million in 2009 compared to $106.4 million in 2008. Shares outstanding at September 30, 2009 were $121 million. Unrestricted cash at September 30 was $17.9 million and Ener1 total assets are $163 million and shareholders’ equity is $112 million.

I will now turn the call over to Cyrus Ashtiani.

Cyrus Ashtiani

Thanks, Gerard. As Chief Technology Officer for the company I would like to outline EnerDel's approach to technology development as well as highlight some of our more impressive recent industry endorsements.

Unlike some of our competitors who have technology that revolves around a single chemistry, we believe that one chemistry alone cannot effectively meet the requirements for the entire range of the applications spectrum. If you look at the market for lithium ion batteries you will find that the requirements vary from the powers to energy ration of 100 for HEVs and some defense applications on one end of the spectrum to about two to four for EVs and grid applications on the other.

EnerDel has, therefore, adopted a multichemistry approach developing mixed off site hard carbon for high energy applications, manganese off sides, hard carbon for mid range applications and titanium off side for high power applications.

Today EnerDel has one of the most mature PHEV/ EV products in the form of mixed off sides hard carbon chemistry with the highest energy density cell on the market at 150 watt hour per kilogram. This product maturity is owed in part to EnerDel's early supply agreement with Norwegian EV manufacturer Think for the Think City Vehicle in 2007 which saw EnerDel make a significant investment in tooling, manufacturing and preparing for stringent automotive quality standards long before the competition.

The relentless focus on the end market automotive applications means that EnerDel today has one of the most diverse sets of products available for the automotive manufacturers offering not just cells but all the successive larger building blocks, modules, sub packs to complete turnkey battery packs with electronics, controls and thermal management systems.

With our recent acquisition of a 31% in Think we are now extending the scope of our offerings to the entire electric power train, a capability none of our competitors can offer today. Our products and processes today are protected by a portfolio of 41 US and international patents and another 60 pending to be issued.

Argonne National Laboratory, the renowned national lab, elected EnerDel to co-develop lithium titanium oxide mixed manganese nickel high voltage cathodes and high voltage [electrolytes]. EnerDel has received over $15 million in R&D funds from US Department of Energy, US ABC and five contracts from US Department of Defense. Nissan has elected EnerDel as its sole outsource R&D partner, which is a great accreditation given their reputation in the field of electric drives.

I will now turn the call back over to Charles Gassenheimer.

Charles Gassenhaimer

Thanks, Cyrus. Breakthroughs in technology are only relevant whether impact can be replicated and produced on a mass scale in end market applications, i.e. outside the lab. Ener1 prized itself on being a total solutions company. In addition to its own R&D efforts it partners with leading national labs in the US to take the most advanced technologies of the day to the 20 yard line, then combines EnerDel's unique industry in manufacturing experience to produce a mass market product to take it all away into the end zone.

I have spent the last 12 months rounding out the considerable engineering and manufacturing talent of the company and am pleased to be able to introduce you today to Rick Stanley, EnerDel's new president. Rick has over 30 years of auto manufacturing experience and was the former president of Ramey International, a tier one automotive supplier and significant manufacturer of hybrid motors and other automotive electric components.

Together with Bob Lawson, who with 36 years of experience at the likes of Ramey MGM is another auto industry veteran that's joined the company. Ulrik Grape, the former CEO of EnerDel has been named president of Ener1 Europe, a new division we created in response to the demand we were experiencing in the European market. Ulrik unfortunately can't joint the call today as he is on his way to a supplier conference at [Gili] in China.

I will now turn the call over to Bob Lawson to give us an update on customer traction.

Bob Lawson

Thanks, Charles. I would like to begin by talking about EnerDel's customer portfolio strategy. Our EnerDel product developed for PHEV and EV applications is currently one of the most [ensured] in the market place today. EV and PHEV batteries are considerable larger that HEV batteries. This means the returns can also be proportional much more attractive. The up front development costs needed to produce an easy battery pack can yield nearly 10 times the revenue of an equivalent ATV battery.

Consultants AT Kearney predicts a 70 billion market for automotive lithium ion by 2020. They righty point out that ATVs will prevail over other types of vehicles. However, when you break out the data, they also go on to say that EV and PHEV battery sales will constitute roughly 87% of that $70 billion sales number in 2020.

To early entrants like Fisker and [Synch], EnerDel will be one of the first companies to commercialize our EV and PHEV product solutions. EnerDel’s strategy is to prove our technology through these early market entrants and performance programs and premium brands that are recognized for quality, safety, and design.

These initial programs will support our marketability with higher volume OEM contracts in the pipeline over the next three to five years. Page 7 of the slide illustrates how we see our customer portfolio transitioning from these early adopters to the more traditional brand OEMs between now and 2014.

Another key focus for the company given the recent turbulence in the automotive industry is ensuring that we create a balanced portfolio of high quality customers. Real products and manufacturing prowess give us excellent visibility into scaling production in the near term and ensure that we maximize the efficiency of our capacity build and business model.

With that in mind, I would like to refer to EnerDel’s announced customer list on Page 8 of the presentation. On Ener1’s fourth quarter earnings call in March, we announced six of the customers on the top ten focus list by year end. With the announcement of EnerDel developing batteries for the Humvee platform, we have now announced seven. These are real platforms with revenue visibility, some of which have taken two to three years to mature. While there are many other opportunities beyond this focus list of revenue potential from this top ten list alone we can also constitute over $1.4 billion in annual revenues by 2015. This model was reviewed with the US DOE as we applied for the ATVM funding.

Now transitioning to a customer by customer discussion, I will begin with Think, the Norwegian EV manufacturer which is a [markey] client for EnerDel in 2010. This is a tremendous near term opportunity with the electrification of fleet vehicles around the world. By this I mean postal services, taxicabs, refuse trucks, company cars, delivery trucks, etc. We identified two unique opportunities in Think. First, the road ready and price tested Think City vehicle, and second, the combination of the EnerDel battery and the Think City drive train which is probably the most mature electric drive turnkey solution that exists in the industry today.

While relatively unknown in the US, Think is a category killer with considerable brand equity in Europe. Think sold and delivered 230 electric cars mainly to large potential fleets this year. In addition, the Think City as a commercial product has a backlog of 2,350 orders with an additional 2300 [hand riser] requests.

There is tremendous upside potential for this product from potential fleet programs around the world. To help you model this, we have included some of the more advanced programs in Europe on Page 9 of the presentation.

The Think City drive train is one of the most sophisticated drive trains in the world with over 18 years of development. Couple this with the EnerDel battery and this package has received a lot of attention in the industry. In July we announced the sale of two such prototype units to Japan Post. This product has now undergone extensive testing in the field and I am happy to announce for the first time on this call that we have received an additional order for 10 new battery packs and drive trains.

Not only did we beat out domestic competition in Japan’s heartland but we were able to build momentum to market to other postal fleets around the world. With our work with Fisker on the Karma, we continue to use in a very positive direction with 10 additional orders for packs for program testing. We continue to work closely with the Fisker engineering team to produce a high performance world class product. We look forward to updating the market on the details of the pending supply agreement by year’s end.

Volvo is a very exciting relationship for the company given its industry reputation for safety, robustness, and quality of design. In July, EnerDel announced it had been selected for the V70 prototype program which is Volvo’s first PHEV to be commercialized in 2013.

In September, we announced we were selected to provide batteries for Volvo’s C-30 platform which is their first battery electric vehicle they have plans to market in 2012. I am pleased to announce for the first time on this call that Volvo has placed orders for an additional 11 packs for testing in a [C30BM]. We look forward to updating the market on both of these vehicle programs over the coming months.

Beyond light duty vehicles, EnerDel has also witnessed increased interest in markets such as heavy duty, military, grid storage, as well as automotive. EnerDel is the announced battery supplier for the ACTransit next generation hybrid fuel cell bus. This is the collaborative effort between Van Hool, the largest bus manufacturer in the world, United Technologies Corporation, and ACTransit.

In addition, EnerDel has four active and one completed contract with the US Department of Defense. We were pleased to announce to the market last Thursday that we were selected for the new Humvee platform as well. EnerDel will be providing four custom built power systems for the US Army that will be subjected to extreme performance simulations. We’re excited about this project and believe it will be a very high profile program with the United States government.

To give you a sense of how EnerDel’s near term revenues will be disbursed geographically, as well as by end market segment, I have included a chart on Page 10 of the presentation. We are encouraged by the productivity that we have seen in 2009. To put this into context, I have inserted a table on Page 11 of the presentation which gives a sense of the underlying traction.

On Ener1’s Q4 2008 earnings call, we stated we were in active discussions with 40 potential customers, RFQs with 31, and active programs, either production, pilot, or developmental, with 15. I can now confirm that we have had active discussions with over 200 potential customers, 75 RFQs, and 34 active programs.

To support this increased activity, we have moved to expand our testing capabilities and engineering support to multiple outside houses. We have also doubled our design capabilities within the past few weeks. It really is an exciting time.

As a public company, we need to balance how we release information on customer programs to the market while allowing you to build a model on which we have the highest degree of visibility.

On internal revenue projections, we anticipate EnerDel’s announced customer list will constitute 70% of its revenue stream in 2012. Of the remaining 30%, [inaudible] include 16% will be from fleet sales we’re currently negotiating and 10% from the larger OEM. [inaudible] we have been working with them for over 12 months.

Our DOE forecast in 2012 timeframe, our revenue is estimated to be between $600 million and $1 billion depending on customer traction. EnerDel has a high degree of visibility into the customer ramp over the short to medium term. That has defined how we plan our imminent capacity expansion.

For more about this, I’d like to turn the call over to EnerDel’s new President, Rick Stanley.

Richard L. Stanley

Thanks, Bob. I joined the team in mid-September and just the past few weeks have been meeting with EnerDel leadership and getting myself familiar with the technology and products. I’ve spent considerable time familiarizing myself with our manufacturing capabilities and ramp up plans. EnerDel pack manufacturing modular assembly capability is particularly impressive. It is an automotive grade assembly operation and it is ready to launch assembly of packs for Think.

[inaudible] specifically sized to meet customer demand for packs. As customer demand increases, we will add modules to pack assembly capacity to match demand. This approach will allow us to install pack manufacturing capacity wherever it makes sense and ultimately we will likely have cell manufacturing in only 3 or 4 locations globally but we could put pack assembly wherever it makes the most sense for the specific customer.

We will be scaling our cell manufacturing capabilities in Indiana over the next few months including launching proprietary processes that are highly automated. We believe these processes are new to the industry and should give EnerDel a significant advantage over our competitors. As we are ramping up our cell capacity, we will be using cells provided by our EnerTech operation in Korea.

I visited EnerTech to see their capabilities. EnerTech has many years of high volume lithium ion manufacturing experience. They are the third largest lithium ion manufacturer in Korea and they are now producing large format cells for EnerDel. Most of the cells we use in pack manufacturing will come from EnerTech until mid year 2010 when we will add significant cell volume from our Indiana operations.

The experienced EnerTech team will also help EnerDel launch its high volume electrode manufacturing operations. I could not have joined the business at a more exciting or challenging time but am encouraged by the people and processes in place which gives me confidence that we will have a robust launch and ramp up over the next few months.

I will now turn the call over to Jeff Seidel.

Jeffrey Seidel

Thanks, Rick. Progress on the advanced battery manufacturing initiative grant and the advanced technology vehicle manufacturing direct loan and has been steady during the quarter. Since the award of the grant, we have managed the ATVM and grant program through separate channels within the Department of Energy.

The National Energy Technology Laboratory based in West Virginia is administering our grant while the ATVM office located at DOE headquarters in Washington, DC is administering the loan application.

The announcement of the grant award created discussion within the Department of Energy surrounding the similarities between applications under the grant program and applications under the ATVM program. In essence, DOE questioned whether applicants who submitted proposals under each program should be awarded funds on a cumulative basis, the premise being that you can’t spend the money twice on the same capacity for advanced automotive battery manufacturing.

DOE was contemplating netting the entire grant proposal against the ATVM loan, effectively capping the capital commitment to the level requested in the loan application but at a higher cost of capital due to the substation of grant proceeds for loan proceeds and the higher equity contribution required by the grant.

We spent a fair amount of time negotiating this topic with DOE and ultimately agreed to build a business model for the ATVM loan that encompasses not only lithium ion batteries for automotive applications but also lithium ion batteries for grid storage, namely wind power storage, frequency regulation, and community electric storage or battery backup power for the home.

The idea presented is if you use grant proceeds to purchase capital equipment for the grid storage market and to use ATVM proceeds to purchase capital equipment for the [FCB] market.

Coordination between the grant and the loan [inaudible] for environmental compliance. Under the grant it was determined that our existing sites plus our proposed expansion site would receive an environmental analysis or EA. This can ordinarily be a lengthy process but the grant team has accelerated the assessment to a four week evaluation conducted by an external consultant to DOE which was completed last Friday.

Once the analysis is submitted to DOE, we believe there will be a 30 day public comment period. The good news is that the environmental work is expected to be applicable for both the grant and the ATVM loan. This will shorten the overall environmental approval process as we expect that it would be difficult to categorically exclude our proposed manufacturing expansion.

Current highlights include: we expect to receive EnerDel’s initial grant documents in the next few days. Our ATVM financial modeling scenarios have recently been submitted for final review by Ernst and Young and AT Kearney. A change to the loan structure on the ATVM will require amortization of principal and interest with a likely deferral on principal repayment for a period of time.

We have submitted an initial equipment list to the grant office that, once approved, will be eligible for reimbursement under the grant for approximately $30 million. We have negotiated what we believe is an attractive incentive package from the State of Indiana comprised of training assistance both at the Federal and State levels, [edge] credits which are incentives correlated to job creation, investment credits, real property tax abatement, recovery zone and [temp] revenue bonds, and road improvements.

We have finalized our financial models at this stage and expect to hear the results in terms of our financial viability in the next few weeks. Subsequently, we expect to move into final term sheet negotiations on the loan. We also believe that the scenarios put forward to DOE are ones in which EnerDel is financially viable and fully able to repay debt incurred under the ATVM program.

On a final note, we have applied for an investment tax credit for our proposed spending under the grant award under Section 48C. We expect to hear results of this application in December.

I will now turn the call back to Charles.

Charles Gassenheimer

Thanks, Jeff. This has been an incredibly busy nine months for everyone at the company and I would like to express my gratitude and thanks for the dedication and hard work from all of our 500 employees globally.

Those of you who know us well will be able to appreciate just how much we’ve achieved within that time frame. On receipt of the final grant paperwork in the next few days and the term sheet for the loan anticipated before year end, EnerDel will embark on a massive capacity ramp to produce batteries for its existing backlog and circle in the new carefully selected customer opportunities highlighted by Bob earlier in this call.

While I consider Ener1 to possess the finest, most hardworking mix of talent in the industry, I think what also sets us apart is our thoughtful, strategic approach to building a business.

This is a capital intensive business and we believe when we have one of the most capital efficient models in the industry. We’ve said this before, but for every $1 we spend, we believe that converts to $4 in annual revenue over time. To see how the anticipated CapEx rollout could trend over time, relative to revenue, depending on how quickly the industry scales, we’ve included a chart on Page 12 of the accompanying presentation.

On our current revenue trajectory, we predict we will be EBITDA positive by January 2011. The company will embark on a $600 million Cap Ex program over the next five years. We expect that approximately $400 million would come from the US Federal under the DOE loans and grant program. I can also announce to you today that we expect north of $50 million in state incentives from the State of Indiana. The balance will be in equity and internally generated cash flow.

I would now like to open up the call to questions and answers.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Dan [Gowz] – Deutsche Bank.

Dan [Gowz] – Deutsche Bank

I just wanted to ask a little bit about capacity. First of all, the plan to produce cells in Korea through mid 2010 or if you could talk a little bit about why that decision was made not to make them in the US and secondly I wanted to know kind of what would be the initial type of capacity you would be looking to build out to in terms of maybe what’s a minimum level of capacity you can put into a new plant in front of demand?

Charles Gassenheimer - Chairman & Chief Executive Officer

I’ll start with the first question. As Rick and others have come on board and we’ve reviewed our capital efficiency, I think one of the things that became crystal clear to us is that greenlighting production in the US prior to filling up our plant in Korea did make a lot of business sense.

So what we’re planning to do is given the high quality nature of the cells we’re producing in Korea, and again I think we’ve said this before, but I’ll just say it again. It’s pretty clear to me and perhaps to the market at this point that the highest quality large format prismatic lithium ion cells in the world today are being produced in Korea. And obviously with the success we’ve had with our cell production there and I’m guessing that LG would make similar comments and clearly GM's choice of LG for the volt is sort of buttressing that idea. But I think it's pretty clear that we're just getting a very good quality and very good productivity out of our Korean operation. So I think that's the first answer.

I think the second answer to that is, again, that we're seeing demand for this product in Europe and Asia well in advance of what we're seeing from the US markets. And while we are optimistic about the US markets and, in fact, as Bob was allluding to in his part of the presentation, a lot of the recent customer traction has come from large OEs here in the US. So we're starting to see a real traction from the US. But the reality is that we want to time the market in terms of sell production by a geographic region to our customer ramp. So I think those are some of the answers. Hopefully that gives you some specificity around that.

In terms of your second question, in terms of initial capacity, I think we are planning to build for the Think program out of Korea. And we've given you some unit volume estimates of the launch of Think. I am pleased to report that Think will be starting volume production here in the month of November. In fact, within the next two weeks they're going to restart production. So I'm pretty excited about that.

But as you look to the US customer base, I think our first volume customer for US production will be Fisker and so w are looking forward to ramping production here in the first and second quarters on a pilot basis and then going into full volume production by mid 2010 which matches their build plan for the Karma. So that's some sort of linkage to our actual linking our production plan to our business development plan. And I think that's what we've tried to do here over the last couple of months.

Dan [Gowz] – Deutsche Bank

Sounds good. One last one, and it sounds like there is a lot of quoting activity going on at this point. Can you talk a little bit about what time frame those programs are for? I mean, what kind of percentage do you think of 2011, 2012 type of activity production is already awarded and in terms of the quoting activity right now, what time frame do you see that being for?

Charles Gassenheimer

Sure, Dan. So I'm going to have Bob Lawson address that question.

Bob Lawson

Yes, the nature of the industry is that the larger OEMs, what I'll call traditionally the brand OEMs, their product life cycle is normally three to four years. And we are getting inquiries from those types of customers. But we're also getting inquiries from more the early adopters. But their timeframe can be anywhere between 12 and 24 months. So I think while there's a blend of opportunities here you'll really see, depending on how aggressive the individual OEM is, you see that timeframe being compressed a little bit.

Now we're not booking on those orders as we have in our plans today. However, we certainly have place holders as those development projects mature for the awards of those businesses in the future.

Charles Gassenheimer

I would just sort of make a color comment there to book offset. One of the things that's interested, Dan, is in one particular program with Volvo we thought we were quoting on a C30 program and that it was going to be a startup production for 2012. And one of the interesting things is that given the additional packs that they're recently ordered and given the volume that we're now discussing with them, that program could very easily be pulled forward by 12 months which is - the final decisions haven't been made yet and so I don't want to speak too far out of field but I think just to give you some color is that it's interesting that we're seeing actually a pull forward in these programs, not a delay.


Your next question comes from the line of Michael Lew - Think Equity Partners.

Michael Lew - Think Equity Partners

Can you tell also characterize the incremental increase? I mean, you mentioned it mostly in the US the PHEV or more EV related. And also the types of batteries, are they power or energy sales?

Charles Gassenheimer

Michael, I'm sorry, we were having a little bit of a difficulty hearing you. Can you just repeat the question?

Michael Lew - Think Equity Partners

Yes. Let me try my handset here. Is this better?

Charles Gassenheimer

Much better, thank you.

Michael Lew - Think Equity Partners

Thanks. Now, you'd mentioned the incremental increase in inquiries are mostly coming out of the US. Can you probably characterize it a little more? Is it more PHEV or EV related? And also what are the types of batteries? What kind of demand? Is it more for energy cells or power cells?

Charles Gassenheimer

Yes, I wouldn't say it's sort of not mainly coming out of the US. I think what I was saying there was that we are seeing finally an uptick in the US demand. So let me clarify that. It's mainly coming from Europe and Asia. And we're finally starting to see some real traction from US OEs. Just to give you a flavor, I think the next five or six announcements we're going to make are all on the PHEV, EV side. So I think [inaudible] about pure energy density and we are just seeing a raw uptick in energy density demand that makes ours and probably our competitors' capacity pale in terms of the real demand that we're seeing where if all of these programs go the way we think scale is going to be a serious issue because, of course, on the energy density side sale capacity gets used up pretty quickly.

On the HEV side we are still seeing some demand but what's more interesting is that what we're seeing is that on the customer traction side most auto manufacturers are jumping straight to PHEV, EV and really jumping over HEV. And so we're pretty excited about that. And, of course, we'll continue to update you on the programs we've been working on, many of which we already have actually packed working in vehicles today. So that's pretty exciting.

The other thing I would say just to your point is that on the grid storage side, and we alluded to this in the press release. But we have launched officially now our grid storage business unit. And I think we're starting to see some real in demand there on the energy density side and I think we're going to have our first announcement here on the grid storage side within the next month and I think you're going to see that it's going to be a pretty robust program. So I think we're really seeing a lot of demand of the energy density side that sort of plays to our strength.

Michael Lew - Think Equity Partners

And on that front, on the grid storage side, do you expect that opportunity to contribute meaningful revenues in 2010?

Charles Gassenheimer

I would say if I could sort of wax philosophical briefly, and I'm not very good at that, as you know, but my sense is that the grid storage business is where automotive was in 2006, so a lot of excitement, a lot of people talking about it within the industry and a huge potential addressable market but still very early in terms of commercial.

So my sense is that what we're going to end up with there is we're going to do a lot of trial programs. There's going to be a lot of announcements with potential power and utility companies and other strategy partners in this space. But I would not anticipate in 2010 a huge commercial adoption. I think that's probably a bit early.

Michael Lew - Think Equity Partners

Okay, and one last question. As discussed before, Ener1 does have iron phosphate production capability In Korea through EnerTech? Based on these new opportunities you've mentioned in Asia that you've seen that are in front of you now, is this the chemistry material that you could start EnerTech and start producing in the near term?

Charles Gassenheimer

Yes, I mean, iron phosphate, what I'm going to do is I’m going to ask Naoki to address the issues of iron phosphate.

Naoki Ota

Yes, hi, Michael. As you know, we have [any] production capability in the Korea of the ion phosphate as [inaudible] do. We have a tremendous amount of the data. But for the production you have to be careful in the [inaudible] [of stuff] and we need to develop some more positive data. So we are not really pushing the product, the very near term at this moment. But in EnerTech we are ready to push the product but it really depends on the market situation. You know that.

Charles Gassenheimer

Maybe, Cyrus, if you want to add, I know you had some comments on that earlier. But if you want to add to that, please feel free.

Cyrus Ashtiani

Yes, just one clarifying comment and that is ion phosphate, by the nature of it is a lower energy type of chemistry. And most applications we are seeing in the market today tends to be on the higher energy side. So they're basically at a disadvantage. However, if there is a large application need for HEVs, then that possibility in my opinion exists for us to consider that.

Michael Lew - Think Equity Partners

All right, so basically you're ready to go if there is enough demand for ion phosphate.

Cyrus Ashtiani

That's definitely my take on it, yes.

Charles Gassenheimer

What you're hearing from all of us unanimously is, yes. But what you're also hearing is that given the propensity for energy density application, I think what you're hearing, Michael, is that we don't believe ion phosphate has the energy density required for basically all of the energy and the application that we're looking at.


Your next question comes from the line of Steve Milunovich - Merrill Lynch.

Steve Milunovich - Merrill Lynch

A couple of questions, first of all, on your customer update slide you've got those two EV deals that you're working on, one North America, one Europe and then you alluded to a 10% of revenue coming from a larger OEM to be announced. I assume it's one of those and more likely the European one. But, Charles, in general, do you want to give us any update on the probability there?

Charles Gassenheimer

Sure. I think in terms of the rhythm and the numbers you're right. I think what we're seeing is that Europe and Asia are being substantially more aggressive in terms of unit volumes. And so the EV programs, in fact, we're working on 304 EV programs in Europe with large OEs in Europe, all of which are substantially high volume programs.

We're also working on 304 major EV programs or call it EV, PHEV programs in Asia. So I don't think there's any doubt that when we look at the overall big picture that we continue to believe that the early revenues on our business plan are going to be coming from non-US.

Steve Milunovich - Merrill Lynch

Okay, and you mentioned involvement in 34 programs. Could you split out those 34 among development, pilot and production?

Charles Gassenheimer

Sure. I don't know that we have that. Do we have that data at our fingertips or is that something we can come back to Steve with?

Gerard Herlihy

It's certainly something we can come back with.

Charles Gassenheimer

Yes. We don't have that at our fingertips today, Steve, but we can certainly make that available and make that available publicly.

Steve Milunovich - Merrill Lynch

Okay. You've always talked about the fact that you think supply rather than demand is going to be the issue. But I saw that compact power was talking last week about a concern that there is in fact going to be excess supply particularly in the next couple years given all the plants that are coming on in the US and their sense that things may develop fairly gradually. Are you still as confident as ever that that's not going to be the case?

Charles Gassenheimer

I am. I did see LG and Compacts Power's information. I think it's pretty interesting because when you look at the end market data that we're seeing, again, any one of our top 10 customers could bust our capacity model almost instantaneously if their programs go into ultra high volume. In automotive that's sort of 30,000 to 50,000 units a year whereas we're still talking about sort of 1,000 to 10,000 units a year with most of the OEs we've been talking to.

So when you combine that with the demand for the grid and you start to look at that from a bottoms up perspective, not from a top down perspective, just in terms of overall market share, I mean, I think the biggest challenge for all of us is going to be timing the capacity build for the revenue ramp and getting the next two to three years right because I think the next five to 10 years, the picture is pretty clear.

And so I think our struggle across all of this is going to be focused on staying excited about the industry but making sure that the next two to three years are managed correctly so that there's not an over under-build and we try to sort of time it precisely to the market which it's going to be choppy. There's no doubt.

Coming back to your early question, I think we did have a slide on Page 10 that does break out the programs that you're asking and I think that data's available on Page 10 for the 2010 revenue by region and by category. And you can see that 87% of the programs are production programs, 7.3% are development programs and 5.7% are military. So hopefully that answers both of your questions.

Steve Milunovich - Merrill Lynch

So that 87%, those are signed contracts today?

Charles Gassenheimer

That is correct.

Steve Milunovich - Merrill Lynch

Okay, that's great. Now you guys talked about the fact you're seeing much more demand in the marketplace for high energy applications. I'm just wondering if that's kind of a self selection issue because people kind of think of you as being particularly strong at that as opposed to some competitors who might be stronger on the HEV side. So do you really think it's the fact that that's where the demand is going to be because I think a lot of people think initially it's more going to be HEV or do you think it's more the kinds of people who would come to you for that?

Charles Gassenheimer

Well, I mean, again, the reality is, I think, that it's interesting because there's not that many people to turn to. So I think everybody's probably seeing everything, right. And I mean, probably the top five or six guys are probably seeing all the deals and then they're probably figuring out which ones that suit them. But we are definitely seeing a lot of the deals and obviously my sense is that EnerDel is certainly best suited for energy density applications. But we do have a bunch of HEV contracts going on, including the [Alameda Costic County] bus program as an example.

So my sense is that it's about focus and one of the things that I think is an interesting point to note is that when you look at the efficiency of our business plan and you look at the ATVM loan proceeds and you look at how those are going to be allocated, those are going to be allocated purely on business plans versus the grant that was obviously allocated on other metrics. And when you go and you due diligence on our business plan, I think the DOE is getting to a high loan amount because they are pretty confident in our business plan.

I think one of the reasons for that is because when you look at energy density the unit volumes need to be 10 times less to get to the same revenue line as what would be an ATV program. So with that 10X less you can start to really buy in to the unit volumes in a lot more credible way on the PHEV, EV side than you have to get to on the HEV side in terms of total market penetration. That would be my comment there and I hope that would give you some ideas to the confidence in our unit volumes and numbers.

Steve Milunovich - Merrill Lynch

No, absolutely. And the final question on the loan, there was a lot of information back and forth there. At the end of the day do you expect to get as much money as you need under the terms that you were initially thinking you would get them?

Charles Gassenheimer

Well, I guess that there is no simple answer with the US Department of Energy to try and dummy down the answer into a yes or no question. The answer is yes. But that being said, there has been a tremendous amount of back and forth and confusion on the loans versus the grants. I think the good news here is what you heard from Jeff is that we've worked our way through all of that and we're now at a very satisfactory resolution. In fact, we're really pleased with where we're shaking out on this.

Obviously I think we are very much on track to get this done ASAP. My sense is that what DOE is trying to do is print both of the battery loans together. So my sense is that [A1P3] and EnerDel's loans will be issued at the same time. And my sense is that with where we are including the Indiana government incentive we may actually have found a way to be higher than where we thought we would be in terms of total government incentives. So our equity needs might be lower than what we were expecting.


Your next question comes from the line of Dilip Warrier - Thomas Weisel Partners.

Dilip Warrier - Thomas Weisel Partners

My question was on Fisker. Have you guys actually delivered I guess the T-shaped battery that I guess was a requirement for Fisker? And then the question was what is the timing of the follow-on orders for 10 packs?

Charles Gassenheimer

Sure. Sorry, to clarify the second part of your question, the follow-on order for 10 packs for whom? For Volvo?

Dilip Warrier - Thomas Weisel Partners

Actually, for Fisker, but while you're at it, Volvo too.

Charles Gassenheimer

I opened myself up for that. I'm going to turn that question over to Bob Lawson on the Fisker side.

Bob Lawson

Yes, on the purchase order for the development packs that we have agreement on with our current financial situation they're releasing those purchase orders at one pack at a time to us. And with that, we continue to produce those and ship those to them as the demand warrants. So, yes, we're in a situation where we are shipping product to them and but that's kind of the status as we know it today.

Dilip Warrier - Thomas Weisel Partners


Charles Gassenheimer

I would just add that I think, look, it's been a difficult year for the entire auto industry. I don't think there is any doubt about that. But I would just add that with the $526 million that Fisker's been awarded for the ATVM loan office that they've sold most of their equity problems. And I think this program is about to go on a really fast track. So we visited them recently and we're getting increasingly encouraged that that program is going to be on a very fast track and we're very complimentary of those guys for working through a tough time.

As I'm sure you're aware, we now know pretty much what not to do with an electric vehicle car company and it looks like Fisker’s very much on the right track so we’re encouraged. On Volvo I think again, the PPO has dropped for the next 10 packs and as I mentioned earlier on the call, without sort of getting too far ahead of myself, it does look like that program could be pulled forward in terms of startup volume productions. So we’re certainly encouraged there.

Dilip Warrier - Thomas Weisel Partners

You talked about the grid storage business here and I was wondering if you could at all talk about the economics on this side of the business versus the automotive side?

Charles Gassenheimer

What I might say there is that from both a gross margin and EBITDA margin perspective, even from a potential revenue perspective, it does appear that the revenue and cash flow potential on the grid side is actually more robust in automotive so what we’re seeing there is better unit volumes and unit pricing. Clearly, as I said earlier, we’re not seeing enough demand there yet to get overly excited and to start sort of walking away from automotive contracts and signing up grid contracts. But obviously as any portfolio manager would, we’re going to be incredibly sensitive to that and make sure that if that means we’ve got to start allocating more of our capacity in the grid to get the best sort of cash flow generation out of our production plant, we will. But I think it’s way too early to make that call but it’s something we’re watching and I do believe that we are going to see healthier and more robust margins.

One of the things that’s interesting there just in terms of when you think about life cycle management into the battery, I was recently in Japan for the Tokyo Auto Show and was with Carlos [Goan] and [Mike Yamashta] when they announced the partnership with [Pseudo Tomo] Corporation for a secondary use application for the energy density batteries, and that’s Nissan of course, and I think that’s pretty interesting because we’ve been working on a similar theme with [Etochu] and I think you’re going to see margins improve over time in automotive as there starts to be a higher bid for secondary use applications for the battery because the consumer in automotive has to bear less of the brunt of the cost up front. So I think you’re going to see a trend where batteries become more valuable over time as people understand the full life cycle value of them.

That’s obviously a bold statement but it is one that I truly believe in because I think you’re going to start to see demand for grid applications improve the residual value of the EV batteries.

Dilip Warrier - Thomas Weisel Partners

Then one last question. EnerTech gross margin I think went to a negative this time and I was wondering what the reason was an what it’s likely to be in the next quarter.

Gerard Herlihy

They’re making cells for EnerDel at the present time and those are eliminated in consolidation until they’re put into packs, that’s part of it. The other part is that the non-automotive business particularly the electrode business in Korea, was down. But the good news is that the US part of the sale actually held up pretty well and Motorola started seeing a comeback in August and September after having a pretty rough July. So as you know, we purchased EnerTech primarily to eventually make cells for the US operations but we found that some of their existing business, particularly the US cell sales for the flat batteries and for the scanners and the two way radios was pretty good business so we’re continuing to maintain that business while we’re gearing up for the EnerDel sales.

Charles Gassenheimer

Just an additional color comment. I think obviously second quarter was a difficult quarter for consumers globally and you did see a sequential increase in revenues quarter-over-quarter, third quarter over second quarter in Korea and we do expect as we predicted from the beginning of the year for that business to be EBITDA neutral which is good news and that’s exactly where managing that business during a downturn I think pretty well and it won’t require a significant amount or it won’t require any operating cash flow. W hat it may require is some Cap Ex that we may be doing to continue to upgrade the cell capacity there in advance of scaling up for large volume manufacturing for automotive so we’re actually reasonably encouraged with the way that business has held up during the downturn.


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

Analyst for Raj Seth – Cowen and Company

This is [inaudible] in for Raj. I had a couple of questions. Firstly in terms of your capacity expansion target for 2015, could you remind us of what this would translate into capacity for EV or PHEV packs, and secondly, I know you touched upon this earlier, the fact that one big order from one of your customers could potentially put some pressure on the capacity that you have. How are you sort of prioritizing the projects that you had, just any color on kind of your strategy in that area would help.

Charles Gassenheimer

I’m going to have Jeff Seidel answer the capacity question while I prepare the answer to your second question.

Jeffrey Seidel

In terms of installed capacity by 2015, we would have fully implemented the ATVM loan at that point in time and we would anticipate capacity in the neighborhood of $80,000 electric vehicles at 2600 kilowatt hours per vehicle which you can turn into a megawatt hour of capacity.

That would not include grid storage capacity at that point. That would be additional capacity that would be available as financed by the grant.

Charles Gassenheimer

On your second question, I think if I can refer you to page 7 of the slide show that we also uploaded to our website, what we show you there is sort of what I would call in portfolio management a more balanced portfolio over time and how we get there, so if you look at the blue line on the chart, tit shows you the early entrance and that would be someone like a Think or Fisker and the red line would be the brand OEs and so you can see that by 2013, you see a crossover point where greater than 50% of our revenues in our portfolio would come from brand OEs and I think that’s something that’s a sound business practice and approach we’re trying to achieve here where over time we want to improve our overall portfolio and the overall balance in our portfolio. We don’t want to e risk adjusted to any one customer but obviously the start of any industry cycle you’ve got 2 or 3 customers that you’re dependent on so I think that’s – what we try to do is give you expect to on ramp some of our additional customers and what percentage of revenues they expect to be. Hopefully that answers your question.

Analyst for Raj Seth – Cowen and Company

If I could just squeeze in one more follow up. So first 2010, do you in view of all the other active discussions, do you still feel that you’re biggest high volume opportunities would be some [Synch] and Fisker or if there are any other of these engagements which could be a month at your largest but then show opportunities for 2010.

Charles Gassenheimer - Chairman & Chief Executive Officer

Again, I think one of the nice things about this business is the visibility so I don’t think there’s any doubt that Synch and Fisker are going to be our revenue drivers through 2010. It’s not like you can sign up a customer today and they’ll be a huge revenue line item immediately. I think that takes what, 12 to 18 months to get into volume production so the customers we’d be signing up today by first quarter of 2010 would really start to have a meaningful impact in 2011 time frame.

So I think that’s how this thing builds. One of the things that is interesting is as you see us continue to build out and you see us continue to announce our OE deals, you will see sort of a greater diversity of revenue across a wider spectrum of customers globally. I think that will be a real sign by the end of 2010 that we’ve achieved a pretty attractive customer backlog, and that will continue to I think give the market a heck of a lot of confidence in our Cap Ex plans so I think those are the things that we’re trying to achieve. $600 million is a lot of money to spend and we want to try to time that money with when these programs go into large volume, so it’s a challenge but it’s one that we’re pretty excited about.

Analyst for Raj Seth – Cowen and Company


Charles Gassenheimer - Chairman & Chief Executive Officer

Thanks very much and we sincerely appreciate your continued excitement and interest in Ener1. I think what you’ve heard today is the strength and maturity of our management team and that also gives me a lot of confidence in our ability to execute. I think certainly in the last four years things have changed dramatically for the positive and having the ability to start to really bring on some additional world class talent to be able to take this company to the next level is something that I for one am very excited about, so I look forward to further conference calls and when I come out on the road, bringing some of our new management team with us. So look forward to seeing you soon. Thanks very much.


Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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