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Ener1, Inc. (NASDAQ:HEV)

Q4 2009 Earnings Call

March 11, 2010 5:00 pm ET

Executives

Rachel Carroll – VP, Corporate Communication

Charles Gassenheimer – Chairman and CEO

Gerry Herlihy – CFO

Jeff Seidel – Chief Strategy Officer

Rick Stanley – President, EnerDel

Robert Kamischke – CFO and Controller, EnerDel

Naoki Ota – COO

Analysts

Dan Galves – Deutsche Bank

Steve Milunovich – Merrill Lynch

Bryce Dille – JMP Securities

Paul Clegg – Jefferies

Thomas Daniel – Thomas Weisel Partners

Rob Stone – Cowen & Company

Operator

Good afternoon and welcome to Ener1's 2009 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 are being placed on 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 Communication for Ener1, Incorporated. Please proceed.

Rachel Carroll

Thank you. Good afternoon and welcome to the Ener1 management call to discuss fourth quarter and year end results for 2009. Prior to 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 for future performance and involve certain risks and uncertainties which are difficult to predict. Therefore, actual future results and trends made up 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

Thank you, Rachel. I'd like to introduce the speakers who have speaking sections on today's call. With me today is Gerry Herlihy, Jeff Seidel, Rick Stanley and Robert Kamischke. Additionally, other members of management that will be available during the question-and-answer portion of the call will be (inaudible) Naoki Ota and Cyrus Ashtiani.

Without further due, I'd like to turn the call over to Gerry Herlihy, Ener1's Chief Financial Officer.

Gerry Herlihy

Thank you, Charles. This is the financial highlights for 2009. Net sales for 2009 was $34.8 million. Net sales for the 2009 fourth quarter were $11 million compared to net sales of $8.1 million in the third quarter of 2009. Revenues include $3.7 million of government grants for R&D project that are reflected as a reduction of R&D expenses.

Net loss was $51.5 million in 2009 compared to $51.2 million in 2008. Basic net loss per share was $0.44 in 2009 compared to $0.51 in 2008 on weighted basis shares outstanding of $116.7 million in 2009 and $103.4 million in 2008. Cash at year end was $14 million. Cash used by operations was $40.7 million in 2009. Depreciation was $7.7 million in 2009 compared to $2 million in 2008.

Operating expense were $53 million in 2009 compared to $36 million in 2008 due to increased engineering requirements for development of customer program. Ener1 increased research and development expenditures, $7.8 million from 2008. Ener1 Inc. purchased $14.6 million of equipment in 2009 compared to $21.3 million of equipment during 2008.

During 2010, we planned to spend $63 million in capital expenditures in the United States plants in Indiana, half of which will be paid for by grants from the DOE under the ABMI program. We also planned to spend $12 million on additional sell production equipment in our Korean plant.

Shareholder equity now stands at $118 million compared to $106 million as of December 31, 2008. Our total assets of $174 million in 2009 compared to $140 million in 2008. I will now turn the call over to Chief Strategy Officer, Jeff Seidel.

Jeff Seidel

Thanks Gerry. Let me begin with an update on recovery ad grants in the ATVM loan. We signed and finalized the $118 million grants at the end of January. We have begun implementation of the grants with the formal kickoff meeting with the department of energy and expect our environmental assessment to be signed off and completed in the next two weeks.

Prior to signing of the environmental assessments, we want access to 10% of our grants on for approximately $11.8 million. Despite the delay in finding the grants, the way was worthwhile as the environmental assessment conducted applies to all of our government funding initiative including the ATVM loan and the state energy program or SAP from which we have received funding for battery test equipment.

To date, we have received reimbursements from the grant and that process is working smoothly with initial reimbursements happening more quickly than expected.

In terms of the ATVM loan, we have recently completed our final round of revenue due diligence with AT Kearney. We have incorporated the results into our financial model and are making some final adjustments to prepare the deal by Grant Thorton [ph]. The DOE with ATVM, transaction advisory firm. I do anticipate some additional dialog with Grant Thorton [ph]. They had not worked on our loan historically.

We remain on track with the loan and believe we remain financially viable for the loan in both lenders case and stress case scenarios. Overall, it is important to note that through the combination of the Grant's ATVM loan and the $70 million incentive package received from the state of Indiana, we will be able to leverage our contributed equity three times for our planned capacity rollout.

I would now like to spend a moment on customer programs. As we had mentioned in the past, the Grant's award had a direct and quantifiable impact on customer enquiry. On the fourth quarter 2008 through the third quarter of 2009, our unique customer list increased from 40 to over 200, a five-fold increase, many of those coming on the back of the Grant's announcement.

We have been a beneficiary of the validation imparted by the DOE and we continue to see excellent customer activity. We are not in the position to pursue 200 customer at once but we are distilled our list with set of 34 active programs including production, highlight and development projects.

For the first time on this call, I would like to announce that EnerDel has received a purchase order to assemble a custom battery packed for the Aerospace industry. This initial program has an upside potential in excess of $2 million annually. We anticipate future awards of additional program with greater upside potentials in this market segment.

Detailing our active program with over the medium term generates the following five conclusions. One, we anticipate the majority of our revenue stemming from Europe over the next three years, trending from 80% in 2010 to 73% in 2012. Two, we have developed solid traction in Asia namely with conversion program so that Japan Postal Service and grid storage demonstrators with ITOCHU and Mazda. Three, revenues from Asia are expected to increase from 4% in 2010 to 10% in 2012.

This does not include any contribution from Ener1's China strategy which we have been pursuing. I will let Charles handle this later in the call that this could significantly impact the revenue mix from a geographical perspective. The balance of revenue was expected from the U.S. or we have truck, bus, commercial, grid storage, military and research and development projects underway.

Four, in 2012, we expected out 78% of revenue to be light duty automotive and 20% of revenue to be heavy duty automotive meaning truck and bus with the rest military and R&D. We expect upside into our internal model and for these numbers to shift, if grid storage projects come on stream and are integrated into our financial model.

Five, over 28% of 2012 projected revenue in light duty automotive remains with European and Asian customer programs yet to be announced. We expect to announce these new relationships in 2010. I will now hand the call over to President of EnerDel, Rick Stanley, to discuss customer programs Zinc involved in more detail.

Rick Stanley

Thanks, Jeff. The Geneva Motor Show continues the trend of showcasing vehicle electrification that we saw at Detroit, Tokyo and Frankfurt. Sincerely, every OEM on the planet has shown electric concept vehicle. While the media and capital markets are saturated with images of flashy concept vehicles, Zinc is producing a fully amalgamated vehicle that is crash tested, road ready and available for sale today.

To be ready for sale to the public, the vehicle must undergo extensive testing at the component and vehicle level. The concept vehicle is a minimum of two to three years away from being ready for the market. By contrast, Zinc has over 30 million miles of real road performance data that makes it one of the most material electric vehicles in the world.

While there are lumpy business projections from a number of early entrant EV startup companies, THINK has a realizable business plan based on sound manufacturing of road-ready vehicles with an existing pent-up demand and growing customer base. We are capacitating for a real car program that has a high probability of being one of the successful EV car launches in the world over the next two to three years. What this means is if you want to buy an electric vehicle in 2010, just not the test drive, THINK is the only vehicle available for purchase, as a result, THINK has been building from pent-up demand throughout Europe as government and municipalities electrify their vehicles.

Large customers include Movebell [ph] the Norwegian car share provider and Lander [ph] the Dutch utility company. Buying in volumes of 100 as oppose to single vehicle, THINK has quickly seen its order bank growth to its current backlog of around 2,500 vehicles. THINK is also targeting postal services and tax employees.

Its early attraction is helping THINK build innovative distribution networks and to drive standardization of charging infrastructure. Capitalizing on these early market opportunities should allow THINK to rapidly scale up production and walk down the cost of the vehicle during the first year of production. THINK is targeting an aggressive lock down of around $12,000 which could yield a price point for the Think City of roughly 28,000 before any subsidiaries.

Subsidiaries range from 7,000 to 14,000 in Europe which could clearly position THINK as one of the most attractively priced EVs on the market by the time other competitors enter the market. EnerDel is preparing to launch production of pack for the same during Q2. We received PPAP approval from Think. PPAP or Production Part Approval Process is the automotive industry standard for approving or manufacturing process for production.

We are finalizing the product validation and continuing to accumulate mileage on Think vehicle within EnerDel battery packs. We are adding capacity to support the Think ramp up during Q3 and Q4. We expected before utilizing the capacity of 900 packs per month by the end of the year.

Moving on to Volvo. In January, we hosted a joint technical seminar with Volvo at our headquarters in Indianapolis. The event showcased Volvo’s New Electric C30 featuring EnerDel batteries. Highlights of the event can be viewed on a video. You can download from the EnerDel website. We were joined for the event by the President of Volvo special vehicle, the division within Volvo responsible for the development of the Electric C30. The vehicle is currently undergoing development including rigorous crash thing that we believe will position the car as the safest EV in the world. Initial production volumes are expected to be 500 to 1000 per year as Volvo carefully gauges consumer reaction to the product. The truly exciting thing about this program is that the electric vehicle architecture for the C30 could also be transferred to the S40 and V50 platforms within Volvo. Analysts predict this could lead to inner volumes of 15 to 25,000 units in the out years.

Now, let me turn the call over to Robert Kamischke, EnerDel CFO.

Robert Kamischke

EnerDel has secured federal state in local incentives, totaling $316.9 million of which thee matching equity funding is $118 million, that's a 3:1 leverage ratio for invested capital. In addition, EnerDel anticipates additional ATVM federal funding in the amount of $250 to $300 million.

The matching equity here is $45 to $50 million. And previously invested capital of approximately $36 million will be applied to this matching requirement. Majority of these secured incentive moneys are directed towards out capital facilities and equipment purchased planned. However, approximately $30 million will also be applied as direct operating expense assets.

Our plan is to take a measured approach to capacity installation. This starts with our facility footprint in Korea and Indiana where we have floor space to accommodate up to $1.56 billion watt hours of capital equipment capacity. However, through clever lease purchase option agreements, approximately one half of this space remains on standby, thereby minimizing current expense.

Likewise, we have developed a minimal volume machine capacity module. User size they produce approximately 390 megawatt hours or 15,000 EV packs annually. Our first module will be producing at volume this year. Our models are designed to closely align with customer, annual volume leases, maximize machine utilization. We purchased and installed and qualified within the lead time required of our product development and production release cycle.

And lastly, support continues improvement by incorporating lessons learned in each generational release. With respect to machine utilization, these capacity modules who run on 7 day continuous operations to maximize throughput for every machine dollar invested. We currently envisioned four release of machine capacity that were within the $238 million of funding, provided to the federal advanced battery manufacturing initiative.

This capacity would generate approximately $1 billion of annual revenue, that's a 4:1 annual turnover ratio, unless we capital. Our current plan also calls us for to achieve cash-based breakeven, with approximately $187 million of annual revenue. This is equivalent to roughly EV battery packs, which coincidently allies with the projected sales volume for our production lease customer, THINK automotive and we will also the annual run-rate at the end of the 2010 calendar year.

I would like to end my portion of this call with some comments on costs. EnerDel's experienced in well equipped to drive cost reduction across our material production and virtually all other costs or operation expense categories since that progress is already been made. 50% of material costs sounds already on the THINK back in the last year as an example.

Our continued focused on materials and production cost effectiveness is methodical and employees are following techniques, value engineering across our cell, modules and pack assemblies. Dual sourcing and/or material substitution for raw materials, volume sourcing of a cell, module and pack assembly at component level, localization of supply, particularly for sell raw materials, long-term supply contracts and last continuous improvement on the sharp floor which we will result in higher manufacturing yields and reduce cycle times across the system.

By employing our know-how and engaging our partners, we are confident that we will reach our 15% to 20% EBITDA margin objectives in the 2015 timeframe. Now, let's turn this call over to Charles Gassenheimer, a CEO and Chairman of the Ener1.

Charles Gassenheimer

Thanks, Robert. As Robert outlined, the manufacturing know how and expertise needed to produce high quality, top efficient, prismatic battery system is significant and should not be understated. As the industry scaled and we are present with new challenges, it remains to be seen who will consistently be able to meet the automotive industry safety, quality and reliability standard and do so at a profit with a real return on investment.

I am confident in the manufacturing and product plan that was presented to you, today. Ener1 execution on the 2010 business plan is an important strategic step. No company in the world today has put a high volume electric ion rode with prismatic solution. Our partnership with THINK, we will be the first to market and achieved industry leading volumes.

This is an important program for the industry and to Ener1 from the financial perspective. As thousands of fleet and municipal vehicles are electrified over the next two to three years, which road ready think as a clear vehicle of choice for these markets. Ener1 will gather important performance and testing data to sell into more, slow boarding but high volume consumer market they come on stream in the 2012, 2013 timeframe.

Over this time period government and municipal fleet bear the risk for new product and technology adoption. We believe that being first in market with THINK and the development projects with the U.S. army on the military side and PGE on the grid side are therefore extremely important from a validation standpoint in EnerDel's three key end market targets.

Scale will be a factor in locking in the sustained competitive advantage. Scale was necessary to address the breadth of the market opportunity and manufacture cost effectively and to end efficiently overtime. While Ener1 has made tremendous strides on its own, partnering remains a primary focus for the company.

We are competing in a space where cost advantage is a necessary ingredient for success. To that end, we have been active in China seeking the right relationship to gain access to what we believe; we're the largest automotive market in the world, take advantage of increasing federal support stimuli and gain access to cheaper precursor materials and important part of Enter1's long-term strategy.

We also expect some momentum for our efforts in China from the U.S. department of energy which is promoting interaction between the U.S. and Chinese companies that are efficient. EnerDel's President, Rick Stanley, traveled to Beijing last September to participate in the DOE U.S.-China Easy [ph] Symposium and we expect more involvement in the department efforts in the region.

Ener1 has also announced several demonstration projects with ITOCHU Corporation, a large investor and an important strategic partner for Ener1. We continue to leverage ITOCHU's considerable scale to grow their new potential partnerships in JV opportunity. The scale of ITOCHU's influence in the converging industries of automotive and renewable energy should not be understated.

The recent survey projected that by 2015 Ener1 will be in the top five companies in the world for prismatic, lithium ion battery capacity capable of producing 3.12 gigawatts per year. It should be noted that ITOCHU's current capacity in renewable energy and grid storage alone dissolved all of this plan capacity expansion if they decided to move forward with their current energy storage plan. These projects are also important in determining the residual value of the battery, once stripped out of the vehicle.

In a few years, we think lifecycle management companies could be the largest consumer of lithium ion batteries. It is then, I would highlight the Skooba project in Japan here EnerDel is working with Mazda, ITOCHU and then ITOCHU owned chain of convenience stores in Asia to gather performance data over the next two to three years on secondary use application. They will help you understand how this all fits together. We had posted a video on the EnerDel homepage and explain these concepts in more detail.

Finally, on financing the growth for the company. This is a capital incentive business and we believe the company like Ener1 will receive considerable financial backing from government already have a head start in heightening various entry and establishing competitive advantage. For the proposed $600 million CapEx plan over the next five years, we anticipate Ener1 has a total equity need of $150 million but we will need to spend over the next three years. What I can say publicly on this issue is that this time I feel highly confident that we can fund our business by means of dividend both coming back for the equity capital market. I am gratified by the backing we received from investors in strategic partners in the past and we expect that to continue in the future.

In summary, the market opportunities are undoubtedly large, that being selective and having the right strategic approach is key as its fiscal discipline, lock-in margins and protect value being created. Performance benchmarks you can measure by in 2010 will be the announcement of two new important programs one with the European and one with an Asian OEM. You should have also expect feedback on the production ramp, I think and judge how we are doing on the production side by our cost work down model as we scale.

Finally and most importantly, we expect to be at a run rate of 900 packs per month by the end of 2010 per se, a run rate at which EnerDel is EBITDA breakeven and important milestone and well ahead of any of our competitors in the lithium-ion battery industry. This is the fiscal discipline in value creation. You can expect from Ener1.

Before I turn the call over to question-and-answers, I would like to pay a special tribute to one of our co-founder, Dr. Peter Novak. After 12 years of tenure at this company, Peter is transitioning from his role of President and Chief Technology Officer to serve the company in more of senior advisory capacity as a Senior Technical Advisor. We believe Ener1 success will allow Peter to take his way amongst academics who gave birth to a new industry.

Thanks very much for your time and attention. And at this time, operator, I would like to open the call for question-and-answers.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Your first question comes from the line of Dan Galves from Deutsche Bank. Please proceed.

Dan Galves – Deutsche Bank

Good afternoon, gentlemen. Can you hear me?

Charles Gassenheimer

Yeah, Dan. How are you?

Dan Galves – Deutsche Bank

Great. Great. Thanks. I wanted to ask about the aftermath of the market offering. Are you able to give us any update on how that's going and also when you talk about $150 million of needs over the next three years, does that include the $60 million and any color you can give on that?

Charles Gassenheimer

Hey, thanks, Dan. So, one of the things that we've looked at it as we come into a – I certainly argue a difficult January, February for clean tech stocks. But one of the things we had to do with as the market transaction was to file that $60 million show to improve capital sufficiency to close on the grant. Now that the grant has closed and the capital has started flowing from the DOE, I do believe that there are better ways for this company to attract long-term investor capital.

So as a specific example, we have drawn something less than 1 million shares total on that in the three to four weeks that it's been up. So we really don't plan on using that as a primary mean to funding the company.

To answer your second question, the $150 million is the total needed to get the free cash flow positive. I guess the total road map, if you will. Of course that includes the capital needed to match the grant. That also anticipates the equity capital needed to match the loaning on the DOE loan side. So that's the total needed to get over the hump in the $60 million that we expect to need to fund the company this year would be included in that number.

So that's the total road map.

Dan Galves – Deutsche Bank

Okay. Got it. Thanks a lot. On THINK, I was wondering if you could give us any color on the cost down to $28,000 for four subsidies. I guess first of all, does that include the full cost of the battery? What are they doing to take $12,000 of cost out? And finally on that, to get to your breakeven number, it implies about 11,000 per year units of THINK. What type of visibility do they on that type of unit volume do they have?

Charles Gassenheimer

Sure. Let me try to answer the cost down first. Clearly, there are things where we try to provide transparency and then clearly there are things where as well near 31% shareholder THINK and it is a private company. We have to be a bit careful and some of these questions probably would be best for the CEO, Richard Canny of THINK to answer. But sort of broadly, there are – when we did the financial restructuring of THINK in 2009. There were three or four key aspects or areas that we focused on as part of a restructuring plan.

The first with the outsource production to Finland, so the THINK is in producing in-house. The second was to hire a new tenant sales and marketing, John (inaudible) was the President, who was previously President of Mazda of Europe. And third was an aggressive cost down program.

And as you look at that I think the key issue for THINK is the material sourcing area. The second key issue is the in-house intellectual property. And one of the key areas of the in-house intellectual property is what THINK called the PCU what more broadly in the industry is called a vehicle control unit or VCU.

THINK has design their second generation what they call in-house their Gen 2 PCU and about the same time that THINK will be launching with the EnerDel lithium-ion battery, it will be launching its own Gen 2 PCU. That alone as a specific example, we will count for $35,000 in costs downs versus the Gen 1 PCU that they are buying from the market.

THINK is a very, very well specific example, and I am pleased to report that the progress on both the Gen 2 PCU and the launch with EnerDel battery are going really well.

Dan Galves – Deutsche Bank

Okay. Got it. Any expectation of – well, let me go and ask my last question. On the EnerDel’s customers just to verify you said that would be expected 28% of your revenue by in 2012. And what type of color can you give us in terms of the status of these customers or are these in development contracts or there are other batteries they are evaluating just to get sense of the probability of winning production contracts for these customers?

Robert Kamischke

So on the Asian side, we are in a development program with this specific customer where we already delivered some number of packs that are being integrated with the vehicles. Once that vehicle is working or vehicles are working and the customer feels confident, we would be able to announce that program. So clearly we feel pretty confident about that one.

On the European side, we are working with some number of OEMs. There is two or three in particular that we feel good about, one of the three is obviously a huge of the competitive situation. So we have assigned a probability to that, they are one or two others that we feel more comfortable. So what we have done since we get in-house, I guess we are saying, as we are going get one of those three as we what believe. So that gives you some ideas of how we are thinking about that.

Dan Galves – Deutsche Bank

Thanks a lot. That is very helpful, I appreciate it.

Robert Kamischke

Okay. Thank you.

Charles Gassenheimer

Next question, operator.

Operator

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

Steve Milunovich – Merrill Lynch

Great. Thank you. Hey, Charles, I'm just a little bit aware, I just want to be very clear on the loan. I did hear you talk about $250 million to $300 million. So are you quite confident that originally targeted amount is what you are going to get and did you say anything in terms of the timeframe on that?

Charles Gassenheimer

I am going to turn to that question. Hey Steve, how are you? I'm going to turn that question over to Jeff to make sure I don’t get myself in trouble.

Jeff Seidel

Yes, Steve, we are pretty comfortable that the loan amount is settling out at this point. We do have – if you didn’t hear my prepared remarks, we do have round of diligence to go through with Grant Thorton [ph] once we turn in basically a button down version of our financial model which we're adjusting based on some feedback from AT Kearney. Once we get to that process, we'll probably be ready to go onto term sheet negotiations. The process has gone a long enough today. He did put targets on it but we really are at the end of the analysis stage. So we are hopeful that we would see a loan in the Q2 timeframe.

Steve Milunovich – Merrill Lynch

Okay. That's very helpful. In terms of China, obviously, there is BYD, A123 working with SAIC. Could you get us a little layer of land in terms of kind of who the producers are and other fairly significant producers that you think you could work with?

Robert Kamischke

Sure. Obviously, we don't feel comfortable at this point. Going into specific detail about who we are working with but what am I to do is I'd like Naoki Ota, our COO, who has been handling up our efforts in China, may be give you a little bit of color on what we're seeing in the Chinese market because it is clearly a very exciting market.

Naoki Ota

Hi, Steve. I'd share with you, in China, we can think of the two – there is three, why is the government develop our program, one for the China incentive program like that falls under EV battery, the EV city and order for the many – the School bus [ph] program, we are targeting like one million school bus in 2016, 2018 timeframe and then the order for the government, the police car, they did a program, those are the government are barking up program. So we are pursuing this program. At the same time, we are looking to deliver in March the program with the large OEM company including six (inaudible) the government of our staff the automotive company including SAIC and the other private of course, the company, the private company associate the DOE Cherry those companies. So lastly in (inaudible) we are not in the state to put the name in the (inaudible) with our partner.

Charles Gassenheimer

So Steve, if I can summarize about what our strategy there, I think it’s relatively clear that this 10 city or 10/1000 programs that's kicking of this year in China is a very exciting program because there is a real volumes. The other thing we are seeing is that there is demand for both city bus and school bus programs that might exceed over a million units over the next 10 years. Let’s say, potentially a $50 billion market just for EV buses. So what we are basically looking at there and of course, as you know that day one, two, three, so the right approach to go into China is the partner. You have to partner with the Chinese company. So we are looking at different models including partnering directly with OEMs and partnering with Tier 1 in China and may do sort of more than one partnership because China is very fragmented by region. So nonetheless, we are excited about the opportunities there and that’s going to be a big area focus of both Naoki’s and my time here in 2010. So we can afford to give you a little bit more granularity around that as this year plays out.

Steve Milunovich – Merrill Lynch

Okay. And then you gave a number of percentages of revenue in 2012 geographically and so forth. Can you give us some sense of what you think the revenue is going to be? I know that you had in the past kind of possibilities they want projections per se, eventually over a $1 billion but what are your current thoughts are on the ramp over time?

Charles Gassenheimer

Thanks for the question. I still, I'm not yet comfortable giving revenue guidance. I still think it’s a bit early. I think the best way to do this and approaches we have taken is to show you what our capacity ramp will be and what our revenue potential is. It’s still just a bit too early in the stage lifecycle as the EV industry to start to give you that sort of guidance. So again, if you look at sort of what we said here what we are saying is we are building capacity for 60,000 EV packs per year or over 1.01 billion in revenue per year with the first phase of our CapEx plan which is the 238 million of our spending under the grant program. That program we expect to fully build out our capacity within the next two years, Jay. Then in the second phase of our capacity ramp-up program taking us up to 120,000 EV packs per year and again all of this is of course standardized on THINK packs, different packs – different size packs would meet different numbers. But we standardized on our THINK pack, so the 120,000 EV packs per year is dependent on the loan and that would take us up to a 120,000 EV packs per year or 2, 2.1 to 2.2 billion of revenues and again we expect somewhere in the region of 20% EBITDA margin and that we do expect to do by 2015, 2016 timeframe.

But directionally, that's the best guides we can give you today.

Steve Milunovich – Merrill Lynch

And you still think, build it, and they will come?

Gerry Herlihy

I am not sure you heard that from us. I think what you hear from us is that we probably know thought it would be no more within the street right now about the unit volumes and clearly we are showing those unit volumes with U.S. Department of Energy and clearly they are really validating those as part of the financial liability test and the fact that we are still talking about $250 to $300 million loan, even though it isn't close yet, suggests that they are very comfortable. Even in the stress case scenario, they are very comfortable that they can backup our revenue and remember that one of the reasons why it's taken so long for this loan to close is that they have called every single one of our customers and validated that.

So it's been a very painful due diligence process, but – certainly as a public side investor, to know that a private side investor who has that level of detailing confidence in the loan as still moving forward, I think that's a good indication that is not build out and they will come. We have some clear visibility. I think the key question is timing, right and that's where we are still trying to figure out, precisely when we need to bring capacity on line, and that's precisely why we build it and broken down our capacity into 15,000 pack increments or modules as Robert like to call it. So that we can bring those on in a much shorter time frame, as we get a much clear picture on the demand side.

Steve Milunovich – Merrill Lynch

Excellent. Thank you.

Charles Gassenheimer

Thank you. Operator, next question, please?

Operator

Our next question comes from the line of Bryce Dille from JMP Securities. Please proceed.

Bryce Dille – JMP Securities

Hi, guys. Maybe if you could just elaborate on that last point? Are you planning on building on a 15,000 packer increments, essentially to keep your utilization rates at the highest level that you could plan for?

Charles Gassenheimer

Thanks Bryce. I am going to turn that question over to Robert Kamischke.

Robert Kamischke

15,000 really is a very nice number for us from a standpoint that we can align all the equipment and get good line balanced across all our equipment, all away from the started the process coating through the final cell of someway navigation area and then also through our module in the pack assembly areas. So with a lot of things that are probably lined up to 15,000 EV packs per year and as Charles had mentioned, that’s kind of level we are seeing as we get enquiries on a customer as well, it all achieving very, very good line I mean at this point of time.

Bryce Dille – JMP Securities

Okay. And then I guess, if you look little bit further upstream on the coating and cell production side. How many 15,000 pack increments are you added at this point?

Robert Kamischke

One.

Rick Stanley

Yeah. We are still building out our first 15,000 pack increment, right. Your price on that question of course, one of things obviously that should start to become clear is that, it's not, its equipment to come, doesn’t come perfectly off the shelf for 15,000 pack increment. So on the sell side, of course, we try to build out access capacity. So where we are in sell side is of course we’ve got the capacity built out Korea and then we are – about you start production on the cell side here in the U.S.

So we have probably access capacity on the sell side then 15,000 packs per year. But on the pack assembly side is where we will do that, clearly, coating machines, which is this 50 meter launcher machine. They don’t sort of breakdown nicely into the 15,000 pack increment. But so it's going to be a bit lumpy as the way you bring those on. But generally speaking, we think we’ve got this very nice tight plan that allow us to grow as we have more visibility into the customer direction.

Clearly, the expertise we have in Korea with world class basically world leading electric coating capability is something that we really believe is really start to give edge here on the on the prismatic side as well.

Bryce Dille – JMP Securities

Okay. That’s very helpful. And then maybe just my last question. On the green cross over project, I believe your targeting may be a start-up sometime around the March timeframe. Can you just provide a little bit more color on where that stands and then what the potential size looks like may be for this year or even into 2011?

Rick Stanley

We understand a green cross over project is on track for start in April. And we understand that things are moving forward with that. Clearly, we view this demonstrate our project in Skooba, Japan is going to be one of those that I think is going to get a lot of visitation. Not to different, I would imagine from better places first battery swap station in Yokohama. So I think there's going to be a lot of interest in that. The two unit volumes there look like probably 50 cars from Mazda, where we will, of course, again be using the EnerDel battery solution and the THINK drive train should be doing the EV conversions for the Mazda program there. So the big side is that's going to be a highly-visible program for us as well.

Charles Gassenheimer

Operator, next question, please.

Operator

Thank you. Your next question comes from the line of Paul Clegg with Jefferies. Please proceed sir.

Charles Gassenheimer

Hey, Paul.

Paul Clegg – Jefferies

Hi, guys. Thanks for taking my question. I don't want to repeat the issue that Jeff just talked about a little while but I want to make sure, I understand when it comes to the grant money, how much grant money in total do you expect to pull off the shelf so to speak in 2010 to meet your capacity objectives, kind of without disappointing the existing and expected customer timelines and then how much capital do you need to raise to do that in the market. Is it less than the $60 million that you talked about and you kind of alluded to other avenues besides the capital markets that were open to you, if you could just elaborate on that a little bit.

Jeff Seidel

Sure. No problem. So I'll just run through the numbers again and continue to ask again until it is clear, in case, I missed to speak that. So $118.5 of grants that needs to be matched 50:50. Our CapEx plans for the U.S. this year are in $60 million to $63 million range that would be 50% equity, 50% grand top there. Next piece for this year is $12 million of CapEx for Korea and of course, that won't be 50:50 match because it's not money being spent here in the United States and last piece is the total funding.

So again, what I said was our total funding need is a $150 million of equity. Again, it is always two to three cash flow positive. What we perceive our need is $60 to $70 million for this year. What I did say is that we file the aftermarket offering as a means of closing on grant show capital sufficiency. But what I said is, it's not my favorite wage raised equity capital for our company right now. And so we have looked at other means and alternative means and I think what I'm trying to get sometimes on it is I'm highly confident that we may very well be heading down in different parts, it doesn't do anything well coming at the capital markets. I would say doesn't involve coming into the public capital market.

Paul Clegg – Jefferies

Okay. And to be clear, the 60 to 70, you talked about this year, that's your external, that's what you intend to raise externally?

Charles Gassenheimer

67, 70 million of equity you need this year?

Paul Clegg – Jefferies

No. so you actually need less than that because you have 16 to 263 plus 12, you are only to going do 50% of the 62, 63, so really we only need 30 something.

Charles Gassenheimer

CapEx and we have got of course operating burn, right.

Paul Clegg – Jefferies

Right. But you got some cash on hand as well.

Charles Gassenheimer

Okay.

Paul Clegg – Jefferies

No, that clarifies a lot.

Charles Gassenheimer

Yeah. No problem.

Paul Clegg – Jefferies

And then you talked about giving to 900 packs per month, just think by the end of 2010. I was just hoping you just might help out us little bit on the quarterly linearity there or month I suppose kind of ramping during 3Q, 4Q, is it pretty linear rise or does it give pretty lumpy in kind of waited towards the end of 4Q there?

Charles Gassenheimer

Well, I am going to have Rick Stanley answer that question.

Rick Stanley

It’s going to come up in about two steps. We'll start out and kind of 100 per month range. It’s like in the late Q2 then it will come up to the 400 a month range and then we should be at 900 a month by mid-Q4.

Paul Clegg – Jefferies

Okay. That’s great. And how should we also think about the margin ramp on a gross margin basis as you start the production for the same contract? Or you are going to be absorbing a lot of overhead, is there going to have negative, is that going to draw your margins down until a negative territory on a gross margin basis?

Charles Gassenheimer

Paul, I certainly appreciate the question. I think that’s probably a bit too granular for public dissemination at this point.

Paul Clegg – Jefferies

Okay.

Charles Gassenheimer

I think we obviously have a fair amount of confidence in sort of the big picture margins and we have given you some color on the cost down but it probably is something, I probably we would say let it play out of it before we give you some more color on that on a quarter-by-quarter basis.

Paul Clegg – Jefferies

Okay. Very good. And if I could just going to sort of housekeeping question.

Charles Gassenheimer

Sure.

Paul Clegg – Jefferies

What was the depreciation amortization in the fourth quarter and then what was CapEx in the fourth quarter?

Charles Gassenheimer

Sure. I am going to have – Gerry, do you have that number at your finger tips?

Gerry Herlihy

Depreciation amortization for the year was $7.7 million. So I don’t have the fourth quarter number right in front of me.

Paul Clegg – Jefferies

What was CapEx for the year, CapEx for the year was $14 million.

Charles Gassenheimer

Paul, what would be is we try to figure out if we can give you for the fourth quarter while the call goes on and if it does, we will bring it on and I don’t want Gerry have to guess and give you the wrong number but if he can find it before the end of the Q&A we will announce it probably, if not, we will make sure we get it to you.

Paul Clegg – Jefferies

Thanks very much.

Charles Gassenheimer

Okay. Thanks for your question. Operator, next question, please?

Operator

Yes, sir. Your next question comes from the line of Thomas Daniel from Thomas Weisel Partners. Please proceed.

Thomas Daniel – Thomas Weisel Partners

Hi, guys. Thank you very much for taking my question.

Charles Gassenheimer

How're you doing?

Thomas Daniel – Thomas Weisel Partners

Great. How you guys doing?

Charles Gassenheimer

Good.

Thomas Daniel – Thomas Weisel Partners

Maybe on a broader type question, we saw I guess couple of days ago, LG Com announced that China Automobile out of China was going to basically replace their incremental high tech batteries with the Lithium ion batteries from LG Com Power, ATV applications. And we are kind of wondering, is there a trend in industry where you guys think that Lithium ion batteries could replace nickel metal hydride batteries, operate EV applications and then, are you guys working with Lithium ions right now on that?

Charles Gassenheimer

Sure, Thomas. Thanks for your question. So I think what's clear to us, I mean, why did EnerDel really focus on EV and PHEV, and why did high energy density applications make more sense to us is because there is no competition in the high energy density range. Lithium is the only material that can give the energy density to power vehicle.

I think on the hybrid electric vehicle side. We actually believe that the nickel metal hydride will have a fairly long shelf life. It works, it is heavy, it is expensive, but it works and automakers are comfortable with it. We do expect for all the reasons that we have said before, half a way, half the size two to three X Power and energy density for lithium versus nickel.

We do expect the hydride to shift over from nickel metal hydride to lithium. We are just not convinced that it's going to happen sort of within the next 12 months. We think it will probably happen until the next three to five years as nickel continues to have some shelf life. Here's another perfect example there, of course, is the Panasonic which just acquired Sanyo is just dream lesser production of another nickel metal hydride plan for their production put to unit.

So we do see that – that sort of a trend. We are working on of course, lithium-based hybrid programs. One of the talking things is that where we see real demand for Lithium within the ATV spaces on the heavy duty side, and that makes perfect sense because the heavy duty applications need a higher 2 watt hour [ph] application. They need more power and energy density, and that's where the weight and cost of nickel metal hydride would clearly be detrimental to the overall application versus lithium.

Thomas Daniel – Thomas Weisel Partners

Got you. Understood. That makes sense. Just one more question on the business model for you guys, as everything changes here over the next year. So are you guys going to be a cell provider and vertically to pay the company or are you guys just going to stick to – being full battery packs buyers in the market?

Charles Gassenheimer

The answer to that question is, EnerDel believes we are a full systems integration company, both cell and pack. Of course, are roots go all the way back to Delphi and really we believe we were the first and still the only pure bread automotive grade EV company from the lithium battery perspective. We never did affordable electronics. We never did power tools.

So our entire DNA, if you will, is automotive. I think that interesting because as other folks in the based start to wake up and realize the prismatic cells or the answer we have been there since 2004. So I think there is a lot of reasons, why we think we’ve got competitive solution. I do acknowledge, of course, that we are a smaller, more entrepreneurial company then LG Cam or even Samsung, Bosch or others.

So clearly, it's a competitive landscape and perhaps there is way for us to partner to continue to gain scale, to gains sales and marketing capabilities and to gain access to balance sheet. So we certainly acknowledge that that’s one of the risks, but we also think given our technology advantage that’s also an opportunity for EnerDel.

Thomas Daniel – Thomas Weisel Partners

Got it. Thanks, Charlie. That’s it from me.

Charles Gassenheimer

Thanks, your question. Operator, do we have one more question, please. I think we have time for one more.

Operator

Yes, sir. Our last question comes from the line of Rob Stone with Cowen & Company. Please proceed, Mr. Stone.

Rob Stone – Cowen & Company

Thank you. Hi, guys.

Jeff Seidel

Hi, Rob. How are you?

Charles Gassenheimer

How are you?

Rob Stone – Cowen & Company

Good. I got – I made into the just under the wire.

Charles Gassenheimer

We are too.

Rob Stone – Cowen & Company

So my first question is, how should we think about run rate of operating expense during this ramp up phase? I know you may not be prepaid to give exact information, but I just in terms of the linearity of the non – costs to goods related numbers of as we step to the four quarter of 2010?

Charles Gassenheimer

Robert, you want to try to give a manufacturing walk on that more broadly?

Robert Kamischke

Yeah. Certainly, I mean we will definitely have reproduction and startup expenses this year. And we will – we anticipate we will start that lower yield levels, cell application areas. And we are going to have to mature the first time quality through those systems throughout the year. So we think that a six month ramp is appropriate for us to accomplish those (inaudible).

Rob Stone – Cowen & Company

Are you going to book a separate start-up expense line during that period?

Rick Stanley

Certainly, Gerry, and I have this subset. I don’t think we've come to a final conclusion on that.

Rob Stone – Cowen & Company

Okay. And for Gerry, how should we think about the other expense areas, G&A, other marketing as companies build up?

Gerry Herlihy

So you got a breakout Korea which is sort of steady state and then United States. All right. So Korea, their G&A number is about $5.5 million. Our R&D numbers are relatively low numbers. So that's the G&A size for Korea. United States, we're trying to keep our G&A at around 11 or $12 million with $4 million of non-cash. So it's an $8 million cash number and our R&D number which also includes money being spent at EnerDel. You'll see when you take a look at the 10-K with $31.48 million and that number is going to start increasing to support the customers during the year. The end of fuel numbers and the narrow numbers are being held that they are prior number but the EnerDel numbers will start ramping up. That really is customer driven.

Rob Stone – Cowen & Company

Question for Charles. The two new customers, you expect to announce sometime later this year, one Asia, one Europe. When you talk about, you think contribution to revenues in the 2012 timeframe. What, if any, might that contribute to revenue this year or next year to new account?

Charles Gassenheimer

Sure. So, well, I think I earlier said that the Asian project was a development so there would be something sort of development style, 5, 10 packs sort of revenue this year hitting the income statement and then it would, hopefully start to lead into a supply agreement sometime in 2011. On the European side, it's still probably – it's still probably confidential in terms of even starting to talking about it so I rather not just because it's sort of one of those where if I get too much information, it might – it might lead you down the road that could figure it out. So I'd rather stay away from that one just for now.

Rob Stone – Cowen & Company

As far as the practical matter, is it fair to say that production for any of these customers would be in 2011 or…?

Charles Gassenheimer

Both of these programs would start some form of volume in 2011.

Rob Stone – Cowen & Company

Okay. With your flagship customer, you talked about the European government programs fleets for that account for significant part of the backlog. How do you see the U.S. market opportunity developing for THINK?

Charles Gassenheimer

So it is interesting. One of the things I think is become a little bit sort of the bit more philosophical if you will about the U.S. market is the rate of change. I think when you saw Chrysler and General Motors going to bankruptcy last year and you saw sort of the dealership networks come under the pressure as they did. You are really starting to see new methodologies emerge whether it be a Jeep Car with this car sharing which we think is going to be a very large potential idea for electrification of the automobile and then in particular that could be a customer for THINK. When you see the rental car distribution models with the herds of analysts and then you start to look at more of big box retailers and what they could play.

So you’re really starting to see new forms in distribution that could be very interesting and could very much gives some competition to the being incumbent retail distribution network. So we are seeing some very interesting ideas. It’s still a bit premature to talk about them more broadly but it’s relatively clear to me that THINK being the – really the first game in town is a huge, huge strategic advantage.

The other thing I would say about the U.S. market that we are seeing and this is probably true for both cars and batteries, is that the energy storage opportunity on the grid side really is starting to get very interesting. And one of the things that we are seeing is that the largest interest or 50, 100 or 150 Think Cars is coming from utility companies. And we are seeing that obviously on a region-by-region basis, because that's how the utility companies are organized here, but the utilities are going to become very, very large customers of electric cars.

So we are pretty excited about that in some of the initial conversations that we are having with some of these large utilities are very interesting as well. Hopefully, that gives you some color there on what we are seeing.

Rob Stone – Cowen & Company

Right. Final question, if I may and this gives us something that have been asked about and have answered in other forum but I just wanted to bring it up again which is this concept of, is the U.S. through its various incentive program possibly in the near-term over funding battery capacity versus how long it takes the market to develop? And to puts its specific point on that, how do you think about the number of vehicle programs or perhaps a percent of new vehicle sales that might develop in, let say the next three to five years, being the uptick relative to that capacity is coming on one.

Charles Gassenheimer

So sure. I mean I think it is interesting, because if you think of the – philosophically if you think of the world of EVs is being a linear spectrum. And on the right or sort of the aggressive end of the spectrum, you have Renault Nissan and it's CEO, Carlos Ghosn who said publicly that there is not going to be nearly enough battery or vehicle capacity in the world to meet the demand side over the next ten years. And of course you made this comment that the Geneva Auto Show, so that was literally in the last ten days.

And on the other side of the spectrum, of course, you have Mary Ann Wright, Johnson Controls who made a speech to congress where she said, that the battery fuel seems to be over capacitized, over capacitizing. What I would suggest and I think my data that I presented to you today, not just as this. Is that Mr. Ghosn who clearly has a Euro-Asian view to the world, given that Renault is based in Paris and Nissan is based in Japan? Given that his view is European and Asian, and given that I will also share you with you we don't expect the U.S. to be more than 10% of our revenues in 2010 through 2012 timeframe, we agree with Mr. Ghosn.

Like Europe and Asia appear to be listing off, and remember the numbers that we presented to you today don't include China. When you come around to the U.S. market, it does appear, and again, unfortunately given we are a U.S. company but it does appear that the U.S. is very slow and very far behind on the uptick in this area.

We are seeing some encouraging signs, some green shoots if you will. But we are just not seeing the level of demand, and activity in the U.S. that we would think would be commensurate with the current administrations view that they left their cars, one of the most important items within the agenda of the White House, so.

I think it is very interesting. I think one of the reasons why you may be seeing more hearings on this in Washington DC is both congress and the White House may be asking how we stimulate demand, how do we get people to buy electric cars and how do we get people to make electric cars in the U.S. because Europe and Asia are really taking to this like a fish to water.

Rob Stone – Cowen & Company

It appeared to me to some degree like a chicken and egg problem but the fact is it's difficult for people to say, how large the market is because you can't really buy other than a Tesla Roadster, in the EV in the U.S. today.

Charles Gassenheimer

Well, and that's right and obviously, and soon to be the Think City in the U.S. today, so. We certainly acknowledge that there is part of that. We certainly acknowledge that some of the excitement around electrification in Europe and Asia, because there is more cars available. So I think 2010 will be a year where we resolve that chicken and egg conundrum. I believe that electrification can be a very, very successful phenomenon on the U.S. And on the battery side of course, I believe that grid storage is going to be very successful here in the U.S. as well.

So I think building capacity here to me still makes a ton of sense. But as with most thinks Rob, I think I also made comment that I believe to use baseball expression I believe we are still in the for staying and we have got to be a bit patient and we have got to let this game play out of bit and we have got to see how things come as some of the stimulus money starts to find its way into the economy.

And I don’t just mean the battery grants, but I also mean the smart grid grants they are starting to flow through. And of course some of that money is now started to come into the market. So – and the utility players are stepping up their game and they charging infrastructures now becoming a more serious phenomenon. So it just – I think it just a little bit of patience here over 2010. We will go a long way in terms visibility and certainty.

Rob Stone – Cowen & Company

Great. Thank you very much.

Charles Gassenheimer

Well, thanks. I'm going to cut off there; I really appreciate all of your time and attention to Ener1. I really do feel that 2009 was a best year yet. I feel like our execution has been really strong. But I think that the thing that gets me most excited about 2010 is, a, I think we have been able to recruit a world class management, b, I am very confident in our production plan. I think our production plan is very executable. It's not got assumptions in it that would cause me to think that we are reaching for the stars. I really do think it's simple blocking and not going; we brought it down to a level that we can really execute on it.

And finally, I believe this is the year that we can go on validate that we are technologically superior by putting cars on the road. So I think we have got a lot to prove in 2010 and I’m excited about doing that. I really look forward to seeing you that conference is on the road. And certainly, we will look forward to getting back together on our first quarter earnings conference call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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Source: Ener1, Inc. Q4 2009 Earnings Call Transcript
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