Ener1, Inc. Q2 2010 Earnings Call Transcript

Aug. 6.10 | About: Ener1 Inc (HEV)

Ener1, Inc. (NASDAQ:HEV)

Q2 2010 Earnings Call

August 05, 2010 05:00 pm ET

Executives

Rachel Carroll - VP of CC

Charles Gassenheimer - Chairman and CEO

Bruce Curtis - President, Grid Energy Storage

Gerry Herlihy - CFO

Rick Stanley - President

Jeff Seidel - CSO

Analysts

Dan Galves - Deutsche Bank

Steve Milunovich - Bank of America Merrill Lynch

Mark Wienkes - Goldman Sachs

Vishal Shah - Barclays Capital

Michael Lew - Needham

Dilip Warrier - Stifel Nicolaus

Matthew Crews - Noble Financial

Operator

Good afternoon and welcome to Ener1's 2010 second quarter earnings 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, Vice President of Corporate Communications for Ener1 Inc.

Rachel Carroll

Thank you. Good afternoon and welcome to the Ener1 management call to discuss second quarter results for 2010. Participants on today's call will be Chairman and CEO, Charles Gassenheimer; President of Ener1's Grid Energy Storage Division, Bruce Curtis; President of EnerDel, Rick Stanley; and Chief Financial Officer, Gerry Herlihy.

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 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 the 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. I would like to begin by addressing the rapidly changing dynamics on the demand side and how Ener1 is evolving as a company to respond aggressively to these new opportunities. This quarter we have made a number of new hirers in key positions, with a view to splitting the company into three product verticals, with profit and loss responsibility: The first, Transportation; the second, Grid Energy Storage; and the third, Small Cell & Consumer.

Small Cell represents the legacy business of Ener1 Korea, the business we previously referred to as Enertech International. That remains a solid contributor to the overall business with a positive contribution margin.

Transportation will comprise light and heavy duty vehicles, military and industrial, and continues to be our primary market.

Grid Energy Storage will be an increasing focus for Ener1, and we are encouraged by recent customer traction, notably signing a memorandum of understanding with Russia’s largest grid transmission company in June and believe this segment will experience rapid growth over the coming quarters. SS Car is the Grid Company in Russia and subsequently does not have the same regulatory burden as in other markets. They have identified and an immediate need to firm that on as part of the solution and put aside money to finance this project. We believe we can see revenues for this project as early as 2010.

The light duty passenger market remains at focus, but Ener1 is more aggressively pursuing higher margin opportunities in light duty fleet, heavy duty buses, military and grid energy storage. Target markets where Ener1 also has an edge either with existing technology or working alongside strategic partners.

Ener1’s strategy is therefore to build capacity in a way that is customer-agnostic. Shell capacity is the scarce resource and will be allocated to the different business units depending on a stringent assessment of the return on investment for each customer program. When assessing the attractiveness of a new program, Ener1 evaluates not only the headline pricing, but performs a comprehensive business assessment, including the implied engineering costs.

At this stage in the game, getting this right is absolutely critical to ensuring we prioritize the right programs. Programs where Ener1 can leverage an existing R&D spend are therefore particularly attractive. Ener1 is currently developing three different EV module configurations which can satisfy a number of different permutations at the PAC level.

We announced today a new industrial customer, Toro, that looks to be a significantly higher margin solution using the hard carbon mixed oxide, 17.5 Amp-hour developed for THINK. Under a new supply agreement, Ener1 will provide Toro with a complete turnkey solution to create the world’s first battery-powered (inaudible) mower. So what that means is coming soon to a golf course near you, earlier in tea time.

Ener1 was able to leverage an existing product solution and ship products at solid margins into what we perceive will be a rapidly growing for electrically driven equipment. As previously stated, Ener1 foresees the most lucrative and immediate opportunities in transportation to be light duty fleet trucks and heavy duty buses.

Ener1 continues to aggressively pursue contracts in these segments alongside strategic partners THINK and Wanxiang. The margins look to be materially better than we are currently seeing in the passenger vehicle segment. In heavy duty, everyone announced today that we will be supplying battery packs to Hyundai Heavy Industries in Korea. The packs for Hyundai are similar configurations as packs currently in operation in California with AC Transit.

To summarize, Ener1 has now publicly announced two programs in the light duty passenger vehicle market, THINK and Volvo, one light duty fleet market, Japan Post, three heavy duty programs with Hyundai, (inaudible) and AC Transit and two grid stores project with SS Car in Russia and PGE in the Portland, Oregon. And finally, two military industrial contracts with the TARDEC Humvee program and now with Toro.

Ener1 has a robust pipeline of customers and customer prospects. These announced programs represent just one-third of the active programs Ener1 is currently pursuing. Importantly, Ener1 will recognize revenue for its deferred type volume customers here in 2010. The revenue from these launch customers provide visibility through Phase I of our manufacturing ramped to 11,000 EV packs or 260 megawatt-hours, with the ability to flex to 15,000 EV packs or 320 megawatt-hours at a relatively small incremental CapEx. This learning curve is essential in driving scale, reducing manufacturing costs and leveraging research and development spend by selling in the new market opportunities.

To speak to you about unique opportunities we are seeing open up in the grid energy storage market, I would like to introduce you to Bruce Curtis, who joined us in July to head our Ener1's Grid Energy Storage division. Bruce?

Bruce Curtis

Thank you, Charles. Hello everyone. I am Bruce Curtis and I have recently joined Ener1 to lead their Grid Energy Storage business. What I’d like to do in the next few minutes is three things: First, to tell you a little bit about myself and my background; second, to explain to you why I’ve entered the energy storage arena and why I selected Ener1; and third, I would like to give you some high level thoughts on the business.

Alright, about myself. I have been working in the energy and utility industries over my entire 24-year career. I began my career here in New York City with Con Edison, where I held management positions in power generation and distribution. After Con Ed, much of my career has been evolved with the startup and managing the growth of new businesses.

In 1991, I co-founded the Dome-Tech Group, an energy services company which is openly acquired by United Technologies. Later, I co-founded DT Solar, a large scale solar PV project development and systems integrator, which partnered with Ted Turner to form Turner Renewable Energy. We were acquired by First Solar in 2007. At First Solar, I led their US program development team and then entering to the wholesale renewable power market. I also formed and managed First Solar’s advanced systems technology and application group.

Now, why I entered the energy storage arena. I firmly believe that in a not so far future, energy storage for the electric utilities will be what water tanks and reservoirs are to the water utilities today, an essential system. Energy storage is the greatest market opportunity that I have personally encountered. I believe that lithium ion chemistry is a good debt to be the future standard in grid scale energy storage. This will primarily be driven by technology advancement and cost reductions driven by the EV industry.

Lithium-ion will also benefit from EV secondary use applications, its high efficiency and system level designs simplicity. Now for the regions I choose Ener1, I believe Ener1 is well positioned to be a leader in grid scale energy storage and here's why. First, Ener1 is a technology leader today, with the mature EV cell chemistry and a design that is still proven as opposed to a new breakthrough in the lab. In addition to its inherent high efficiency Ener1’s sell packs have a high energy density. This will drive down the balance of system cost similar to the effect that high efficiency silver modules have on in the total plan cost.

Second, Ener1 has multiple chemistries available that can be targeted for specific utility applications. Third, Ener1 system solutions experienced an automotive applications is an excellent platform for utility scale systems development. And fourth, and a very important one to me, I was very encouraged by Ener1’s management division and strong support from market leading grid storage business.

I would like to close by giving you some thoughts on how we are thinking about our business. First, the primary objectives we had is the drill down and fully understand what targeted market segments we want to enter and the timing of this entry. We will develop comprehensive business models for these targeted applications. We will be balancing this market discipline with the need to build a near term project pipeline. We will focus on scalable markets and long-term programs not one off projects.

Second, clearly we want to develop assistant solution and field services capability at a minimum in the energy storage value chain. This is the only way we'll be able to effectively drive down cost on the system and plant level and optimize the battery cell design for utility good storage applications. The cell is a technology that makes this all work and is the largest cost to the system. So, it makes sense that we play a larger role in the value chain than a mere cell supplier.

Thank you for your time and I look forward to work into communicating with all of you in the future. I'll now turn the call over to Rick Stanley, President of EnerDel.

Rick Stanley

Thanks, Bruce. Ener1 continues moving ahead with our capacity expansion plan, the rapidly scaled US and Korean facilities in response to demand from our launch customers.

As we have previously communicated, we are currently installing capacity supply up to 11,000 EV pack equivalents or 260 megawatt hours of lithium-ion battery pack systems. We kicked off our capacity expansion program in November 2009. The program scope includes new equipment and facilities expansion at our large format cell fabrication facility in Korea as well as facilities preparation and installation of our initial battery cell and pack equipment in Indianapolis.

Throughout the course of this year our unique relationships with our launch partners have allowed us to fine tune this plan. For example our insight into think demand has allowed us to adjust our time and capacity deployment for 2010 and early 2011. Under the current plan Ener1's Korea's high volume cell capacity ramps up first followed by Indianapolis later this year. Better matching capacity availability with the real time demand has allowed us to manage the operating expense and CapEx demand on our cash resources while ensuring we are taking advantage of every available sale opportunity.

The overall capacity of our cell manufacturing modules, is sized around the capacity of the upstream electrode fabrication processes. These areas require a minimum level of equipment to be in place in order to operate effectively. Once the electrode manufacturing processes are in place, the total capacity of the cell manufacturing operation can be adjusted more flexibly. For example, while we've initially sized our capacity to 11,000 EV pack equivalents, capacity could be increased to 15,000 EV pack equivalents quickly and inexpensively as customer demand dictates.

Ener1 Korea continues to be a strategic asset. Our sell throughput for 2010 has been maximized by creatively deploying Ener1 Korea based electrode fabrication capacity along with Indianapolis based cell finishing equipment. And that result is earlier availability of higher volumes of cell to satisfy production and prototype demand for battery pack system. Ener1 is well aware that the affordability is the key issue in creating value for electric drive and create energy storage customers.

In the past we've noted progress in creating value to volume sourcing of bulk materials and developing second sources. More recently we have implemented focused value engineering resources to help drive down costs

At Ener1 we've recognized the strong cooperative relationships are a key enabler. As such it has become even more important that our long standings and strategic relationship with the ITOCHU Corporation be exercised in new ways and not only on the material supply side. We are aggressively taking advantage of ITOCHU’s capabilities on business development and distribution side to develop global market opportunities, particularly in Japan and Asia. In addition, we expect the upcoming JV relationship with strategic partner Wanxiang to create another link in this chain as we work as partners to create customer value.

Now, I will turn the call over to our CFO, Gerry Herlihy.

Gerry Herlihy

Thank you, Rick. We filed our 10-Q at 4.30 tonight, the following of the financial highlights from the 10-Q. Net sales were $16.1 million in the second quarter of 2010, an increase of $8.5 million or 113% over their prior year quarter. For the six months, net sales were $27 million, an increase of $11.3 million or 72%. The net loss was $15.5 million in the second quarter of 2010 compared to $13 million in 2009. For the six month period, the 2010 net loss was $31 million, compared to $20.3 million in the 2009 period.

The net loss per was $0.12 in the second quarter of 2010, compared to $0.11 in the second quarter of 2009. Weighted basic shares outstanding were $1 million to $31.8 million in the second quarter of 2010, compared to $113.8 million in the second quarter of 2009. Shares outstanding at June 30th, 2010, were $144.4 million.

Automotive production battery pack shipments began in May, with second quarter sales totaling $3.4 million. We are currently shipping 100 packs a month to Th!nk Global. Our small cell commercial battery business also improved as quarterly sales increased $3.8 million and six month sales increased $5.6 million over the prior year periods. Gross margins improved from $1.2 million to $2.1 million in the 2010 quarter.

Gross margin percentage declined from 15.6% to 12.9% due to startup variances related to automotive battery production. Included in the cost of sales is depreciation of $876,000 and $568,000 for 2010 and 2009 quarters.

Gross margin percentage before depreciation was 18% in 2010, compared to 23% in 2009. The year-to-date equipment expenditures were $54.6 million, including $38.4 million in the second quarter. DOE grant proceeds were $24.5 million for the six months, including $18 million in the second quarter. Ener1 Inc.’s total assets are $260 million at June 30th, shareholders equity is $156 million.

In June Ener1 announced an equity investment of $65 million from its principal shareholder Ener1 Group. This was the first trench of multi-phase investment plan and we expect to have the second trench of our strategy in place by the end of the summer. I will now hand the call over to Charles Gassenheimer, Chairman and CEO for final remarks.

Charles Gassenheimer

Thanks Gerry, this quarter has been one of solid execution, announcing new customers and strategic relationships, making considerable headway in ramping our manufacturing facilities and shipping commercial battery packs to launch customers.

The light duty passenger market remains the key focus, especially in Europe. In other regions Ener1 is seeing greater margin potentially in light duty fleet, heavy duty buses, in military and grid energy storage. Target markets where Ener1 has an edge either due to its unique product offerings or creating a clear advantage by working alongside strategic partners.

The US government has been an important part of Ener1. Last year Ener1 received grants totaling $118.5 million from the US Department of Energy. We are in final term sheet negotiations for a larger low cost loan from the US Department of Energy. We now believe that the total commitment amount will be in excess of $275 million and we are now in our third turn of term sheet negotiations.

The recent legislation proposed by Senate Majority Leader, Harry Reid, revealed the ideological commitment of the current administration to provide comprehensive legislation and funding to support the mass scale deployment of electrical vehicles and smart grid technology in the United States. The more recent proposal by Senator Udall to electrify the non-tactical arm of the U.S. military fleet by 2015 could also provide a phenomenal opportunity for Ener1 given its existing relationships with the US Department of Defense.

ITOCHU continues to be an incredibly important strategic partner. On August 1st, ITOCHU gave an interview to Safehaven where it outlined for the first time its comprehensive strategy in developing energy storage applications. ITOCHU has built ownership stakes in mining, material and equipment companies, procuring access to cheap precursor materials and manufacturing equipment. Lesser known is ITOCHU’s role as a business development organization. ITOCHU currently has ownership stakes in SYNC, Suzuki, Mazda and Isuzu and has three JVs with First Auto Works in China. ITOCHU is incredibly active in the wind and solar markets most recently signing a deal with General Electric. Their property development arm alone could absorb Ener1’s capacity in the residential energy storage market in Japan. In my mind ITOCHU is the most comprehensive player in energy storage today. Their continued financial and strategic support is integral part of the Ener1 story.

We expect to receive additional equity directly from it ITOCHU as we continue to successfully hit our milestones. This quarter Ener1 has also announced two new strategic partners that represent considerable revenue opportunities in transportation and grid. In May, Ener1 agreed to a JV with Wanxiang, the largest component supplier to the Chinese auto industry. Wanxiang has a formidable reputation in China. Its customers include FDIC, Chana, Haima and Yutong, the world’s second largest bus maker through Guangzhou automotive in which it has a significant equity interest Wanxiang has a JV relationship with Honda, Toyota and Fiat.

Guangzhou is currently supplying buses to the Shanghai World Expo, a project that is providing excellent exposure for Wanxiang’s EV capability. There will also supply buses to the Asia Games later this year. As the necessary diligence on the JV reaches a close which we expect to be late September Ener1 will update the market on the significant customer opportunities we are seeing evolve, as we marry Wanxiang’s considerable reputation manufacturing in balance sheet with Ener1’s industry leading technology. In June, Ener1 signed a Momentum of Understanding with Russia’s Federal Grid Company. FGC owes the world’s most expensive electric system despite facing record stating demand, transmission system that have seen two decades of deferred investment.

Consequently FGC has committed $15 billion in investment over the next two years. They estimate that the immediate implementation of smart grid technologies could amount to savings of up to $1.6 billion annually. We are particularly attracted to this market opportunity due to the pressing need for Ener1's unique systems technology. The fact that the funding is already in place and the lack of regulatory burden that can accelerate the speed of this project are also big pluses.

We are going to co-present with FGC at the Sochi Form in September 2010. So stay tuned for updates on this project. In closing, as I have stated on numerous occasions this is indeed a marathon race and not a sprint. The credibility Ener1 has built in the industry is starting to attract game changing strategic opportunities. Ener1 will continue to maximize its unique technology platform, manufacturing assets and time to market advantage. And we look forward to updating you with our progress over the coming months.

With that operator, I'd like to stand for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Dan Galves with Deutsche Bank. Please proceed.

Dan Galves - Deutsche Bank

Hoping you could give us a little color on the CapEx plan for the rest of the year, I think your plan is for $75 million in 2010. It looks like more than half of that we will spend in the first half. Is that the case and will that spending get you to the point where you are at this Phase I completion of 11,000 EV packs?

Rick Stanley

Yeah, hi, Dan, yeah we’re on track with the outstanding plan and that’s correct we will get to that capacity level of the 11,000 per year when we spend that project which is now about $72 million.

Gerry Herlihy

I think the facts are out there. There's $12 million that was in Korea and the rest of the money was being spend in EnerDel. We did receive over $25 million from the DOE to offset the US portion of that.

Dan Galves - Deutsche Bank

Okay what are you seeing in the, well, can you also give us an update on may be what has been forwarded by the DOE grant and if there's anything owed on the money that you’ve already spent.

Charles Gassenheimer

I think Dan to just sort of come out from a big picture perspective rather than just the dollars and cents of it. I think where we are, is we've already seen coming into this year that this was going to be a heavy lift year to say the least. I think where we are, is we are actually ahead of plan right now. So the reimbursements and the equity match are in line and we’re ahead of plan versus where we thought we would be. We've spent a significant portion of $12 million already for Korea and we expect Korea to start to ramp up the output on the sell per month basis here in August. So we’re really very excited, the Korean plan I was just there about three weeks ago and it really is looking fantastic out there.

In terms of in US side and where we are, I think at the end of the day where we’re going is that we are timing the implementation increase in cell production with some additional customer news that obviously we know about but are ready to announce yet. So, as we try to break that out for you on the call, we are very, very clear about every time we now spend a dollar it’s because we’ve got customer traction that we are spending at that dollar for. So, I think one of the things we’ve done a reasonably good job of and I guess the message we are trying to deliver to you and the rest of the analyst community is that we’ve broken down our CapEx plan as the bite-size chunks where we can actually now add incremental capacity without huge dollars. And every time we do that, it’s going to be to deliver more than $1 of revenue. So, it’s actually a very, very manageable situation from hereon out.

Gerry Herlihy

And one other thing Charles, I think Dan was asking about whether there was any overhang related to the DOE funds like there was in the first quarter where we were billing and receiving money before the equipment was arriving. But there was no overhang at June 30th, Dan. I think that’s what you were asking.

Dan Galves - Deutsche Bank

And then my other question has to do with the new customers. Can you give us any color on the timing potential customers for Hyundai Heavy Industry buses. Is this a development program or are they looking to make this kind of a commercial production bus program?

Charles Gassenheimer

I think a couple of things, I think the one thing I would highlight to you Dan is that, the one thing I made a comment on around just underline is that the Hyundai Heavy opportunity is immediate. So this will be in buses that we will be shipping packs to this year and on the road this year. So, we are reasonably excited in curbs because it was a short fuse opportunity and really EnerDel was one of the only companies they can come to in a world that could deliver.

So, I was encouraged by that. I think it’s a great program for us. Clearly, there is a bigger opportunity for us going forward. I would say this again, I mean we are not getting into specific details about volumes in pricing just because of the overall competitiveness that we are finding in the markets. But one of things I just want highlight is that we change the way we are approaching our goals and the way we are thinking about the business ended the 3 P&L segment. That we will be reporting going forward, transportation, grid energy storage and small pack, and I think that will help as well. As you start to see how we are going to scale and ramp the business. So, I think what you will find is that, that will be more helpful going forward.

Dan Galves - Deutsche Bank

Just one follow-up on that, I mean there is anything you can tell us on the sides of the batteries for these buses, are they pure EV buses or are they hybrids?

Charles Gassenheimer

It’s a very-very similar pack to the pack we are doing for AC Transit. I don’t know Rick if you want to give any color there.

Rick Stanley

These are fully EV buses that contain multiple packs as part of a system.

Charles Gassenheimer

It will be about, Dan, just to sort of benchmark it off as a THINK pack, you think about it as 4:1 ratio for every one bus, there’s four THINK packs.

Operator

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

Steve Milunovich - Bank of America Merrill Lynch

So Charles, just to be clear, are you going to be reporting revenue broken down by these three businesses going forward?

Charles Gassenheimer

Yes, Steve. So, as we start to move forward, that’s our goal. I don’t know if we will there get there by the third quarter or whether we will get there starting in 2011, but we are going to be reorganizing the businesses in the P&L units and I think one of things that I have been asked before and I’ll just sort of use this and I will talk about it. As you go from a company with. I need to be fair 40 employees when I joined in 2006 and now it’s 710 employees globally. As you start to go through that level of growth and your revenue goes through a 10x shift, you really need to start to think about how you mature the organization and how you manage the business.

And so by breaking it down into P&L segments with a president in each of those business units, they will be the P&L manager for each of those segments. And that allows us to better control how we go after and how we price and how we think about aggressively on-boarding new customers. And what that allows me to do is gain better control and visibility over how I allocate my cell capacity, because the cell capacity really is a scarce resource, and it's interesting because as you think about and as you think about some of the comments we've seen from the overall industry analysts for example, Roland Berger who really hadn’t done enough research to be able to really understand what this industry really is going to on the ramp side. And that's why they are finding conclusions really are quite mysterious, but as you think about that you think about what we need to do.

What we are trying to do is we are trying to create an almost auction environment in-house, where as we think about the three different segments and we think about on-boarding revenues, what we want to do of course is maximize the growth in EBITDA profit margin by splitting it into three separate segment. It allows us to better control that from a pricing control standpoint. So, I really feel very, very good about that and clearly obviously I feel good about the fact that we've been able to on-board some talent in the last quarter, including Bruce who has been a wonderful addition to the team.

Steve Milunovich - Bank of America Merrill Lynch

Can you talk a bit more about financing? It looks you are going to need money fairly soon. Did you say that you are likely to get more in the loan than expected and I don't how many turns you’ve seen this go through but you said three, so I hope we are getting pretty close and then you mentioned the second trench is that going to be coming from a ITOCHU and the same investors or might there be other investors involved in this next trench?

Charles Gassenheimer

On the first part about the DOE amount, I’m out of the prediction business, so I’m not going to say any more than that other than the most substantial part of our business plan in terms of the CapEx growth is the ATVM loan and it is the biggest driver to us getting the 3.12 gigawatt-hours of capacity by the 2015, 2016 timeframe.

And obviously given the amount of time and effort and more hearing thus going on, we feel reasonably confident that we will get the loan but at the end of the day it still requires approval from the credit group that the DOV, so it still needs to go in front of the credit review board and be approved. So we think we are within sitting distance that as with anything we got to keep going and this has been a marathon race and we are going to finish the race, race and get itself to go on, so what does that mean in terms of short term

In the short term we have the principle shareholders and other strategic partners that agree to fund the company during that period until we land the ATVM loans, the other thing I would point out in addition of board’s commitment ITOCHU additionally equity commitment is, the board has also agreed to convert $16.7 million convertible line of credit from debt to equity.

I think, that’s in the queue and I think one of the things that I look at is we find this to be the cheapest and the more sufficient way to fund the company in the near term, because we look at that the overall picture and we look at where our stock is trading overall and we just find that with where we are, we feel very, very confident, in fact we feel incredibly confident as we continue to build our business through the end of the year, that bodes from a revenue and potentially even getting to a cash flow perspective, we are going to be a very, very different company, six months from now than where we are today as we continue to execute on the milestones we have laid out and I think if there is notice that this past quarter’s execution is certainly evident to the fact that we are I think doing a pretty good job of having the ability to control that.

Steve Milunovich - Bank of America Merrill Lynch

Thank you and last question. You seem to indicate that you are backing off a little bit on the light duty market other than Europe, and you has talked about having an edge in these other markets. Do you feel that you are not as competitive as you would like to be for some of these kind of big car OEM's? And/or do you think the industry profitability just isn't what maybe a lot of people thought coming into it or you seeing the agents or other competitors just kind of low [bowling] here which makes it tough for you?

Charles Gassenheimer

I think that’s a fantastic question. Obviously it’s on analyst call, I can't give you a sound bite but let me sort of try to summarize and answer with the idea that’s probably a question that we debate on a weekly basis within the executive committee of Ener1. I think the answer to question is in summary that we are just simply seeing better gross in EBITDA margin in pricing in light and heavy duty and grip and as I said before filling up my type or filling up my plan with the highest gross margin possible is what I'm supposed to be doing. So, we certainly are excited about light duty and we certainly understand that that’s the key revenue driver and obviously to our equity commitment and think we are very, very much embedded in that market. I think we are the only one today still with a validated highway capable product on the road, obviously we listen to Evan Bayh testimony yesterday on his earnings call, where he thinks he has got a better product than the (inaudible) at both in terms of the pack levels and the BMS level, I think that’s going to be interesting to see if that gets validate, but at the end of day we feel that we are the only ones in the world with a highly capable product and we are certainly excited about seeing the song coming to the table with (inaudible) both come to table and now Ford has LG sales as well.

So I think its about pricing, its about margins, I think its about building credibility, I think that the approach we are probably going to see, that you see us take into the light duty market is to partner up similar to what you saw in June China with (inaudible) and probably through one or more partners see us approach that market because I say that market is certainly is competitive on pricing perspective as anything else so you know what does all that mean? What all that means to me is A, we are still very-very much active in the game B, we are absolutely considered one of the top three choices technically anytime we go to battle. C, we certainly don’t have the balance of an LG camera or Samsung Bosch and we can’t come in and bid under market just to buy business and that’s not something that I plan to do as long as I am CEO of this company

So I would say those are the key consideration every time we go to battle, but we are right there. So what does that mean? That means we need to partner up that means we need to find long term strategic partners who are going to help us and that can include OEMs and that can include Tier 1s and can include all of the above then you should certainly assume that the fact that I am going to about this obviously means that we are well down the road.

Operator

Your next question comes from the line of Mark Wienkes with Goldman Sachs please proceed.

Mark Wienkes - Goldman Sachs

Thanks good afternoon, Charles in your comments earlier regarding dialing the ROI across the multitude of opportunities either to best allocate yourself I guess how do you think about the investment cycle as a time to the realization of the cash on cash, because the Hyundai commentary would imply that you are thinking sooner is better?

Charles Gassenheimer

Dan, doing is better than talking.

Mark Wienkes - Goldman Sachs

Just in terms of perhaps as a higher return, but is three years out and would you choose something that maybe has a slightly lesser return but has a quicker payback?

Charles Gassenheimer

I think that the answer to your question is as follows which is that the best analogy I can give you is the way I see the market today is very, very much as I would sort of analyze the bond market in the sense that we believe we are going to be in a rising interest rate environment, so you want to keep the duration of your portfolio relatively short. So as I think about that, what I am seeing is that you don’t want to spill up your pipe with sell and pack commitments at the wrong price. And what do I mean by the wrong price? I actually think, contrary again to the industry research that might be out there around, and we keep picking on Roland Berger but that report was just so nonsensical, but at the end of the day, I will just stress that cell capacity is going to be at an absolute premium. And if you have the opportunity to go and sell a bunch of solutions to a customer and they are in desperate need and you can sell that at $2,000 to $3,000 kilowatt-hour but yet you committed all that capacity to an automotive customer at $400 kilowatt-hour. That doesn’t make a whole ton of sense to me from a business perspective.

So what we are doing is we are staying relatively nimble, certainly if a fat pitch opportunity came down the pipe, and we would look at it and we take it very seriously, but I don’t know that now is the time to try to get fully committed at the wrong price. I do believe very, very strongly that grid energy storage is going to be a much fatter opportunity or fat pitch opportunity, both in the sense of growth in EBITDA margins and as we start to organize ourselves into groups that can properly allow us to have competition within Ener1 for that cell capacity.

I think that we are going to able to see that we can really generate substantial cash flow in 2011. So what does that mean for the balance of the year? That means that we are going out and we’ll try to do that, we are creating that level of competition that I think is going to be very healthy. And that’s how I think we get to over-deliver against where we think we are going to be. I feel pretty confident right now given some of initial feedbacks and some of things we are seeing and especially for example SS Car in Russia.

Which I think, again we could have the potential to surprise you with some revenues out of that this year. So, we are starting to see some real traction that gets me very encouraged.

Mark Wienkes - Goldman Sachs

And just follow-up, in your previous response you mentioned in relative scale of balance sheets across the industry, I guess what do the key metrics OEM typically look to, you can differentiate between when you are talking to a light vehicle class versus a heavy duty class. When they are assessing the potential battery suppliers, what are they bringing?

Charles Gassenheimer

Right now they are ranking technically first. And as I said before, what we are seeing is that EnerDel was always on the top three lists. And I think we rank out very highly technically. I think what you are seeing on heavy duty and light duty side is we are winning because we’ve got technically the best product. Okay. And there’s less price activity because there is an immediate payback on the light and heavy duty market, right. If you are paying $0.15 to $0.20 a mile and you can bring that cost down to $0.5 a mile that breaks even within the first year for these customers. So there, because we’ve got technically the best solution we are winning, and Hyundai for example right, so here we are, we are ready to go and we’ve got the solution.

I think on the automotive side, with the light duty market the sales cycles are much, much longer. They can be as much as two years in length and there again technically the shortlist get created and then it just become the bidding war. Who wants it bad, and who is going to come down to $300 or $400 kilowatt-hour in some cases and again, there I am not sure that being a hero right now is the right thing to do in a market where I think there is going to be a lot richer opportunities to commit your capacity too. So, regardless of my balance sheet, okay which again I think has been over played in terms of being a problem because we are doing much-much better than I think what the research would indicate.

Regardless of our balance sheet, we are being successful because I think we are being smart and prudent and I think I will give you an exact and specific example. There is a large light duty OV that's looking at us for cell supply and potentially modular and pack supply. And one of the reasons they are encouraged about talking with us this is our honesty, and the fact that we are not coming in and trying to buy business from them is because they are looking for a long-term healthy supply partner because nothing is more expensive to a car company than they have to come in and bailout their supplier. And I think they really appreciate our level of honesty and I think we are doing real well there because of that. So that gives you a very specific example. So I think it's about focus, I think it's about target and I think it's about sticking to business fundamentals.

Operator

Your next question comes from the line of Vishal Shah with Barclays Capital. Please proceed.

Vishal Shah - Barclays Capital

Charles, on THINK, did I hear you say 100 packs per month run rate, is that the plan for the rest of the year? Do you have any plans to accelerate that (inaudible) and then I have a couple of other follow-ups.

Charles Gassenheimer

No, as we’ve said all along the 100 pack per month or 25 pack per week run rate with the initial volume ramp, as many of you aware in August in Europe things slowed down quite a bit. So as we come into the September ramp, you are going to see us work that volume up towards the end of the year.

So again, without sort of getting into specific volumes, we have talked about going from 100 to 300 and then auto did 900 packs a month and we still feel pretty confident in that walk up over the next six to 12 months.

So we are feeling very, very strong, we are seeing the demand side for things start come through toward those or to unit volumes and 2011 looks like it could be a real good year for us.

Vishal Shah - Barclays Capital

And then on the contract you announced with Hyundai, were you competing with any other battery supplier and how long have you been in discussions with them?

Charles Gassenheimer

There again, don’t want to get into too many details, but if you pull up some of the Korean newspapers, you will see that we actually replaced an ultimate battery supplier who unfortunately wasn’t able to deliver, so that’s all pretty much stated in the press.

So you can do the homework there pretty quickly. So we feel pretty good about that and obviously it’s always good when you are able to come in and help a customer solve a problem because anytime you can do that and you can deliver. Then there are going to be more women in company going forward, right. You got a friend for life when you help a customer solve a problem, the specific issues there I can’t really get into in more detail because of the nature of the relationship but we feel pretty good about that.

Vishal Shah - Barclays Capital

And then on the grid side, I know Bruce has stated, so maybe you can help us understand what your plan is for that business in the next couple of years and how you look at the grid opportunity here in the US and at some other parts of the world.

Bruce Curtis

Like I mentioned in my talk earlier, we are going to look at this very selectively in the US in terms of targeting the correct markets and applications that the scaled outlook for the profitable beachhead applications that we could do obviously put into regulation as the market that’s open now and you see other lithium-ion battery providers effectively building projects and development projects.

So we are going to closely look at that, we are going to look at some other maybe some unique applications that others haven’t looked at, but as you know it’s going to take a little time to get the utilities to adopt the technology and regulatory reform, market reform the curve.

We are really excited about the Russian opportunity, I'm personally really surprised and excited about the level of engagement that they are having with us. So, we are going to really closely look there and hopefully we can scale and understand how to build these units for less cost and get some technology and some technical knowledge as we grow.

We pretty much see the US as a clear market, the timing is going to be important on where and when we enter, but we want to get some early wins on the board too. So, then three weeks old here and having a lot of fun, but we are hopefully going to get some wins on the board soon. So we can have something to talk about.

Operator

And next question comes from Michael Lew with Needham.

Michael Lew - Needham

In the past Charles, you highlighted the expectation for revenue contribution by region to be lead by Europe in the upcoming years and how much will that outlook change once the JV with Wanxiang is signed and in place?

Charles Gassenheimer

There are two answers to the question Mike. As you know, we feel pretty good about getting the JV papers by the end of the September which means that we would have immediate traction on the revenue line starting in October. Your answer to the question is more of an accounting answer which is obviously related to the 60-40 JV. We would not consolidate revenues in the (inaudible) income statement right.

So we feel really good and clearly what this does is it gives us access to the hugely, hugely rapidly growing Chinese market. Again it’s one of those where I think you saw some of the news out from the Chinese government that they are potentially willing to stimulate the hybrid electric vehicle market in China, with as much as 15 billion or more.

So we think we really, really excited about that. We think that we are in a very, very, very profitable leash and especially in EV buses heavy duty and we think that this gives us a really good access on what will create a tremendous amount of value for shareholders.

Michael Lew - Needham

Now they think it could be a like 45-45-10 split Europe, Asia, US that kind type of outlook if everything goes according to plan?

Charles Gassenheimer

You know its hard to predict. I think a lot of that depends on Russia who include the grid opportunity in Russia and Europe. Next year could actually be 60% or 70% Europe. So we are starting to see some real traction out of Russia because as we think about that and then as we think about the US and we are starting to see traction and we will have some announcements here in the US side with automotive here at the back half of this year.

If I had to take a stat at that, I would say probably 60% to 65% Europe, I would have to say 15%, maybe even 20% US, and then the balance is Asia if you were to consolidate the revenues in JV with China being the lion share of that.

Michael Lew - Needham

And in China given there as a propensity to use iron phosphate in that region, once the JV in place, is it a strategic plan to start leveraging Enertech's capabilities to offer that chemistry as you go to market?

Charles Gassenheimer

One of the things we are seeing and why formed the JV is that while Wanxiang has buses on the road today at the Shanghai Games and because of the battery management system and other software that they have created, the buses are running quite well.

One of the things they have set up in Shanghai is that battery swap stations and we are just not seeing the energy density from ion phosphate to be able to run these busses long enough. So what we are having is swap out the batteries for too long, meaning we are having to swap out the batteries too often and the other thing we are seeing is that life of the battery packs is not where it needs to be from a residual standpoint with the ion phosphate.

So, I think what you are going to see is we are going to be shifting over to the manganese, the mix oxide chemistry as we start up the JV and that was sort one of the reasons why Ener1's technology was required. So we are going to be shifting that over from both an energy density and life perspective, the life is important for the buses, not because of costs.

Okay, but because of the number of times you have to swap out the pack which is both timely and it means the bus is down for that long. As you shift over to more of the passenger in EV market, the residual value and the license is important because the higher the residual value, the lower the cost of the battery pack to the automotive consumer either in the form of a lease or other form of financing.

So one of things as you know we really worked hard on with ITOCHU is creating secondary used markets for the battery and coming up with a residual bid which we think could be relatively high, so as we look at it getting the $300 of kilowatt hour for the automotive consumer is going to be all about creating a residual bid for that battery pack.

And we think the manganese-based chemistries are going to have the highest residual bid. So I think those are some of the answers to your questions hopefully that gives you some color on what we are thinking.

Michael Lew - Needham

And one last question with regard to Volvo, how is that tracking or the 10 demo vehicle still schedule to be on the road in the fall.

Ulrik Grape

Now everything is on track with Volvo running on schedule and we are getting ready to deliver quite a few more batteries to them here in the autumn. So the relationship is excellent, so I think you are going to see more out of that as we progress in the autumn as well.

Operator

Your next question comes from the line Dilip Warrier with Stifel Nicolaus.

Dilip Warrier - Stifel Nicolaus

I had a question for you on Russian grid opportunity, do you have any sense of the timing on the spend of the $15 billion that have been approved and any sense of what percentage of that could be set aside for energy storage reliability stuff of that?

Charles Gassenheimer

Good, we understand that again this is very much a work in process, I mean let’s recall we only singed the MoU just over a month ago, right. So I think we are still trying to work some of that out. What we understand is that the $15 billion is planned to be spend over the next two years and we understand that they are looking for somewhere between $1.6 billion and $1.8 billion a year of cost savings. So I think what we are seeing is a huge acceleration in that spend. I don't know Bruce if you want to breakdown how much of that could be for storage versus other products. It might be bit too granular at this point.

Bruce Curtis

Yes, Charles, I think it's little too early to tell that.

Dilip Warrier - Stifel Nicolaus

What is the vision here? Are you expecting to assemble sales tax modules in trailers and shift them over there or are you expecting some sort of assembly and construction work over there?

Bruce Curtis

Well, initially it make sense for us to assemble them here and I think if orders are large enough we would look to which we expect -- we look to build them over -- assemble them over there, it’d be actually cheaper in the long run for us though.

Operator

Your next question comes from the line of Matthew Crews with Noble Financial. Please proceed.

Matthew Crews - Noble Financial

Just a follow-up on the Volvo question, now that Geely has finalized their sale, have you had any chances to talk with those folks or what’s your opinion there in terms of opportunities between Volvo and their new owner?

Charles Gassenheimer

Sure, Rick, do you want to address that question.

Rick Stanley

Sure. I think that we have been actually working towards Geely as well, and if you will in parallel or for a while here now as well. So, we are attacking this from both sides. So, we are I think very bullish on this joint company and the opportunities that exists with that as well.

Matthew Crews - Noble Financial

And just switching over to grid, I know that it's hard to get some details since it’s sort of new for you guys, but there has been news out with AES in installing a 20-megawatt system in New York, and there is a 40 more megawatt of ups that’s they want to install plus there is several megawatts in the PJM, if you had a chance to look at closer to pricing I know there was conversation today regarding questionable on how competitive the pricing is on those systems?

Charles Gassenheimer

Well, yes, a lot of these systems that have been announced are being there is some funds some funds, some grants that are associated with them and some as long as you get go along with that, but I think in terms of frequency regulation it is a market, some markets that PJM look better than others like, (inaudible) doesn’t have an open market yet for storage that should occur maybe next fall. So we’d have to wait to see how that plays out but the, I think the answer to your question, the system cost needs to be driven down and as you drive down on these cost on the system level we can hopefully open up some new markets in addition to frequency regulation in some more lucrative areas like New York and PJM. Does that answer your question?

Matthew Crews - Noble Financial

I know it’s a great new world out there in terms of regulations on demand side, in terms of the technology, do you feel that accelerating the development if we are looking tightening its going to offer you once again a competitive advantage on specifically the frequency regulation side which requires more of a high power system versus your traditional high energy system?

Charles Gassenheimer

That’s a good question. One thing that we are going to definitely do is and this is an advantage I think that Ener1 has its multiple cell chemistries and we are going to be able to test different cell chemistry to see what looks best maybe of the cells that have more of a levy could participate and react that’s enough to participate in frequency regulation and get the see rates so, what would be great to have some systems that have multiple capabilities to react with enough power, but also enough energy and as you drive the cost down I think the energy level applications will be very lucrative as we can get the cost down.

Operator

Your next question comes from the line of Paul (inaudible). Please proceed.

Unidentified Analyst

That was an interesting pronunciation of my last name. Congratulations first of all on the tour announcements, I wanted to ask you also about (inaudible) if I'm saying it right. How much capital will you contribute to that JV for that 40%?

Charles Gassenheimer

Sure, so Jeff you want to manage that one?

Jeff Seidel

Yeah, sure. There are two JV's that are in process with (inaudible) first on the cell side and then a second JV on the pack side. The pack side we anticipate being relatively slow in terms of capital commitments somewhere in the neighborhood of $8 million to $10 million initially and on the central side the dollar commitment is much more significant namely in the neighborhood of probably $100 million up to 300 million amp power of capacity, but we are not going to, cash finance that as we start up the JV that we will receive a financing arrangement with (inaudible) whereby we will pledge our collateral in the JV or JV or ownership is collateral against the financing arrangement with (inaudible), that’s the plan as we stand today, so I think we’ll be able stay capital light, obviously we’ll have the obligation but as the JB grows we’ll able to either receive local financing or just grow the business and then pay off the financing rate.

Unidentified Analyst

And these numbers that you just threw out the door, is related to the figure in the press release I think it was few capacity of 20,000 packs by the end of 2010.

Jeff Seidel

Yeah that’s where we are today you know we believe that we have got a good capacity number in terms of what their intention are to get by the end of 2011 and that’s kind of the initial ramp for capacity in the JV so that’s I think ultimately that the business will be much bigger than that, but that’s where we are initially focused.

Charles Gassenheimer

And Paul just a follow up as you probably remember from the original announcement on the pack side its going to be a 50-10-40 JV and Ener1 40 ITOCHU 10 and Wanxiang 50 and there is a reasonably good chance that ITOCHU will fund our equity commitment on that as well so there may even be a scenario where we entered this with limited to no cash up front.

Unidentified Analyst

And I know you have already been asked this a couple of times, but I'll try to go here again, I know there is only so much you can say today about the Hyundai Heavy Industries and its oral agreement, but anything else that you could give us with respect to the scale of agreements would be helpful obviously to kind of measure their level of commitment here. So, are we talking about signed orders for multiple vehicles or are we talking about more prototypes a few prototypes?

Charles Gassenheimer

No, in both cases we are talking about multiple vehicles; vehicles and (inaudible). Alright, so on the vehicle side, we are talking about multiple and these are on the road vehicles, these are not prototypes this is a supply agreement bonafide on the [Nova] side again and it is supply agreement and it is for multiple units. So these are both real supply agreements.

Operator, any further questions?

Operator

We have no further questions in the queue.

Charles Gassenheimer

Okay. Thanks very much for joining. We appreciate the continued interest in supporting Ener1 and look forward to further update on the conference circuit and on the next quarterly conference call. Bye-bye.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. All parties may now disconnect. Enjoy your day.

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