Ener1 CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: Ener1 Inc (HEV)

Ener1, Inc. (NASDAQ:HEV)

Q3 2010 Earnings Call Transcript

November 4, 2010 5:00 pm ET

Executives

Rachel Carroll – VP, IR

Charles Gassenheimer – Chairman and CEO

Jeff Seidel – CFO

Bruce Curtis – President, Grid Energy Storage

Tom Goesch – President, Transportation

Analysts

Dan Galves – Deutsche Bank

Steven Milunovich – Bank of America

Mark Wienkes – Goldman Sachs

Jake Greenblatt – Barclays Capital

Dilip Warrier – Stifel Nicolaus

Matthew Crews – Noble Financial

Bryce Dille – JMP Securities

Jaimie Levin – AC Transit

Operator

Good evening and welcome to Ener1's 2010 third earnings conference call. Today’s call is being recorded. (Operator instructions) I would now like to turn the call over to Rachel Carroll, V.P. of Investor Relations for Ener1 Incorporated.

Rachel Carroll

Great. Thank you. Good afternoon and welcome to the Ener1 management call to discuss third quarter results for 2010. Participants on the call today will be Chairman and CEO, Charles Gassenheimer; Chief Financial Officer, Jeff Seidel; President of Grid Energy Storage, Bruce Curtis and President of Transportation, Tom Goesch.

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, actually future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors. I will now turn the call over to Charles Gassenheimer, Chairman and CEO of Ener1, for opening remarks.

Charles Gassenheimer

Thanks, Rachel. Good afternoon. It's great to be able to speak to so many of you again on Ener1's third quarter earnings conference call. Let me start by giving some highlights of Ener1's achievements since our last quarterly earnings call.

On November 1, Ener1 announced the signing of its first material supply agreement in the grid energy storage space with MGTES, a wholly owned subsidiary of the Federal Grid Company, one of the largest electricity transmission companies in the world. The contract is for $40 million. Approximately $36 million of the revenue for this project will be recognized in the first half of 2011, $4 million in 2012.

This new bolt energy storage contract is in addition to the work we are already doing with Portland General Electric for a frequency regulation application. These pilots also allow us to field test our technology and rapidly develop two different energy storage products in parallel to potentially sell the new customers in North America, Russia and other emerging markets.

Ener1 is segmenting its business into three verticals, transportation, grid energy storage and small format pack products which includes consumer and military. This allows us greater flexibility to aggressively pursue the high-growth opportunities while the market potential for volumes and profitability in each vertical evolved.

In this quarter, Ener1 delivered its fifth consecutive quarter of revenue growth and has now successfully launched commercial product in each vertical. Ener1's growth has received industry recognition. And this quarter ranks as the number one in the northeast region for Deloitte's Fast 500 program, an award that ranks fast growing technology companies in North America and Canada based on their five-year revenue growth and innovation in commercializing new technologies.

Ener1 continues to ramp its manufacturing facilities in Korea and the U.S. We anticipate a fourfold increase in manufacturing throughput in our Korea operations from the third to the fourth quarter of 2010. Ener1 is able to transfer Ener1 Korea's 10 years of experience in producing prismatic lithium ion cells to rapidly ramp its U.S. facilities. Since start of production in May of 2010, Ener1 has produced and shipped over 572 packs for THINK and Volvo. All products have met or exceeded industry quality standards.

Having a portfolio of manufacturing assets also allows Ener1 to centralize purchasing and aggressively pursue cost down targets as well as strategically allocate capacity utilization. This allows us to produce one of the highest quality prismatic solutions in the industry at a highly competitive price.

We continue to emphasize the importance of research and development and our technology leadership in the industry. Demand for high power and robust long life applications in both grid with frequency regulation and transportation with PHEV and EV – PHEV, HEV and heavy duty applications has pulled for the time-table for commercialization of Ener1's lithium titanate chemistry.

As we have previously discussed, this chemistry is showing excellent potential through a rigorous evaluation by one of our potential automotive customers. We have achieved more than 10,000 cycles with 100% depth of discharge at 25 degrees Celsius and one C discharge rate with only 10% loss in capacity. This outpaced one of our competitor's cells by over 5% under precisely the same conditions.

In our view, the ability to work with multiple chemistries and develop complete turnkey solutions remains unique to Ener1 versus our peer group. In 2010, Ener1 successfully raised north of $160 million in a combination of private and strategic investments. These funds allow Ener1 to expand its global manufacturing footprint to 260 megawatt hours of capacity for which it has solid demand visibility. As a consequence, we were able to give our customers a high degree of comfort that we can meet their requirements. We continue to believe in a step-by-step approach to adding incremental capacity and in making prudent capacity allocation decisions.

Our next step, which we expect to complete by the end of 2011, will take us from 260 megawatt hours to 360 megawatt hours. We estimate this step will require between 15 and 20 million of additional CapEx, of which some portion will be underwritten by the U.S. federal grant. We continue to be very excited about the growth prospects of the overall market and flatly disagree with some of the analysis that has been presented recently about EV [ph] penetration rates.

To discuss these opportunities in more detail, I will turn the call over to Ener1's President of Grid Energy Storage, Bruce Curtis and Ener1's President of Transportation, Tom Goesch. Bruce?

Bruce Curtis

Thanks, Charles. The characteristics of lithium ion technology are particularly well suited for bulk energy storage, frequency regulation, community and stationary energy storage applications. Ener1 has identified a number of near-term opportunities in North America, Russia and other emerging markets.

This week, Ener1 announced its first material supply agreement in bulk energy storage for a $40 million pilot project with the federal grid company, one of the largest electricity transmission companies in the world. $36 million of revenue should be recognized in the first half of 2011 and $4 million in 2012.

Systems will be delivered and installed at the end of Q1 and then commissioned in Q2. This is a unique opportunity. FGC operates in a competition free environment with the Russian Energy Minister as its chairman. It has fully funded investment program of $15 billion over the next two years.

We believe there is a considerable potential upside to this initial opportunity. The speed to implementation is also important as it allows Ener1 to rapidly develop its high energy platform architecture, which can then be sold into other markets.

The supply agreement was signed with a fully owned subsidiary of FGC, translated as Mobile Gas Turbine Electric Stations or MGTES. MGTES currently uses 18 mobile gas turbine generators with the cumulative generating capacity of 405 megawatts. These units are mobile, allowing them to relocate to energy star regions of Russia as needed.

The project applications require high energy density, which is a core advantage with the Ener1 EV cell developed for THINK. The systems will be custom engineered and will require startup, commissioning and long-term system monitoring and maintenance support. The additional services and systems provided positively impact the overall value of the project.

Ener1 continues to make progress with Portland General Electric. The PGE project will utilize our PHEV battery cells, which we will see Ener1 create a second platform designed suitable for fast high powered frequency regulation applications. For both platforms, Ener1's ability to work with multiple chemistries to offer targeted and hybrid designs and complete turnkey solutions is a distinct competitive advantage.

While still early in the process, a bottoms-up analysis of identified projects in the bulk energy storage and frequency regulation markets could potentially represent a $300 million revenue opportunity for Ener1 by 2013, with attractive gross and EBITDA margin potential. Going forward, community and stationary energy storage markets represent excellent candidates for secondary use applications.

We believe that Ener1, ITOCHU Mazda project currently operating in Tsukuba, Japan, is currently the only demonstration project in the world collecting life-predicting data for secondary use models. Over 50 car sharing commuters are currently using the converted Mazda EVs with the Ener1 battery and THINK drive train. Determining the residual value of the battery and full [ph] pricing for utilities is the key to unlocking the secondary use model.

Phase two of this project will be launched in 2011 and will involve the opening of a second demonstration site in Japan. The GES and transportation business segments are also collaborating with ITOCHU, THINK and a major U.S. utility to establish a U.S. based project.

I will now turn the call over to Ener1's President of Transportation, Tom Goesch.

Tom Goesch

Thank you, Bruce. Ener1 has successfully launched products within the three categories of the transportation vertical, industrial, light duty and heavy duty off road vehicles. We retained a disciplined approach to product development. Our internal philosophy is one where each program competes for capacity and resource allocation based on profit potential.

In industrial, Ener1 has responded to a number of opportunities where it can use the technology that it has developed for THINK and sell into other high margin categories. In light duty, we believe that Ener1 has established itself as an early leader in pure EV technology with its strategic partner THINK. Ener1 is currently shipping at a rate of 30 packs per week and expects to increase to a rate of 75 packs per week through December.

We continue to believe this will give us an edge by providing real world data for new customers and follow-on sales for early adopters and commercial fleets. The interest in Ener1's LTO chemistry for HEV applications, coupled with the phase out of nickel metal hydrate technology beyond 2012 has also led to a number of new program opportunities in the HEV category, especially in the North American market.

Ener1 has seen a considerable increase in demand in heavy duty, notably from the North American bus market. Ener1's energy density solution and pack systems expertise are particularly well suited to this market. And consequently, we are targeting industry leading market share in this North American bus market.

A bottoms-up analysis of launched customers THINK, Volvo and other identified projects and transportation with a shifting bias toward heavy duty could represent a $300 million to $500 million revenue opportunity for Ener1 in the 2013 timeframe. Finally, as follow up to the Hyundai heavy industry development program announced on last quarter's earnings call, Ener1 can (inaudible) that we are powering the 10 E-Primus electric busses at the upcoming G20 summit in Seoul, Korea, transporting dignitaries between key sites. Upon completion of the summit, these busses will be placed into service on a public route in Seoul.

I will now turn the call over to Ener1's CFO, Jeff Seidel.

Jeff Seidel

Thanks, Tom. With the end of the third quarter and most equipment deliveries in place, Ener1 is progressing as planned with the build out of release one of our global manufacturing footprint, just 260 megawatt hours.

At Ener1 Korea, where we’ve been producing state of the art prismatic lithium ion cells for over a decade, production of our large format EV cell will ramp from 2.6 megawatt hours per month in the second and third quarters of 2010 to 9.2 megawatt hours per month in the fourth quarter. This is nearly a fourfold increase in throughput in less than nine months.

In the U.S., our EV module and pack line has been running at rates almost simultaneously with the startup production in May. We have produced over 572 EV packs, an overall equipment effectiveness rate has been at or above industry standards. With the increased cell availability out of Korea, we expect to ship over 300 EV packs per month by the end of quarter four.

Our cost down activities are gaining momentum. We have a 10% reduction in our non-cell pack costs already identified and have four cost down projects underway per cell. One key to cell cost reduction is volume purchasing of raw materials, in this case, combining the Ener1 volumes with potential Wanxiang JV volumes along with the engagement of our key strategic partners ITOCHU will provide the purchase scale needed to drive raw material production.

Net sales were $17.3 million in the third quarter of 2010, an increase of $9.1 million or 113% over net sales of $8.1 million in the third quarter of 2009. This represents the fifth consecutive quarterly revenue increase for the company.

For the nine months, net sales were $44.3 million, an increase of $20.4 million or 86% over the same period last year. The net loss was $26.9 million in the third quarter of 2010 compared with $15.8 million in 2009. The increased loss during the quarter was largely due to non-cash debt conversion expense of $13.2 million. Adjusting for debt conversion expense, the net loss was $13.7 million.

The net loss per share was $0.18 in the third quarter of 2010 compared to $0.14 in the third quarter of 2009. Weighted basic shares outstanding were $148.632 million in the third quarter of 2010 compared to $131.804 million in the second quarter of 2010. Shares outstanding as of September 30th, 2010, were $151,660,747.

Automotive production battery pack shipments began in May with second and third quarter commercial sales totaling $7.7 million. Our small cell commercial battery business also improved. Quarterly sales increased to $8.8 million from $5.3 million in Q3 of last year. Nine month sales increased to $24.1 million from $14.3 million in the same period for 2009.

Gross margins improved from $424,000 in the third quarter of 2009 to $2.1 million in the third quarter of 2010. The gross margin percentage increased from 5.2% to 12.2%.

Year-to-date equipment expenditures were $67.1 million, including $12.5 million in the third quarter. DOE grant proceeds were $37.7 million for the nine months, including $12.1 million in the third quarter.

Of the $37.7 million, $28.6 million was reimbursed for equipment expenditures and $9 million was reimbursed for engineering expense. As a result of the DOE grant, net equity investment and manufacturing equipment was $37.6 million through the third quarter.

During the quarter, Ener1 receive $24 million in equity from Ener1 group, sold $55 million of senior unsecured notes, together with shares of common stock and warrants with funds led by Goldman Sachs asset management and sold $10 million in senior convertible notes to strategic partner, ITOCHU Corporation. This follows the $65 million investment from principal shareholder Ener1 group in June 2010 and a $20 million investment from ITOCHU Corporation in December 2009.

With regards to the ATVM loan, we remain in the solid opposition to close the loan in the near future. DOE has indicated a desire to complete our application and we are working to fulfill the requirements necessary to close.

Remember that DOE has not closed any ATVM loans in 2010. Time delay has enabled us to put in place a significant portion of the recovery act grant, which is scheduled for completion by the end of January 2013. On successful completion of the ATVM loan, there would be minimal overlap between the grant and the loan. We view this as a desirable outcome.

I will now turn the call back to Charles.

Charles Gassenheimer

Thanks, Jeff. Let me give you a brief update on THINK. Ener1 increasingly views THINK as a strategic asset and technology partner in addition to being an important launch customer to take Ener1's battery manufacturing to scale.

Ener1 announced last week, as a subsequent event to the end of the quarter, that its equity ownership stake in THINK is now around 44%. This increase in ownership did not impact Ener1's cash position as the increased equity ownership in THINK was obtained in exchange for Ener1 common stock.

THINK is projected to sell 1,700 Think City vehicles in 2010, ramping to approximately 6,000 units in 2011 in the European and North American markets. THINK is additionally exploring other opportunities in the Asian market, especially drive train partnership opportunities in China. And it continues to sell to a wide mix of customers.

Norway is largely a retail market and due to the favorable avoidance of 100% VAT tax on an imported vehicle with an internal combustion engine, the Think City can achieve an attractive price point. Additional benefits for THINK and all other electric vehicles in other European markets include use of the HOV lane, free parking at or close to choice retail locations and access to prime charge polls where ICE cars done have access.

Additionally, THINK is seeing opportunities in the fleet markets. Notably, the recent GE announcement is a prime example of the type of behavior we are now seeing from large corporations and growing opportunities in the fleet sector as a whole.

THINK has had over $200 million invested in its product development and now has over 30 million miles of all-electric drive experience. This makes THINK one of the most matured drive trains in the industry with a modular platform architecture that can be adapted for numerous plug-and-play drive train sale opportunities. This has led to a potential ancillary drive train business with opportunities in Japan, China and Europe.

THINK recently announced it will be partnering with Jaguar, Landrover, Lotus and Nissan to form a consortium called Revolution, co-founded by the U.K. government to develop a low-carbon solution in the PHEV space. The Revolution target is to deliver advanced engineering demonstrator vehicles with a sub 50 gram per kilometer tail pipe emission, which is typically a 70% to 75% savings over a similar vehicle with a conventional power train. The E.U. has reduce mandatory vehicle emission targets to below 95 grams per kilometer by 2020, target that would virtually require vehicle electrification.

Ener1 is currently negotiating a 40/60 JV relationship with Wanxiang, the largest tier one supplier to the Chinese auto industry. Ener1's senior executives have been involved in multiple trips to China establishing the JV senior management team and business plan. The JV expects to commence operations with its existing 390 megawatt hour capacity currently in operation and has good visibility on 2011 and 2012 revenues from existing Wanxiang customers.

Next week, I will accompany Governor, Mitch Daniels and a delegation from Indiana on a 10-day trade mission to China and Japan. The governor's mission is to continue to expand the more than 42,000 Hoosier jobs that are currently employed by Asian companies and to increase the $10 billion in capital investments, the Japanese companies have committed to Indiana's development.

Highlights of the trip will include a meeting with the chairman of Wanxiang as well as top management meetings with auto makers including Dongfang, Jiali [ph], Honda, Toyota and Subaru.

In a rapidly evolving industry like ours, one of the most essential challenges is how to meet customer demand for specialized sector specific solutions while still maintaining a clear and concentrated focus for the company as a whole. That is something, I think is one of the company's greatest assets and most sustained successes and it's something that I've talked about over and over in these types of calls.

We offer the power and performance that custom tailor design with speed, pricing and ready availability of an off-the-shelf solution. We simply can't afford to custom design for every single customer, but we can't afford to make every customer feel as if they were receiving a custom design solution.

We have the experience and the know-how to deliver fully integrated end-to-end product from the cell to the battery, from the electronics to the drive train, from the driveway to the grid. No other company comes close to offering this kind of capability. And let me emphasize this again. I believe firmly that this is ability to respond quickly, efficiently and effectively to a range of evolving customer needs will be a deciding factor in who flourishes in this industry and who does not.

A little over six weeks ago, we announced that we were adding a new level of focus to the structure of our business units in response to our customer demands. The idea is to unfold our structure so that people who use our technologies have direct immediate access to the experts who design it. So car people can talk to car people and so the grid people can talk to grid people, while still making sure that our grid people and car people are still talking to each other. And also so that management has an immediate streamlined perspective into each of our markets.

Let me also say a few words about our operating environment. Obviously, the subject on everybody's mind this week is the election. It is the nature of our industry, as it is with all clean technologies, that we depend heavily on public policy to create a level playing field with more conventional, less sustainable fossil fuel alternatives that have years of inertia behind them.

So what did Tuesday mean for us? What does it mean for President Obama's ambitious plan to create a new technology driven economic base in clean energy? Well, one thing I think we know for sure is that the election was about more than just today's economy. It was about the future as a nation and the ability to prosper and compete.

Yesterday, President Obama said there's a lot of agreement around the need to make sure that electric cars are developed here in the U.S., that we don't fall behind other countries and there are things that we can do to encourage that. And there's already been bipartisan interest on that issue. Immediately, following that speech, President Obama appeared with Senate Minority Leader, Mitch McConnell, at the Heritage Club and once again pledged from both sides that electric vehicles were an immediate area of cooperation.

There is no better example of strong bipartisan support for clean energy investment and job creation than Ener1. Our experience working with Senators Lugar and Bayh and with Indiana governor, Mitch Daniels, proves that when you've got the goods, the politicians will be there to back you.

Let me say that is important as Washington is, it is not the only place that matters. Global markets are crucial to the success of Ener1, and they've been central to our strategy from the very beginning. Whatever happens in the U.S., we know the countries around the world are spending billions of dollars to build or rebuild their energy infrastructure. That's why our growing business in emerging markets like Russia are so important and that's why we're so deeply committed to our partners in China, Korea and Japan. It is that global perspective that is sorely lacking from some of the research analytics we see. The U.S. could actually miss the train.

Capacity is not the only issue. Disruptive technology affecting a convergence of energy, utility and automotive is simply the biggest business opportunity I’ve ever seen. Maintaining a strong diversified global footprint is more crucial than ever today. Not only is that good for Ener1, it's good for the U.S. and the state of Indiana too. And that's something I'm very proud of.

As U.S. monetary policy focuses on a lower dollar and allowing higher inflation to reinflate asset prices in the U.S., oil prices will continue to rise. Commodities like oil will be used as an inflation hedge.

This bodes well for Ener1 for two reasons. First, as an exporter of goods a lower dollar strengthens our pricing position against competition in Asia. Second, rising oil prices means a renewed sense of urgency on accelerated automotive electrification and a stronger desire by the U.S. to reduce our dependency on foreign oil and for consumers to cut the pain at pump.

For Ener1, this means continued elevated focus on getting the electric car to market. No company is better positioned for the inevitable climb in global EV demand.

Let me take a minute before I wrap up. I would just like to take this opportunity to thank our global employee base of 723 dedicated staff. They are the ones that make our company first class. With that, operator, I'd like to open it up to questions and answers.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Dan Galves from Deutsche Bank. Please proceed.

Dan Galves – Deutsche Bank

Good evening, guys. Thanks for taking my questions.

Charles Gassenheimer

Hey, Dan.

Dan Galves – Deutsche Bank

So, I wanted to ask just one housekeeping question about the R&D, the decline sequentially in R&D expenses. Did that have to do with the grant offsets?

Jeff Seidel

Yes. Yeah. There was about $8.1 million in grant offsets, Dan.

Dan Galves – Deutsche Bank

What should we be looking at kind of going forward for R&D expenses on a quarterly basis or is it going to be kind of volatile with the grants?

Jeff Seidel

Well, I think, as you know, as we factored the grant through the system, it's probably going to be lumpy because of the way we deploy CapEx. I think we'll be relatively smooth in '11, but we'll be building CapEx in probably the second half of '11 for 2012. So you'll probably see – I hate to predict but it's probably going to be a little lumpy just because of what's going through.

Dan Galves – Deutsche Bank

Okay. Thanks for that. Just kind of following up a little bit, is the 260 megawatt hours that you're funded for, I mean, what type of CapEx is remaining to get that equipment fully up to speed?

Jeff Seidel

We have most of the equipment reserved and on order. We'll probably have about, I think, $7 million left as we move into the beginning of 2011 to get that fully in place.

Dan Galves – Deutsche Bank

Okay. Got it. And then you're looking at an incremental 100 megawatt hours of capacity and you're saying that's going to be kind of starting in the second half of 2011. What's the equipment costs for an extra 100 megawatt hours?

Charles Gassenheimer

So I mean, Dan, on that point, the one decision we have to make is where do we green light that capacity? Do we do it in Korea where we have the ability to continue to expand our current plan? And I think the team in Korea did a fantastic job of growing the capacity this year from the capability of 40,000 sales a month to 140,000 sales a month and the production yields have been fantastic. So obviously that could go into a decision mode to put that in Korea. The downside, of course, of putting it in Korea is you don't have the benefit of the 50/50 cost share on the DOE grant.

So I think that's an economic decision that management needs to look at as part of their 2011 budget process. And I mean that's the – that's the math but the maximum exposure is $15 million to $20 million, but it could be less if we decide to green light that capacity in the U.S.

Dan Galves – Deutsche Bank

Okay. Thanks for that. And then moving on to the grid opportunity in Russia, in most of the lithium ion grid work that we've seen so far has been in frequency regulation type of applications. And this in bulk storage which seems to be the bigger long term opportunity, we weren't sure that that was kind of ready for lithium ion. Can you tell us a little bit about what your solution is for that? Were you competing with other technologies and kind of how did that work out?

Bruce Curtis

Okay, Dan. The attributes of the EV cell and our offering in this case come down to the energy density and the weight, the – and the portability of the – of the system. I think are the key attributes that we see that the efficiency and the ability to utilize the technology for more than one mode of operation, not just a single mode. So I think that the – that the Federal Grid people saw the advantages of our proposition to them and related to that, that it wasn't just for frequency regulation. They have a lot of hydro and they actually don't see much of a market for frequency regulation right now.

Dan Galves – Deutsche Bank

Got it. And then just one more, I mean, it seems like you guys are talking about $608 to $100 million of potential revenue in 2013. I think $300 million was the number for grid. Is there any type of outlook for what the Russian federal grid, what could they take up out of that number? I mean is there - potentially 50% of that number?

Charles Gassenheimer

Yes, I mean Dan, obviously we're transitioning and evolving as a company. And we're getting more and more confidence in the overall visibility in our plan. And as part of that maturation process, we're starting to give you color. I think as you start to go through that process, you have to be a bit careful about forward-looking statements and clearly, what we're focused on right now is we've got a hell of a job to do to deliver a product by March 31 to FS Car [ph] on this $40 million project.

So I think let us get that part done first. And then clearly I think it's relatively easy for most investors to see that this thing could blossom nicely if we execute on our first parts. So I would just sort of guide us to let's execute and the rest will take care of itself there.

On the automotive side, I think we feel relatively comfortable with suggesting that the heavy duty market has really been an uptick for us and a very exciting uptick. And I think we're really starting to see that starting in 2012, we're going to see a material increase in revenues in that end of the market. And in both cases, we're comfortable with the level of visibility we're getting both in terms of product pricing and margins.

Dan Galves – Deutsche Bank

Okay. Sounds good. Thanks a lot.

Charles Gassenheimer

Thanks for your questions.

Operator

Our next question comes from Steve Milunovich from Bank of America. Please proceed.

Steven Milunovich – Bank of America

Thank you. Good afternoon. You talked a bit about the 2013 revenue and how that might break down. What sort of EBITDA margin would you associate with that kind of revenue?

Jeff Seidel

Sure. Thanks, Steve. So look as we've – as we've often talked about before, it has been our goal and our mission to build a 20% to 25% EBITDA margin business. Obviously, we'd like to be there as soon as possible. I think you can only get to that level of EBITDA margin by exercising discipline over the product mix between grid, transportation and small pack. And clearly, we're trying to give you some guidance by 2013 timeframe as to what that product mix could be to get there.

So while we're not sort of going to guide you specifically on EBITDA because we're not quite ready to do that yet. I think we do feel comfortable that around that timeframe we want to start achieving that sort of direction on the EBITDA line.

Steven Milunovich – Bank of America

And on a shorter-term basis, when to you expect EnerDel and Ener1 more generally to be EBITDA breakeven?

Jeff Seidel

Sure. So thanks. So we've talked about EnerDel being EBITDA positive and we've talked historically about that being Q1 2011. So as we've restructured our business and looked at the global manufacturing operations, what I like to do is I like to say, look, at our manufacturing level, so with the four walls of the manufacturing plant, what I call in retail you used to call four wall profitability. At those four walls, we think we can get to EBITDA positive on 11,000 packs. And we think we'll be at that run rate by the summer of 2011 and that's where we are.

I think we're looking at EBITDA positive for the corporation still by the end of 2011 and that is our mission and our goal and that's what we're trying to get to. So I think we have – one of the things we are excited about is that the heavy lift for our equity shareholders is over. And what I mean by that is we come through a – we know we've come through a year of very, very heavy investment in the business to build the initial capacity that we need.

But we strongly believe that we now control our own destiny and what I mean by that is we now believe we have enough capacity where as the plant is filled up and obviously as a portfolio, we need to make sure we need to fill that plant up with bonafide revenues that can get us a cash flow positive situation. But assuming we do our portfolio management in our mix correctly, we believe we control our own destiny and can get the company to EBITDA positive by the end of next year.

Steven Milunovich – Bank of America

Okay. And then finally, can you give us a little inside baseball commentary in terms of what's going on in the industry in terms of discussions with OEMs? Are people moving more quickly, less quickly? How do you feel our competitive position is? It sounds like this LTO could be a bit of a game changer for you in the HEV side.

Charles Gassenheimer

We've always believed that lithium titanate was going to be the dominant chemistry in high power applications. Simply stated, no chemistry can compete. It's the only high power chemistry that is able to discharge and charge at a rapid rate with literally almost zero internal heat generation. And we've always been really excited about that and I think for five years, we've been developing this chemistry. So I think the time has come and we're pretty excited.

I think in terms of the inside baseball comments, I mean look, 2011 is going to be one of the more exciting years to be around electrification. You've got green energy storage really starting to take off. And obviously, I think our entry into that business has been well timed, and vehicle electrification, you've got some very exciting product coming to market with the Leaf, with the Volt. Clearly, THINK is coming to North America and we're staring production in Elkhart, Indiana in the fourth quarter. So we're excited about that. So, I think a lot of the pieces are starting to come together.

I mentioned earlier about some of the strategic initiatives that we've undertaken. And I think here of course is where we're going to start to see some real traction. I think you saw – many of you probably saw Panasonic's equity investment in Tesla today. A battery company investing in an auto company, in an auto EV company, well, that's a good idea. So clearly, I think you're starting to see the convergence of the battery, the drive train, the electrical system that pulls all of that together and makes all of that work.

There's going to be a bunch of companies reaching for that holy grail of having that 80% mind-share in an electric car, 80% of the electric car is electronics versus about 30%, 35% of an internal combustion engine car. And Steve simply stated, we think we have an unfair competitive advantage with the excellent vehicle control unit technology we have at THINK with the – obviously, we strongly believe we've got a competitive product on the auto side with our EV pack and with grid starting to fire up. So we think 2011 is going to be a very, very interesting year.

Operator

And our next question comes from Mark Wienkes from Goldman Sachs. Please proceed.

Mark Wienkes – Goldman Sachs

Thank you. Just following up on that question from Steve. Could you update us on the progress on the redesign of the THINK for the U.S. market? And then, is it too much to read into the statement that you made with respect to GE? Can we assume that THINK is on the short list for the chatter about their purchase of some fleet vehicles?

Bruce Curtis

Sure, hey Mark. So with THINK, what we're very focused on right now is the TC5 which is the current Think City model. One of the things that I think we've been very, very clear about is that it is the only car in its category that is only focused on the urban electric market. Why is the urban market so important? It's not a suburban car, it's not a soccer mom car. Simply stated, we believe the electrical vehicle makes the most sense in urban environments.

That's where you get currently the lowest MPG on a vehicle, as low as eight or 10 miles per gallon if you're a taxi, for example, working within an urban environment. So within the urban environments, we think we got a dominant position. And with the cost down program that THINK's been currently working on, we brought the bill of materials down on the vehicle by over 25% this year alone.

So I think the message point, I would give to you on THINK right now is we can sell the product we have today and we have a product. I think the message point on the TC6 or the next-gen Think City is that the product development is underway. It's dependent on an ATVM loan application for THINK that is working thought the process, and we're making really good progress there. So I think those are some of the pieces to the puzzle.

In terms of your specific question about GE, I think a lot of what we're doing and I think a lot of what we're focused on is fleet opportunities and B2B sales. It shouldn't surprise you that some of the early substantial interest is focused on – is focused on markets where B2B or fleet customers, for example, utility. Utilities are very, very interested in getting their hands on Think City electric vehicles. So we see a lot of opportunity there.

I mean, clearly, we don't have any crystal ball as to what GE is planning to do. And if we did, we couldn't share it with you anyway. But to buy tens of thousands of electric cars, it's going to be quite a challenge when you think about it, given what's available and on the market today. And we'll see what the decisions out of GE are. But not withstanding that, we think that is precisely the type of behavior that we're going to see from companies all over the world and we commend GE on their leadership. We think it's a very, very interesting development.

Mark Wienkes – Goldman Sachs

That's helpful. And then just a quick follow up. How do we think about – two actually, the margin profile of the $40 million Federal Grid, is that more labor and consulting type headcount related or is that more pack sales - if it says supply agreement?

Charles Gassenheimer

Yes, I mean – look, I mean I think, we've redacted a fair amount of the contract as being confidential. I mean, it's a fairly important development contract for us. I'm not sure that we can go into that level of granularity at this point in time.

Mark Wienkes – Goldman Sachs

Understood. And then I guess one for you or for Bruce, just what's the process? You mentioned establishing the value in the secondary market for the battery, what's the process, I guess, by which you guys see, what's the path we're going to take in order to get to that point?

Charles Gassenheimer

So, I mean, I think coming back to the work we've done there and many of you have heard me talk about this over the last two years and know that this is, I guess, a personal mission for Ener1. We so strongly believe in the secondary use and we've been working so closely with strategic partner, ITOCHU, on this. And I think you look at the Tsukuba project where we've taken the commercial application racks and we literally have four THINK packs running a family mart convenience store with solar panels on the roof. And that store draws its power during peak hours from the - the store battery energy, not from the grid.

So as we think about that and as we cycle that data, we're going to have some pretty good prediction data on what the residual value will be. Ultimately, my vision for this is that you end up leasing the battery to the automotive consumer. I don't see any reason why an automotive consumer should ever own the battery. In fact, I would be safe to say that I'm not sure the automotive company ever needs to touch the battery. From my perspective, either a lifecycle management company or a utility company should be the ultimate owner of the battery. And the first three to five years should be on a lease model or some sort of lease with an option to be bought out or swapped out.

So I think to answer your question, I see $100 to $150 a month lease for the battery with a swap out in three to five years and a new battery provided where your lease payments just continue. And it's my view that the lifecycle management company needs to be the one to determine when the optimal time to pull the battery out of the vehicle is and when the optimal time is to sell it into the secondary use application market.

Mark Wienkes – Goldman Sachs

Understood. Thank you.

Charles Gassenheimer

Thank you very much. Next question.

Operator

Our next question comes from Vishal Shah with Barclays Capital. Please proceed.

Jake Greenblatt – Barclays Capital

Hi, guys. This is Jake Greenblatt for Vishal. Thanks for taking my question. Couple of quick questions on the near-term, you mentioned that you can get to about 75 packs per week out of Indiana in December. So is it safe to say that the majority of those packs are going to THINK?

Charles Gassenheimer

Yes. We do have – we do have approximately some number less than 30 between now and the end of the year that are going to Volvo, but most of the majority of those packs are going to THINK.

Jake Greenblatt – Barclays Capital

Okay. And then for next year, for the grid storage business is – do you think the majority or all of your revenue from the grid storage business is going to be this Federal Grid contract or do you think you'll recognize any other revenue maybe from PGE or from anyone else?

Bruce Curtis

Yes. We'll be recognizing revenue from other projects, hopefully within Russia and the U.S.

Jake Greenblatt – Barclays Capital

Okay. That makes sense. And then one quick housekeeping question. On the G&A line, it looks like that number went up by quite a bit this quarter, anything going on there?

Jeff Seidel

Yeah. There's a little bit of a reclassification as we move from the commercial manufacturing in May. We had some of our manufacturing expense in the R&D line, about $1.2 million of that got reclassified into the SG&A line in the quarter. There's a little bit of headcount growth, but the $1.2 million is the big – is the noticeable difference.

Jake Greenblatt – Barclays Capital

Okay. That makes sense. And then for next year, just quickly, I think you had mentioned 6,000 packs to THINK, does that makes sense?

Charles Gassenheimer

So Jake, I think that's – the answer to that is close. THINK still has some allocation of batteries going to the sodium sulfur battery technology from Zebra and Mazda has a Zebra battery. And so for next year, we'll still have some mix between the lithium and the Zebra technology. But I would say a vast maturity would be lithium batteries.

Jake Greenblatt – Barclays Capital

All right. Makes sense. Thanks guys.

Operator

Our next question comes from Dilip Warrier with Stifel Nicolaus. Please proceed.

Dilip Warrier – Stifel Nicolaus

Thanks, Charles. So just a question on the Russian grid pilot, how long is this going to be tested out before they decide on next steps, I guess? And then the second part of the question is of the $15 billion that has been identified, do you have any sense of what goes towards energy storage and where the rest of that money would go towards?

Jeff Seidel

Okay. The testing that we're going to be performing on the units is going to be comprehensive monitoring and that's going to cover 18 months. But we will be looking in the near-term, we'll be doing a study, an economic viability on all applications within their system. And our goal is to create additional projects much more in the near term than the 18 months. We'll be understanding how the units are operating rather quickly, but we've extended it to 18 months to look at the systems.

Dilip Warrier – Stifel Nicolaus

Okay. So is it too early to kind of try and quantify how much of that $15 billion would be set aside for…?

Jeff Seidel

Yeah.

Dilip Warrier – Stifel Nicolaus

Yeah. Okay.

Jeff Seidel

I'm not so sure. Yeah, I can't answer that question.

Dilip Warrier – Stifel Nicolaus

Okay. Cool. On THINK, I was wondering if you could provide an update on the capitalization and what their needs would be if they're going to ramp to 6,000 units next year?

Charles Gassenheimer

Sure, so it's Charles. So look, I think one of the interesting things that THINK accomplished as part of its plan of reorganization was to outsource manufacturing to Valmet up in Finland. And so I think the scalability is good. I think the challenges with any company that grows form a zero start last year to obviously going 1,700 units this year and going with the type of volumes, we expect next year is the usual standard stuff of material supply chain – material supply chain issues and stuff.

And so you can't go from zero to 100 miles an hour in 30 seconds or less. So I think we really do focus on how do we continue to pressure check the system as we grow the business. And I think it's – I think we have a fair amount of confidence in that. The other thing I think, Dilip, that give us a lot of confidence is the potential to continue to sell drive trains, and that is a higher margin business for us as well. And in bundling the battery and the drive train, we see that as potentially more exciting piece of the business than the vehicle side. So I think those are the pieces of the puzzle that we look at. So I think that's part of it.

Dilip Warrier – Stifel Nicolaus

Okay. And, you know, I know you're not yet out with your 2011 budgeting. But I was wondering what your CapEx requirements would be over the next, you know, let's say, six months?

Charles Gassenheimer

You mean, what's our CapEx for 2011?

Dilip Warrier – Stifel Nicolaus

Yes.

Charles Gassenheimer

So our budgeting process for 2011 is coming together and our Board meeting is coming up at the end of November. So I think there is some critical decisions we need to evaluate as a company, and clearly we then need to sort of take the budget in front of the board. So I think I'd feel more comfortable giving that estimate on our year-end call rather than giving you a sense for it today. I think directionally you've heard form – I think directionally you've heard from Jeff some of the plans we have, and I think again, we give you more clarity on that after we file our 10-K.

Dilip Warrier – Stifel Nicolaus

Okay. Got it. Thank you.

Operator

Our next question comes from Matthew Crews with Noble Financial. Please proceed.

Matthew Crews – Noble Financial

Yes. Thanks. Good afternoon, everyone. Question on well Japan post first, was there any volume in the quarter for Japan post related?

Charles Gassenheimer

No, no volume this quarter for Japan post. The volumes for Japan post we expect to pick back up in 2011.

Matthew Crews – Noble Financial

Okay. So nothing for – no volume for Q4 as well?

Charles Gassenheimer

No, no, we expect that to kick back in the 2011 timeframe.

Matthew Crews – Noble Financial

And do you have a rough idea, is that kind of in the 300 – 300 to 400 run rate? Is that reasonable…

Charles Gassenheimer

The numbers that have come out of the press in Japan are 1,000 units for next year. We obviously can't comment at this point in time given that there's still POs that are being negotiated, so I think it's a bit preliminary.

Matthew Crews – Noble Financial

Okay. On the Hyundai, the heavy duty in South Korea, you said there was 10 buses, was that revenue all in Q3 for supplying batteries to those buses?

Tom Goesch

I think it was all in Q3. It was all in Q3, yes.

Matthew Crews – Noble Financial

Okay. And the press has had – there's probably around 3,800 buses over the next 10 years they'd like to electrify with full EVs, is that obviously something that you're looking into?

Charles Gassenheimer

Well, I mean the press – I think we've – Matt, I think we've been relatively clear that we see the EV bus market as one of the most exciting and explosive growth markets in the world. And I think if we come back to Wanxiang for a minute, China's announced that they want to put a million electric busses on the road over the next 10 years. So that's $100 billion revenue opportunity. So I – look, I think our excitement about the heavy duty market is completely justified by the research and the marketing that we're seeing.

Matthew Crews – Noble Financial

Okay. And then just speculation on the trip to China, is that you think when you might expect to close on the JV with Wanxiang?

Charles Gassenheimer

Well, given that you used the right word in the beginning of your question which is speculation and again, I don't think management should comment on speculation. But clearly we think we're close. I think at this point, we do expect it to get done this year. And we'll see where we get.

Matthew Crews – Noble Financial

Okay, and any update on Tauro [ph] or anything in the small pack in the consumer side? I know there was brief talks in the last quarter, but any update there?

Charles Gassenheimer

No, again, I think the small pack business has done real well for us. And it's been a nice steady grower. And we think the folks in our small pack have done a real nice job of continuing to serve as the current customer base and continue to grow that business out. So it's been a nice product for us. I think we're seeing upside in the unmanned aerial vehicle market and that continues to be a source of growth for us.

So you know, we feel like the way we've structured the business and the way we continue to manage the business now, we have a lot more visibility in the end markets with the way we have the three business segments. And we feel like we can continue to make capacity allocation decisions between our businesses in a very responsible manner based on profit. And we're really excited about the new structure. It's really starting to bear fruit.

Matthew Crews – Noble Financial

Thank you. And just one last question, with California's prop 23 being voted down, you know, that California passed their 802514 [ph] which is an energy storage bill. You know is that an – I mean is that where you - are you seeing opportunities there? Is that where you're pushing hard I would assume, you know, that's an area of interest for you? I don't know if the utility company you're talking to that could be a California based utility?

Charles Gassenheimer

Yes. We are looking in California.

Matthew Crews – Noble Financial

Okay. Thank you very much.

Operator

Our next question comes from Bryce Dille with JMP Securities. Please proceed.

Bryce Dille – JMP Securities

Hi, guys.

Charles Gassenheimer

Hey, Bryce.

Bryce Dille – JMP Securities

I know this question could be a little bit premature, but can you just talk about maybe the margin profile of the power and energy density chemistries? And then, is there any potential for supply chain issue or benefits among the two different types of chemistry?

Charles Gassenheimer

Okay. So I mean, look, yeah, I mean I'm not sure that you can look at it in that regard because if you think about titanate, typically you're going to be using titanate in a high power application like a hybrid electric vehicle pack, which obviously is substantially smaller. I mean, your average hybrid electric vehicle pack is going to cost between $1,500 and $2,000 or that dollar range relative to an EV pack, that's going to be obviously much, much larger. You're talking about a one kilowatt hour pack versus a 20 to 25 kilowatt hour pack. So it's hard to compare margins.

I do believe that the titanate chemistry is going to be a very, very prolific chemistry in high power applications. I think if you look at it on the supply chain issues, clearly both the powder for the anode and the cathode continue to be I think the area where you see a lot of focus from a supply chain standpoint. And Bruce, if you want to add anything on from a grid perspective.

Bruce Curtis

No.

Charles Gassenheimer

Okay.

Bryce Dille – JMP Securities

And, yeah, maybe just to expand on that, on the power side, this is some of the first mention I've heard you guys talk about on the displacement of nickel metal hydrate technology. Can you just say or talk maybe a little bit about what you're hearing from OEMs or auto manufactures on the beginning to convert from nickel metal hydrate to lithium ion?

Charles Gassenheimer

Sure. Yeah. Hey, Tom, you want to give some market color on that?

Tom Goesch

Be glad to, Charles. What we're hearing form the customers are that their focus has changed away from nickel metal mainly because the manufacturers of nickel metal are beginning to switch their capacity from nickel metal over to lithium ion. So it's run its course. The efficiencies of lithium ion are recognized and therefore, the manufacturers want to be gaining those efficiencies.

Bryce Dille – JMP Securities

Okay. Thank you guys.

Charles Gassenheimer

Thanks, Bryce. Operator, next question please?

Operator

Our next question comes from Jaimie Levin with AC Transit. Please proceed.

Jaimie Levin – AC Transit

Thank you. I'm interested in if you're able to share with us what your commercial timeline might be for the lithium titanate. And then kind of follow-up question to that is as you know there are – you've got competitors out there that are already commercially making this chemistry available. And I'm wondering if you cold comment on how you see yourselves positioned relative to those that are already selling product.

Charles Gassenheimer

Sure. Hey Jaimie, thanks for the question and it's always nice to talk to a customer.

Jaimie Levin – AC Transit

Yeah. And I will add to that, so far we're a very satisfied customer. The buses are extraordinary. I cannot tell you. In fact, with respect to the battery application under the – with these new designs, our transit operators love the buses because there's more than sufficient power that we lacked in the earlier generation. So we see great promise. Anyway, I'm interested in the – as you could tell by the question, sort of next generation or what the titanate chemistry offers or might.

Charles Gassenheimer

Thanks a lot. And obviously, thanks for the unsolicited comments. Really appreciate it. So on the titanate, I mean look, we understand that there are other – two other battery makers in particular that like the titanate as well. Our formulation is different. But I think that the ability to offer titanate into the heavy duty market we think is very, very attractive. And obviously, we look forward to getting some sample cells over to your for testing as soon as possible.

I don't think we're ready yet to sort of give you a commercial time-table on it. We're – as I mentioned in the prepared remarks of our speech, we have gone through 10,000 cycles of testing. So we do have some fairly robust life data. But Jaimie, as you know as well as anybody, the testing the cells in the lab is a heck of a lot different than packaging it and putting it into a live product where you're going to put people on it. So I think we've got some work to do.

I think we look at the possibility of partnership with titanate as a possibility versus competition, because we're really excited about this chemistry. So that gives you some and obviously, we'll look forward to giving you some more color here shortly on that. And I'll ask Tom to follow up with you offline on that.

Jaimie Levin – AC Transit

Yeah. That would be great actually. We'd be very interested in exploring that with you.

Charles Gassenheimer

Thanks. Thanks very much for – thanks very much for dialing in, appreciate it. With that, it's the top of the hour and look, we really appreciate everybody's continued interest in Ener1. We – as you can tell, I think and I hope, that the evolution of this company has been something that has been a huge passion for all employees involved. And we're really starting to – we're really starting to fire on all cylinders. So we are looking forward to rounding out the year and getting back with you early in the new year. So thanks again for your interest in Ener1.

Operator

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

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