Valence CEO Q&A: A Pivotal Year for Us

The CEO of lithium battery product producer Valence explains why being an early adopter of this technology will pay off for the company.
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NEW YORK (

TheStreet

) -- In early August, lithium battery producer

Valence

(VLNC)

announced a $13 million energy module order from

Smith Electric Vehicles

for Smith's all-electric commercial trucks through 2010.

Valence develops and manufactures lithium iron magnesium phosphate energy-storage products that go into electric commercial vehicles and industrial and marine equipment.

The $13 million order it received arrived on the heels of President Barack Obama's visit to Smith Electric's Kansas City manufacturing facility; Smith was recently awarded a $32 million grant from the Department of Energy to produce all-electric, zero-emissions commercial trucks. Robert Kanode, Valence's CEO was with Obama to support the use of alternative energy for commercial vehicles.

"The whole advantage of starting early

with lithium battery technology," said Kanode, in an interview with

TheStreet

, is "there's trial and error involved. There's discovery of efficiencies. It's difficult. The technology is very involved and it takes time to perfect -- we've invested the time."

The electric-vehicle market is still in its nascent stages, but if and when it takes off -- and many believe that it'll accelerate with the help of strong government support worldwide -- lithium battery product makers will be first in line to benefit.

Some observers say the electric vehicle market may already be outgrowing its nascency. "The industry is already exhibiting signs of a more mature market with

Nissan

(NSANY)

and

Mitsubishi

already engaged in an EV (electric vehicle) price war," said Needham analyst Michael Lew. He expects the unit growth of lithium-ion batteries to exceed 3 billion units this year, largely driven by the economic recovery and some help from electronic vehicle product rollouts.

In light of all this,

TheStreet

sat down with Valence CEO Robert Kanode last month during the Needham Clean Technology Conference, to discuss the future of electric vehicles -- and why his company is poised to profit from them.

TheStreet: Valence's revenue has been growing, but the company continues to see losses. Why is that?

Kanode: We think we're in a very unique position because we already have manufacturing capacity up and running that will get us to a very low breakeven. We're very comfortable that when we reach $80 million a year in revenue we will be at breakeven. We're comfortable because we've been doing this for a while. We know exactly what our costs are and we don't have to invest in anymore plants to get to our breakeven. I don't know what our competitors' breakeven are, but for us, it's very low. We've taken a very tightfisted, efficient approach to our manufacturing operations and it's starting to pay off. You see us in a loss position now, but it's very modest. As we grow, our outlook for the quarter we're currently in is $8 million to $10 million, which is up significantly again.

Our bookings are very strong and all of our customers are taking off. We feel very good. This is a pivotal year for us and we can comfortably sit here and talk to you about what our breakeven is.

TheStreet: You've been in the energy-storage business since the late eighties. How has your business and the industry evolved over the years?

It's interesting because when Valence started, it started working on oxides. It was very much like what some of our competitors are like today. We had the big customers, nice investments from major corporations and before they were on the eve of shipping very high volumes they performed additional safety tests in the mid-nineties and they had some explosions and the company stopped all work on oxides and started working on phosphates. As a result, we have the largest phosphate intellectual property portfolio in the world.

We have three patent attorneys inside Valence on our staff to care for our worldwide patent estate. So if someone adopts our technology they not only have an advanced technology, but they have freedom to practice resell in the 20 major markets in the world with total peace of mind. As potential customers start doing their homework, it really benefits us because we have the tools and the intellectual property to guarantee them a free path to go into commercial production.

Before you start this type of investment, you need to do due diligence and just about all potential customers do. They don't want to be exposed to any restrictions on their sales worldwide and they don't want to be exposed to any interruption of supply if they don't have that clear path.

TheStreet: What is the biggest challenge in making the types of battery products Valence makes?

In any battery, the first important element is to have a superior cathode. We have not only a superior cathode, which we manufacture at one of our plants in China, we manufacture it with a patented process that we developed, which we believe is one of the lowest-cost processes in the world.

Any battery, from step one: better cathode. Step two is a better electrolyte. We don't do the electrolytes, but companies like

du Pont

(DD) - Get Report

do. They're moving towards a nonflammable electrolyte, which we will need for future higher performance lithium applications. The next generation of lithium is lithium vanadium phosphate. We have 250 core patents worldwide protecting that. We've done years of research on that. We will probably introduce that early in 2011. We've been testing it in commercial-grade cells for about a year to a year and a half. If you do this right, testing will take up to two years on new materials and cells.

Back to the steps. First is the cathode material. We have today and tomorrow's generation. How you make it is important. We have that locked down. We've been doing it for a long time. Step two is a better electrolyte. Step three is a better separator that keeps the plus and minus, the cathode and the anode from touching. The final step is you need a better anode. Those are the four steps. It's a long way down the path before you need a better anode.

Vanadium is going to be special because you can drive it at a very high voltage and you can momentarily drive it at what we call 50C: 50 times the rated capacity of the battery. It's really going to be a breakthrough. We're excited about that.

TheStreet: How are you managing the material costs of producing your battery products?

As far as the cathode material is concerned, we have that on a very deliberate cost takedown and we manage it as simply as any other manufacturing operation -- and that is on long-term contracts with major suppliers that have the capabilities for volume that we're looking for. We've already done all of that and we're taking our costs lower with both improvements in our manufacturing process that may let us use a slightly less expensive material and carefully selecting and challenging suppliers to reduce their costs further with higher volume. Entering into a situation where we can use our volume to leverage our costs is very good.

The $13 million battery order from Smith Electric Vehicles for example is one little step, but it's noticeable to the whole supply chain. It represents to them the fact that Smith didn't just blindly select us. It's been using us for years and it's comfortable with us. They recognize that as one step of stability and they get a little more comfortable whether it's a credit situation where you're buying a component from someone and they need less credit guarantees because they're more comfortable with you as a corporation.

Or if you're selling -- we're getting ourselves in a very good position because I simply can say to you if you're thinking about us, let me give you the phone number of the chief engineer of Smith Electric Vehicles; he'll tell you all about us and the recommendation will be glowing. We're in a territory where we now have these types of references. Controlling costs, we're at a different level today than we were three, four years ago and there will be more efficiencies as we go forward with higher volumes and further process improvements.

That's the whole advantage of starting early. There's trial and error involved. There's discovery of efficiencies. It's difficult. The technology is very involved and it takes time to perfect it. We've invested the time. That's why we're happy this year. Our revenue is modest, but it's going to grow nicely with the right customers.

TheStreet: In April, Valence announced that it regained compliance with the $1 minimum bid price requirement for continued listing on the NASDAQ. Is there any risk that the company might fall out of compliance again?

We believe as people look at our story and we continue to make progress that our stock will grow; because we think we have all the tools in place to accelerate our commercial progress. We really do have all the tools in place and we're marching in the absolute right direction. Our challenge is to portray this story to stockholders in the U.S.

I think part of this problem is people are very confused about what this whole battery world means. But we're finding that more people are really improving their due diligence.

TheStreet: You said you have all the tools in place and you're ready for an acceleration in electric vehicle demand. That said, what do you think is the catalyst that can really set things in motion for you?

I think the first trigger is already happening. I think we're at the point where the market wants the availability of a flexible standard system -- we've got it. We're now taking our U-Charge modules to its third generation and it's very reliable. We're enjoying more companies looking at it. It doesn't do everything for everyone, but if it doesn't work for someone, we also have the materials that sell the packaging experience to give them what they want in a real-time manner if they have to have a custom product. So, I think we've passed that first hurdle of 'how do you get going.'

Now it's just to pay strict attention to managing our business properly. What I mean by that is cost control, selecting the right suppliers, making sure that the relationship with all those suppliers is absolutely stellar, making sure that we manage our lead time properly and drive them down and making sure we communicate very openly and on a regular basis with our customers.

-- Written by Andrea Tse in New York.

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