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Tesla Q1'16 Earnings Conference Call: Full Transcript

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Operator:

Good day ladies and gentlemen and welcome to the Tesla Motors Inc (NASDAQ: TSLA) First Quarter 2016 Financial Results Q&A Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at this time. If anyone should require assistance during the conference please press star then zero on your touchtone telephone. As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Mr. Jeff Evanson. Mr. Evanson you may begin.

 

Jeff Evanson:Investor Relations:

Thank you Sharia and good afternoon everyone. Welcome to Tesla's first quarter and 2016 Q&A webcast. I'm joined today by Elon Musk, Tesla's Chairman and CEO; JB Straubel, our CTO; CFO, Jason Wheeler; and Jon McNeill, President of Global Sales, Service and Delivery.

Our Q1 results are announced in the update letter at the same link as this webcast. As usual this letter includes GAAP and non-GAAP financial information and reconciliations between the two. During our call, we will discuss our business outlook and make forward-looking statements. These are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recently filed Form 10-K filed at the SEC website.

We're going to start today's call with some comments by Elon, followed by the question-and-answer period and during the Q&A time, please try and limit yourselves to one question and one follow up so we can give everyone a chance to ask a question.

So while Elon is making his remarks, if we haven't done so go ahead and please press star one now to get into the queue to ask a question. Elon, I turn it over to you.

 

Elon Musk:Chairman, Product Architect and CEO:

Alright. Thank you. I think the most important point here that we're advancing the Q3 as with the Model 3 our build plan substantially and just over the overall volume plan with Tesla I mean to get to the 0.5 million per year run rate in 2018 instead of 2020. As it states - demand received for the Model 3 which I think it's actually a fraction of the ultimate demand when people fully understand what a car is capable of and are able to do a test drive.

So this is the probably biggest change strategically. Also Tesla is going to be hell-bent on becoming the best manufacturer on Earth us so, thus far I think we have done a good job on design and technology of our products.

The Model S and X I think are general regarded by critical judges as technologically the most advanced cars in the world and so the done well in that respect the key thing we need to achieve in the future is to also be the leader in manufacturing. We take manufacturing very seriously at Tesla. It's the thing that we need to obviously solve if we are going to scale and scale rapidly and make the cost more affordable so that - earlier when I send a message out there to those to the best manufacturing people in the world we want you to come join our company and that is going to be the primary focus of Tesla is how do we get super good at making large complex objects. So that's I think the most salient point.

And I feel they get wrapped up in like a bunch of short term issues but I think in terms of what matters in the future I think that is the most significant thing.

Overall on the short term our quarter-over-quarter has approved quite significantly our production increased by factor 5 from Q4 to Q1 and we're continue to make huge strides in volume and quality of the vehicle and of course we are spending an enormous amount of time on the production line. My desk is at the end of the production line. I have a sleeping bag in a conference room adjacent to the production line which I use quite frequently. The whole team is super focused on achieving rate and quality at that target cost.

So that's confident in us achieving that goal and with the increasing ramp we do feel comfortable affirming the 89,000 deliveries this year. So I think it's the rate of improvement with each passing day is very significant and I'd like to sort of thank great job who head of production for - contribution over last five years - countries some - so ad Tesla he has grow with the company and he is helping with the transition to new sort of to some new leadership and we have some exciting announcements coming and in the next possibly next few weeks after addition to because of management team on the production side. So that's feeling really excited about what we think is ahead in that direction. With that we go questions.

 

Question & Answer

 

 

Operator:

Thank you. Our first question comes from James Albertine of Stifel.

 

Jamie Albertine:Stifel Nicolaus:

Great thank you so much for question and Elon thank you for that introduction. There is no doubt you have an incredible undertaking in front of you can you help us understand some of the key obstacles and how we should consider those obstacles between now and you anticipated launch of the model three in late 2017 whether it sort of P&L adjustments that we need to make along the way but can you just help us sort of choreograph how that's going to take place.

 

Elon Musk:

Sure so with model three as I mentioned on the last earnings call we really trying to take little less than from model x where model x we put a lot about - and later events technology that weren't necessary one of the vehicle. With model 3 we are being incredibly rigorous about in showing up we don't have any anything that even really necessary to make very compelling which one of the car. We also have a much tighter feedback between design engineering, manufacturing engineering and production and so no elements of model three can be approved unless manufacturing has that this is easily manufactured and there is risk associated with manufacturing it is low.

There are many ways we are going to cap and its - how you can achieve the same objective with a hugely varying degree of difficulty, I mean if you take and say if you wanted to qualify you can qualify with - with - with cruise missile with machine gun -. So the end result is the same but the difficulty is considerably more significant from one to the other on the - advantages considering more -. So, having production to be really fundamental to design and - is that important and make sure we are not adding Australian features to the three that unnecessary to achieve production rhyme is also certainly important.

At the risk of this being misinterpreted and probably there will be some another verticals that I think is worth explaining sort of how manufacturing a complex object with several pass unique components actually works. And what base to relevant and - what in order to achieve volume production of a new car with several thousand unique items. You actually have to set a target base internally and with suppliers that is quiet aggressive. And that is a date that is taken perhaps we taken seriously so, like today and I am sure this will lead it's hard to keep a secret really.

The day we're starting with suppliers to get to volume production capability with the model 3 is July 1st next year. Now where we actually be able to achieve volume production to drive first next year of course not. The reason is that even if 99% of the internal produced items and spare items are available on drive first, we still cannot produce the car because you cannot use the car that is missing 1% of it's components. Nonetheless we need to look internally and our suppliers take that seriously and they need some penalty's for anyone internally or externally who does not meet that timeframe.

That this is just this has to be the case because this is no way that you have several thousands components all of whom make it on a secret base. So the reality is that the volume production will than be some number of months later as we saw the supply chain and internal production issues. But it is it is a bit of confusing thing and it is it does create some churn because people like or what's the real date you have to take the drive first day seriously in order for some day a few months later or some months later to actually be the real day. So yes that's actually how our has to work.

So in order first we are confident of achieving volume production model 3 late 2017 last year they said a day of a date of mid-2017 and really hope - internally and externally to achieve a natural volume - 2017. So as rough guess I would say we produce 100,000 to 200,000 both even second half of next year. That's my expectation right now.

Yes that's thing now what I'd say one that is think about ordering well three now if we get time to actually place new reservation or pace new order, because you don't have worry about placing new order and receiving it 5 years from now. If you place the order now their is high probability you are actually receive your car in 2018. So I really recommend that anyone who want to receive a car in 2018 place their order very soon.

 

Jamie Albertine:

Thank you and if I may as a follow up. Can you give us some reference as you again most generously you would think of you said end of fourth quarter or fourth quarter of 2017 so six month and it's most generous calculation. How do they compare with the volume production agreed date for the Model X just an example and then how does this flow with your cash need as you particulate it seems you walk back a little bit from the prior quarter discussion around cash flow positive and no need for capital markets raise it seems like there maybe a need here but you could just articulate how - together that will be helpful. Thanks.

 

Elon Musk:

It's always tempting for fewer to reason by now as you - first principal and that's what there would be the mistake of assuming that's anything to do with the X production has varying on all 3 they're very different programs with fully different approaches. So I would not trying to calculate from that anymore than it would made sense to extrapolate from- were making 600 cars years 20,000 cars years with the model S. So in the various decades we wanted for making 600 cars a year in 2010 where - made the body and chasse we made the car trend and we did final assembly and was far simpler cars than Model S. I would help you for we are going to do 20,000 gets a run rate of 20,000 cars a year with Model S despite of being a - complicated car and a car where we made the whole car not just the car trend.

If you are extrapolate from the expense we will be completely wrong about the Model S outcome and many people were. That's why its I would say X -. As far as the increased capital raise were obviously if you double your plan volume you can't expect the capital to stay the same. I think our capital efficiency will actually improve on a per car basis, but obviously you can't say same.

 

Jamie Albertine:

Thank you.

 

Operator:

Our next question comes from Colin Langan of UBS.

 

Colin Langan:UBS:

Great. Thanks for taking my question. Just that account follow up - is with the act there is management changes what gives you the confidence that the 500,000 of pretty amazing jump into next year, what kind of gives that - investment by

 

Elon Musk:

You mean by 2018. Well personally I think we have got an excellent team - in production and thus we are adding world class ACs in production with each passing week. It is a huge advantage to have more I think its Thursday is probably the most compelling product program in the world with the Model 3. I am not sure will be more compelling I think that there is a good argument that model 3 is the most compelling program on it. So from manufacturing standpoint so are ready to - manufacturing talent to most compelling product on earth is very strong.

We find the response to be extremely good when we call people out. So based on the way which we are adding - manufacturing team and some of the things I know we are going to announce in the future I feel really confident that Model 3 is going to be products - program and yes that's -.

 

Jason Wheeler:Chief Financial Officer:

Yes some might just add I mean you mentioned this briefly before that the design of the vehicle lend itself to high volume production very efficiently and I think that's really.

 

Elon Musk:

Design for manufacturing.

 

Jason Wheeler:

Absolutely and that is something that we are doing even today those designs are firming up. So this is something happening far ahead of time and the second point would be the quality and the motivation of the suppliers involved in the program.

 

Elon Musk:

That's increase. I mean every supplier want to deal this program.

 

Colin Langan:

Got it. If I like to ask the follow up I mean obviously cost going to be an important factor when 3 launches. I think you have indicated that your battery cost with pack announced under $190 per kilowatt hour. How do you think that compares to the industry? Where do you think it will be by the time of Model 3 launch.

 

Elon Musk:

Yes we are trying to comment on individual component cost and that's proprietary as going to anyway our playbook but I think its pretty obvious but we will exceed anyone else in the world in scale economies with the factory and we are very confident in ability to execute on that front. So I just don't know anyone who in terms of intrinsic cost is going to be close to what the factory can produce on a cost to kilowatt hour business.

 

Colin Langan:

And I think when you think the $190 how much like CAGR decline and fill that to another 30% at some moment?

 

Elon Musk:

Yes. Next question.

 

Colin Langan:

Thank you very much.

 

Jeff Evanson:

We will go to the next question and thanks.

 

Operator:

Thank you. Our next question comes from the line of Colin Rusch of Oppenheimer.

 

Colin Rusch:Oppenheimer:

Thanks so much. As you look at this accelerated plan for production, what can we expect on OpEx spending to support all of those cars coming out a lot faster than you previously expected?

 

Jason Wheeler:Chief Financial Officer:

Yes this is Jason. I think we updated our guidance on an OpEx for the year a little bit in the letter. We had talked about 20% last year and were in that range to 20% to 25% for 2016. So there is obviously going need to be more OpEx at this however at the same time, you see how we improved quarter-over-quarter in terms of OpEx we're down $12 million from Q4 down 3%.

So there is renewed focus in the halls here at Tesla on making sure that we're managing cost extremely effectively and all the employees get that and are contributing to that.

 

Elon Musk:

Yes and I think our operating leverage means sort of fixed cost relative to cost has been improved dramatically as you get following up.

 

Jason Wheeler:

Yes absolutely. We talked a little bit about this on the call last quarter the potential for operating leverages is massive with production scaling.

 

Colin Rusch:

Great and then Elon what do you need to see to move your desk out of the factory it's kind of a dramatic thing to talk about. I mean you're factory and sleepiung bag there so obviously there are some things you are concerned about but where you want to see just to go back to a different location.

 

Elon Musk:

Yes I mean my desk has frequently been in the factory. This is not some new thing. On the Model S ramp, my desk is also in the middle of the factory at the start of the bodyline for a year. So I move my desk around to wherever the most important place is for the company and then I maintain a desk there overtime to come in and check in on things. But I mean I suspect probably by the end of this quarter most of my time will not be spent on the factory floor.

 

Operator:

Thank you. Our next question comes from Patrick Archambault with Goldman Sachs.

 

Patrick Archambault:Goldman Sachs:

Alright. Thank you. Good afternoon. You know just so getting back to the capital requirement for the expanded Model 3 production, appreciate the guidance that you've provided for this year from a CapEx perspective, that's helpful but I don't know maybe this was a question for Jason. I mean have you guys - can you share with us maybe what a total capital cost estimate might look like for the Model's reprogram that you've got handle on what your volume is going to be or what you want to produce to.

 

Jason Wheeler:

A couple of things there so one we provided some bread crumbs we updated our CapEx guidance to we did guide it at $1.5 billion last quarter and we think it will probably be 50% higher than that for 2016 and in to 2017 we are not going to talk about there right now but the thing to pay attention to is our CapEx for this quarter was $216 million which was a 47% decrease over Q4. A little bit of that is what we talked about last quarter where a lot of the big investments from are already been made but also we're just really focusing as Elon just said on capital efficiency and making sure that we are investing in highest and best uses of cash and I think those principals are what's going to guide the Model 3 program.

 

Patrick Archambault:

Yes I mean look that's a good starting point to work with for us I mean we appreciate the update for this year maybe the way to take the question is just to kind of understand when the peak spending periods are going to be if you're launching through middle of next year is it kind of a good idea to maybe extend the amount of capital you see spending kind of in the balances of quarters through the second half of next year and then clearly with the launch that tapers off is that a right way to think about it and then second to that I would probably ask the same question just on the R&D front. You know when did those cost spike in the timeframe of that program.

 

Elon Musk:

Sure I think it can be about the way you have laid it out it can kind of use model X and model S and ramp up capital for those programs as a way to think about model 3 on the R&D piece of it that is a big driver behind our updating of our range to 20% to 25% OpEx in 2016 so we will start to see a little bit of that in the second half of this year and then certainly some more into first half of 2017.

 

Patrick Archambault:

Got it. If I can squeeze in one last one just on the sourcing is this changing your strategy of working with suppliers I mean you've done a lot in house for all your products so far but obviously this is a very different kind of volume number you are talking about so are you thinking about changing the level vertical integration and how is that working to sort of ongoing capital requirements for this program.

 

Elon Musk:

No I think we're actually going to increase the amount of vertical integration that we have I think it's very important for us to have the ability to produce almost any part on the car that will because it elevates risk with suppliers where - if 2% is cars on ready we can make the car having the ability internally to adapt and make of those two separate parts internally is really nicely reduces risks associated with production ramp that's very important thing. Now once like if we get to steady state and where we talk to supplier and they can do a very efficient job of making that part we've no problem into transitioning in source to out source.

As always not to insource for the sake of in sourcing but are all that in source if we think it has meaningful improvement on scheduled of cost of quality. And I mean what one of the challenges we face is that for allow the supply chain there in - match to the timeframe of the big OEMs and that was just moves a lot faster than the big OEMs and so if - match to a typical for attend or sort of like of six year development cycle and we are on a 2 or 3 year development cycle it's just doesn't connect properly. Some suppliers can handle that and some can't.

 

Patrick Archambault:

Certainly seems to limit some of the people you could work with. Thanks for the clarification.

 

Operator:

Thank you. Our next question comes from Brian Johnson with Barclays.

 

Brian Johnson:Barclays:

Yes. Good evening afternoon. I just wanted to talk a little bit about may be some of the milestones that you see in terms of this accelerated development and launch of the scale up to the model 3. First it look like in they proxy that the Alfa Prototype was completed as a one that was trialed a few weeks ago.

So one questions. One when you kind expect to better prototype to be achieved when do you think you'll have firms specs for both year internal parts operations and for your external suppliers and then in terms of the capital do you see two other question going to one when we do see raising capital if it all to meet this and then finally given the volume of trade of decision you talked about making between manufacturing design engineering do you see any role for COO type similar to what do you have space - accomplishes timeline.

 

Elon Musk:

Well from initial stand point we already always compete with the design of model 3 and the prototype that which driving at the - events end of March was actually using the production drive trend. So I think we feel pretty good about engineering completion of the last items within their six day week about. So with sort of competing final for drilling later than end of June that could leave roughly 9 months for the tools you manufactured which I think isn't you will timeframe it gets some suppliers to consumable timeframe I mean you can have a human baby in 9 months you can pretty much make a tool in nine months..

That's our expectations. So then we want to have parts of production tooling starting in April next year. So we have got three months of validation for a number of starts of point fraction in July against the nominal start and its the date today that we internally take seriously and that suppliers need to take seriously but its one where inevitably there will be some small number of items that such that the actual date of reaching volume production is some number months after that. s unavoidable and so that's if you tell me what's those cost would be we willing to takes action now what things are side it's not in advance and sometimes the things you don't going to expect to be your problem. There is large complex businesses its I think I don't want to comment on two specifically on -

 

Brian Johnson:

Okay and I guess is this imply similar accelerated schedule for Gigafactory which always seem tied to the 2020 half million unit

 

Jason Wheeler:

Yes. We've I mean as we've discussed previously this is a small part of why the Gigafactory was we accelerated some of our plans there we are still on track to have first self production starting at the end of this year. So that we'll be able to ramp up to match the model 3 schedule as well.

 

Elon Musk:

Again I sort of I want to emphasize some comments that I made earlier in fiscal which is - really held on being to worlds best manufacturing this is a big deal and I think it's the right thing to do the because what we're trying to get as many electric cars as early as possible and what's the factor was it's production because we're calculate scale and scale efficiently and so we need that forget how actually this organize we have that on

 

Brian Johnson:

okay thanks

 

Operator:

Thank you our next question comes from Adam Jonas of Morgan Stanley.

 

Adam Jonas:Morgan Stanley:

Hey Elon so on our math your combined suite of model S and X are driving out more than 3 million miles a day. So in just one day you car drew about 2X of distance that Google is done in the entire history in their self driving car project now why your cars on exactly sense or across the Christmas trees tens of thousands of dollars of equipment like a retrofitted Google car and still lot of miles and I just want if you can explain investment community what kind of advantage this gives Tesla in the race versus - transport and - free driving in some commercial financial terms if you could. Thanks. Even engineering terms.

 

Elon Musk:

Well I think you pretty much ask the question and answered it. I mean the data is everything really when you're trying solve autonomous transport problem and having millions of miles per day of the date accumulating and then as fleet grows that growth of portion to the fleet is incredibly helpful, and I mean think really as we go to say kind of long term kind of full year time is driving which is - that's going acquire quite a lot of regulatory of regulatory of the side and I think in order to regulatory to improving that they are going to want to see a very large amount of data may be billions of miles showing that the car is an - safe an autonomous mode compared to manual mode in wide range of circumstances in countries all around the world with different rules of the road and ways of the behavior and it will significantly like billions of miles.

 

Adam Jonas:

Okay will that actually my follow up which is once high volumes the statistical data for your autonomous miles are collected and analyzed I can't help to get of my mind I have this image of you and some CEO's of other auto companies and CEO's of other software and hardware firms testifying and congrats about urgent need to replace these dangerous purely human driving cars on the road with available affordable improvement even L2, L3 technology or semiautonomous that's ready for introduction to dramatically improve the epidemic of traffic - and as like a national public health and safety priority. Am I crazy you on about kind of that type of that role for people on your position armed with the data. I am not crazy then help do you think take firms like you to have sufficient quantity and quality of data to be able to such a scientific improving case. Thanks.

 

Elon Musk:

Well I feel like I mean Tesla will argue for what kind of driving but we are not going to argue against annual driving. That people should have freedom to chose do what they want to do and yes sometimes things are dangerous, but the freedom is important and if you want to drive if it dangerous this should be allow to drive in my view the autonomous safety system should be in there for even the period annual mode the car will still aid you and avoiding an accident.

 

Adam Jonas:

Okay great thanks.

 

Operator:

Thank you. Our next question comes from with RBC Capital Market.

 

Analyst:

Thanks Good afternoon everyone. So wanted to focus on the - Gigafactory plans I believe originally you indicated that 15 Gigawatt hours per year or - for energy and with model three demand clearly you robust it and might be more robust than you originally planned. I am wondering if that moves some of those - ambitions to move - just to accelerate the need for second Gigafactory or maybe perhaps you find the way to squeeze mroe out of the existing one?

 

Elon Musk:

I think the simplest answer is that we have a lot more capacity at that side then the initial 35 and 15 gigawatt hours that we discussed that's part of why we have so aggressively make sure that we have extra land and extra space around the sites so we can continue to expand and we won't need to rob from Tesla energy plans in order to meet the model 3 schedule. We definitely have a way to solve both.

 

Analyst:

And are you willing to provide an update to those initial targets.

 

Elon Musk:

Not yet maybe in one or two earnings calls from now I think will provide more - will add on that but yes, as clearly seeing - those is not constrained by vehicle needs. And I think we are the growth rate of Tesla energy is potentially is something far greater than the growth rate in cars.

 

Analyst:

Thank you.

 

Operator:

Thank you Our next question comes from the line of Ryan Brinkman of JPMorgan.

 

Ryan Brinkman:JPMorgan:

Great. Thanks for taking my question. We can all now see what the model3 pre orders that you are entirely correct that there is tons of demand for the car just like you have been saying all along. So I think about a month ago when you started - this pre orders right the investor and part supplier confidence in ability to ramp to half million units right place - with that said from the supply perspective sometimes had difficulty in achieving delivery targets because of issues and smoothly increase increasing capacity and assembly and you shown a strong preference for emphasizing quality over quantity so is there anything that's change on a supply side either equation that should also be confidence in may be I don't know lessons learned from the launch of - or some other factor that should be your confidence in your ability to be at a 200,000 to 400,000 annual run rate of model 3 production approximately 14 months from now.

 

Elon Musk:

Yes again I want to emphasize that the July one date is not a date that we will actually be met. It is an impossible date however is the date we need to hold ourselves to internally and we need to hold suppliers to but it is an impossible date because the 6,000, 7,000 unique components in model 3 and it would and that would assume that all of them arrive on time and just like the college term paper they are always late term papers but you so have to have a deadline at it needs to be a real and one consequences if the dead line is not met. But it actually will no even the - recurring excludes incredibly low of actually achieving our July Joint1 but nonetheless it is a date we have to take seriously. I explain that it would some risk of this being interpreted but hope it will appreciate that I am trying to explain how it needs to work in and can has to work that way there is not a way to go.

And the things that help us get there are designing mode3 for manufacturing with engineering manufacturing engineering and production and supply chain all very closely and making sure that we designed the car easy to make that we iterate with suppliers and ask them how if we given them the design that's easy to make or one is hard to make or how do we make it how do we reduce risk and make improvement and make it easier to build this is really different from S and X. The S was the first we really designed ourselves and it was all about just trying to cover in first place.

X was basically built of 50S platform but then even more complicated. So unfortunately even harder to make the - is the first car Telas's creating back to it's design to be easy to make that this is really a fundamental deffects and then I mentioned also increasing the scope of our in house abilities so that if there is a supplier that they will to run time we can scramble fast and produce their components in house

 

Ryan Brinkman:

Okay that's helpful. Thank you

 

Operator:

Thank you Our next question comes from John Murphy with Bank of America

 

John Murphy:Bank of America:

Good afternoon just a first question on the capital needs I mean it looks like there is a little over $400 million left on the ABL and given the pre orders are the reservations for the model3 it seems you like have at least another $400 million flowing in the second quarter. So just curious I mean as you look at that kind of cash potential or liquidity and potential inflow do you really think you need to do a capital raise this year or could you get by with those source of the cash.

 

Elon Musk:

I don't think we want to rely too much on customer reservation money as a source of capital maybe there is - or something that is not as a primary source of capital. So I mean its going to make sense for us to raise some of the money from the combination of equity and debt and make sure the company has a good buffer of cash on hand I think its important for - the company.

 

John Murphy:

Okay and then the

 

Jason Wheeler:

Yes, Jason the only things I would add to that is we did $430 million on the ABL this quarter a lot of that was we have large amount of cash and trends at the end of the quarter our deliveries were a little bit back and loaded and as those cars delivered in early April we are able to pay a significant portion of buy-back.

 

Elon Musk:

Yes and I think that the back line but its important of say like why is that the - like general debt so unlike other automotive companies Tesla doesn't shift retails we shift to customers. So we build the cars to order the car is complete and is going to non-customer. So really the only risk associated with that is if like the shift things or something or the truck that's carrying the cars crashes the ABL is that's the back line is basically finished goods and transit to non-customers. Its not like general corporate debt I think more appropriate thought of a slight increase in cost of good sold.

 

John Murphy:

Okay. That's helpful and then if I can just ask one follow up follow up from another question I mean as you look at the rampant suppliers is there any recourse to supplier they don't meet sort of X part of production next year or any point of the production schedule or is it really just you cancel a business and moment to in a supplier.

 

Elon Musk:

Yes. So will ask to be asking for commitments from suppliers to meet that timeframe. The and I am meeting personally with the team from that supplier who is going to execute on the task so I have not just the commitment of the CEO of our manager of that supplier, but the actual team that will execute on the product and we want to confirm that we feel confident in the actual team and basically we're asking for the A team from the A supplier and a commitment from that A team that they intend to - have on a year program and if they - and we worked together right now.

 

John Murphy:

and recourse if they miss targets?

 

Elon Musk:

Yes so along the way we'll be assessing progress in our confidence level that - at the July 1 target. If it looks like they will not we have a confession with them if our comfort level address - level we will they will not be aspire to Telsa.

 

John Murphy:

Great. Thank you.

 

Operator:

Thank you. Our next question comes from Rod Lache with Deutsche Bank.

 

Rod Lache:Deutsche Bank:

Hi everybody. Couple of questions one distribution and franchise loss in the US we've always seem like their initiative their but it needs to be deal was it some point does this trajectory force the issue or is this something that you can accommodate even with the distribution constrain constraints.

 

Elon Musk:

It was emphasizing with the whole dealership thing only price in US - that issue anywhere else in the world and what's happening is that dealers are using it kind of its scheduled legislation that was originally put in for adjust purpose which is to protect them from - practices from the franchiser and then using it for an unjust purpose which is to prevent direct distribution. We believe that in the long-term justice will prevail.

 

Rod Lache:

Okay. But is there a view that you can actually achieve this even under the constraints that exist today or is that something that you do need to address not to achieve this plan.

 

Elon Musk:

We believe that, that is not a constraint on our quality to achieve our plan.

 

Rod Lache:

Okay. And the second question is I am assuming that concurrently with this plan there is kind of a longer term plan for growth and that there is going to be a free model number two and I think you alluded to further extension of Gigafactory can you just give us the sense of what you are aspiring to in terms of the trajectory by the end of the decade as you have done before and Jason I know you didn't want to get into details on project spending but it would be helpful just a pass along some thoughts on what needs to go in to the company in terms of investment in order to get that sort of thing out is it reasonable to assume that the new level of spending that we are seeing right now is something that we should assume is being a sustained level going forward.

 

Elon Musk:

Sure on that to 's yes I don't want to go into details of what is the total capital cost for the model three program but certainly as we continue to ramp there is going to be more capital requirements in the company that's just a fact and ideally I like fund as much that is possible with cash flow from operations so that is really the focus that we have in the short term

 

Rod Lache:

Is there a target

 

Elon Musk:

I mean it still like probably like you know our 2020 target full volume is closer to maybe closer to a million 2020 or something like that

 

Rod Lache:

Okay great Thank you

 

Operator:

Thank you Our next question comes from Charlie Anderson

 

Charlie Anderson: Dougherty:

Yes thanks for taking my question I just had two part on the model 3 reservations holders I imagine for many of them this was their first interaction with Tesla and maybe the first time they went to a store and I wonder as you looked at that base if there is any potential to up sale to access interim will they wait for their car if you have any program plan to address that then secondarily I was curious if you have any color on geographics port of the reservation holders? thanks.

 

TSL

Yes so this is John. In terms of the your first question on whether not the reservations orders this was their first interaction with Tesla. Just about 93% of the reservation holders this is their first interaction with Tesla so it is super majority of new client base or customer base for Tesla and it's exciting it was exciting when we walked to lines that were people waiting line at the stores and excited to become a part of the Tesla community and family and the demographics of the orders we're not going to say much about that but they are a bit different as you can imagine then the model S model X owners first today and it presents an exciting new market for Tesla as well. And it should be noted that this folks are not interested just only in Tesla motors but also Tesla energy because the price point is the Tesla power law is an accessible price point for many of these folks and so their expressing interest in both.

In terms of their X as a bridge to model 3 we are talking through and taking through that as mentioned earlier the quickest path to receiving in model 3 is being a Tesla owner we've agreed the Tesla owner's are receiving priority in terms of production and so you can run the math I just mentioned it's 93% or new to Tesla 7% of the reservations holders. Our Tesla owners and the fastest way to get production vehicle even in 2017 is through the Tesla ownership and so we are finding that there is a good conversion rate of folks that are coming in to Tesla drive in S and X we're model 3 reservations holders and our motivated to be Tesla owners now so that they can receive their model 3.

 

TSL

Yes actually an important point worth mentioning is that are certainly worried about what happen with the model 3 announcement would it course like some big drop and say model S so it seems to have had the opposite effect things are - estimate is increase and it has increased.

 

TSL

I think you saw the estimated number in the first quarter 45% year-over-year and that demand that demand continues.

 

Charlie Anderson:

Thanks very much.

 

Operator:

Thank you. Our next question comes from Emmanuel Rosner of CLSA.

 

Emmanuel Rosner:CLS

Hi. Good afternoon. Wanted to ask you guys about any early thoughts need for in the manufacturing expansion obviously if you are - 500,000 units by 2018. I think that's the original capacity of the three months plan so do you need start thinking about an additional plan and in that context any thoughts on global expansion you are mentioning obviously very strong increase in model S order in Asia for example anything you could share with us at this point.

 

TSL

Our plan to for international expansion at Tesla of new plans are sort of speculative we haven't made any firm decision but I mean some of the things are just sort of common sesne that manufacturing cost and - and then shipping more around the world is not a very efficient thing to do particularly as you go to more affordable vehicles. So at some point it's going to make sense to have a plant in Europe and a plant in China and probably plants in other parts of the world. So that's kind of natural thing you would expect to. If that wouldn't make sense to ship cars from California to Europe from California to Asia in those volumes its just not its not and efficient way to go and then particularly as we - on three month volume in so to satisfying demand in North America I think we will just as demand in North America for our future product line up we have been need more than one plant in North America, just as -

 

Emmanuel Rosner:

Right so when we think about this extra capital needs that sort of eluding to leading to in addition to just the obviously the cost of the Model 3 in the development are you also confident as part of that to raise the money for an extra factory to the extent that just beyond 2018 you'd need some extra capacity.

 

Elon Musk:

I don't think we will be raising money for new factories before we are at volume production of the Model 3 and then as Jason said earlier, we are really trying to find as much as this is possible from operating cash flow.

 

Emmanuel Rosner:

Got it. Thank you.

 

Operator:

Thank you. Our next question comes from Ben Kallo of Robert Baird.

 

Ben Kallo:Robert W. Baird.:

Hey thanks. I have 18 questions. The first one I have Model X production, where are we at right there? You've had all these consumer reports - back date but can you talk to us about the state of production of that.

Number 2 on the Gigafactory, battery size for the Model 3 I think everyone's abiding by the 80 kilowatt hours and 71 kilowatt hours for the number of cars and how do we think about actually the Model 3 battery size and what the Gigafactory can support and then the third question is, why is Bob and Jim they keep on saying such negative things what you guys? What do you have to do get the centers that actually believe in Tesla logo? Thank you.

 

Elon Musk:

So I feel confident that we are going to hit the 2000 vehicle a week target by the end of this quarter of which on the order 40% are X. I am saying that that's our internal plan and what we expect to meet. No question the X is a very difficult car manufactured.

I questioned - actually the most difficult car to manufacture in the world and both of us agree with that I think you said - it wasn't manufacture-able or something that like and it certainly manufacturer-able it's hard thing to look for. And so I think we have some internal milestones that I think are able to achieve that's what our I'm pretty excited about.

Friday - we actually got first production of the Model X went through the whole production process and had zero issues. That was a great milestone - and then we start to get several inroads that are and those really - we feel pretty good about the trajectory of X.

As for convincing all the natives I think that would basically been never - and I just said what I find ironic about is the very same people transitioned from same it was impossible to say it was obvious and like wait a second or is it obvious or impossible? It can't be both

 

Ben Kallo:

Got it and Model 3 battery we're all analysts here. We still doubt strong the volume wise 75 kilowatt hours. Is that the right thing to do with the Model 3 or we have a lower number like 40 kilowatts or 45 and then we got the guy with both making that car saying this is going to be ahead of you guys and then sell for cheaper than you so how do I think about GM being able to make a car cheaper than you versus make it margin or Tesla with a lower battery cost that makes sense.

 

Elon Musk:

Yes I mean we are going like specifics on battery pack size but I think it's fair to say like the - battery pack size for the 3 would be the less than 75 kilowatt-hour that's...

 

Ben Kallo:

I am sorry what's that?

 

Elon Musk:

The average energy content of a 3 pack is something like that less 75. It doesn't really need to be anywhere near 75 to achieve the range of 250 miles.

 

Jason Wheeler:

I don't think its probably - you probably don't need to fixate on the 35 gigawatt hours we're planning to Gigafactory to meet the production needs of the energy that we know the cars will need. So there is not a problem in scaling that as we need to. So obviously internally we have we know the math and we know what we need to do and we're on track to do it.

 

Ben Kallo:

Then I guess my 18th question is, so I am not a far guy so I have you guys having 40,000 units of the Model 3 at 2017 from your commentary it seems like I need to raise my numbers but how do I think about that ramp up from zero to 500,000 over pushing from 2018 on is that go from zero to 500,000 over two years or one year or how do we think about that.

 

Elon Musk:

Well I mean obviously for saying that Tesla will have total of your completion of on your 500,000 cars and have been more than 2 years to get there. So I think there is just sort of another education about product ramp is production ramps looks like - it is extremely difficult to predict what precision the early part of the - so because in the early part of S cars we have its first thoughts of price low and that increases exponentially move to a linear and then move to a logarithmic. So really difficult to predict exactly what the shape of that - is and that's why things get tricky because you end up putting quarterly results kind of bracketing somewhere on that depending from where you are and then - actually look like as they different but actually it could be - to the exponential matter of the beginning of -.

 

Ben Kallo:

Then my 19th question could you make 13% gross margin on it or 20% gross margin or how do you think about margin you can't make it profitability.

 

Elon Musk:

I mean we are highly confident that it can be made profitably and design for manufacturing and economies of scale early the keys to achieving that outcome. I think Jim is not aiming for anything near the volumes that we are and so that there are I mean despite in the company there economies of scale scale are can be driven by whatever elements are unique and their EV and we know for the fact that they will not give the economic of scale that we will be out for .

 

Ben Kallo:

Great. Thank you.

 

Operator:

Thank you. Our next question comes from Dana Hull of Bloomberg News.

 

Dana Hull:Bloomberg News:

Yes Hi what is the mix in 2018 of the 500,000 cars I mean its combined S, X and 3 should we think of it as like 300,003 or I mean what's the kind of mix of those three vehicles.

 

Elon Musk:

Well I mean I don't think like an amazing cripple growth to got exactly what its going to be but I am I felt confident about this top line number of the mix internally is typical to think of that but I mean maybe of something like 100,000 to 150,000 S and X and then 300,000 to 400,000 of 3 but this is I don't know its really hard to say.

 

Dana Hull:

Hard to say. Okay. And then if you try to attract top manufacturing talent as you begin to ramp have you given any thought to trying the hire SCOO I mean I am just thinking about your personnel life between Tesla and SpaceX and sleeping in the sleeping bag and working 90 hours a week between two companies. SpaceX has a great COO and has had one year since company for years the Tesla never has

 

Elon Musk:

I mean it's really I mean scope of - is activity is SpaceX. SpaceX is one of the pure technology company and dose not have sort of sales service and kind of fleet management and customer financing and - that Tesla has and obviously John's - taking that role at Tesla and then my focus is primarily on technology, design and then manufacturing. So but I mean so we can expect that there will be announcements in coming near future about some great join

 

Dana Hull:

okay great Thank you

 

Operator:

Thank you. Our next question comes from of Phil LeBeau of CNBC.

 

Phil LeBeau:CNB

hi Elon I have question it was about 10 minutes ago you made a reference to 1 million vehicles in 2020 is that a production target or production goal or hypothetical I am just looking for some clarification there.

 

Elon Musk:

I mean that's - guess for half a million in 2018 and then sort of roughly 50% - growth from that and its probably around a million in 2020.

 

Phil LeBeau:CNB

And do you know have an estimate is to how many production plans you will need in order to make that happened?

 

Elon Musk:

Well we I think it is actually feasible maybe not advisable but feasible to do it with just 3 months and Gigafactory. We actually believe that three month in Gigafactory could scale 2 million vehicles whether that actually why is a separate question. I said earlier it's going to make sense to do localize production and based on the continent basis stabilize your logistics cost and the things quiet extreme or that they something your logistic cost stock becoming a bigger and bigger percentage of total vehicle cost.

I mean that's really why manufactures hold their cars for a local market for those cars for a market in that market because logistics cost associated with shipping one and a half to two tons vehicles are actually greater than say shipping a little consumer electronics device.

 

Analyst:

Great. Thank you.

 

Operator:

Thank you. Our next question comes from -

 

Analyst:

Hi can you hear me. Elon you said that your calling out to the best mines of manufacturing to join Tesla but at the same time Google and Apple are giving out the same call I guess I would wonder what you would said to these people who haven't joined Tesla over this other companies. At the same time the second question is whether you had any takeaways from the in terms of your suppliers in terms of distributor experience and how you can hold these suppliers seed to the fire on some of these more complicated task that they are ask you to fulfill?

 

TSL

Yes I mean I select your first question I mean should or you appreciate Apple and Google do not manufacture things themselves.

 

Analyst:

Right but they are hiring manufacturing people.?

 

TSL

To what.

 

Analyst:

That's correct. Good question but they are hiring manufacturing people. People with manufacturing experience.

 

Elon Musk:

Okay well Tesla actually, Tesla believe strongly in making things. They do not that's fine - difference we believe that manufacturing technology is itself subject to - innovation and in fact we will leave that there is more potential for innovation in manufacturing then there is in the design of the car by a long shot and so now this is just a - difference has to be our own but we believe in manufacturing and we believe that the company that values manufacturing as highly as we do is going to attract the best miles in manufacturing.

 

Analyst:

Okay

 

Jeff Evanson:

Okay so I think that's all the time we have.

 

Analyst:

With the supplier question.

 

Elon Musk:

I don't understand what you're referring to.

 

Analyst:

- the

 

Elon Musk:

- There is nothing with that name.

 

Analyst:

It's the original

 

Elon Musk:

We're certainly going to try to - to sure that we have had confidence to meet that - on the - program those that didn't perform very well on say prior programs will unlikely to be selected for - program.

 

Jeff Evanson:

Okay.

 

Operator:

At this time I would like to turn it back to Mr. Jeff Evanson for any closing remarks.

 

Jeff Evanson:

Alright. Thank you everyone for joining us today we'll talk to you in a quarter. Bye bye.

 

Operator:

Ladies and gentlemen this concludes today's conference you may now all disconnect and have a wonderful day.

Posted-In: Earnings News

 

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