特斯拉 (TSLA) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tesla Motors first quarter 2016 financial results Q&A conference call.

(Operator Instructions)

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.

Thank you, Sherrie, and good afternoon, everyone. Welcome to Tesla's first quarter 2016 Q&A webcast. I'm joined today by Elon Musk, Tesla 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 this 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, now 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 you haven't done so please press star one now to get into the queue to ask a question.

Elon, I'll turn it over to you.

Thank you. I think the most important point here that we want to make is that we're advancing the Model 3 build plan substantially, and just the overall volume plan, with Tesla aiming to get to the half million unit per year run rate in 2018 instead of 2020. And this is based off the tremendous demand received for the Model 3 which I think is actually a fraction of the ultimate demand, when people fully understand what the car's capable of and are able to do a test drive. So this is probably the biggest change strategically.

Also, Tesla is going to be hell-bent on becoming the best manufacturer on earth. Thus far, I think we've done a good job on design and technology of our products. The Model S and X are generally regarded by critical judges as technologically the most advanced cars in the world. We've 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 we need to obviously solve if we are going to scale and scale rapidly and make the cars more affordable. I really want to send the message out there 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, how do we get super good at making large complex objects? That's the most salient point. It's either get wrapped up in a bunch of short-term issues, but I think in terms of what matters in the future, I think that's the most significant thing.

Overall on the short-term stuff, our quarter over quarter stuff I think has improved quite significantly. Obviously Model X production increased by a factor of five from Q4 to Q1, and we continue to make huge strides in volume and quality of the vehicle, and I'm personally 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 the target cost. I feel very confident in us achieving that goal. With the increase in ramp, we do feel comfortable affirming the 80,000 to 90,000 deliveries this year. The rate of improvement with each passing day is very significant.

Finally, I'd like to thank Greg Reichow who was our head of production for tremendous contribution over the last five years. Contrary to media reports, Greg is still at Tesla, he's still with the company, and he's helping with the transition to some new leadership. We have some I think exciting announcements coming in possibly the next few weeks, in addition to the Tesla management team on the production side. I feel really, really excited about where things are headed in that direction.

With that, let's go to questions.

James Albertine, Stifel.

Great, thank you so much. Elon, thank you for that introduction. There's 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 your anticipated launch of the Model 3 in late 2017? Whether it's a P&L adjustment that we need to make along the way, but can you help us choreograph how that's going to take place?

Sure. With the Model 3 as I mentioned on the last earnings call, we're really trying to take a lot of lessons learned from Model X. Where Model X, we put a lot of bells and whistles on Model X and a lot of advanced technologies that weren't necessary for version one of the vehicle. With Model 3 we're being incredibly rigorous about ensuring that we don't have anything that isn't really necessary to make a very compelling version one of the car.

We also have a much tighter feedback loop between design engineering, manufacturing engineering, and production and so a new element of Model 3 can't be approved unless manufacturing has said that this is easy to manufacture and that the risk associated with manufacturing is low. There are many ways to skin a cat, and it's remarkable how you can achieve the same objective with a hugely varying degree of difficulty. You can take an analogy and say, if you wanted to kill a fly, you can kill a fly with a thermonuclear weapon, with a MOAB, with a cruise missile, with a machine gun, or a flyswatter. The end result is the same, but the difficulty is considerably more significant from one to the other, and the collateral damage is considerably more significant.

So having production be really fundamental to the design of the Model 3 I think is very important, and then making sure we're not adding extraneous features to the 3, that are unnecessary to achieve the production volume, is also extremely important. At the risk of this being misinterpreted, and probably there will be some (inaudible) articles that do, I think it is worth explaining how manufacturing a complex object with several thousand unique components actually works, and what dates are relevant. In order to achieve volume production of a car, a new car with several thousand unique items, you actually have to set a target date internally and with suppliers that is quite aggressive and that is the date that has to be taken seriously.

The date, I'm sure this will leak, it's hard to keep a secret really, the date we are setting with suppliers to get to volume production capability with the Model 3 is July 1 next year. Now, will we actually be able to achieve volume production on July 1 next year? Of course not. The reason is that even if 99% of the internally produced items and supplier items are available on July 1, we still cannot produce the car because you cannot produce a car that is missing 1% of its components.

Nonetheless, we need to, both internally and with suppliers, take that date seriously, and there need to be some penalties for anyone, internally or externally, who does not meet that timeframe. This has to be the case because there's just no way that you have several thousand components, all of whom make it on a particular date. The reality is that the volume production will then be some number of months later, as we solve the supply chain and internal production issues.

But it is a bit of a confusing thing, and it does create some churn because people are like, well what's the real date? You have to take the July 1 date seriously in order for some date a few months later or several months later to actually be the real date. That's actually how it has to work.

So in order for us to be confident of achieving volume production of Model 3 by late 2017, we actually have to set a date of mid-2017 and really hold people's feet to the fire internally and externally to achieve an actual volume production date of late 2017. So as a rough guess, I would say we would aim to produce 100,000 to 200,000 Model 3s in the second half of next year. That's my expectation right now.

What I would say to anyone that is thinking about ordering a Model 3, now is a good time to actually place your reservation or place your order, because you don't have to worry about placing your order and receiving it five years from now. If you place your order now there's a high probability you will actually receive your car in 2018. So I'd really recommend that anyone who wants to receive their car in 2018 place their order very soon.

Elon, thank you. And if I may as a follow-up, can you give us some reference as to, again, most generously you would think if you said the end fourth quarter, or sorry, you said fourth quarter of 2017, so the six months, at its most generous calculation, how does that compare with the volume production agreed date for the Model X, just as an example? And then how does this flow with your cash needs? As you've articulated, it seems you've walked back a little bit from the prior quarter's discussion around cash flow positive and no need for capital markets raise. It seems like there may be a need here, if you could just articulate how the two fit together, that'd be helpful. Thanks.

It's always tempting for people to reason by analogy instead of first principles and that would be the mistake of assuming that anything to do with the X production has bearing on the Model 3. They are very different programs with completely different approaches. So I would not try to extrapolate from that, any more than it would've made sense to extrapolate from the Roadster when we were making 600 cars a year, to 20,000 cars a year with the Model S.

So in the roadster case we went from making 600 cars a year in 2010, where Lotus made the body and chassis, we made the powertrain, and we did final assembly, it was a far simpler car than the Model S. We told people we're going to get to a run rate of 20,000 cars a year with the Model S, despite it being a vastly more complicated car and a car where we made the whole car, not just the powertrain. If you were to extrapolate from the Roadster experience, you would be completely wrong about the Model S outcome, and many people were, that's why I would say X is not relevant.

As far as the increased capital rates, well obviously if you double your planned 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 it can't stay the same.

Thank you so much.

Colin Lincoln, UBS.

Thanks for taking my questions. Just to follow-up, you've had issues with the [act], there's management changes. What gives you the confidence that the 500,000, that's a pretty amazing jump into next year, what gives that conviction that that's going to be possible by 2020?

You mean by 2018.

Yes, 2018, yes.

First of all, I think we've got an excellent team at Tesla in production, and we're adding world-class [aces] in production with each passing week. It is a huge advantage to have, it's fair to say it's probably the most compelling product program in the world with the Model 3. I'm not sure what would be more compelling, I think there's a good argument that Model 3 is the most compelling program on earth from a manufacturing standpoint.

So our ability to recruit top manufacturing talent to the most compelling product on earth is very strong, we find the response to be extremely good when we call people up. So based on the rate at which we're adding world-class manufacturing expertise, and some of the things that I know we're going to announce in the future, I feel highly confident the Model 3 is going to be well executed as a program.

Yes, that's it. You want to add something, JB?

Yes, if I might just add, you mentioned this briefly before, but the design of the vehicle lends itself to high-volume production very efficiently. And I think that's --

-- designed for manufacturing.

Absolutely. And that's something we're doing even today. Those designs are firming up, so this is something happening far, far ahead of time. And the second point would be the quality and the motivation of the suppliers involved in the program --

Yes. That's massively increased.

Every supplier wants to be in this program.

Got it. And if I could ask a follow-up, obviously cost is going to be an important factor when 3 launches. I think you've indicated that your battery cost with [Packer] now, under $190 per kilowatt hour. How do you think that compares to the industry, where do you think it'll be by the time the Model 3 is launching?

We're trying to comment on individual component costs, and that's fairly proprietary, it's like giving away our playbook. But I think it's pretty obvious that we will exceed anyone else in the world in scale economies with the Gigafactory, and we're very confident (inaudible) to execute on that front. I just don't know anyone who in terms of intrinsic costs is going to be close to what the Gigafactory can produce on a cost per kilowatt hour basis.

Any color on when we think the 190 how much of a (inaudible) decline and the Gigafactory (technical difficulty) 30% (technical difficulty)?

Yes. Next question.

Thank you very much.

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?

This is Jason. We updated our guidance on OpEx for the year a little bit in the letter. We talked about 20% last year and moving that range to 20% to 25% for 2016. So there's obviously going to need to be more OpEx.

However, at the same time, you see how we improved quarter over quarter in terms of OpEx. We were down $12 million from Q4, down 3%. So there's a renewed focus in the halls here at Tesla on making sure that we are managing costs extremely effectively, and all of our employees get that and are contributing to that

Yes. And our operating leverage means fixed cost relative to the variable cost is going to improve dramatically.

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

Great. And then Elon, what do you need to see to move your desk out of the factory, it's a dramatic thing to talk about having your factory and your sleeping bag there. So obviously there were some things you were concerned about. But what are you going to want to see to go back to a different location?

My desk has frequently been in the factory, so this is not some new thing. On the Model S ramp my desk was also in the middle of the factory at the side of the body line for a year.

So I move my desk around to wherever the most important place is for the company, and then I sort of maintain a desk there over time to come and check in on things. But I suspect probably by the end of this quarter most of my time will not be spent on the factory floor.

Pat Archembault, Goldman Sachs.

Thank you, good afternoon. 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 maybe this is a question for Jason, can you share with us maybe what a total capital cost estimate might look like for the Model 3 program, now that you've got a handle on what you're volume's going to be, or what you want to produce to?

Yes, a couple things there. We've provided some breadcrumbs, like we updated our CapEx guidance to, we had guided at $1.5 billion last quarter, and we think it'll probably be 50% higher than that for 2016 into 2017. And into 2017 we're not going to talk about that right now, but the other 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 for Model X had already been made, but also we're just really focusing, as Elon has said, on capital efficiency and making sure that we are investing in the highest and best uses of cash and I think those principles are what's going to guide the Model 3 program.

That's a good starting point to work with for us, we appreciate the update for this year. Maybe the way to take the question is to kind of understand when the peak spending periods are going to be? If you're launching through middle of next year, is it a good idea to maybe extend the amount of capital you see spending in the balance [of recorders] 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?

Second to that, I would probably ask the same question just on the R&D front, when did those costs spike in the timeframe of that program?

Sure, I think you're thinking about it the right way, the way you've laid it out. You can use Model X and Model S in the ramp of 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'll start to see a little bit of that in the second half of this year, and then certainly some more into the first half of 2017.

Got it. If I can squeeze in one last one, just on the sourcing, is this changing your strategy of working with suppliers? 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're talking about, so are you thinking about changing the level of vertical integration, and how does that work into sort of the ongoing capital requirements for this program?

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 at will, because it alleviates risk with suppliers, where, going back to if 2% of suppliers aren't ready, we can't make the car. Having the ability internally to adapt and make that 2% of parts internally really massively reduces risks associated with the production ramp. That I think is a very important thing.

Now if we get to a steady state, and maybe we talk to a supplier and they can do a very efficient job of making that part, we have no problem transitioning from insource to outsource. Our goal is not to insource for the sake of insourcing, but I would rather see insource if we think that it has meaningful improvement on schedule or cost or quality.

One of the challenges we face is that for a lot of the supply chain [they are being matched] to the timeframe of the big OEMs, and Tesla just moves a lot faster than the big OEMs. And so if they're [being matched] to like a six-year development cycle, and we are on a two- or three-year development cycle, it just doesn't connect properly. Some suppliers can handle that and some can't.

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

Brian Johnson, Barclays.

Yes, good evening, afternoon. I want to talk a little bit about some of the milestones that you see in terms of this accelerated development in the launch of, the scale up of the Model 3? First it looked like in the proxy that the alpha prototype was completed as of when it was filed a few weeks ago, so a few questions. One, when do you expect the beta prototype to be achieved? When do you think you'll have firm specs for both your internal parts operations and for your external suppliers?

And then in terms of the capital, do you see, two other questions, when would you see raising capital, if at all, to meet this? And then finally given the volume of trade-off decisions you're talking about making between manufacturing design engineering, do you see any role for a COO type, similar to what you have at SpaceX, to accomplish this timeline?

Okay, that's like 17 questions in one.

You can send us the project plan.

From an engineering standpoint, we're almost complete with the design of Model 3 and in fact the prototype that was driving at the [motor] event end of March was actually using the production drivetrain. So I think we feel pretty good about engineering completion of the last items, probably within six to eight weeks, thereabouts. So we're completing final release for [tooling] no later than the end of June.

That leaves roughly nine months for the tools to be manufactured, which I think is an achievable timeframe, I guess for some suppliers an achievable timeframe. You can have a human baby in nine months, and you can pretty much make a tool in nine months. So that's our expectation.

So then you want to have parts or production tooling starting in April next year. So we've got three months of validation for a normal start of volume production in July. Again, it's a nominal start and it's a date that we internally take seriously and that suppliers need to take seriously, but it is one where inevitably there will be some small number of items that cause slippage, such that the actual date of reaching volume production is some number of months after that.

This is simply in the nature of things. It's unavoidable and if you could tell me what those parts would be, we would be able to take action now. It's easier what these things are in hindsight, not in advance, and sometimes there are things you don't expect to be a problem.

Tesla is a large, complex business. I don't want to comment too specifically on (inaudible).

Okay. Does this imply a similar accelerated schedule for the Gigafactory, which always seemed tied to the 2020 half million unit goal?

It does. JB, do you have something on that?

As we've discussed previously, this is a small part of why the Gigafactory was, we accelerated some of our plans there and we're still on track to have first cell 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.

Again, I want to emphasize some comments that I made earlier in the earnings call which is Tesla is really hell-bent on being the world's best in manufacturing. This is a big deal and I think it's the right thing to do. Because what we're trying to do is get as many electric cars on the road as possible, and what's the limiting factor? Well it's production.

How can we scale and scale efficiently? And so we need to figure out how to be the world's best in manufacturing, that's what we're going to be hell-bent on doing.

Okay, thanks.

Adam Jonas, Morgan Stanley.

Elon, on our math your combined fleet of Model S and X are driving more than 3 million miles a day, so in just one day your cars do about 2X the distance that Google's done in the entire history of their self-driving car project. Now while your cars aren't exactly sensor-encrusted Christmas trees with tens of thousand dollars of equipment like a retrofitted Google car, it's still a lot of miles, and I'm just wondering if you could explain to the investment community what kind of advantage this gives Tesla in the race for sustainable transport in accident-free driving, in some commercial financial terms if you could? Thanks. Or even engineering terms.

I think you've pretty much asked the question and answered it. Data is everything, really, when you're trying to solve the autonomous transport problem, and having millions of miles per day of data accumulating, and then as the fleet grows, that grows proportionate to the fleet is incredibly helpful.

Particularly as we go to long-term fully autonomous driving, that that's going to require quite a lot of regulatory oversight, and I think in order for regulators to be comfortable approving that, they're going to want to see a very large amount of data, maybe billions of miles showing that the car is unequivocally safe in autonomous mode, compared to manual mode, in a wide range of circumstances, in countries all around the world, with different rules of the road, and ways of behavior. It'll have to be something statistically significant, like billions of miles.

Okay, well that leads to my follow-up, which is once high volumes of statistical data for your autonomous miles are collected and analyzed, I have this image if you and some CEOs of other auto companies, and CEOs of other software and tech hardware firms testifying in Congress about the urgent need to replace these dangerous purely human-driven cars on the road with available, affordable, and proven, even L2, L3 technology, or semi-autonomous, that's ready for introduction, to dramatically improve the epidemic of traffic fatalities. It's like a national public health and safety priority.

Am I crazy, Elon, about that type of role for people in your position to play, armed with the data empirically? And if I'm not crazy, then how soon do you think it would take for tech firms like you to have a sufficient quantity and quality of data to be able to make such a scientifically proven case? Thanks.

Tesla will argue for autonomous driving, but we're not going to argue against manual driving and I believe people should have the freedom to choose to do what they want to do, and yes, sometimes those things are dangerous. But freedom is important, and if people want to drive, even if it's dangerous, they should be allowed to drive in my view. But then the autonomous safety systems should be in there, such that even if you're in manual mode, the car will still aid you in avoiding an accident.

Okay, great, thanks.

Joe Stack, RBC Capital Markets.

Thanks, good afternoon everyone. Also wanted to focus on the adjust in the Gigafactory plans. I believe originally you indicated about 15 gigawatt hours per year were earmarked for Energy, and with Model 3 demand clearly robust and likely more robust than you originally planned, I'm wondering if that moves some of those Tesla Energy ambitions to the backburner, does it accelerate the need for a second Gigafactory, or maybe perhaps you found a way to squeeze more out of the existing one?

I think the simplest answer is we have a lot more capacity at that site than the initial 35 and 15 gigawatt hours that we discussed. That's part of why we've so aggressively made sure we have extra land and extra space around the site, so that 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.

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

Not yet. Maybe in one or two earning calls from now I think we'll be able to shed more light on that. But yes, as JB was saying, we're going to make sure Tesla Energy is not constrained by vehicle needs. The growth rate of Tesla Energy is, on a (inaudible) basis, going to be far greater than the growth rate in cars.

Thank you.

Ryan Brinkman, JPMorgan.

Great, thanks for taking my question. We can all now see with the Model 3 pre-orders that you are entirely correct that there is tons of demand for the car, just like you've been saying all along. So I think about a month ago when you started tweeting those pre-orders, the investor and parts supplier confidence in your ability to ramp to half million units rightfully skyrocketed.

With that said, from a supply perspective, sometimes you had difficulty in achieving delivery targets because of issues and smoothly increasing capacity and assembly, and you've shown a strong preference for emphasizing quality over quantity.

So is there anything that's changed on the supply side of the equation that should also be confidence [fulfilling, building], maybe lessons learned from the launch of X or some other factor that should give confidence in your ability to be at a 200,000 to 400,000 unit annual run rate of Model 3 production approximately 14 months from now?

Again, I want to emphasize that the July 1 date is not a date that will actually be met, it is an impossible date. However, it is a 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 the Model 3, and that would assume that all of them arrive on time.

Just like a college term paper, they're always late term papers, but you still have to have a deadline, and it needs to be real, one with consequences if a deadline is not met. But it absolutely will not, the probability of it occurring is incredibly low, of actually achieving on July 1, but nonetheless it is a date we have to take seriously. I explained that at some risk of this being misinterpreted, but hopefully you would appreciate that I'm trying to explain how it needs to work and has to work that way, there's no other way to do it.

And the things that help us get there are designing Model 3 for manufacturing, with manufacturing, engineering, and production, and supply chain all in a very close loop, and making sure that we designed the car to be easy to make. That we iterate with suppliers and ask them how, if we're giving them a design that's easy to make or one that's hard to make or how do we reduce risk, improve it, and make it easier to build.

This is really fundamentally different from S and X. The S was the first car we really designed ourselves and it was all about just trying to make the car to work in the first place. X was basically built off of the S platform, but then even more complicated, so unfortunately, even harder to make.

The Model 3 is the first car Tesla is creating that is designed to be easy to make. This is really a fundamental difference. And then I mentioned also increasing the scope of our in-house abilities, so that if there's a supplier that isn't able to deliver on time, we can scramble fast and produce that component in-house.

Okay, that's helpful. Thank you.

John Murphy, Bank of America.

Good afternoon, a first question on the capital needs. It looks like there's a little over $400 million left on the ABL and given the pre- orders or the reservations for the Model 3, it seems like you'll have at least another $400 million flowing in in the second quarter. So just curious, 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 sources of cash?

I don't think we want to rely too much on customer reservation money as opposed to capital. Maybe there is a buffer or something but not as a primary source of capital. So it's going to make sense for us to raise some amount of money, some combination of equity and debt, and to make sure the company has a good buffer of cash on hand. I think it's important for de-risking the company.

This is Jason, the only thing I'd add to that is, we did draw $430 million on the ABL this quarter. A lot of that was we had a large amount of cash in transit at the end of the quarter, our deliveries were a little bit back-end loaded, and as those cars were delivered in early April, we were able to pay a significant portion of that back.

Yes, I think most people are familiar with the Asset Backed Line, but it's important to say why is that different from general debt? Unlike other automotive companies, Tesla doesn't ship to dealers, we ship to customers. So we build the cars to order, the car is complete and it's going to a known customer.

So really the only risk associated with that is if like the ship sinks or something, or the truck that's carrying the cars crashes. But the ABL is, the Asset Backed Line is basically finished goods in transit to known customers. It's not like general corporate debt. It's I think more appropriately thought of as a slight increase in cost of goods sold.

Okay, that's helpful. And then if I can ask just one follow-up from another question, as you look at the ramp with suppliers, is there any recourse to suppliers that don't meet that starter production next year, or any point of the production schedule, or is it really just you cancel the business and move on to another supplier?

We'll be asking for firm commitments from suppliers to meet that timeframe. And I'm 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 or general 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 work harder than they ever have on any other program. And if they're willing to do that, then we work together. Otherwise, not.

And recourse if they miss targets?

Yes. Along the way we will be assessing progress and our confidence level that suppliers will meet the July 1 target. If it looks like they will not, we'll have a conversation with them. If our comfort level drops below a certain level, they will not be a supplier to Tesla.

Great, thank you.

Rod Lache, Deutsche Bank.

Hey everybody, a couple of questions. One, distribution and franchise laws in the US have always seemed like there are initiatives that are going to need to be dealt with at some point. Does this trajectory force the issue, or is this something you can accommodate even with the distribution constraints?

First of all, it's worth emphasizing that the whole dealership thing only applies in the US. We don't carry that issue anywhere else in the world.

What's happening is dealers are using a (inaudible) legislation that was originally put in for a just purpose, which is to protect them from predatory practices from the franchisor, and then using it for an unjust purpose which is to prevent direct distribution. We believe that in the long-term justice will prevail.

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 in order to achieve this plan?

We believe that that is not a constraint on our ability to achieve the plan.

Okay. The second question is, I'm assuming that concurrently with this plan there's kind of a longer-term plan for growth, and that there's going to be a Fremont Number 2, and I think you alluded to further expansion of Gigafactory. Can you give us a sense of what you're aspiring to in terms of the trajectory by the end of the decade as you've done before? And Jason, I know you didn't want to get into details on project spending, but it would be helpful just to pass along some thoughts on what needs to go into 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're seeing right now is something that we should assume as being a sustained level going forward?

Sure. I don't want to go into the details of what we think the total capital cost is going to be for the Model 3 program, but certainly as we continue to ramp, there's going to be more capital requirements of the company. That's just a fact. Ideally I'd like to fund as much of that as possible with cash flow from operations, so that is really the focus that we have in the short-term.

It's fair to say there's probably a 2020 target for volume is closer to a million vehicles in 2020, or something like that.

Okay. Great, thank you.

Charlie Anderson, Dougherty.

Thanks for taking my question, just a two-parter on the Model 3 reservation 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've looked at that base if there is any potential to upsell to an S or X in the interim while they wait for their car, if you have a programs or plan to address that?

And then secondarily, I was curious if you have any color on the geographic split of the reservation holders? Thanks.

This is Jon. In terms of your first question on whether or not the reservation holders, this was their first interaction with Tesla, just about 93% of the reservation holders, this is their first interaction with Tesla. So it's a super, super majority of a new client base or customer base for Tesla and it's exciting.

It was exciting where we walked the lines, with people waiting in line at the stores, and they were excited to become part of the Tesla community and family. And the demographics of the owners, we're not going to say much about that, but they are a bit different as you can imagine than the Model S and the Model X owners to date. And it presents an exciting new market for Tesla as well. And it should be noted these folks are not interested just only in Tesla Motors, but also Tesla Energy, because the price point of the Tesla Powerwall is an accessible price point for many of these folks, and so they're expressing interest in both.

In terms of S and X as a bridge to Model 3, we are talking through and thinking through that, because as Elon mentioned earlier, the quickest path to receiving a Model 3 is being a Tesla owner. We've agreed that Tesla owners are receiving priority in terms of production. And so you can run the math I just mentioned. It's 93% are new to Tesla and 7% of the reservation holders are Tesla owners and the fastest way to get a production vehicle even in 2017 is through Tesla ownership, and so we're finding that there's a good conversion rate of folks that are coming in to test drive an S or an X, who are Model 3 reservation holders, and are motivated to be Tesla owners now, so that they can receive their Model 3 earlier.

An important point worth mentioning, we were fairly worried about what would happen with the Model 3 announcement. Would it cause like some a big drop in, say, Model S sales? It seems to have had the opposite effect. It seems as though S demand has increased.

It has increased. I think you saw the S demand number in the first quarter was 45% up year-over-year, and that demand continues.

Thanks so much.

Emmanuel Rosner, CLSA.

Hi, good afternoon. I wanted to ask you guys about any early thoughts on the need for manufacturing extension? Obviously if you are doing 500,000 units by 2018, I think that's the original capacity of the Fremont plant, so do you need to start thinking about an additional plant, and in that context, any thoughts on the global expansion you were mentioning, obviously very strong increase in Model S orders in Asia, for example. Anything you could share with us at this point?

Our plans for international expansion and establishment of new plants are speculative. We haven't made any firm decisions. But some of the things are just sort of common sense that manufacturing cars in California and then shipping them all 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 the natural thing you'd expect to do. It wouldn't make sense to ship cars from California to Europe or California to Asia in those volumes. It's not an efficient way to go. And particularly as we saturate on Fremont volume in terms of satisfying demand in North America, just to satisfy demand in North America, for our future product lineup we're going to need more than one plant in North America, just to satisfy North America demand.

Right, so when we think about these extra capital needs that you're alluding to, in addition to obviously the cost of the Model 3 development, are you also [campaigning] as part of that to raise the money for an extra factory to the extent that just beyond 2018 you would already need some extra capacity?

I don't think we'll be raising money for new factories before we add volume production for the Model 3. And then as Jason was saying earlier, we'll try to find as much of this as possible from operating cash flow.

Got it, thank you.

Ben Callow, Robert W. Baird.

Thanks a lot, I have 18 questions. The first one I have, Model X production, where are we at right there, because we've got all these consumer reports issues, and I think that's a little backdated but can you talk to us about the [state] production of that? Number two on the Gigafactory and the battery size for the Model 3, I think everyone's dividing by 80 kilowatt hours or 75 kilowatt hours to the number of cars, and how do we think about actually the Model 3 battery size and what the Gigafactory could support?

And then the third question is why is Bob Lutz and Jim Chanos, they keep on saying such negative things about you guys? What do you have to do to get the dissenters to actually believe in Tesla a little bit? Thank you.

I feel confident that we are going to hit the 2,000 vehicle a week target by the end of this quarter, of which on the order of 40% are X. That's our internal plan and what we expect to meet.

There's no question the X is a very difficult car to manufacture. I think unquestionably the most difficult car to manufacture in the world and Bob Lutz would agree with that. I think he said something to the effect that he thought it wasn't manufacturable, or something like that. It's certainly manufacturable, it's just a hard thing to (inaudible) for.

So we have some internal milestones that we've achieved that I'm pretty excited about. Friday at 3am we achieved our first flawless production of the Model X, where we went through the whole production process and had zero issues, that was a great milestone.

[Background Noise] Celebrating with the team at 3am Friday was great. Now we're starting to get several in a row that are flawless and -- [Background Noise] -- very quickly, and [we] feel pretty good about the trajectory of that fact.

As for convincing all the naysayers, that will basically be never. There's always going to be naysayers. [Background Noise] What I find ironic about the naysayers is the very same people will transition from saying it was impossible to saying it was obvious. [Laughter]

I'm like, wait a second. Was it obvious or impossible? It can't be both.

Got it. And the Model 3 battery, we're all analysts here. We stare down a straw, dividing by 75 kilowatt hours. Is that the right thing to do with the Model 3, or should we have a lower number like 40 kilowatts or 45?

And then you've got the guy with the Volt making that car, saying that it's going to be ahead of you guys and sell for cheaper than you, and so how do I think about GM being able to make a car cheaper than you, versus making a margin on a Tesla with a lower battery cost? If that makes sense.

We're not going to get into real specifics on battery pack size, but I think it's fair to say the average battery size for the 3 will be less than 75 kilowatt hours.

I'm sorry, what was that?

The average energy content of a 3 pack is still going to be less than 75 kilowatt hours. It doesn't really need to be anywhere near 75 killowatt hours to achieve the range of 215 miles. We don't want to get into the nitty-gritty, it's probably unwise.

You probably don't need to fixate on the 35 gigawatt hours. We're planning the Gigafactory to meet the production needs of the energy that we know the cars will need. So there's not a problem in scaling that as we need to, so obviously internally, we know the math and we know what we need to do and we're on track to do it.

I guess my 18th question is, I'm not a car guy, so I have you guys having 40,000 units of the Model 3 in 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, let's push it from 2018 on? Does it go from zero to 500,000 over two years or one year or how do we think about that?

Obviously if we're saying that Tesla will have total vehicle production on the order of 500,000 cars in 2018, [can't] be more than two years to get there.

Production ramps look like an S-curve. It's extremely difficult to predict with precision the early part of the S-curve. In the early part of the S-curve, it starts off very slow and then it increases exponentially, moves to a linear, and then moves to a logarithmic. So it's really (technical difficulties)incredibly difficult to predict exactly what the shape of that S-curve is.

And that's where things get tricky, because you end up putting quarterly results kind of [bracketing] somewhere on that S-curve, and depending on where you are in that S-curve, it can actually look like a big difference, but actually it could be a shift of a (technical difficulties)because of the exponential nature the beginning of the S-curve.

My 19th question, can you make 15% gross margin on it, or 20% gross margin, or how do you think about margin on it, because people think you can't make it (technical difficulties)profitably.

We're highly confident that it can be made profitably, and design for manufacturing and economies of scale are the keys to achieving that outcome.

GM is not aiming for anything near the volumes that we are. And despite being a big company, their economies of scale are going to be driven by whatever elements are unique in their EV, and we know for a fact that they will not get the economies of scale that we will be at for Model 3.

Great, thank you.

Dana Hall, Bloomberg News.

Hi. What is the mix in 2018 of the 500,000 cars? It's combined S, X, and 3. Should we think of it as like 300,000 3, or what's the mix of those three vehicles?

I don't think we've got an amazing crystal ball to figure out exactly what it's going to be. I feel confident about the topline number, but the mix internally, it is difficult to figure that out. Maybe it's something like 100,000 to 150,000 S and X, and then maybe [300,000 to 400,000] of 3, I don't know. It's really hard to say.

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 to hire a COO? I'm just thinking about your personal life between Tesla and SpaceX and sleeping in a sleeping bag and working 90 hours a week between two companies. SpaceX has a great COO and has had one since the company, for years, but Tesla never has.

The scope of Tesla's present activity is broader than SpaceX. SpaceX is more of a pure technology company and does not have the sales, service, and fleet management and customer financing and all that sort of stuff that Tesla has. Obviously Jon McNeill has that role at Tesla.

My focus is primarily on technology, design, and manufacturing. So I think we certainly can expect there will be announcements in the future about some great executives joining the ranks.

Great, thank you.

Phil LeBeau, CNBC.

Hi Elon, I have a question, it was about 10 minutes ago, you made reference to 1 million vehicles in 2020. Is that a production target, a production goal, or a hypothetical? I'm just looking for some clarification there.

That's my best guess. If we're 0.5 million in 2018 and roughly 50%-ish growth from there, then it's probably around 1 million in 2020.

And do you have an estimate as to how many production plants you will need in order to make that happen?

I think it is actually feasible, maybe not advisable, but feasible to do it with just Fremont and the Gigafactory. We actually believe that the Fremont and the Gigafactory could scale to a 1million vehicles. Whether that's actually wise is a separate question.

As I said earlier, it's going to make sense to do localized production at least on a continent basis, otherwise your logistics costs end up being quite extreme. Your logistics costs start becoming a bigger and bigger percentage of total vehicle costs. That's really why manufacturers build their cars for a local market, they build cars for a market in that market because logistics costs associated with shipping 1.5 ton to 2 ton vehicles are massively the greater than, say, shipping a little consumer electronics device.

Great, thank you.

Alex Sage, Reuters.

Hi, can you hear me? Elon, you say that you're calling out to the best minds of manufacturing to join Tesla, but at the same time Google and Apple are giving out the same call. I wonder what you would say to these people to have them join Tesla over these other companies?

The second question is whether you had any takeaways in terms of your suppliers in terms of this Hoerbiger experience, and how you can hold these suppliers' feet to the fire on some of these more complicated tasks that they're asked to fulfill?

In response to your first question, I'm not sure you're appreciating -- Apple and Google do not manufacture things themselves.

Right, but they are hiring manufacturing people.

To do what?

That's a good question, but they are hiring manufacturing people, people with manufacturing experience.

Tesla believes strongly in making things, they do not. That's fine. It's a philosophical difference.

We believe that manufacturing technology is itself subject to [transmatter] innovation, and in fact we believe that there's more potential for innovation in manufacturing, than there is in the design of the car by a long shot. Now this is just a philosophical difference. Perhaps we are wrong. But we believe in manufacturing and we believe that a company that values manufacturing as highly as we do is going to attract the best minds in manufacturing.

Okay.

I think that's all the time we have.

The supplier question?

I don't understand who you are referring to.

Hoerbiger?

Not familiar with that name.

We're certainly going to do our best to ensure that we have high confidence in the suppliers on the Model 3 program. Those that didn't perform very well on, say, prior programs are unlikely to be selected for the Model 3 program.

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

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

All right, thank you.

This concludes today's conference. You may now all disconnect and have a wonderful day.