Investor Update

Apr 2, 2013

Good day, ladies and gentlemen, and welcome to the Tesla Motors 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 that time. I would now like to introduce the host for today's call, Sarah Miron. Please go ahead. Thank you, Patrick, and good afternoon, everyone. This is Sarah Miron, Head of Communications for Tesla Motors. Welcome to the call with Elon Musk, Tesla's Chairman, CEO and Chief Product Architect for a question and answer session regarding today's announcement. The press release for the announcement is available www.teslamotors.com/press and a webcast of this Q and A is available on the Tesla website as well. Today's call is for your questions, but we'd like to keep it to about 45 minutes. Elon will begin with a few brief remarks, and then we'll conduct the Q and A session live. During the course of this call, we may discuss our business outlook and make forward looking statements. Such statements are predictions based on management's current expectations. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent 10 ks filed with the SEC. Such forward looking statements represent our views as of today and should not be relied upon after today. We also disclaim any obligation to update these forward looking statements. Now, Patrick excuse me, and now I'll turn it over to Elon. Thank you. So I know a lot of people are wondering what today's announcement was going to be about. And it's So a lot of people are thinking, well, is it are we going to announce something revolutionary about service or Some huge expansion of superchargers or maybe something else That's pretty amazing. That's right under your nose if you're driving a Model S. We will make those announcements, but not today. We're going to put out a new announcement probably every week or 2 from here on out. But today's Talk is really about financing. It's about trying to figure out how we combine the best of ownership and Leasing. And we're really thinking like there's got to be some better way than the traditional approach. And that's what we were able to do working with Wells Fargo and U. S. Bank. What was to come up with something where essentially net of the tax credit, you can buy a Model S For no money down, net of the Tenetax credit and around $500 a month. It can actually be less than that depending On what sort of tax deductions and what time savings you gain. And I think that really makes it Affordable to a much broader audience than people who currently think is the case. I know that when we did this with SolarCity, when we transitioned from a purchase model to a finance model, it had a tremendous effect on customer adoption, and I anticipate a similar effect with Tesla. And then we wanted to address in addition to addressing the sort of question of affordability, we also wanted to address This is longer term question of residual value or peace of mind in buying an electric car. Because a lot of people think, well, what's going to happen to an electric car? Is the battery going to depreciate much faster than they expect? There's a lot of uncertainty. So we want to eliminate that uncertainty. And so the best way to eliminate that uncertainty was to say, okay, we will Match the residual value and guarantee the residual value of the Model S proportionate to that of a Mercedes S Class, which is made by our partner and investor, Daimler. And that's an iconic car. It's one of the most respected Premium Sedans in the World. So you're guaranteed to be on par with in terms of residual value with one of the best cars in the world. And not only is Tesla standing behind that, but I'm personally standing behind that and that to illustrate the level of confidence I have And the long term value of a Model X. So really, the goal there is to give customers complete peace of mind. Like you do not have to worry about buying a car. And then to match the convenience of a lease, you can just give us the car back after 3 years, and we'll Take it and you have traded in for another more or less, so we'll give you cash. So you have all the cash convenience of a lease, but all The value of ownership because unlike Elise, you're not obligated to give us back the call for that amount. You're welcome to retain it, So the car has greater value than that, which I think will, you have the option to hang on to it if you'd like. And so it gives you the right to give it back to us, but not the obligation. And as we're really trying to figure out what's the best possible thing that we could get. If we were A customer out there, what's the thing that we would want? And that's what we're trying to construct here. And there may be some continued refinements over time as we try to make it even better, but I think we've got something pretty great. And I'm really excited about how people will respond to it. So with that, we can jump to questions. Our first question comes from Damon LaViereque from WIRED. Your line is open. Thank you. I was hoping to get a rough estimate on what we're looking at as far as a monthly payment I realize that the partnership between the two banks is going to consume some of that Initial costs, so what are we looking at as far as monthly payments are concerned? Yes, absolutely. So for it's always important to look at net out of Pocket, that's the thing that really matters. And this is where electric vehicles really shine, because The cost of electricity is maybe 10% to 20% that of gasoline per mile. So You actually if this is your daily driver, that's where it really comes into play. The savings in gasoline per month Plus in other factors like getting oil changes, smog checks, filters changed, brake pads changed. On the Model S, for example, you never need to change the brake pads Because most of the breaking is done with regeneratively with the electric motor. There are actually huge savings that one experiences there. And By having a monthly payment, you actually really do see that difference. Whereas if you acquire the car, you So effectively, your net cost of ownership It's maybe $500 or $600 a month, and in fact, in some circumstances can be quite a bit less than that. And I should mention, we have a calculator on our website that You can then customize and as a consumer and say, okay, well, this applies to me or this doesn't apply to me and just basically adjust it to what your Actual circumstances are and get a very accurate number for what the net the true net out of pocket Cost is per month for Model S. So we're trying to make it such that you can just answer the questions of How do you conduct your car ownership experience and get a First Alliance number that applies to you? Thank you. Our next question comes from Dana Ho from San Jose Mercury, your line is open. Yes. Hi. Thanks for taking my question. What kind of credit score do you need to qualify for this lease? And Can existing reservation holders convert their reservation to the lease model? The credit score information is something that's proprietary to the banks. There is a you do need to consider that Quite a good credit, I know, for the best terms. But we see certainly a majority of our customers And I think perhaps the super majority are qualifying for these loans. Unfortunately, this does not apply to prior purchases of the car. And because of the residual value guarantee, it only applies on a go forward basis. If we were to apply it retroactively, it would affect the accounting in past quarters. So this is a plan on a go forward basis. But I should mention Our expectation is that the residual value is for all Model Ss is in excess of what we're guaranteeing. So the guarantee is really just there to give people peace of mind. Our expectation is that the value of the car will actually be in excess of that number, all cars. Okay, thanks. Our next question comes from Nicola Groom from Reuters. Your line is open. Hi, thank you. I was wondering if you could just say why this was important to do. You have always had a Demand for it without this financing product, why was this important to do? Well, I mean, It's true. We do have plenty of demand for the car even without a finance product. But as much as possible, I'd like to broaden The affordability of the car. It's always been my goal from the beginning of the company to try to make the mass market cars. I wish we could have done a mass market affordable car as our first car. It simply wasn't possible because it's going to take us at least 3 major iterations of the technology to get there. However, by providing a compelling financing solution for Model We're helping to broaden the access of customers to the car, and I think that's a good thing. So that's really our goal. We're really this announcement is about improving affordability, about giving people peace of mind and about giving people the whole convenience factor of just being able to give Back the car for a known amount of money in the future. And I think it's the right thing to do. And I do expect that demand will respond accordingly. We have quite a big factory, so we've got to learn blood room to grow. Thank you. Our next question comes from Joe White from The Wall Street Journal. Your line is open. Hi. Just quickly, so this looks like the kind of product, I mean, that most other car companies luxury car brands are already offering. And I'm curious what happens when if I decide I want to keep the car, what do I do? I mean, keep paying on it, What happens? Yes, I think you've hit a key differentiator, which is that if you want to keep you have With what we're talking about here is you have the right to put the car back to Tesla at a known price, which is The same percentage of residual value of a Mercedes S Class, but not the obligation. So like in contrast to a lease, there's a If you want to buy the car at the end of that lease, you have to pay that amount, because you don't actually own the car. But in our case, You can either get the preset amount, which is equivalent to the residual value of the lease or you get to keep the car If it has greater value, and I think it will have greater value. So that is beneficial to the end customer. So if I make 3 years' worth of lease payments, I can just keep the car? Yes. Well, you keep the car and I mean, you continue paying It's not a lease per se, it's a financing essentially over 5 years. So you continue paying your financing payments for the next couple of years, At which point you would have paid off the loan and you would fully own the car. That's essentially what would happen. Like I said, you have the right at the 3 year point, put the car back to us for a more known amount of money or to retain it, Pay off the remaining amount and on the call. Okay. I don't want to overstate my time, but I just want to read that play that back to you. So basically, I'm signing up for what amounts to a 5 year loan. At year 3, I can if I for whatever reason, I want to sell the car back to you, I can do that or I can just keep paying, or? That's correct. You're essentially building equity in the car. And Yes. I mean, it is a loan that you can collapse at any point as well. So that gives you additional flexibility. So this is a loan that where you could sell the car, Pay off your remaining principal at any given point in the 5 years and be done. You're not locked in like a lease. Okay. All right. Thank you. All right. Thanks. Our next question comes from Jim Mottevili from Car Talk. Your line is open. Yes. Elon, you had mentioned at the beginning that this is somewhat based on the SolarCity model, and I believe you're Chairman of SolarCity, run by your cousin. Is it true that in SolarCity, I believe you don't actually pay anything upfront for the lease cost? If you could just talk a little bit about how that model, How successful it's been and how that led to this model for Tesla? And also, you want to disclose your net worth? I'd like nothing better than disclosing my network. So What we found at SolarCity was really pretty interesting Because essentially, the product that a customer received at the end of the day was the same. They got solar panels in the house for particular power output. However, when we approach them and say, would you like to buy the system, some of these sort of fairly expensive like might be $50,000 $60,000 People will look at that and say, well, I don't know if I want to make that investment, or I don't have to have a cash handy. And It was just a harder thing to get them to buy off on. And we tell them that, look, this has got A payback period of 5 years. So within 5 years, you pay it back and then it's going to keep generating electricity from there onwards. But And we would compare that to having, say, a CD at the bank, where somebody is earning like maybe 2%. And this would be like having a CD that is 20%, guaranteed by the utility. And yet still people would have they'd be reluctant. It was a Difficult thing to get them to fork out sort of $50 in that case. And So we changed the model to one where we take care of the financing. And then it's a much simpler approach. When we say like, look, what's your utility bill? And with no money down, After the solar system is installed, your electricity will your total cost of electricity goes down every month. So essentially, you get more money in your pocket every month Just by installing solar and you have the environmental benefits as well. And That was vastly more appealing to people, even though it was essentially the same product at the end of the day. So In that case, SolarCity worked with a number of banks, including U. S. Bank, to provide that to people in a very seamless way, and the Company's growth took off in a tremendous way. We increased sales several fold. So it was very positive. Yes, I think going to the net worth question, well, I mean, if you went to look at some of the Assessments that are out there like by Forbes or Fortune or whatever. They're, I suppose, not too far off. So there's certainly Significant assets besides Tesla that from which I can cover the guarantee that I'm making. And that's what I mean when I'm I'm putting my money where my mouth is, is to say that no matter what happens, people should I feel confident that the residual value of the car will remain what we're committing to here. And I'm I'm making myself personally liable for that, because I believe so strongly in the quality of the product and the long term value of the Model S. Didn't Forbes say 11,000,000,000 If they did say about $11,000,000,000 they're being a bit too generous. I'm not familiar with that number. That sounds a bit high. Okay. Thanks. Any last questions there or? No, I think that's it. Okay. Thanks. Our next question comes from Kyle Sabat from AOL Auto. Your line is open. Yes. I was wondering what your expected lease penetration is going to be for Model S? Sure. Well, for our financing product, We're expecting a pretty high percentage. I'd say probably a majority of our customers will end up doing taking this approach. That's what I'd recommend That's the way to go for customers, and it's so I'm guessing probably at least half of you more. Sorry, this is with respect to the U. S. And we'll be trying to Figure out something for Canada as well and then for Europe and Asia as we get to those markets. Thank you. Our next question comes from Jacob Brown from Source Interlink Med. Your line is open. Hi. I was just wondering what the interest rate for financing Through Wells Fargo, our U. S. Bank would be for a well qualified customer. It's just under 3%, so like 2.95, I think is what we're talking about. All right. Thank you very much. Thanks. Our next question comes from Julia Piper from ClimateWire, your line is open. Hi, there. Thanks for the call. I wondered if you could say how many orders you have on Books right now and if you can say anything about number of cancellations you've had. Well, this call is really about the financing. But I can say, as I said before, we certainly don't have a demand problem. And we expect to sell about as many cars as we can efficiently make. Maybe on that, could you address sort of delaying the Model X and how you expect to put out this volume of car? That's not for today's conference call. Okay. Thanks very much. All right. Our next question comes from Phil Lebout from CNBC, your line is open. Quick question. You mentioned that you're personally standing behind this offer. Is that some kind of a guarantee separate from your word? In other words, a financial guarantee That if somebody says to you, listen, I'm not happy after 3 years. I know you have the guarantee in there in terms of the residual value being equal to the S Class. But is there something more behind that wording? No. I mean, I think it's I don't think I could express it more clearly, which is that no matter what happens to Tesla, I mean, obviously, I think Tesla is going to have a very bright future, But there are some people out there who I think are pessimistic for reasons I don't entirely understand. And even in that circumstance, I will stand by the residual value of Tesla cannot with all of the assets at my disposal. Thank you. Our next question comes from Mark Wiegowski from Forbes. Your line is open. What's the residual value on an S Class right now after 3 years? Sure. Yes. According to the Automotive Leasing Guide, which is the sort of industry authority on leasing residual values, it is currently 43 10% after 3 years. Okay. And you mentioned the 5 year loan, but Just because if you take the At the risk of being overly precise, essentially, if you take the trailing 12 months And average of the trailing 12 months for Mercedes S550 and automotive leasing guide, which is the industry standard guide, It stands 43%. Sorry to be overly yes, there may be too much detail, but anyway. No problem. Precision is good. And you mentioned a 5 year lease, but the example on the web calculator uses a 66 month loan. So that seems to be 5.5 years, if we're being precise. So is that the actual loan term that we're sort of working with? Or does it really depend on what you negotiate with the bank? You get to give us the call back After 36 months. And yes, so It's essentially it's we're taking the best likes of the best elements of Elise, which is the ability to just return a car After 3 years with no hassle and best element to financing. And so it is a 5.5 year loan Afterwards, you would have paid off all the principal. However, at the 3 year point, you can just say, hey, I want to get a new Model S or I want to get a different car, and you can just give us back And I'll be done with it. And do you guys think that if the cars are worth more at that point, you'd be willing to pay more for them? Or are you not looking that In other words, let's say that the car is worth 50% of the price paid, so it's worth $40,000 instead of $30,000 Will you help people capture that value or are they going to have to go private party to do that? We will. If the residual value is higher than that, and We think it will. We will pay the market rate. Okay. So yes, it should be thought of as no less than. Thank you. Thank you. Our next question comes from David Baker from San Francisco Chronicle. Your line is open. Having the press conference here. I wondered if you could just sort of walk us through the process from the very beginning and use someone in California As an example, in terms of the state and federal incentives that are available here, if I'm a California customer, I'm interested in going with this model. Do I actually After putting your money down, how exactly does this work? Sure. And I encourage people to go and check it out on our Web Which has gone live and has sort of the calculator and sort of figure it all out. But essentially, in California, You get in addition to the $7,500 federal tax credit, there's a $2,500 state tax credit, and several other states also have a state credit. So let's say you bought a Model S that including options that was $70,000 or something like that. Then you would have the tax credits I think California would amount to state and federal would amount to $10,000 You'd have $3,000 left over from the tax credits. And then, I'm not sure what the exact monthly payment would be for a vehicle like that, but I think it would be something In the sort of $500 or $600 a month range, it could actually be a bit less than that depending upon how you value your time or how much gasoline you use, Because we're talking about net out of pocket, which is I think really what matters to consumers. And Yes. So it worked out, I think, really well. I mean, you could essentially own a Model S, own a Model S for And no money down net of the tax credits and around $500 or $600 a month in California. You'd still be putting money down though The tax credits only come in at a particular time, right? I mean, you still have to front the money, don't you? Yes. There is some time delay, which can vary from 3 months to a year sort of thing, depending upon When you buy the car versus when tax time is? Well, actually, I think the California one is immediate. Sorry, the California one is immediate, the federal one is at tax time. Got it. Okay. Thanks. You're welcome. Our next question comes from Jacob Brown from Source Interlink Med. Your line is open. I was just wondering what you meant by you were personally guaranteeing The value of the car and basically, Yes, that was pretty much my big question. How are you guaranteeing it? And how can you make that kind of promise? Yes. So essentially, Tesla is the sort of the first backstop on the guarantee. So Tesla is essentially saying that The value will be proportionate to that of a really awesome car, which is the Mercedes S Class. And then For those who still have any doubt remaining in a worst case scenario, because I know there's some people out there that are still quite pessimistic about the future of electric cars and Tesla. I mean, I think that is increasingly changing, at least with respect to Tesla, that perception. But nonetheless, To give you a complete peace of mind, I'm personally standing behind that residual value. So even if Tesla isn't able to honor it, I will personally do so. Okay. So you're willing to put your own money into it or your own investments into it to guarantee that for some odd reason, if electric car values tank in Next 5 years that the car will that nobody is going to be on the hook about it. Exactly. Okay. That's what I mean by putting my money where my mouth is. And obviously, I feel very confident about the future. In fact, I think the Residual value is going to be excellent. And what we've seen with the Tesla Roadster, which is our first product, is that we've seen very good residual values. And so we do have some confidence as a function of what we've seen there. Okay. And then if the customer doesn't want to give the car back And for some oddity or the value of the car completely inflates because everybody wants Model S, you're telling me that you don't have to give the car back for the That's exactly right. And that's part of what I mean by combining the best elements Of financing and leasing or ownership and leasing is you as the consumer have the right, you have the right, but not the obligation To give the car back for a particular amount. So it's your car. And so it's a one way thing that's in the favor of the consumer. And we're trying to construct essentially what the most consumer friendly financing product in existence. That's our goal here and yes. Okay. And then I'm sorry, one last question. Is there any way to find out how Good your credit has to be to get this kind of financing? I think the banks are sort of sensitive to these requirements. You have to have a good credit rating, but what we've seen is a pretty substantial percentage. I mean, a super majority of our Customers that have applied have been approved. So I think most people who apply will be approved for the best outcome. And then In some cases, they might say, okay, well, there needs to be a slightly higher down payment or something like that. And we're going to keep working with the banks Make them increasingly comfortable over time to improve the Increased approval rating. But what we've seen thus far, because we've been running this as kind of a Sort of I wouldn't say secret, but as sort of a quiet trial program. In our quiet sort of trial program, We've seen a super majority of people accepted and it's in the sort of If you're financing a car, you're probably not going to have quite the net income that You would be able to buy the car outright. So, I mean, is this going to bring a lower income buyer into Tesla? Yes, I think this is going to fundamentally improve the affordability of the car. And yes, this is what we're trying to do is we're trying The car more broadly affordable to people, and We're going to keep working it to make it better and better in that regard. Yes. Thank you. Our next question comes from Michael Bettencourt from Globe and Mail Newspaper. Your line is open. Hi, yes. This is Pogram. I'm interested if there's timing already in place In terms of when it might be expanding to Canada and other programs and other countries, sorry, When a similar program might be expanding up north? Sure. Well, We've got it organized obviously for the United States, and our next priority is Canada. We work with Scotiabank In Canada, and we'll probably be working with a few other banks, actually, I can give you a tiny point of trivia. I actually once did a summer internship for For the Chairman's Office of the Bank of Nova Scotia in Toronto about a zillion years ago. I don't know if any of the guys there remember me, but Well, they should give you a better reason. It was a very interesting time. So I worked for yes, I worked for Kevin Anderson at the time. He went on to be the Chief Economic Advisor of Canada. He's a great guy. Anyway, good going. So, yes, whatever it's totally random. But the larger point is that We're going to work with Scotiabank and others to bring this to Canada really, really soon. Yes, as soon as we can manage, Hopefully within a matter of a few months. And I don't want to cut this off, but we're running out of time. So we're just going to take one more question. And our last question comes from Matt DeBoer from Southern California Public Radio. Your line is open. Hi, Elon. I want to keep it short. You guys aren't currently doing any of your own financing, right? I should probably know this, but is that the case? Yes. We do not have like a capital finance on like the big car companies. So yes, we don't have that. Do you anticipate that in the future given that you I've taken the first step toward that by putting your considerable net worth behind this deal. I think we could see something like that in the future. It won't be in the near term, but it could be there in the long term. Right now, the cost of financing from the big banks is incredibly competitive. Yes, it's not something that we could, I think, match with an internal system in the near term, but maybe in the long term. And lastly, is there a reason why you don't understand the pessimism out there? It may be meager in nature. Well, I could probably hazard some guesses. But I mean, generally, the nature of the pessimism doesn't seem to be based on Fundamentals, but more on the idea that, well, there hasn't been a new car company startup that was successful since Chrysler, and that was 90 years ago. And but generally, when people come and do the due diligence and actually visit our factory and see the cost being made or talk to customers or drive our car, As soon as they appreciate the actual product and really do the research on the fundamentals of the company, then that seems to have quite a profound effect and really Changes the perception substantially. So we try to encourage people to do that as often as possible. Yes. Okay. Thanks. Thanks. Great. Thank you all for joining today. We really appreciate it and look forward to speaking more in the future. Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.