Earnings Call: Q2 2019

Jul 24, 2019

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Tesla Q2 2019 Financial Results and Q and A Webcast. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference may be recorded. Would now like to turn the call over to your host, Senior Director of Investor Relations, Martin Bioga. Sir, you may begin. Thank you, Latif, and good afternoon, everyone, and welcome to Tesla's Q2 2019 Q and A webcast. I'm joined today by Elon Musk, JB Straubel, Zachary Kirkhorn and a number of other executives. Our Q3 results were announced at about 1:45 p. M. Pacific Time in the update letter we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward looking statements. These comments 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 recent filings with the SEC. During the question and answer portion of today's call, please limit yourselves to one question and one follow-up. But before we jump into Q and A, Elon has some opening remarks. Elon? Thank you. So last quarter, we delivered more than 95,000 vehicles, which is a record for Tesla. To put that in perspective, it's nearly an 80% increase in deliveries compared to the Q2 of last year. I think it's hard for people to appreciate when you have a large manufactured item with a complex global supply chain, just how difficult that is, I'm incredibly proud of the Tesla team for being able to do that. I think this level of growth is possibly unprecedented. It might be the fastest that any large complex manufactured item has grown in history. So just really great work by the Tesla team to achieve that outcome, and we expect growth to continue in the future for several years to come at the 50% to 100% level. So, I just like generally think that is not well appreciated, how to produce grow at that rate. Achieving record number of deliveries is an important milestone and shows the rapid progress we've made in managing a global logistics and delivery operation at high volume. And as I said, all this was achieved thanks to the tremendous hard work of the entire TELUS team. Model 3 was once again the best selling premium vehicle in the US, outselling all of its gas product equivalents combined. In Europe, Model 3 is approaching sales levels of its established premium competitors, and it was awarded a 5 star rating from the Euro NCAP earlier this month. This is in addition to Model 3 receiving an overall 5 star rating in the U. S. From NHTSA, including earning 5 stars in every category and subcategory, and achieving the lowest probability of injury of any vehicle ever tested. MotorTrend also recently selected Model S as the best vehicle they have ever tested in their 70 year history across all other cars. So MotorTrend, which is, I think, arguably the leading authority in evaluating vehicles. The Motor Trend Car of the Year is the most coveted award. Pretty incredible that they would say that Model S in their entire 70 year history is the best vehicle they have ever evaluated. This is despite Tesla not buying any advertising in MotorTrend, and I think speaks to their journalistic integrity. That's something special. Since the vehicle that they've evaluated, we've actually made tremendous advancements in both Model S and Model X, including our recent update of a new suspension with active damping capability and an all new drivetrain that's capable of a 370 mile range in the Model S and a 325 mile range in the Model X. We've also issued numerous software updates and improvements that have made Model S and Model X faster, safer and added dozens of new features. Just like Model 3, Model S and X have the hardware needed for future full self driving capability. As we look ahead to the rest of the year and into 2020, we remain focused on launching new vehicle and energy programs, further expanding our manufacturing operations and continuing to improve customer service. We remain focused on international expansion because local production is essential to being cost competitive. By the end of this year, we expect to be producing Model 3s in volume out of Gigafactory Shanghai. As you can see from the photos in our quarterly letter, equipment installation there is progressing well. We also have to finalize location for our European Gigafactory before the end of the Here in Fremont, preparations for Model Y production have already begun. Since Model Y has high component overlap with Model 3, it should be and we expect it to be a lot easier to ramp. It's something on the order of 3 quarters of all the parts are common between Model 3 and Model Y. And we expect manufacturing costs of Model Y, despite additional content, to be approximately the same as Model 3. This quarter we opened 25 new service locations and added more than 100 mobile service vehicles to our fleet. And although our fleet's total Tesla fleet size has doubled in the past 12 months, which is like, again, just kind of a crazy thing to consider, that Tesla is almost doubling all cumulative production every year. This is a totally mad thing, to make as many cars in a year as we've made in our entire history and to have that be an ongoing trend, I think it is difficult for people to really feel an exponential. We didn't evolve to feel an exponential. We can feel a linear, but we could only understand an exponential at a cognitive level. But Tesla is expanding at an exponential rate. Fact, if you look at the Tesla cumulative deliveries chart, like year over year cumulative deliveries, it's about the cleanest exponential graph I've ever seen. So obviously, if that trend continues, the results are going to be pretty amazing, and I think that will continue. So we've been able to improve service considerably. You can imagine that obviously if we're doubling our fleet every year, managing service is quite difficult. It's like the total, because service scales as the, not just with new production, but as the total fleet scales, service needs to scale. And we want to scale service in a way sensible from a cost standpoint, but it's really quite a difficult challenge to scale. Nonetheless, we've made massive improvements in service, especially in parts waiting. It's time to wait for parts and any collision repair, and we've in sourced a great deal of the collision repair activities, which has had, I think, quite a good effect on customer happiness, and this will continue in the months to come. So, a very important milestone, I think, we believe Tesla is now at the point of being self funding, and we expect to be free cash flow positive in future quarters, with the possible temporary exceptions around the launch and ramp of a new product. From a profitability standpoint, we expect to be probably around breakeven this quarter and profitable next quarter. So I feel pretty confident about that. Then in terms of deliveries, we expect deliveries to be between 360,400,000. We expect production to be a slightly higher number than that and demand to be a slightly higher number than that. So people often confuse deliveries, production and orders for Tesla, and they're actually 3 different numbers. So yeah, you obviously cannot deliver more than you make, so typically we'll make more than we deliver. And then demand generation activities kind of move in kind of like a to get together with production. Like it doesn't make sense to put a lot of effort into demand generation if production can't meet the demand. Then likewise, so what tends to happen is that we'll solve the production issues, then it's like, okay, we need to increase demand, address demand, then it may increase production, then increase demand. Like, we will get caught up in these details a lot, but if you look at the actual results, like I said, look at cumulative deliveries over time for Tesla, cleanest exponential I've ever seen. Extrapolate that curve. So there's a tremendous amount to be excited about at Tesla, and we'll have more share in the coming weeks months. Zach, is there anything you'd like to say about our results? Yes, sure. Thanks, Elon. A few things I want to highlight before moving into the Q and A. Overall, Q2 was a strong quarter for Tesla. I'm extremely proud of the team for the progress we've made. We've achieved record vehicle production and delivery, record storage production and deployment, record services and other revenue with a corresponding reduced loss. As we've mentioned a few times, we stabilized international logistics and delivery operations at higher volumes, and we saw gross margin improvement in nearly every aspect of the business, adjusting for the impact of regulatory credit revenue. As a result of these accomplishments, we once again achieved strong free cash flows, which is only partially attributed to working capital benefits. We also successfully raised roughly $2,400,000,000 in net proceeds in May. Thus, we exited the quarter with $5,000,000,000 in cash and cash equivalents, the highest in our history. Our net loss reduced significantly relative to Q1, aided by higher volumes and progress on cost efficiencies. A few things to note. There's $117,000,000 within operating expenses for restructuring. We had a sequential reduction of $104,000,000 related to regulatory credits, which is inherently lumpy. And in our other income line, we saw a $66,000,000 reduction. This is nearly entirely due to foreign exchange, which we don't hedge. GAAP automotive gross margin only reduced slightly despite the reduction in credit revenue and expected reductions in our vehicle average selling prices. Adjusting for the impact of credits, automotive gross margin improved materially. For Model S and Model X, ASPs were impacted by pricing actions applied to inventory of vehicles built prior to the launch of our powertrain and suspension upgrades in April, the majority of which were sold and delivered in Q2. For Model 3, global ASPs stabilized during the quarter at roughly $50,000 a sequential reduction, yet gross profit per Model 3 improved, representing the continued success of our cost management efforts. Note that we continue to defer a significant portion of revenue associated with full self driving, which will be recognized in future periods upon the release of additional features. Operating expenses, net of restructuring, continues to improve as well despite the increases in volume, reflecting the immense focus on improving our operating efficiency. And while operating expenses and capital expenses may appear to be unnaturally low this quarter, that's not the case. Rather, these reflect continued progress on cost efficiency and ability to scale our core technologies and processes. If we take a step back here, I think it's important to remember that Tesla is on a long term journey, and it's difficult to see the full picture looking quarter to quarter. We committed that Model 3 would be a transformative product, both for the industry and our business. 3 years ago, we unveiled the Model 3. 2 years ago, we brought the product to market. 1 year ago, we demonstrated our ability to build the Model 3 at high rate. So far this year, we've demonstrated our ability to manage global deliveries and logistics at a higher rate, but the most important thing is that we've demonstrated our ability to generate significant organic demand as nearly all orders generated in Q2 were non reservation holders. And thus far in Q3, our order casing is ahead of where we were at this point in Q2. And as we noted in our Q2 production and delivery release, our order backlog increased over the course of Q2. Ultimately, the Model 3 is accomplishing what our business needs it to do. It expanded our sales and customer base, enabling us to generate cash we need to reinvest. In the process, we've appropriately managed our operating expenses and have reduced the cost of running the business. This is critically important because I feel as though we've broken through a baseline fixed cost barrier enabled by the success of the Model 3 business. With continued focus on execution and cost management, the next 12 to 18 months should be the most exciting yet. During this time, we believe that Gigafactory Shanghai will be producing at scale. Model Y will be in production, addressing the most popular vehicle segment our European Gigafactory will be well underway Our autonomous driving feature suite will continue to develop. Energy Products business will grow and maybe a few other things along the way. And while there is inherent risk in any large and ambitious set of projects, our intent is to grow and invest as fast as we can afford to. With the cash we have on hand and the stabilization of Model 3 across the key areas as I've noted, we believe we're in great shape for this next phase of growth. Thank you very much. Let's start taking some first questions. Sorry about that, sorry, go ahead. Yes, So some important update is J. B. Straubel, Co Founder and Chief Technology Officer, will be transitioning to a senior advisor from the CTO role, and Drew Baccino will be taking over most of JV's responsibilities. I'd like to thank JV for his fundamental role in creating and building Tesla. Thank you, JV. Thanks, Elon. If we hadn't had lunch in 2003, Tesla wouldn't exist, basically. Yeah, it's been quite an adventure of 16 years. Lunch with you and Hal Rosen at Smith and McCormick and Schmick's in Alsakinde. That's the reason Tesla exists. I remember it well. And maybe just to add a bit more to that, I love the team and I love the company and I always I love the team and I love the company and I always will. So Drew and I worked closely together for many, many years and I have total confidence in Drew and not going anywhere if there's anything I need to do to be helpful to Drew or the whole team or any of the ongoing projects. So, yes, I mean, I'm actually really happy with how we've kind of phased and transitioned some of these different projects and people in, and I feel like this is a super good process overall. Terry, do you want to say anything? I'll just say, obviously, big shoes to fill, JB, but we have been working closely. In fact, we were even talking about this project back in 2003 all along. But you guys talked about it in 2,003 as well? Yes. Wow. 2,003 is a good year. I was graduating and I didn't know what to do. So I was like, oh, this project. But, no, I feel exactly as you feel that we are well set up, that we know how to get help when we need to from you, and that we're very excited about the growth ahead of us, myself and the whole team. And I'm excited to stay involved in some of our core technologies and follow that and help where I can, just in less of an operational, obviously not an executive type role. Sounds good. Well, JV, thanks Gabe for your instrumental role in creating this company and Drew as well. So that's cool that you guys were talking about in 2003. Yeah, Lovely, the right year. Good year. Good year. The technology was ready, at least the time. Yeah, the damn ion was finally ready. It just needed to be put in a car. AC Propulsion, Al Cacconi, Tom Gage, T0, if you're going to give those guys a lot of credit. Yeah, they did some pioneering work. Great, I think we've got some sort of questions. Thank you very much. So we have some first questions from our retail shareholders from say.com, and the first question is, it has been stated that Tesla is supply constrained, not demand constrained. Can you help us shed some light on why Tesla is lowering car cost if supply is constrained? Sure. There's a number of things to consider here. There's really 2 key dimensions for demand. There's value for money and then there's affordability. Obviously, if somebody simply does not have enough money to buy the car, it doesn't matter how much the value, how good the value for money is. You have infinite value of money if somebody does not have the funds to buy the car, they simply can't get it. So it's just very important to parse those 2, and I think there's a tremendous amount of desire to buy our cars, but people obviously, if they don't have enough money to buy them, they cannot. So we have to make the cars more affordable. And effectively, like in the U. S, our cars got almost $2,000 more expensive with the expiry of the tax credit on July 1, or partial expiry. And we only dropped the price of the Standard Range Plus Model 3 by $1,000 or actually, yeah, about $1,000 So the base Model 3 actually got $8,000 more expensive, which seemed like a reasonable compromise. So that's essentially what I mean. Vehicle sometimes just have these sort of pretty absurd notions like if demand is high, can't you just charge any price? Like no, you cannot charge any price. I think making our cars more affordable is also fundamentally part of the Tesla mission. Yes, I'll just add to that. I agree completely. What I'll add is that, generally speaking, within the Model 3 lineup, Standard Plus. So we'll see how the data plays out on this as we take in more orders, but the expectation is that our mix will move towards higher trend to some extent, offsetting some of the ASP adjustments from the pricing changes. And one other thing I'll add is that we are focusing on a couple of markets as well to target and densify some of our sales. And so some of our pricing adjustments reflect those elements of that strategy. Yes. Essentially, we expect average selling price to be the same within a few percentage points. That's correct. Yes, generally on ASP, as we noted in the letter, it was roughly even over the course of the quarter stabilized around 50 $1,000 And we have good visibility into where our ASPs are going based on order data. So that gives us 1 to 2 months of lead as to where our actual recognized ASPs will be. And so I would expect some adjustment to our Model 3 ASPs as a result of this pricing change, but the trim mix will offset some of that. And we continue to make great progress on cost efficiencies. And so overall in net, our expectation is that Model 3 gross margin will continue to grow. Yes, on the gross margin point, full self driving is an extremely important part of the margin calculation, and the features for full self driving are only a portion of them have rolled out. So the revenue recognition on the full self driving option is limited at first until those features roll out. And also the demand for the full self driving package is limited because the features are mostly prospective instead of current. But as those features roll out, I would expect the take rate for full self driving to increase significantly, as well as the revenue recognition of full self driving to obviously match the rollout of the product. So the gross margin over time will be really quite compelling, going back to the end of the full self driving option, which is headed to 7 ks in mid August, and that number will increase over time. Thank you very much. The second question is, many of us who follow Tesla closely are incredibly excited about Battery and Powertrain Investor Day and its technology implications. Can you provide us any more detail on when this will be and what will be covered? Yes, I think for her battery day, we're going to do a comprehensive review of cell chemistry, module and pack architecture and a manufacturing plan that has a clear roadmap to a terawatt hour per year. The timing for this probably is about 6 months, like maybe February or March next year, show and tell. Great, thank you very much. The next question is, you stated on the Q4 2018 earnings call that customer service was a personal priority for 2019. Can you update us on what has been done to date to ensure that all owners are receiving an industry leading customer experience? Sure. I meet with the service team multiple times a week and get daily updates on the reliability of the vehicle, we've the best service, of course, is no service. Like that's the vehicle, just reliability and quality being so good that service is rarely require, that's the main goal, is like eliminate the need for service. Then in terms of increasing service resources, as I mentioned, we're opening service centers as fast as we can, and we have already opened to 25 new service locations this quarter, and that will increase the rate of service center opening will increase dramatically through the course of this year, as well as more mobile service. Mobile service is really great because it's like we just come to you and fix the car wherever you are. And it's hard to beat that for communities. For parts delivery, we've made massive improvements to logistics for getting parts to service centers. Jerome, do you want to, Jerome is helping manage the service, the global service. As you pointed out, the best service is no service, so we're trying to continue improving the quality of the cars. I'm trucking this daily, and fewer and fewer service visits are required for the most recent cars that we're building. So we're on a good trend there. We also need a lot fewer work to finish the cars in the factory. Besides that, we sold way more parts of all the service centers, and we ship everything same day pretty much so that people don't have to wait for parts and we accelerate service and we increase our capacity. There's a lot of improvements that we have already implemented and many more on the way. So I'm relatively optimistic and I'm happy to help with the service team. Yeah. We had the regional service heads in the U. S. At the factory last week, and it was incredibly helpful, just a closed loop with service and production and with the software team. For example, a lot of service visits are just questions about how to use the car. And That's the number one visit. The number one visit is how to use autopilot. So a little bit of education there helps. Like what we had, I turned it on. It's sort of like, how do I turn it on? Okay. So just providing better feedback on the user interface and virtually how do you turn it on. A whole bunch of things that are quite elementary to reduce service load. Okay, and the next question is, in April, Gigafactory 1 had efficiency of about 23 out of the 35 gigawatt hours theoretical capacity. Has this been approved yet? And is Tesla still cell constrained? Are there any near term plans to increase the plant theoretical capacity? Drew? We have seen improvements in the 23 gigawatt hour number. We're in the high 20s now with the trajectory continuing upward. We're not We're still about 28 ish? Yes, 28 ish. Yes. I would say we're not self constrained for any of our activities at the moment. Cell volume is approximately matching the production ramp rate. Yes. Great, thank you very much. The last question is, what is the new Lathrop facility? Nothing major, or parts distribution warehouse? Yes, we're optimizing the real estate, to consolidate everything under one roof, reduce the cost. There's really nothing special there. Okay. Thank you very much. Latif, we can start the Q and A question queue on the call. Yes, sir. Our first question comes from the line of Dan Gauths of Wolfe Research. Your line is open. Hey, thanks very much for taking the questions and congrats on the $5,000,000,000 cash number. I'm halfway expecting some headlines tomorrow of Tesla's got too much cash on the balance sheet. I was wondering if you could update us on Gigafactory China. I don't have a great sense of what delivery volumes in China are for Model 3 at the moment. Some sources are around maybe 3000 or 4000 per month. What have you seen in terms of order flow and demand you announced pricing at a local product, that gives you confidence that you can get to 3,000 per week type of demand in that market? Yes, I mean, we don't want to talk too much about like detailed price plans, but I mean, if you're asking like what do I think the long term demand for Model 3 is in the Greater China region, I think it's about meaning from Shanghai Gigafactories, I think it's actually long term demand is about 5,000 a week. Okay. Sounds good. And have you considered potentially sourcing cars to Europe from that China plant at all? No. Our plan is to source cars to sort of Greater Europe area from Fremont, California and so we have European Gigafactory operational, but that's probably a couple of years before, it's probably 2021 before we have an operational Gigafactory in Europe. And so that's all the time we will source from California. Yeah, this is speculation, that's my opinion, but what I think say long term demand is for Model 3, it's probably 15,000 units a week globally, something like that. Okay, thanks for taking my questions. Thank you. Let's go to the next question, please. Our next question comes from the line of Toni Sacconaghi of Bernstein. Your line is open. Yes, thank you. I was wondering if you can comment about whether you felt that Q2 benefited from consumers in the U. S. Sort of rushing out to buy Model 3s in advance of the declining federal tax credit, a phenomenon that you sort of saw in Q4. And part of the reason I ask is, at least by my analysis, it looks like maybe 70% of the Model 3 sold in the quarter were in the U. S, which is sort of higher than your normalized percentage of U. S. Sales. And so, do you feel that, that phenomena may have occurred in Q2? And are you still confident that Q3 deliveries can improve sequentially? And beyond the data point that you provided on the call, that the orders quarter to date are better than last quarter, is there anything else you can point to that provides that confidence? Yes. I think demand in Q3 will exceed Q2. It has thus far, and I think we'll see some acceleration of that. And then I think Q4 will be, I think, very strong. So we expect like quarter over quarter improvements. I think Q1 next year will be tough. I think Q3 and Q4 will be good, Q1 will be tough, Q2 will be not as bad, but still tough. And then I'd say like Q3 and Q4 next year will be incredible. Yes, just to add on the tax credit step down. So the step down from Q2 to Q3 was significantly lower than the step down from Q4 to Q1. It's also important to keep in mind that there's seasonality in the auto business in Q1, which also was part of the impact. But generally speaking, our order rate so far this quarter is higher than where we were at this point in Q2. And we haven't seen a significant impact on U. S.-based orders as a result of the step down. Okay. Thank you for that. If I could just follow-up, Elon, I'm wondering if you can comment on whether you believe Model 3 is having any cannibalization impact on S and X sales or why you think that or why else there might be sort of a structural step down in the demand and delivery levels relative to what we've seen over the last 5 or 6 years? Actually, we're just talking about this earlier today. We're not quite sure ourselves. I think that there's some cannibalization. There may be a false expectation in the market that there's like some big overhaul coming for S and X, which then causes people to hesitate to buy if they think there's like some radical redesign coming, which is why emphasize publicly that this is not the case. The Model S and X today are radically better than the ones that when we first started production, especially S, say like 2013 or 2012 Model S, compared to Days Model S, night and day. In fact, I still run into people I know who have like 2013 Model S and they think it hasn't changed. I'm like, it is dramatically better in every way. But we don't do model years, we just roll in improvements as they come. But I think there is maybe a communications issue where people don't realize just how much better the S and X are today than when we first started, and we obviously want to address that communications issue and just get a better understanding from the front lines, like demand should be higher for S and X than it is, and we'll get to the bottom of it and fix it. Okay, thank you very much. Let's go to the next question. Next question comes from Emmanuel Rosner of Deutsche Bank. Your line is open. Hey, it's Edison on for Emmanuel. Just first question on the guidance. I know previously there was a target out there of 25% kind of on the Sx and Model 3. Just wondering is the updated one, is that suggesting that that's no longer in play for the year or kind of what are the implications with today's update? Well, if you factor in the full self driving option, I think it is in play for the year. We just need to get the futures done, make sure they're great, roll them out and recognize revenue and increase the take rate on full self driving. There's also for the existing fleet, there's a very significant opportunity to upgrade the existing fleet to full self driving since most of the fleet has not purchased this option yet. So there's a significant margin potential for the existing fleets to upgrade to full self driving, which most of the fleet can. So yes, absolutely, I think, like long term, we are talking 25%, 30%. Long term meaning like a year. Long term, in terms of vernacular, that 30% gross margin is, I think, quite likely. Yes. And we continue to take significant cost out of the Model 3 in particular as well. And Jerome can comment further on this. But every week nearly every week, we hit record lows on labor content to build the vehicle. And we saw an ASP adjustment reduction in Model 3 from Q1 to Q2 yet the gross profit on the vehicle expanded attributed to the cost reduction efforts that are underway? Yes, labor costs are more than 50% reduction in 1 year. It's progressive every quarter. Yes, I just wanted to just say what the labor hours were quarter over quarter? Yes, reduced in half since the Q3 last year. But it's also all the OpEx associated, the spares, the scrap is reduced to pretty much nothing, reduced 90% year over year. Spares reduced more than half full. So our goal is to make the comp more affordable and sort of pushing every day. And every week we beat records on most lines, yes, in terms of output and cost per unit, yes. We're in very good dynamic and a level of school discipline that I have not we have not had in the past. Agree. Yes. So from a core financial health standpoint, I think I'd just like to echo Jerome's words, like I think Tesla's fiscal discipline is dramatically better than at times in the past. Thank you. Our next question comes from the line of Joseph Osha of JMP Securities. Your line is open. Hello, hello. Listening to you talk about mix here and the fact that you're running a single shift at your S and X facilities in Fremont. I'm wondering is there maybe some potential to reconfigure the floor space there a bit? And is that something that you're thinking about? Well, we are reconfiguring the floor space in Fremont, and there's quite a lot of factory space that's currently taken up with the SX parts warehousing, parts for the SX line, and we don't really need that. So that's where we're putting a lot of the Model Y activity. Jerome, do you want to? Yes, we're improving the material delivery for SMX just like we have done for Model 3, I've seen some Radicom improvements. We reduced production part warehousing cost by again, 90%, nine-0 since Q3 last year. And so we're making a lot of room. We have we're much more efficient with parts delivery. It helps that we're increasing production actually. And so that space that we've cleared out, I'm looking at it right now in Fremont. We're just going to put more wine stuff in there. So every if you visit the factory from, I would say, every 6 months, you'd have a hard time recognizing and finding your way, It's constantly changing and evolving. I'm sorry, go ahead. I was just going to say, the efficiency of this factory, both Greenmont and Giga, is like just the rate of improvement, which is not slowing down, has been incredible. It's like you're just like, you can feel it and see it. And just as a follow on then, could we see you manage to make 7,500, 8000 Model 3s in Fremont by the end of the year, you think? Yes. Okay. Thank you very much. I feel confident. At least to say that the trend is very clearly towards being able to get to 10,000 vehicles a week, of which that would be this is very rough numbers, like 83 to 8,600 Model 3s and the balance in S and X, so sort of 1600 to 18 00 SX and around them is 8,500 Threes, 1500 Sx per week, but probably a bit more than that. Thank you. Our next question comes from the line of Dan Levy of Credit Suisse. Your line is open. Hi, great. Thanks for taking the question. I wanted to ask about your reg credits, in particular the non ZEP piece. You're not disclosing the ZEP piece anymore. But just a couple of questions on this. First, how can we think is there any quarterly cadence to think about this? And then what's the composition of this? Is this going purely to European OEMs? There's obviously one automaker that you've agreed with. I don't know if there are any others that you're looking at. And lastly, to what extent can you or are you willing to sacrifice pricing in Europe to sell higher volumes to generate more red credits? And are you having discussions with other automakers on this front? Yes. On your question about the cadence of regulatory credits, it's, it is generally, as I've commented in the past, we expect regulatory credits to become a more meaningful part of our business. On a quarter to quarter basis, it's very difficult to forecast them. As you saw from Q1 to Q2, that declined. So as you model regulatory credits in Q3, I would not expect a significant increase in regulatory credits, although it's hard to forecast exactly. The regulatory credits composition is a mixture of there's particular deals that are one time. There's also some that are production based over time. The production based ones are easier to forecast because it's based on cars that we build and we get an offset to that. The deal specific ones are lumpier, which makes it more difficult. And then your final question was on, does it make sense to sacrifice pricing to drive regulatory credit in certain markets? It might I'm not sure if we've specifically gone into the details of that. But generally, we're selling cars in markets at the prices we think are appropriate. And the regulatory credits is something that's additional. We generally try not to run the business based on regulatory credit revenue. The regulatory credits, it's a relatively small part of the abrasion for Tesla. And the reserve credit situation, I think, really needs reform because the market reserve credits is negligible. Now, some of what's happening here is the other manufacturers are kind of like waiting to see how their EV sales do before buying any any credits from Tesla. And so it kind of depends on how that goes. If they sell more EVs, then there's not really need to deal with Tesla, and if they sell fewer, then there is. Great, let's go to the next question please. Thank you. Our next question comes from the line of Colin Rusch of Oppenheimer. Your line is open. Can you walk us through the plan for battery sourcing in China? How many how much of the supply is going to come from internally produced batteries? How much is coming from externally? And what's your expectation around cost per watt hour as you start to ramp? I don't know if you want to talk about the details of battery supply, but we believe we've a good handle on we don't expect to be self constrained in China for the next year, I don't know. Drew, what do you think? Yes, that's what our plan looks like right now. In terms of internal versus external, I think we should wait until we have our discussion early next year. But yes, we have agreements in place with all the we're good for the next year, as you said, Johan. Yeah, I mean, I think like we probably need to just do a reset, like, I would say Master Plan Pod 3, but it's sort of like, least to some degree, like battery day will be kind of like Master Plan Pod 3, which is like, okay, how do we get from kind of in the tens of gigawatt hours per year to multiple terawatt hours per year? That's a pretty giant scale increase. And so that's like increased by sort of roughly 100. Like, if we're at 28 gigawatt hours right now, Well, actually, yeah, there's more than that when you count the factories in Japan, so collect a little over 30 to 35 or something like that. Then how do we get to like 2 terawatt hours a year? So two order of magnitude increase. That's the way you have to think about it, because that's what we need to do. Exactly. In order to really make a fundamental shift in the world's energy usage and really transform things to a sustainable energy future, If you're not in the terawatt hour range, it's a nice news story, but it's not fundamentally changing the energy equation. Okay, and can I have a follow-up question around MOLEX and MOLEX saturation? Obviously, you guys have some ideas around how big that market is. How should we be thinking about sustainable volumes and pricing on those volumes? Obviously, we're seeing some lower numbers here and I think that's a core element of what's going on with the story that as we pricing drop and volumes drop, what are the right numbers to think about for you guys from a planning standpoint in terms of sell through on both Model S and Model X? Yes, I think there's probably a bit too much focus on S and X. The S and X are X are nice, but they're not and I think it's like without them, we couldn't spell sexy. So the main reason, well, not the main reason, but a reason because we want to keep spelling sexy. That is a reason, I should say, not the main reason, but the main reason to keep going with S and X. But the story for Thousand Future is fundamentally Model 3 and Model Y. I think my guess is like long term sales of, long term meaning a couple of years type of thing, the demand for sales demand for 3 is like on the order of 3 quarters a 1000000 units a year, and it's probably 1 and a quarter 1000000 units a year for Model Y. So the combined is like maybe 2,000,000 from those 2 vehicles alone. And then SX is like maybe 80 to 100 ks a year, so it's like 4% or 5% of volume of 3 in 1. And then you throw like a truck in there, pickup truck, and tow the semi, it just gets smaller and smaller. So they're great products, but from a volume standpoint, they're not all that important in the long term. Thank you. Let's go to the next question, please. Next question comes from Pierre Ferragu of New Street Research. Your line is open. Hey, thank you for taking my question. I'd like to ask you, Elon, about distribution. So you made like you guys made a big change at the beginning of the year going from like an almost 100% online distribution model. You tried to push back on test drive and get people to buy the car, try it and return it if they don't like it. So could you give us an update on how it is progressing? You see Tesla becoming like mostly like an online distribution following an online distribution model. And I saw you opened 25 new retail locations in the quarter. So how do you see your retail footprint evolving over time? Actually, I was saying that we're open 25 service locations. I think really what we find is that the word-of-mouth for Tesla is incredibly good. So once there is a nucleus of customers in a particular area, they love the cars and they talk to their only friends about it, and that's really what drives sales. So you can think of like a retail location, it's kind of like a viral seed in an area. It would grow organically by itself, but the retail location is like a biosead. They aren't needed, they're like an accelerant. What is needed for sales in any given area? And I'd say this worldwide. Frequently told like this country is different or that country is different, I'm like people around the world pretty much want the same thing, in my experience. But you have to have a service location that's convenient, so it can't be like you've got to drive 5 hours to a service location. You have to have service, you have to have supercharging and charging well sorted out, you have to have good consumer financing and then the price must make sense. And any place where those four things are true, our sales are great. So we're rolling out service centers like crazy. So service centers are the key to sales, not the retail locations. Yeah, and we're going city by city on the service center point. We're looking at where our populations are of existing customers. We're mapping driving time from those customers to the service centers, inclusive of traffic, to improve densification of our service centers in the locations in which our customers currently reside. We do have areas that are underrepresented with service centers where the drive time is too long or there are populations that don't have appropriate access to charging their service centers. And we're working as fast as we can to get places up and running in those areas. So it's very systematically being mapped out with a focus on service and supercharging as opposed to a retail presence. Yes. The supercharging is incredibly important. You can't just have 80% of the routes that somebody wants to take. You need 100% of the routes, because a car is really freedom to travel, and anything that inhibits freedom to travel compares to the fundamental value of the product. Or perceived. Yes, exactly. We all perceived for freedom of travel. Thank you. Let's go to the next question, please. Our next question comes from Joseph Spak of RBC Capital Markets. Your question, please. Thanks. So, Elon, you mentioned the importance of full self driving for gross margin. You've also mentioned the importance of China. Do you expect to be able to offer the full self driving suite that you plan to offer in the U. S. And China? And I guess even in Europe where they've been also been a little bit tougher on regulating? Yes. We expect to be able to offer full self driving actually everywhere except EU because there's just some committee rules that were put in place years ago that need to be changed. It's not from a technical standpoint, it's very doable, but we just need to work through the regulatory committees to get the regulatory approvals and rules changed. And it will just take a bit longer than other places. But I think we'll see a lot of pressure from our customers in Europe to have these rules changed so they can have access to full self driving. And I think at the end of the day, the regulators will answer to the public. I think that's just a temporary thing and it's quite specific to EU rules. And then we were just not present really when those rules were drafted, so they sort of got put in place. They don't make a ton of sense, but we just got to work through the process to change them. Okay, and then the second question is, you mentioned service a number of times. There's obviously been some, I think, growing frustration with owners. And you mentioned parts availability and you've issued the dealership model. But I guess how do you plan on increasing parts availability without the corresponding working capital commitment that would be required as the fleet continues to grow? It's actually just taking the parts that were stored in a bunch of warehouses and just moving them to the service centers. The thing that makes sense is to have the service centers where the parts are kind of all on the wall. It's like a supermarket. You always know where the cocoa pots are, and you can just go meet there and go and grab it, and then you just replenish the shelves with parts. And so we're basically putting all parts that are used more frequently than like 6 weeks literally on the walls on service centers. There's no ordering of the part. You just go take off the shelf and put it on the car. Really want to get to not merely same day service, but same hour, sort of like Jiffy Lube, but applied generally to service. Yes. And specifically on the working capital piece of this, we actually have a significant amount of service parts inventory. The challenge is it's just not at the service centers. And so a lot of the lag that is experienced is we have to get the part from a distribution center to the service center. And so by moving by localizing the parts, I don't expect that to be a large working capital chain on the company. It might actually be the reverse. Where we don't need to store as many parts centrally. Yeah, and also just having parts, if they're made at if we make them internally or if they're made at a supplier, just sending them directly to the service center instead of like having them go through a bunch of distribution outlets. In fact, when I was in China on my last trip, I asked the China team, hey, is there anything silly that we're doing that we should fix? And I said, yeah. Well, several of the parts that require replacement are literally made in China, and then we end up shipping them to New Jersey and then back to China. And could we please just ship them like literally across the road? Like, yeah, no problem. There's all these crazy things that happen. If you're like, if you have a 45,000 person company and then just going to basically stop doing silly things, a lot of what is needed for improvement. And as the scale of the business increases, the economics of localization of things like parts distribution make a lot more sense, whereas in the past when the company was smaller, having centralized centers, it was easier from a cost perspective. So the business thing because the company is growing so fast, as Elon has mentioned, we have to continue to redesign processes and systems to restabilize ourselves at a new plateau of volume. And then we'll grow again, and we'll need to rebuild those processes. Yeah, Tesla is the only company that makes things in volume that is fully vertically integrated all the way through sales and service and charging everything. So we really just need to look at total system efficiency and say, in the limit, if Tesla was the auto industry, how would we do it to maximize economic efficiency? And we've got to kind of recalculate that optimization as we achieve greater scale. I'm confident we can achieve a fundamentally better economic efficiency than the rest of the auto industry. Thank you. Okay, unfortunately, that's all the time we have for today. So thank you so much for all your questions and we'll speak to you again in the next 3 months. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.