M&A Announcement

Aug 1, 2016

Good day, ladies and gentlemen, and welcome to the Tesla and SolarCity Combination 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. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Mr. Jeff Evanson. Sir, you may begin. Thank you, Chanel, and good morning, everyone. Welcome to our call to discuss the combination of Tesla and SolarCity. From Tesla, I'm joined today by Elon Musk, JB Straubel, Jason Wheeler and Tesla General Counsel, Todd Marin. From SolarCity, we have Lindon Rive, CEO Peter Rive, CTO and Tangi Serra, CFO. Earlier this morning, we issued a press release and short investor presentation at the same web address as this webcast. 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 recent SEC filings. We're going to start today's call with some comments by Todd, our General Counsel, followed by comments from Elon, Lyndon and then Jason. And during the Q and A time, please try to limit yourselves to one question and one follow-up, so everyone gets fair time. And also, let's please stick to the discussion of the combination this morning. We certainly can discuss other matters about Tesla Wednesday evening this week when we report our financial results for Tesla's Q2. And with that, I'll turn it over to you, Todd. Please begin. Thanks, Jeff. Good morning, everyone. Just real briefly before passing it off to Elon, wanted to go over the quick overview of the transaction, which if you have the investor presentation is on Slide 3. Under the deal, Tesla will acquire SolarCity in an all stock transaction. SolarCity shareholders will receive 0.110 shares of Tesla stock for each share of SolarCity stock and this corresponds to a per share value of $25.37 The pro form a ownership of the combined company would be approximately 93.5 percent Tesla and 6.5 percent SolarCity. The expected close is in Q4 of 2016 after we go through the standard SEC review and regulatory process. And there will be a special approval process for this deal where the transaction will be subject to the approval of the majority of the disinterested shareholders of both companies voting at each shareholder meeting. So with that, I'm going to pass it over to Elon, who can speak more about the objectives of the deal. Hi. I think I've spoken quite a bit at length obviously about the objectives. So I don't think there's anything new I have to add. We've described when we announced this and then again in my master plan update. But the Tyro deal is essentially driven by the need to bring together the products on the factory and the solar side to create an integrated product for the end user, the end user being away from the individual to the utility. So the idea is that there's one sales process, one installation process, one service contact, one phone app to monitor things. And then on the hardware side that we can integrate the power electronics and the energy management grid from DC from the solar panels, DC from the battery pack and mixing and matching that to provide AC to homes and businesses or in the case of utilities, in some cases, very high voltage DC. So this is really all part of solving the sustainable energy problem, something that has been a goal from the beginning effect for my sort of first tongue in cheek after that, I should say, my master plan 10 years ago. That's why we're all doing this is to try to accelerate the advent of a sustainable energy well. And I think this is an important step in that direction. Thank you. Hey, Don, I'll add to that. This is Lindon speaking. Many of the shareholders listening right now are very familiar with Tesla, but may not be that familiar with the SolarCity. Now just to elaborate more on the importance of vertical integration. When SolarCity started, we at first didn't do our own installation and quickly realized that in order to provide the best services and the best products, you need to do your own installation and can control that customer experience. So we vertically integrated our installation services and our financing services and was able to provide a better experience for customers and separated from the competition. We became the biggest in the country. Now one out of every 3 systems installed in the country is installed by SolarCity. We're larger than the next 50 solar companies combined. In order to continue to maintain this differentiation, you've got to do more than just vertically integrating the services. You've got to vertically integrate the products as well. And so that's the next phase of the company. And Tesla creates some of the best products in the world. When you add their manufacturing expertise and the investment they're making into storage, and as Elon mentioned, it's going to be very clear that this combination of solar combined with storage will be able to provide energy at a lower cost than traditional forms of energy. And that energy won't just be energy as we know today, it will be energy plus grid related services. We can address all the grid needs when you add storage to the equation. So I'm very excited about this next phase. And I think together, we can really accelerate the adoption of clean energy. So this is Jason. I'm speaking to Page 12 of the presentation we sent out first. So first and foremost, the headline here is we believe we can generate substantial cost efficiencies with the combination of the 2 companies. Right now, we're targeting $150,000,000 within the first full year after closing. If I drill down on that some of the details, clearly there's going to be sales and marketing efficiencies. There are opportunities to rationalize our sales channels. We're talking about one brand and a complete solution for the customer. There's also opportunity to leverage our combined digital and retail capabilities. We also think there's real opportunity just to improve the overall value proposition when combining the 2 companies. On hardware costs, there'll certainly be supply chain efficiencies. There are common components between the 2 companies. Inverters is a great example, rationalizing the software as well. We believe there's substantial opportunity to reduce installation and service costs. Elon has talked about this already, but we're talking about 1 trip or 1 trip by 1 truck to install 3 products, solar, storage and home charging for our vehicles. Improving manufacturing efficiency, we've talked a lot about the machine that makes the machine and to make this a little bit more real, I'll give an example. When Elon and I sat down and started reviewing our Model 3 CapEx plans, there were new buildings everywhere. And I think Elon has been very clear about talking about volumetric efficiency. And as we've rationalized these plans, we've talked a lot about there's no need for new buildings. We can do this in the space we have for the most part. So that's an example of where we think manufacturing efficiency will come into play, and we believe that this is going to be applicable to SolarCity as well as they continue their journey down manufacturing. There's obviously opportunities to reduce customer acquisition costs as well. There's a slide in the deck on Page 11, which just talks about North America. And I think there's a couple of key things that jump out there. One, in the markets that SolarCity is currently operating in, Tesla has a footprint there as well. So we've got nice concentration within those shared markets. And then obviously, Tesla has got a global footprint as well, which in the future we could certainly leverage. And then we also believe there's opportunity to cut capital costs as well. So moving on to the next page, I'm on Page 13 now. I think the headline here is the Tesla Solar City financing strategy is really underpinned by 2 key factors. One of those factors is the continued maturation of Tesla's production capabilities. We already announced this at the beginning of or at the end of Q2. Our production capacity for vehicles grew 20% quarter over quarter and over 40% year over year in spite of some of the challenges that we talked about with ramping up Model X. Number 2, SolarCity has a formidable project financing acumen. I believe that this is a real asset and as I've gotten to learn a lot more about it, I think we're really going to be able to take advantage of this great capability that the company has built across the enterprise. If you look at the necessary. So that's the headline story around that, but let me drill into it a little bit. There's 5 points on the page. 1, greater visibility into cash flow dynamics of the combined company. As stated, we're very encouraged by the observed improvements in S and X production, which is naturally going to lead to positive delivery momentum. In addition, we're quite impressed by the cash flow generation of SolarCity's large market leading installed base. Number 2, Tesla's disciplined capital expenditures, applying that across the enterprise. We've demonstrated capital preservation capability at Tesla. In our Q1 earnings, we talked about $217,000,000 in CapEx, which is significantly down from the run rate in 2015. Also, the physics based first principles approach we're taking to Model 3. I've already mentioned volumetric efficiency, and we're also displaying a healthy disregard for conventional wisdom. It's always been thought that increases in capacity require step change increases in capital. We're looking for different ways to optimize assets that are already in place and breaking through that. We believe that will be certainly applicable to SolarCity in the future as well. Number 3, we've got great confidence in our initial capitalization and we've got a goal to delever the enterprise in the future. Number 1, drilling down on this, we'll govern the near term debt growth at SolarCity concurrent with the development of a rationalized capital plan across the enterprise. And second point here, we'll continue to build our credit profile to open up new sources of capital over time. Next point, we've got revenue growth that is driven by new products that are already under development. Model 3 is the key example here. We'll generate gross profits from that vehicle and that will enhance our overall leverage profile as an enterprise. Also, the combined solar and storage offering is expected to fuel revenue growth and should help us self fund future investments. Last point on the page, realized synergies and cash flow. I covered a lot of that on the last page. But overall, just to circle back, we think each company has things that they can provide, which as a combined entity, really increases the financial profile and gives us great confidence in the future. All right. Chanel, I think we're ready for questions now. And Our first question comes from the line of Ben Kallo of Robert W. Baird. Your line is now open. Hi, thanks for taking my question. Can you talk a little bit about the 45 day go stop provision? Is it just a formality and if something were someone else were to come in and given a hired offer, how would that impact Elon your next step in your master plan? Yes. If someone were to come in and make a higher offer, I mean, assuming more than like a $0.01 higher offer, then I guess the independent board members would be compelled to accept that and we'd have to find out that. And I've committed to vote my shares in favor of whatever ultimate offer comes through. So if an ultimate offer comes through that is materially better for Sol City shareholders then I assume their pension holders would accept that. I should point out that I had no role in establishing this valuation that the offer that was made, nor do I send any of the mechanics that went into it. This was I was fully recused from the matter. So I know about as much as you do about how this price was obtained. Great. Thank you. Thank you. And our next question comes from the line of Julien Dumoulin Smith of UBS. Your line is now open. Hi, good morning. Good morning, Julien. Good morning. Julien is one of the Solar City analysts. I wanted to follow-up here just quickly on the 150. Can you break down a little bit more specifically, numerically where that is exactly coming from? And also, again, given a few months now, what are the specific targets you're thinking about in terms of storage and where geographically are you thinking that to take place? The specific target and what? Julian, you broke up a bit there towards the end of your question. Could you repeat it please? Yes, I apologize. So the 150, can you break that down a little bit more quantitatively? And then with regards to the storage element, can you quantify what kind of projected deployment on the SolarCity side you would expect and perhaps a little bit more comment by region? All right. Do we have a question? Sorry, before Jason, I do want to remind everyone on the call that the deal isn't done. This is simply a recommendation from the independent board committees. It must go through SEC review and it must then receive a vote of a majority of the independent shareholders of Tesla and about majority of independent shareholders of of Sole City, only at that point it is actually a deal. So this is a prospective deal, but it would be probably at least a few months, I'm guessing. We don't control the SEC timeline before it actually becomes a deal. So it's likely to close sometime in the Q4. Just to preface all the questions because I think some of the articles I'm seeing seem to assume that the deal has been done, but it's only done with the SEC review and 2 sets of independent shareholders voting and that is at least a few months away. So, sorry, go ahead. All right. Jason, you want to take the financial question and we'll go back to Elon for the storage penetration? Sure. Yes, no problem. Julien, great question. Thank you for asking it. So right now, we're not assigning the 150 $1,000,000 at any lower level of detail than that. But let me talk you through some of the things to think about. So one of the things is obviously Tesla's retail footprint is a real example to drive down customer acquisition costs. We have more than 3,000,000 people that come through Tesla retail locations every year. And there is a broad overlap in the types of products that these customers are looking for, which we think plays right into SolarCity. So one, great opportunity for sales channel rationalization. Another one we've talked about as well, we install home charging and usually we do this through 3rd party providers for our Tesla vehicle sales. Also, it would be a separate person coming out to your house to install a battery storage solution and a separate person coming out to your house to install a solar solution. In the combined entity, we can do all of this with one truck and one trip. So there's real opportunities for synergy on the installation and servicing side. And then the other key one that we're looking at across the company is manufacturing as well. We've been in the manufacturing business for many, many years now, and we've developed a lot of experience in this area. SolarCity is still in the beginning of that journey. So there, I think, are a lot of key learnings that can be applied to SolarCity. So I was going to kind of wrap that all up. I think really looking at customer acquisition cost is a key source of synergy. Looking at reducing installation and service costs is another key source. And then also looking at the manufacturing capabilities of the combined entity is a third key source. Of course, we're going to look for more beyond that. And we believe there are potential revenue synergies, large potential revenue synergies in the future as well. But just on the cost side, there's a lot of meat on the bone. And then in terms of the storage adoption, the way I see it, the first product available for residential customers is primarily going to be focused on backup. But you'll see that there's policy changes that are occurring where the grid is looking for grid services. And so when you combine solar with storage, you can provide essentially most of the grid services that the grid needs. So New York came out with a joint agreement with the solar industry and the main utilities there describing a 3 to 5 year glide path of how solar and storage would work together. Solsys just did a it's just announced a pilot with PG and E in Northern California of how solar storage is going to provide grid services. So as that policy becomes more common across the different utilities, I see that almost all systems will be deployed with a solar and storage combined, call it, over the next 3 to 5 years. But no specific quantitative targets on storage deployment yet? Not on that that we will say. Okay, fair enough. Thanks. I mean, as the companies actually get integrated, remember, this is not the companies are integrating deals that are yet approved. Then of course, there'll be conservatively high fidelity on that. But I would take that sort of $130,000,000 to $200,000,000 estimate. I think that's conservative. I guess what my gut feel here is. I think we will significantly exceed that even in the 1st year. Got it. Thank you. And our next question comes from the line of Patrick Ottenbaum of Goldman Sachs. Your line is now open. Yes, thanks. Good morning. I guess my first question is the 3 to 5 year timeframe for when solar plus storage makes sense. Is that in all jurisdictions of the United States or is that some obviously there's different rate levels and regulations as well. And there are places like Hawaii that makes sense now, but other states where it's going to make sense in a longer time horizon. So that was my first clarification. And then secondly, just related to that, I mean, the question got brought up last call, but but it does beg the question of why now, right? If you've got sort of half a decade until this sort of makes economic sense and the degree of difficulty of what you've got going on over the next 18 months is so high. Why was the decision made to take this on right away? Why not wait until some of these more difficult operating hurdles were gone over, I guess. So just I just want to add one clarity to my comment of 3 to 5 years. That is with full and mass deployment applying to essentially almost all systems we're deploying. Naturally, the adoption will occur a lot earlier with many of our customers. If you combine solar and storage, it can provide a backup offering at essentially roughly the same rate as what they're paying for energy today in many of the states that we operate, we see high adoption will occur. My comment on the 3 to 5 years is essentially getting to a point where almost every single system that we deploy will have solar and storage. So I just wanted to clarify that. There will be a growth period in from now until then as we integrate. Yes. And I mean, this is really long term thinking here. In order for the right scenario to transpire in 3 years, we need to make take the action now. You can't take the action in 3 years and then have it instantly be the right move. It takes time to get there. So this is an action now, which is anticipating several moves ahead. Okay. And if I can just ask a clarification, I mean, there's it's just that, there are a number of studies from credible sources that have put the kind of lower cost of energy. Well, I mean just people like the RMI that have done a lot of work on this. And I'm not saying it's 100% right. I mean there's assumptions into every piece of research, right? But I was just wondering their view is that kind of the levelized cost of energy is sort of equaling the grid cost is further out than what you guys would suggest. And I was just curious, maybe you haven't read their work, I don't know, but what where do you see yourselves being different is really is it just the manufacturing costs that you feel you can get it better than what some of those assumptions are? I'm just kind of curious on that point. Well, it's a point to bear in mind that the cost of energy varies quite dramatically around the United States and throughout the world. And the pricing mechanism for that energy also varies considerably. In some countries, there's quite a huge premium depending upon the time of day that you use energy. But in United States, for example, Hawaii has very expensive electricity. So we expect to see a lot of activity in Hawaii, certainly well before, say, Texas, which has a very low cost of energy. So one shouldn't look at this monolithically, but rather as the competitiveness of solar powered with battery improves, it starts to address more and more of the total market for electricity, initially addressing only where electricity is very expensive, then where electricity is moderately expensive, and slightly expensive and eventually, reaching the point where it's competitive relative to the average price of fossil fuel energy. So that's a sort of steady march in that direction. It requires a lot of technology development, operational improvements and economies of scale, all of which this merger is intended to achieve. Got it. Okay. Thanks for taking my questions. And if I could just chime in on that too, this is JB. I think most of our projections of cost especially for a well integrated product are more aggressive than what most of these different industry studies have been assuming. And also it's not just about levelized energy as Lindon was saying. There's a lot of other benefits that have specific value when you can have a very well integrated product with storage. So I think it's really key to take those benefits into account, whether it's just backup power or whether it's aggregated grid services that these distributed resources can be provided. Got it. Okay. Thanks guys. Thank you. And our next question comes from the line of Rod Lache of Deutsche Bank. Your line is now open. Good morning, everybody. I was wondering if you can share, maybe it's just a stab at what the revenue synergy opportunity might be or the extent to which customer acquisition costs for solar can decline? And also, just from a high level, from a Tesla shareholder perspective, can you just talk a little bit about the financial impact of the combination? What is the impact just roughly on the earnings and cash flow as you look out at the combination in 2017, 2018 2019 versus Tesla alone? Sure. So this is Jason Rod. So let me there's a lot of questions built into that. That was like a paragraph there. First of all, on the revenue synergies, I think you look at the combined footprint of the 2 companies and I just think that there's just a more efficient way to just to drive revenue. If you look at the digital capabilities from a marketing perspective that SolarCity has, the physical retail capabilities that Tesla has, I think there's real opportunity there. But I also think the story of the value proposition of combined solar and storage is not well understood. And I think putting the 2 companies together makes that message quite clear and we're going to really be able to help educate consumers on the value there. So I think that's also a huge source of potential synergy. Now in terms of modeling out into the future, 2017, 2018, 2019, we're certainly taking a look at that. But this is the early days of integration and digging through that. So we're not going to provide a lot of detail on that at this time, but more to come. Okay, thanks. And just housekeeping, do you have an approximate record date for the vote? This is Todd. We don't have a record date right now. We need to go through the SEC review process, but we'll give everyone plenty of notice before the record date is set. Okay. Thank you. Thank you. And our next question comes from the line of Vyshil Shah of Deutsche Bank. Your line is now open. Yes. Hi. Thanks for taking my question. Linden, I just had a question on your cash flow breakeven targets. I think you had said previously that you'll be breake ven, achieving breakeven by the end of this year. Do you still expect that to be the case given the new installation run rate? And then as you think about the combined company, what do you think about the split between leasing and direct sale? I think majority of your business today is leasing. Is that going to be the case going forward? Or you expect more of direct sale approach? Yes. So in terms of our forecast for cash flow positive for Q4, yes, we still feel good about that. We'll be updating our investors and providing a more detailed cash flow forecast at our earnings call on August 9. So but we're still well on track to achieve that goal. And your second question on leases versus loans or cash sales, we actually seen an increase in loan and cash sales. And so over time, I actually think loan and cash sales will become a larger portion of our business. And specifically, as we start differentiating more with products and I think customers would want to own the equipment too. Thank you. Thank you. And our next question comes from the line of James Albertine of Consumer Edge. Your line is now open. Great. Good morning and thank you for taking my question. I wanted to ask, if possible, and apologies, as we're, again, much more focused on Tesla and have never covered SolarCity in the past. I wanted to understand a little bit about where SolarCity is in its product sort of cycle from an investment standpoint. We know where Tesla Motors is with the Model 3 coming up and the cash needs there. But wanted to understand what the key cash components or needs were in the short term for SolarCity? And then as you think about that answer, are we going to be expecting an infusion as it relates to the combination? So it sounds like, I think I heard you say a minute ago, the combined solar and storage proposition is not well known. What is entailed with that higher advertising costs, consumer education? So really trying to get a sense and triangulate here where capital is needed and where capital is coming from in the short term? So let me answer the combined solar and storage. We actually think it's going to appeal to a different emotion to customers today. Today, the primary emotion for going solar is it's environmentally a better source of energy, and you can save money. Once you add storage to the equation, you have backup. So you go from saving money, environmental and then liability or safety. With many of the large climate events that are occurring, blackouts are quite common. In the East Coast, in the West Coast, you have earthquakes. And this type of insurance or this type of product will appeal to a large base of customers. So we actually think that will actually help with acquisition cost and bring it down. In terms of capital for SolarCity, as I said, we our goal is to be cash flow positive in Q4. The as we look at ramping up the manufacturing facility next year, that will assume additional capital. And I think with Tesla's help, we'll be able to make it more efficient. And I think that answers your questions. That's very helpful. Just as a follow-up, if I may. And I'll just ask you very quickly. I think if I can just add if I can just add if I can just add one thing, which is, I do think we're again, the nail needs to conclude. We're still probably at least a few months from that being done. But I think we would expect a decrease in the marketing expenses and the sales expenses. For SolarCity that's quite substantial. And the focus would be much like with Tesla through a network of stores where we have tremendous amount of foot traffic that I think is underutilized because we just we have just 2 cars right now to sell them and 1 prospective car and selling them storage for solar, I think, we're educating them about that. I think, could quite dramatically leverage the value of the stores and would allow us to reduce the advertising spend of ideally, we're really not into advertising. So we will be at some point in the future, but not now and reduce the selling expenses substantially as well. Thank you so much. I appreciate that additional color, Yaron. All right. Thank you. And our next question comes from the line of Philip Chen of ROTH Capital Partners. Your line is now open. Good morning, everyone. Thank you for the questions. Just to drill in a little bit deeper, I know this might be tough, but to what degree can you talk about or quantify the customer acquisition costs, integration costs reduction? And then I think I just heard Linda mentioned that Testimibe supports the manufacturing launch of Salvo. Can you discuss that in any degree as well? Thank you. Yes. I think on the manufacturing side, as Jason was articulating, I think Tesla at this point is starting to become quite good at manufacturing. And in fact, I think with the battery Gigafactory and with Model 3, I think we will start I mean, obviously, this is we need to show that we can do this, but I'm starting to feel confident that, it's possible to dramatically improve the state of the art of manufacturing by applying a physics first principles approach to manufacturing process. And to be sort of quite specific, really applying the a couple of the key concepts behind the Rocket equation to 2 factories. One being the usefulness density of a factory, which defines the capital expenditures associated with the factory and then the excess velocity of product from that factory. Those are actually analogous to 2 elements of the Ocuka equation. And we found that by applying those principles to automotive manufacturing and to battery manufacturing, we've been able to come up with dramatic improvements that we ultimately think will lead to at least a half order of magnitude improvement over the next best auto factory in the world. Now of course, talk is cheap, and we need to show that that's true. But the math suggests it is. So will that be applying those same principles to the production of solar cells, panels and modules as well as making those systems really custom designed to a house or location, business, whatever the case may be, and making them beautiful. This is very important. It needs to be an asset to your house. It needs to be so good that when it's done, you call your neighbors over to show them how proud you are. Great. And one more if I may. In terms of the solar storage business, as you guys ramp, the focus of SolarCity historically has been residential, but 10% to 20% of the business in a quarter could be commercial. Is there a focus at all with that business to pursue the commercial opportunities that might be more economic near term? Or is it focused solely on the residential side? Yes. Most of you actually don't know this, but we're actually the largest in the country as well when it comes to the commercial industry, behind the meter commercial. And we've actually been selling a fair amount of storage already for behind the meter commercial. In with commercial, the utilities separate demand cost from energy cost. And so when you provide solar combined with storage, you can offer customers a higher level of savings plus they have backup. That division is growing really nicely with inside the company. Then there's also the utility scale business that has done a fair amount of work there. We've announced the large project in Hawaii where we can firm up energy. I mean, you combine solar and storage and can provide a large part of the island's energy needs at MAC. And with the benefit of storage, the ramp up and ramp down period is almost instant. So we definitely see that market growing and it has been growing. Yes. And if I can add a little bit there, because I think what just to touch on what Linda was saying at the end there, it's current for SolarCity or hopefully a combined company to be cast as sort of competitive with utilities or belligerence in a belligerent situation. But actually, I think, I really see it as quite different from that. I see us as really working hand in hand with utilities to transition the power generation to a sustainable scenario long term. And I think it's very important to bear in mind that as transport becomes electric and as a lot of heating, which is currently using fossil fuels becomes electric, the demand for electricity is going to increase dramatically, probably by a factor of something on the order of at least 2, maybe 3. So that's actually going to present a huge challenge for utilities where they're really going to have to build a huge number of new electricity plants and lots of new transmission wires all over people's neighborhoods and new substations all over people's neighborhoods, which people don't want and it's a big headache for the utilities to do. Or you can combine centralized renewable energy generation with localized renewable energy generation on the rooftops. So I think there's a prosperous future here for both utilities and rooftop energy providers. And everyone wins because this is a growing pie, a rapidly growing pie. When a pie is constant or it's shrinking, that's obviously where you get you can get kind of negative competition. But this is really case where the pie is growing rapidly. And I think there's plenty of room for utilities and for rooftop providers like SolarCity. And I don't think many people want like I think we'll want that. If you ask the average question, do you want a ton of new power lines going to your neighborhood? Do you want a ton of new substations going to go? Everybody wants that. And it would take ages to do that. And I think we probably get stuck in permitting and it's just not a good way to go. So, on the other hand, if you say, do you want beautiful localized rooftop generation paired with transition to sustainable central generation? I think it's the obvious thing that we will want for the world and that's the solution we should all fight for. Thank you. And our next question comes from the line of Joe Spak of RBC Capital Markets. Your line is now open. Good morning, everyone. Elon and Jason, I mean, you both mentioned in terms of synergies, one visit, one installation, one I guess I wanted to get your thoughts on one bill, which presumably simplifies as well and whether you think you need to build something bigger internally from a financing perspective or potentially form a JV to someone to facilitate that? I think about JV. I mean, I'm not the biggest I just have a hard time with JVs, just trying to think of any good examples that work. I'm in all for writing having simple deals that where parties understand each other and whatnot, like what we have with Panasonic. A lot of people think we actually have a JV with Panasonic, but we don't. We're just rather simple, I don't know, real short couple of pages contract or something. And just everyone understands the basic principles of what it means to work together. But you don't have all the governance issues of JV, which usually leads to problems down the road. But we will have, I think, as a combined company, actually a stronger balance sheet. It sort of stands to reason, if you're going to maintain, say, cash reserves in 1 company and then cash reserves in another company, you can't take the probabilistic combination of what both companies need. It's actually best efficient to have cash reserves in one company or another. And I think a stronger balance sheet means you can also raise lease financing a lot easier. I'm not sure if anyone else would like to comment on that. I think we're good. Chanel, why don't we go to the actually, let me mention real quickly, we are at the 45 minute mark. So we do want to try to wrap up within an hour here and get you all to your trading desks. But, Chanel, let's go to the next caller, please. Okay. And our next question comes from the line of Edwin Monk of Needham and Company. Your line is now open. Thanks for taking my question. So, Ylan, I have a question about your master plan. You mentioned that on the plan, you actually said empowering individual to lead only utility. So kind of conceptually, do you see that the solar business should have more of your customer owning the solar system versus right now, it's mostly mostly are leasing, which has been Solsys is owning the system. So that's my first question. Yes. I think it's up to the customer. But I think we want to I think and I shall say, by the way, is already starting to do this. But we really offer customers, as we do with cars, 3 options: outright ownership, a loan, which you can get an extension of your house mortgage, which is actually a very low cost of capital weighted to do it. Actually, it's cheaper than what SolarCity can do. So I think it's sort of actually it involves a bit more paperwork with the bank usually, but it's actually the most economically efficient way to do it, is an extension of the loan in your house or perhaps Solstice do a lease. But SolarCity's cost capital is higher than the individual in most cases. So the logical move is actually to either own it outright for the cash purchase or to add it to your home mortgage. And I think we're going to push a lot more in that direction and also of course decrease the dependency our solar business on the capital markets. Great. That's very helpful. And then just a question on the technology development. I think on your prepared remarks, you mentioned that some of the components such as inverters, you can potentially develop your own or have some technology synergy there. Maybe can you give us some more color in terms of which areas that you guys are working? Have already started working on together or which area that you guys plan to start work together on these kind of technology joint to that technology development? Yes. Well, as separate companies, it's actually quite difficult for us to work together, because there has to be a justification for why I say Tesla favoring SolarCity or SolarCity favoring Tesla. For independent companies, it has to be an arms length transaction, where the same thing is offered to other companies. Everything is going to be run through the independent board committees. It's very unwieldy. And in fact, the one of the things that sort of really prompted the timing of the merger was just the difficulty, for example, this big utility deal that we're doing in Hawaii, which, of my understanding, will be the largest combined solar battery deal in the United States, perhaps the world. And how we had to spend months running through independent board committee of Tesla and Solar City and conflict waivers and we're like, man, this is we're going to do dozens and then 100 and maybe 1000 of these deals. There's no way we can keep running we can have such a real deal process. And it's just crazy. So we've got to combine the companies. But obviously until we combine the companies, we just we're constrained by complex of interest. I mean, it's irony of this, a lot of reporting around this merger is that they were reporting like, oh, there's also a complex of interest in the merger. I'm like, no, the complex of interest are if we don't merge. The point of the merger is to get rid of the conflicts of interest, silly bugger, honestly. So we can't really we can only talk prospectively what we might do, but we can't actually do anything. It's very limited what we can do until we are actually one company. Yes. And maybe just quickly on the inverter point. Power electronics is something that is really quite core to Tesla and I think it's something we see as a really strong competency of ours. Most people don't realize it, but Tesla is one of the biggest manufacturers of power electronics in the world. If you look at all the charging equipment in the cars, the inverter that runs the motors in the cars. So looking forward, it's something that we see a lot of potential on and we see this an interesting and lucrative opportunity if we can more aggressively innovate and integrate that with storage. Great. Thank you. Thank you. And our next question comes from the line of Colin Rusch of Oppenheimer. Your line is now open. Thanks so much. In the last call, you talked about the potential for loaning SolarCity some money because of the length of the acquisition process. Can you give us an update on your expectations now that you've done a deeper dive, SolarCity has updated its guidance and you're a little bit more familiar with their need to refinance assets on what your expectation is for providing a loan from Tesla to SolarCity during this process? Sure. This is Jason. Yes. Go ahead, Jason. Sure. I was going to say that it turned out that Tesla would not need to provide a loan to Solsys. What he said. And then you just talked about your power electronics capabilities and certainly that's an area for innovation in terms of the integration of these assets. I would expect that you'd probably apply some of Tesla's engineering expertise on that. How quickly do you think you could have a product that fully integrates the 2 without using that outside inverter to assist the integration? I think we don't want to jump the gun on future announcements. But we are internally betting on the come here. So if it doesn't turn if this doesn't go through, it will be a bit awkward. So we are betting on the come on integrated system of power electronics, which actually does get quite complex. Actually, it's not an easy technical problem to solve and solve, well in terms of mass volume, cost, aesthetics, longevity of the electronics. But as JB is saying, I think we're probably the best in the world on advanced inverter technologies. And we're kind of working that direction kind of hoping that this all goes through. But again, with salt station, we're being at arm's length, so less than ideal. But we want to reserve the product announcements for the right timing as opposed to this is sort of more of a financial call. Okay. All right. Thanks so much. Thank you. And our next question comes from the line of John Murphy of Bank of America. Your line is now open. Good morning. Just a question on funding and maybe sort of a non traditional angle to it or maybe not so non traditional. I mean, you guys have highlighted the potential to raise money in different forums. Would you ever consider bringing in a well capitalized 3rd party into the equation, if this deal goes through and you think you need more capital to really help with that? I'm not sure what that means, but I think we are going to do okay on the capital front. I did mention at one point that there may be some merit in doing small equity capital raise as a combined company just to delever and de risk the balance sheet. But small meaning kind of low to mid single digit percentages. So but I don't think we need more than that. Tesla's core business of Model S and X sales and Powerwall and Powerpack sales, will be generating quite significant positive cash flow. SolarCity's business will also be generating a lot of core positive cash flow. So it's really mostly about scaling up Model 3 and then scaling up the advanced solar cell and module manufacturing. But if we weren't in such kind of a crazy rapid growth mode, we will be producing significant positive free cash flow. Yes. I'm sorry, I was just really kind of coming from this sort of the idea that there might be a third party that you'd be talking to in some other way, but it sounds like nothing like that is going on. No. I mean, I'm sure there's third parties we could talk to, but there just doesn't seem to be a need right now. Okay. And then just a second question and a follow-up to sort of the efficiencies you may gain in manufacturing. And I certainly applaud you for trying to be more efficient on manufacturing over time. It sounds like you're trying to really advance the ball more than other folks have. Just curious what that means for employment in your plants. I mean, sort of the dumb guys view of the auto world, which is where I come from, is usually a 2 and 50,000 unit plant, has about 3,000 workers in it. And it sounds like you're going to have a much greater capacity with maybe a lot fewer workers. And I mean, it does get into sort of this existential question of, if there's less manufacturing and less employment, where does the demand ultimately come from? And once again, I applaud you for trying to get more efficient. So I'm not making any judgment on that. I think that's actually the exact right thing to do. But just as you think about employment in general, it just seems like it did start hollowing out the demand side. And this is for a broader question, not just so specifically for you, but it seems like you're going to make a lot of progress. How do you guys think about that? Yes. Well, I mean, there's, I mean, broad societal implications long term for automation of everything. If you have self driving vehicles, then obviously what the people do who currently drive vehicles, this is going to apply to many professions. It's not unique to automotive. I think we're going to have to rethink the whole social contract. But I mean, we can spend a long time dealing with both South Carolina's potential questions. In the specific case of Tesla's factories, I actually think we're going to have more people, not fewer people. But the volume in vertical integration will be a lot higher. But the ratio of worker to output, I'm just curious where you think you can get to? Yes. It's going to be substantially better than anything else out there. Just look, we will have a lot of work. We'll have I mean, I estimated, for example, that the Gigafactory will probably end up at triple its original expected output of from 50 gigawatt hours to probably 150 gigawatt hours. But the and the headcount we had estimated about 5000 or 6000. I think it probably ends up more like 10000. But that's tripling of output for doubling of workforce. So that's and it will actually be with a higher training level. I think we're going to have to establish schools and training and everything because a lot of the work is going to be more sophisticated and involve maintenance and upgrading of machines and dealing with anomalies in the production process. So it's going to require a lot more training as opposed to sort of basic repetitive actions, which really are better done by machine. So I think the quality of work will be more interesting, and it's going to require us to engage in training and I think establish internal training high level of internal training as well as work with educational institutions to make sure that the students are graduating with the level of training that's needed to deal a very sophisticated machine that makes a machine. So I think it's more rewarding and interesting work, but yes, one that requires more training. Great. Thank you. In Nevada, we're actually already partnered with several of the local colleges and universities and technical schools, setting up curriculum that really focuses on just those things. Basically working with automation, figuring out how to maintain it. It's been really interesting. There's huge interest from students and also the workforce in general. That's very good to hear. Thank you. Thank you. And our next question comes from the line of Michael Morrissey of Avondale Partners. Your line is now open. Hi, thanks for taking the question. Two questions here actually. First off, how can the combination of SolarCity and Tesla help de risk the Gigafactory as Model 3 production ramps, specifically kind of ensuring that there's an outlet for the additional battery output into grid storage application? I can maybe take a shot at that one. A lot of the initial growth and scale up of the Gigafactory is focused very much on Model 3. So we don't really absolutely need some large storage market to justify or sort of fill up the Gigafactory. It's actually ramping up as fast as we can possibly grow it. That said though, we do see, I think as we've said a few times, incredibly strong growth in the storage products coming out of the Gigafactory. And eventually those could make up a very large percent of the output. And I think if we are able to do a very well integrated product and we can see the demand that Lindon was talking about earlier, ramping up to essentially all the solar installations, that could really help fill up that portion of the storage demand in the intermediate term. All right. Thanks for that. And I guess maybe this one's for Elon. But a lot of people have made the comparison and saying that General Motors or Ford never made sense for them to acquire ExxonMobil. So why should Tesla and SolarCity combine? I think that it's a bit of a false analogy and ignores the key difference between distributed renewable energy infrastructure and potential autonomous vehicle fleet owner long term. I'd like to get your thoughts and a little bit more of the longer term leverage between a fleet of autonomous vehicles and a distributed network of renewable energy infrastructure? Sure. I mean, it's always dangerous to apply kind of past historical analogies a future that's very different, conceptually different. But I think it takes time for people to kind of adjust their templates and sort of re appreciate the dimensions by which something should be viewed. I mean, because one could also have said, for example, with the advent of when they were just horses and carriages and going towards automotive companies, that's like, well, clearly the horses the horse companies and the carriage companies weren't combined. So why should car companies produce motors and vehicles? But when you have an integrated thing with a car, it makes sense to have the motor and the car designed by the same company, so you can have a good integrated system that works together well. That same paradigm didn't exist in horses and carriages. So there was not there wasn't a good rationale for the carriage company to also own all the horses. Now with solar, you really need to combine storage because obviously the sun doesn't shine at night and sometimes it gets cloudy and there's a variance during the day for how much energy is produced. It's obviously lower in the morning, it peaks in the middle of the day and then it's lower at dusk and then off at night. So there's so naturally, you need to offer that power, because people want electricity 24 hours a day. And so it naturally lends itself to being an integrated product. And then you also want to factor in the when does it make sense to charge the electric car? You want to charge electric car at the right time of day. You don't want to charge it and kind of complete your home storage units. If you know that dawn is about to break and you're going to be generating electricity and it you sort of you want the station storage, the battery in your car and the solar power to all work together and provide you with a great solution for your home. And so I think that there is natural product integration here where there isn't for gasoline and cars. You don't want a gas station at your house. It doesn't make any sense. And I'm showing no further questions at this time. I would now like to turn the call over to management for closing remarks. All right. Thank you, Chanel, and thank you everyone for joining us today. Look forward to talking to you Wednesday after market close. Have a great day. Thanks, Aaron. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect.