Tesla Motors' (TSLA) CEO Elon Musk Hosts Offer to Acquire SolarCity Conference Call (Transcript)

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Tesla Motors, Inc. (NASDAQ:TSLA)

Tesla Offer to Acquire SolarCity Conference Call

June 22, 2016 07:30 AM ET

Executives

Jeff Evanson - VP, IR

Elon Musk - Chairman and CEO

Todd Maron - General Counsel

Jason Wheeler - CFO

Analysts

Brian Johnson - Barclays

Charlie Anderson - Dougherty & Company

Sachin Shah - Albert Fried

Colin Rusch - Oppenheimer & Co.

Joseph Spak - RBC Capital Markets

Ben Kallo - Robert Baird

Samik Chatterjee - JP Morgan

Patrick Archambault - Goldman Sachs

Colin Langan - UBS

Patrick Jobin - Credit Suisse

Dana Hull - Bloomberg News

Brian Lee - Goldman Sachs

Trip Chowdhry - Global Equities Research

Operator

Good day, ladies and gentlemen. Welcome to the Tesla Motors Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I would like to introduce your host for today’s conference, Mr. Jeff Evanson, Investor Relations, Tesla Motors. Sir, you may begin.

Jeff Evanson

Thank you, Tiria and good morning, everyone. Welcome to Tesla’s call to discuss rationale for our offer to acquire SolarCity. I’m joined today by Elon Musk, Tesla Chairman and CEO; Todd Maron, Tesla General Counsel; JB Straubel, our CTO; and CFO, Jason Wheeler. Yesterday, we announced our offer to acquire SolarCity in filings with the SEC and through a blog post available at www.tesla.com.

During our call this morning, we will discuss some of our business outlook and make other 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 Form 10-Q filed with the SEC.

We’re going to start today’s call with some comments by Todd and then Elon followed by Q&A. So, go ahead and please press star 1 now to get into the queue to ask a question.

And with that I’ll pass it over to you, Todd.

Todd Maron

Good morning, everyone. Thanks Jeff. So, I just wanted to briefly touch on some of the process points and why yesterday’s announcement might have looked somewhat different to people who normally see these kinds of announcements. It’s actually somewhat of a easy explanation but it’s somewhat of a unique situation.

So, usually, I know that everyone is used to seeing an announcement when there is actually a definitive agreement is reached and not just simply an offer. And obviously, in our situation, we are only announcing an offer. And then, as a result, you didn’t receive the same kind of information that you would receive when an agreement is reached, such as the agreement itself and detailed financial information about the combined company. The reason for that is that Elon is a 5% stockholder in SolarCity and he is required by the securities laws to keep the market informed through a scheduled 13d filing about his plans with respect to those holdings. And because of Tesla’s decision to make an offer to SolarCity and Elon’s support for that decision, it was appropriate to amend his schedule 13d to update the market even though no definitive agreement has yet been reached.

It’s obviously our hope to engage in the due diligence process with SolarCity and ultimately reach that agreement. And all that information that you would customarily see at that time including the agreement itself and detailed financial information about the combined companies would be provided then. But the result of this is that this is actually a more transparent process because you’re essentially seeing behind the curtains more than you would ordinarily see in a transaction because you are actually getting additional information upfront at the offer stage and getting an advanced look at the strategic business rationale for the deal.

And so, with that, I will actually pass it over to Elon so that he can speak more about the strategic rationale for the deal and why we do think that combining the two companies makes sense here.

Elon Musk

Sure. I did touch on most of this yesterday, but I think what this call is mostly going to be about is getting into maybe some of the detailed questions that people have. As I said yesterday, there is kind of three parts to -- and as I said at the actually Powerwall presentation last year, so, I think this is really quite an obviously correct move, is that in order to solve sustainable energy question, we need sustainable energy production, which is going to come primarily in the form of solar, overwhelmingly in the form of solar in my view and combine that with stationary storage and electric vehicle, and you have a complete solution to a sustainable energy future. And those are three parts that are needed. And those are three things that I think Tesla should be providing. And it just became increasingly obvious that as we’re developing the Powerwall and new versions of the Powerwall, particularly as we integrate more of the inverter electronics and intelligence in the Powerwall, you really need to take the solar panels and the solar system into account when doing that. Otherwise, you duplicate a lot of hardware that doesn’t work together as well; it’s more expensive; the installation cost is substantially higher since you’ve got to put the solar Powerwall, solar panels and if you got an electric car, you’ve got to install the Wall Connector and at home charging system. Those are potentially three visits or at least two visits. And then, in terms of the sales process itself, when we’re selling somebody the Powerwall, very often if not almost always, they’re curious about solar and want to do the same things. So then, not being able to sell them solar directly at SolarCity -- sorry, at Tesla through our stores is pretty inefficient. But I think as you look ahead to say Model 3, a $35,000 car, well that same person at the same moment, we could sell them roughly an equivalent amount value of solar panels and Powerwall effectively doubling, or almost doubling the sale at that time and then putting all in at the same time.

I think the word synergy, it’s like almost sort of dirty word but I think these synergies are really just common sense, like obviously it’s more efficient to do this as an integrated system at the sale and at the installation and in terms of just general maintenance and managing customer relationships. And I think that makes it kind of a pretty obvious thing to do. And it’s quite difficult to create an integrated product, if you’re forced to be at an arm’s length and be two different companies. So, if we give a special deal to SolarCity and SolarCity is not part of Tesla, then why we’re doing that. So, we can do that if SolarCity is part of Tesla; we can’t do it if SolarCity is a separate company.

So, it just makes things, the execution, I think a lot easier and cleaner, and more effective. So, that’s why I think it’s really kind of a no-brainer. If we didn’t do this, it’d make Tesla’s execution harder and worse. And I think the tide of history very strongly supports and it will be a sustainable energy future, primarily solar and virtually entirely electric vehicles and maybe things that temporarily interrupt that tide of history, but long-term it will overwhelm everything. And our goal is to accelerate the advent of that future as fast as possible, and this helps us accelerate it. So, that’s the reason.

And yes, I think there have been some questions about like does this sort of really increase our debt position or lever -- our balance sheet? It really doesn’t, I think [indiscernible] will take a close look at SolarCity. What really matters is the recourse debt. Obviously the non-recourse debt is not what matters. And the cash flow that’s generating, that SolarCity will generate -- it covers what’s required with the recourse debt. So, we’re headed to cash flow positive situation for the next three to six months at the [indiscernible], and that’s where the company has been steering itself, reducing their growth rate to some degree to achieve that cash flow positive position, but they are very clearly on their way to getting there in short order. So, it’s actually -- we expect it to be a net cash generator, not a user of cash, particularly when taking into account the dramatic reduction in the cost of sales of solar systems sold through our stores. The biggest factor in SolarCity’s increasing cost per watt in Q1, was their sales costs. So, some of you -- quite a big increase in sales cost. That will go radically in other direction with sales through Tesla.

And then, I’d love to talk more about what’s going to happen on the product side. Obviously that would be -- I think that would shed a lot of light on this deal and why I think it makes total sense and really no-brainer. But I can’t talk about material nonpublic plans except to say that I’m very optimistic about those plans. And that tells while to-date SolarCity has not been significantly differentiated on the product side to the solar panels and sales, they certainly will be in the very near future. And actually if you listen carefully to what SolarCity has been saying in its earnings calls and its announcements that I think should be also pretty clear like [indiscernible] is saying that there is going to be significant product differentiation. There is the Silevo acquisition, which we think is the best technology out there for high efficiency, low cost solar panels, and at the same time, very significantly improving the esthetics of the solar panels. I think there is quite a radical difference between having solar panels on your roof that actually make your house look better versus one that do not. I think this is -- I think it’s going to be night and day difference. And the Silevo development allows for that.

We can’t go into details of those because making future product announcements that are really exciting, obviously affect future product sales and it’s -- the full extent of that is not yet public information. But, I do believe it fits together very well with Tesla’s plans on the Powerwall and Powerpack side.

So, we can turn it over to questions at this point.

Jeff Evanson

Alright, thanks Elon. Tiria, why don’t we go to the first question please?

Question-and-Answer Session

Operator

Certainly, our first question comes from the line of Brian Johnson of Barclays. Your line is now open.

Brian Johnson

Thank you. I have about three questions. One for Elon. Why don’t we start with the General Counsel and Jason? For Todd, you talked in the letter about two of the directors not voting. Can you give us a sense, because this will come out in the proxy eventually, of the discussions between the two companies; is there actually a committee of independent directors; how independent do you consider the remaining directors; do they have any personal ownership of SolarCity and the other things that are likely to relate to the Board issues?

Todd Maron

So, this is Todd. When -- this is little bit tracks back to what I was saying earlier about the stage of the process that we’re in. But, when a deal is announced, if that happens, all the steps will come out in terms of exactly what the process was at every point. The key point now as Elon and Antonio since they’re on both Boards have recused themselves from the Board process of voting on the transaction, and they’ve also committed to if there is a deal that the disinterested shareholders would vote on that deal with the majority of those disinterested shares determining the outcome of the vote. But beyond that, it’s really too early in the process to get into all the different details, but rest assured that will all come out, once there is actually a definitive agreement that’s reached. At this point, it’s probably more appropriate to just focus on the business rationale for why this deal makes sense.

Brian Johnson

Which -- and then, just when you say recused from voting, does that also mean recused from discussion and not present in the room when this was brought out?

Todd Maron

No, it’s recused from voting.

Brian Johnson

Okay. For Jason, given your talks earlier about focusing on cash and even stipulating perhaps that SolarCity could reach some sort of cash breakeven by fourth quarter, how does this change your view of the pro forma companies in terms of their cash usage and their need to potentially go back to the capital markets, either debt or equity to finance the ongoing business?

Jason Wheeler

Yes, sure, on the Tesla side, I’d stick with the statements that we made on previous earnings calls. On the SolarCity side, as Todd has laid out, we’re just at the beginning of the process now. And the only information I got access to is what’s publically available. So, I don’t have anything to say about the pro forma combined entity at this point, and we’ll start to look at that as we get into full due diligence now.

Brian Johnson

I guess the due diligence question was probably scoped out before you did the deal. When you survey Tesla owners, what percent have solar already; what percent are in states where solar would make sense; and what is some of the basic merger synergies in terms of customer overlap and customer potential that you guys look at?

Elon Musk

I think the way to think about this is, not to kind of look in the rearview mirror but to look through the windshield. I think only about 1% of U.S. homes have solar. So, you have a massive addressable market that’s unserved. And there is at least 40 to 60 million households that where solar -- where they could do solar if they wanted to. So, if the economics were right and they liked the aesthetics and was easy to do, then they would do it. So, the future market there is really gigantic. And on the cash front, we don’t expect SolarCity to have material impact on future cash needs. Yes, I don’t think it’s going to make much more difference really. And we should see positive cash flow by the end of the year.

Brian Johnson

And just final, you talked to it little bit yesterday but how does this affect -- how do you make sure that your personal time between this and of course the rocket business, given the M&A that synergies that you are trying to get given the service overlap, that’s kind of a whole separate line of processes and grunt work on the ground from launching a new model car. How do you actually get both the integration of a sales and service system for solar and cars and batteries done at the same time you’ve got by your own admission aggressive launch schedule for the Model 3?

Elon Musk

I mean my intuition about this could be wrong but from my standpoint, this makes Tesla’s future execution easier not harder, because it’s just getting increasingly unwieldy to work with SolarCity on an onsite basis. We really need to have an integrated product. The Powerwall and the Powerpack need to be designed together with the solar system. So, it’s a one piece thing. And we really can’t do that if we are two separate companies. We’ve got to treat SolarCity like they are any other company, which is extremely unwieldy. So from my standpoint, this makes the execution easier and not harder.

And I think SolarCity has got a great future independent of Tesla and also Tesla does. But, being able to integrate things at the product level, at the consumer experience level, the utility level, the commercial level, it actually makes it easier, not harder. And that’s why we are doing this. It’s like why should companies exist at all, what the point of having companies. The point is that a given company is going to create a more compelling better service for the end customer. And then, should the companies be two separate containers or one container, and if they’re one container, we can make a more compelling product and work together easier. So that’s the reason for it. So, I think that speaks to sort fundamental economic goodness of the transaction. And it will be harder if we remain two different companies.

Operator

Thank you. And our next question comes from Charlie Anderson of Dougherty & Company. Your line is now open.

Charlie Anderson

Yes, good morning. Thanks for taking my questions. So, I wondered if shareholders of Tesla will have a synergies number in mind when they vote, and if you guys have any early look at what synergies could be. And are you expecting much in the way of cost, and just thinking about the incremental cost of combining the products; what will that be? It sounds like some of the work has already been done to combine the products, but just any thoughts on that will be helpful.

Elon Musk

Sure. We give estimates because obviously this is still early stages. I mean they’re estimates based on kind of stands to reason. But looking ahead, particularly to next year, selling Model 3 something in the order of $35,000 car, if we are selling Powerwalls and solar systems of comparable value and doing so in the same sales footprint with the same person, the first order approximation, our cost of sales should drop in half as would SolarCity’s correspondingly; maybe it’s not entirely in half, maybe it’s 30% to 40%. It’s a pretty -- I think a very substantial drop on SolarCity side and also a material drop on Tesla side. So, you’re basically selling let’s say almost twice as much in a single transaction as you otherwise would.

And then, on the installation and setup side, it’s one crew instead of -- and one visit instead of two to three visits. The ongoing maintenance is kind of one point of contact and not sort of two or three points of contact. And the cost of the system itself is lower because we’re not duplicating hardware, the hardware level. So, I think that all makes a lot of sense. And yes, the final costs of our companies would go down materially. I think it’s -- one could argue about like is it sort of 20% reduction, 30% reduction, 40% reduction, but it’s pretty significant and for sure better than if the companies were separate.

Charlie Anderson

Great. And then just another quick one from me, I wonder why now versus two years ago, versus two years from now?

Elon Musk

The reason now is because we’ve got -- we’re really ramping up Powerwall and Powerpack, developing version two and then we have our plans for version three, version four and so forth. SolarCity also is preparing to turn out with the solar panels that as a consequence of a Silevo transaction couple of years ago that significantly improve efficiency and the esthetics of roof. And I think the aesthetics matter a lot. As you know Tesla is super sensitive to esthetics. And I think SolarCity is -- I think they are going to get their on their own. But I think that journey will be accelerated as part of Tesla as well. And it just sort of makes sense that if you had a solar system that made your house look better, lowered your cost of electricity and then gave you security with -- against the power outage with the Powerpack and allowed you go potentially completely off grid, then it’s kind of a no-brainer, like why wouldn’t you do that.

Operator

Thank you. Our next question comes from Sachin Shah of Albert Fried. Your line is now open.

Sachin Shah

Hi. Good morning. Congratulations on the offer. Couple of questions I think that people are kind of trying to digest. I think strategically Elon that you’ve made your points clear, but I think the valuation is what the market is having issues with. There are some questions about SolarCity’s balance sheet and you mentioned about the debt. So, how do you put that into context with the exchange ratio that you have offered kind of not jeopardizing kind of future Tesla while you make this offer?

Elon Musk

Well, I think Tesla is getting a pretty good at current share price. I mean, Tesla doesn’t decide what their company’s share price like mortgage should be, the public market does. So, we’re just executing off of what the public market price is, which is decided by people other than ourselves. And then there is I think quite a reasonable neither high nor low acquisition premium that is being put forth, subject to further diligence. And I think it’s -- every element of it is very reasonable; it’s nothing that’s out of whack about the proposal; it’s sort of extremely normal to have acquisition premium of that size. It’s sort of quite a bit lower than for example say LinkedIn. LinkedIn obviously had a 50% [ph] premium. Here we’re talking about sort of low 20s to may be 30% premium. So, it’s more or less in line with the average acquisition premium for any given public market company that’s extremely normal. And then, just all of these -- I think when people, when we are down the road, not even far down the road next year but particularly as you go further into the future, these I think are going to seem like very small numbers. I think as a combined automotive and power storage and power generation company; I think the potential is there for Tesla to be a $1 trillion company, market cap company. So, if we play a major role in transition of the world to new form of energy generation and storage and transport, that’s what kind of happens. So, I think one isn’t going to be worried about whether it’s a few hundred million dollars one way or the other here down the road. It’s not going to be different.

Sachin Shah

Okay. I appreciate your candor about the $1 trillion market cap. I think that leads to the future value of SolarCity. But I guess the near-term, because you’re not loading your shares, both on Tesla and SolarCity from my understanding.

Elon Musk

That’s correct.

Sachin Shah

How would you expect the near-term kind of shareholders or near-term focus shareholders to kind of vote this in favor of this? I’m assuming it’s a simple majority. And so, it’s kind of chicken and egg thing where your future -- your expectation of the future is probably correct strategically, but near-term people are having more time to digest this -- not enough time to digest this and kind of looking more near-term, and that’s what the concern is, is getting to the finish line. So, how do you see this getting to the finish line where you see shareholders on the SolarCity side being receptive to exchange ratio, you reach a merger agreement; and then further along, Tesla’s shareholders being receptive to voting in favor of this? Because ultimately it’s these two or three ducks, valuation of exchange ratio and then understanding the future opportunity that will get this sort of finish line on the shareholder side, shareholder vote?

Elon Musk

I mean, the exchange ratio, obviously I mean there is some balance on the exchange ratio. But, if we exceed the bounds of reasonableness for any party, obviously it wouldn’t happen. So, those would be -- market cap of SolarCity is decided by market. So, that’s what it is -- it is what the investors think it is. And then the premium -- you don’t get to acquire companies at zero premium. That’s not how it works. And so, some reasonable premium obviously is incorporated in situation like this as it always is. And we are right where premiums normally are and actually lower than some recent prominent premiums like the LinkedIn one which I believe was on the order of 50%. So, I think, we’re -- it’s a reasonable market cap with a reasonable premium and one can maybe quibble around the edges a little bit, but it’s, I don’t think that’s anything like out of whack there. And this will definitely be up to you guys who own shares. As I said, I’ll recuse myself from shareholder vote; it has to be a majority of non-me shareholders. But like said, I’m doing this because I think it makes things better in the future, if not worse for everyone.

And so, I’d really recommend voting in favor this, because I think anyone who doesn’t vote in favor of this is going to be voting against their best interest. But, we will certainly abide by the shareholder vote. So, if there’s great deal of unhappiness, we will move forward. But, I’d just really want to emphasize that I have zero doubt about this, zero. Arguably we should have done it sooner. But I think doing it now gives us enough time to create a compelling integrated product, assuming it doesn’t take forever to close, it gives us time to create a very compelling integrated product and bring that to significant scale next year.

Sachin Shah

Okay. So, when you say you have no doubt, so you believe the special committee, independent board, when they do their due diligence and reverse due diligence on both companies that they will reach -- you will be able to reach your agreement. That seems very likely…

Elon Musk

At the board level, yes. I mean, like the board opinion is unanimous for both companies. So, I mean -- unless there is something discovered that that I have no idea about or just -- or nobody in the board has an idea about, which is extremely unlikely, then the board would -- the entire board members would recommend in favor of completing a transaction somewhere in that price range that was mentioned, most likely. And then, it would be after shareholder vote to say -- excluding me to say yes or no. And so, I think that’s about as fair as one could make it.

Sachin Shah

Great, thank you very much, congratulations again.

Elon Musk

We hear things like here there is some better way to do this, like morally better way to do this or better way to do this from execution standpoint like when you know but -- and we’ve tried to do this in the way that’s as fair as possible and really going beyond what’s legally required and to make this not just legally correct, morally correct.

Operator

Thank you. And our next question comes from the line of Colin Rusch of Oppenheimer & Co. Your line is now open.

Colin Rusch

Thanks so much. At what point are we going to get financial details here? And clearly, there’s been an awful lot of crosspollination with the boards, former CFO of SolarCity’s on the board of Tesla, JB, is on the board of SolarCity. There has been a lot of sharing. To have a price here without some sort of scope of return on capital, I think it would be incredibly important for us. So, when are we going to get that information? And without you’re begging off the detailing on synergies but I think getting specific about return on capital for Tesla shareholders would be essential to getting this done; when are we going to that information?

Elon Musk

I Agree. I was probably saying like we have to do this in a bit of an unwieldy way because I’m largest shareholder of both companies. If that wasn’t the case, we could do a lot of this and then kind of present to you it like the full and final details of the proposed merger and -- but before we -- since I’m the largest shareholder of both companies, we have to tell you at the beginning of the process and not the end. So, we will certainly have all that done for you, but the reason it’s not just all in a neat package is because this is a sort of an odd case where we have to tell you at the start of the process, before we have all the answers rather than at the end of the process. We will get, defiantly get all that information and I’m confident it would be extremely compelling.

Colin Rusch

The second question is around Silevo. So, there is actually a lot going on in terms of manufacturing for solar at this point, with Asian manufacturers reducing cost well in excess of what expectations have been and certainly there is folks that are getting around import duties. Even with the potential savings on installation costs with the extra efficiency at Silevo, it looks like, there isn’t going to be that much of a cost advantage, just from a raw cost perspective, when you look at a price point for solar panels coming into the U.S. that SolarCity would buy. Can you talk you a little bit about, you are begging off some of the product details here but, what you are expecting to be able to bring to their engineering process to improve that cost trajectory? Because by the time you get the Silevo factory up and running, there is going to be I think at least a $0.15 cost disadvantage for their target cost at this point. And I think there is something that needs to get done there to make that a compelling offering.

Elon Musk

Sure. So, at Tesla, we’re -- a lot of that’s been to become a world’s best manufacturer. And I really mean that. That’s like I’m highly confident we will be the world’s best manufacturer. And I said we would build the world’s best car, we did that. At SpaceX, I said we’d build the world’s best rocket, we did that. We are going to be the world’s best manufacturer, not by a small margin but by a margin that people don’t even think is possible. And I believe in taking a first principles physics based approach to analysis. And my analysis of the situation is that dramatic improvements are possible on the automotive side and on the photovoltaic side. An important advantage of the Silevo technology is that it has significant higher efficiency than the very low cost Chinese panels. So, on the same surface area of roof, you can get as much as a third more power. And then aesthetically speaking, the Silevo panels look better, they look a lot better. And if it’s done right, we can make your roof look better with solar panels than without. This is a night and day difference.

And if you’ve got a -- if somebody’s got a $400,000 house, if you make roof look ugly, then arguably you have made that house worth 5% less or some non-zero percent less valuable. On the other hand, if you make the roof look beautiful, you have made the house more valuable, and maybe that’s plus 5% or some non-zero percent plus percent in the value of a house. If it is something on the order of 5%, then the value delta there is call it $40,000 or maybe something like 2% or 3% and it’s 20,000, just like there is -- you have a quite a big value delta. So, being able to have higher power that looks great and I think it costs better, at least as good as if not better, then what’s coming from anywhere else in the world, that’s obviously a wining outcome, and that’s the outcome that we will pursue. And I think we will be comfortable to get there.

Colin Rusch

Okay. I’ll follow-up on that. I think my question was more around the process technology of Silevo than the ultimate…

Elon Musk

Are you talking about fundamentals of the…

Colin Rusch

Yes, the fundamentals of the process technology and where are you going to get the cost out. I think there is variety of detailed questions I can come back here with. But my follow-up question on that is just fundamentally SolarCity is a specialty construction and specialty finance entity at its heart. And so, as you look at Tesla being a value-added manufacturer of variety products and the technology company moving into what we see as a fundamental different business, where are you seeing the synergies come back to Tesla other than the sales side; is there something to do on the specialty finance expertise that you would be bring in house? And the actual boots on the ground, the footprint of SolarCity is incredibly important to actually closing sales and delivering things versus a footprint of Tesla’s customer base, which is very different than the concentrated footprint at SolarCity. How are you seeing the value come back to Tesla other than just in the cost of customer acquisition?

Elon Musk

Yes, I think the various assets that we would be acquiring are the other installers, the installation team of SolarCity, and a lot of people trained and doing the permitting and the paper work and all the complexities that exist in municipalities throughout the country and understanding how to deal with 37 different roof types and having efficient logistics infrastructure for doing installations, and then I mean I think some strengths in the SolarCity sales side that we can take advantage of. But I really -- I do want to emphasize that I think the Silevo technology is going to make quite a big difference. And I don’t think it’s been a fundamental cost issue that prevented from being at or lower cost per watt than any other panel in the world.

Colin Rusch

Okay, thanks.

Elon Musk

I spent time in the SolarCity Silevo power plant in the Bay Area. And so, I am familiar with this. And my observation is there are dramatic improvements, like there’s not some physical thing that’s preventing it from being super competitive. It’s actually relatively straightforward manufacturing process.

Colin Rusch

Okay, thanks a lot.

Jeff Evanson

Elon and Todd, it’s Jeff. I have had a number of people emailing in questions about process here, possible timeline. Todd or Elon, if you want to speak to kind of a recap of who needs to vote, who is recused and how and when diligence disclosure and the shareholder votes might happen? That might be helpful.

Todd Maron

Sure, I can take that, if you want. So, on the Tesla side, the board has approved going forward with the offer which is why we made the announcement and an offer was made. Elon and Antonio being directors on both boards, recused themselves from to vote on that. We’re now in a stage where we have delivered the offer to SolarCity. SolarCity will set up their board process on their end and decide how to do this so that it’s done, as Elon said not only legally but morally correctly, I am sure. And then, we’ll move into a diligence stage very quickly. Hopefully diligence can take place promptly, so in the next two, three weeks and we can get to a place where everything makes sense that there is a signed merger agreement. And at that point everyone will receive the merger agreement as well as the typical disclosures that would be provided at that time combined with potential proxy statements and everything and we’d move to the shareholder vote. We are now getting a little bit further out, so it’s hard to predict with certainty. But the hope would be that there would be a shareholder vote on each side in the next few months.

Operator

Thank you. And our next question comes from the line of Joseph Spak of RBC Capital Markets. Your line is now open.

Joseph Spak

Thanks. So, I guess I just wanted to get your sense on how much of a play you think the SolarCity bet is on lower storage costs, meaning, we’ve seen some proposed changes to net metering laws? And if that sort of continues or there is more of that, does -- how long does the business model work, like do you need to see the falling storage costs for it to work and is your confidence in that the reason to go forward with the deal?

Elon Musk

Yes. The storage costs are going to drop dramatically with each passing year. And I think that, with exclusion of certain situations like Nevada and maybe Arizona, which we’re working to mitigate, it will be ahead of the net metering situation. In fact in New York a regional has been arranged and basically this gets ahead of the net metering situation. And call it roughly the two or three-year time frame. So, it’s certainly important for long-term. And although some utilities would exaggerate the impact of solar on the grid, ultimately the impact of solar on the grid beyond a certain localized percentage does have an impact and you do need to buffer the power.

So, they have valid argument. It’s just exaggerated. And so, it’s very important for long-term. And yes, it’s going to work together well. I mean this is what the world needs. This is the ultimate solution for earth; it’s what we are talking about here. Solar power, stationery storage, electric cars; this is earth’s solution. And we’re going to try to make that happen as fast as possible and the fundamental good of SolarCity and Tesla will be measured by the degree at which we accelerate that transition so trying to make it happen as fast as possible. And I think it would have a meaningful impact on that timeframe.

Joseph Spak

And then may be just two real quick ones, if the deal is consummated, do you -- have you given any thought or plan to provide segmented balance or cash flow just to provide a bit more transparency on each line? And then, on a technical point -- you will do that.

Elon Musk

Yes, and I do think it’s valuable path to have transparency. So, everyone -- we will want to show that transparency as much as we can. And so, in some cases, it’s going to be like where exactly should the cost be allocated. But, I think it won’t be great if it’s like black box that people can’t figure out and then have to somehow parse out what pieces are what. So, we don’t want to have an information discount to start because people want certain. So I think that having clear information gives people a better understanding of the value of company; there are pieces. It will inevitably lead some people to reach conclusions that they shouldn’t reach that’s premature but I do believe in transparency.

Joseph Spak

And then from a technical standpoint, you talk about some greater seamlessness between entities, would you also consider allowing vehicle to grid support?

Elon Musk

It’s like we’ve debated this since the early days of the Roadster. I mean very -- early proto Roadsters that we had would do vehicle to grid. But you do get a lot of complications with that if you back flow power car into the wall when do that like when is the car allowed to do that, when not, I mean how much you allow the car battery to be drawn down and then people will [indiscernible] if the lights are on in the house but they can’t drive their car because all the power in the house shuts down. So, I think the right solution is to decouple it and into vehicle, stationery, battery and solar. And then obviously some need to supplement that power at the grid level by having utility scale solar battery installation, because you don’t always have enough surface area on a house or certainly for an apartment building; you don’t have surface area. So, you are kind of ground mounted utility scale solar battery system and feedback to the grid. But if anyone that’s seen Powerwall presentation, it’s remarkable how little land you need to power the entire United States, crazy, like a little corner of Texas or Utah that is it, all United States power.

And then there is like one pixel inside that box that I shared, which is the box of how land area you need to power the United States, but that’s a like a little box. Like I said that seems like the little Texas Panhandle or corner of Utah. Inside that box is one picks. That’s the surface area the battery packs needed to support the entire United States one pixel. So, we’re going to try to pull that as best as we can and not for U.S. but throughout the world.

Joseph Spak

Thanks.

Jeff Evanson

And that video by the way is available on our website of Elon’s presentation on the Tesla energy products. Elon, we are at the half hour mark here. We have nine more questioners in queue. So, defer to you as to determine far, long you want to go.

Elon Musk

Yes, let’s try to answer everyone’s. And as I said, I really would encourage folks like think about the long-term where this is all headed. And I think if you think about like the long-term, there is really no question about the convergence of Tesla and SolarCity. It’s really is question of what timing is appropriate for that convergence. And basically, SolarCity’s product roadmap and Tesla’s product roadmap, which obviously is very significant, can provide information. I wish, I could tell you about, can’t. The timing is if anything where maybe should have done this sooner. But I certainly don’t think we’re doing it too early. And then, what’s long-term picture, long-term picture is overall sustainable power generation with stationary storage to buffer that power and then electric cars. And Tesla is going to be leader in all three. So, if you believe that that’s the future we’re headed towards which like everything points that being true, and really like gasoline cars, we have to look back on gasoline cars like we look back on steam engines, like a phase, a bit weird. And we’re going to look at back on fossil fuel power generation the same way, it was weird phase. Now, we are going to get out of that weird phase as soon as we can. And this all by accelerating, us getting out of idiosyncratic moment in history when we were digging up Cambrian level fossils and burning them.

I think you will be telling your grand children like you won’t believe what we used to do like we used to take out liquidized remains of dinosaurs and old plants and put them in cars and burn them to move and did the same things with the power plants and the like. That sounds crazy. That’s what’s going to be in the future, obviously. So, we are trying to have the non-weird future get here as fast as possible.

Operator

Our next question comes from Tyler Frank of Robert Baird. Your line is now open.

Ben Kallo

Hey guys, it’s actually Ben Kallo from Robert Baird. Elon, I was just wondering, I understand working together and being cumbersome by separate entities. But, could you just talk us through what the difference is of actually owning SolarCity versus maybe doing some kind of JV or some other kind of entity like that to help you guys work through some issues?

Elon Musk

Yes. I mean, the problem is that I think we just hit the -- it’s like we don’t have a good basis for doing some special deal with SolarCity, because that’s effectively a conflict of interest. Ironically conflict of interest goes away for one company, but it doesn’t go away for two separate companies. So, like I say, it’s not really a good rationale for just offering a special deal and only working with one company that I also happen to own. It just -- I don’t think we have a good moral or legal basis for behaving special way to SolarCity unless we’re -- it’s actually one company.

Ben Kallo

Got it and then one more if I can. Could you just rank some of the things that you talked about in terms of -- in the order you look at as far as revenue synergies from cross-selling, the technical synergies of being able to work with on both the manufacturer -- the panel side, as well as the battery side and then maybe a third one bucket being cost synergies. And then if I forgot any out there, maybe list those as well in kind of the order that you’re thinking of them.

Elon Musk

I think we’ll have a more definitive answer for you once this process wraps up. I mean you have to regard what I’m saying here is anecdotal, but it’s kind of the way I think about it from a gut standpoint. And is like first and foremost, do we offer what allows us to offer the most compelling product to consumers and businesses. And it’s seamlessly integrated product that all just works together, that’s better. You don’t want to have heterogeneous systems integration problem. That’s just basically where the interfaces break down and then people -- there is some pointing fingers like this didn’t work, now yours thing didn’t work, like this is just one integrated system, there is no finger pointing, you can iron out all the bugs and it just works. And you’re not wondering whether should I blame the solar company or the battery company or the -- who knows and this is sort of like pain in the butt to try to figure that out, if you’re the end customer.

And I think we can guide the integrated product to be the right -- to be just the right, to be better. That’s kind of from that standpoint more than anything else. And then in addition this obvious cost savings to be had in the same store, we can sell twice as much dollar volume, like same store and not selling twice as much stuff. And it’s with the inflation crew, if they are now able to knock out three things in a single visit rather than schedule, two or three separate visits, that’s also way better. And one can argue the sort of -- how much better is it? It is defiantly some percentage better that’s material, which is kind of I mean that’s kind of like the threshold for making a decision. It’s obviously going to be a lot better. If you just cut the business down to -- from two, or three to one, you’ve probably cut your transport, labor and logistics costs maybe in half, something like that. And if you have a seamless integrated product, you can have less servicing costs and things are going to breakdown less. And it’s just a thing you’d want to buy if you’re end customer. Why would you want to buy anything else?

Operator

Thank you. And our next question comes from Ryan Brinkman of JP Morgan. Your line is now open.

Samik Chatterjee

Hi. This is Samik here on behalf of Ryan, just a quick one from us. Have you had conversations about this offer already with the largest disinterested shareholders of Tesla and what’s your sense in terms of do they see the same value in combining the two businesses as you do and what’s your sense about how they will vote on this?

Elon Musk

We want to make sure everyone heard about it at the same time. So, we do not discuss it with anyone because we wanted to investors large to hear about it at the same time. Apart from that over the years, has there been, has this idea been bandied about with some of our largest shareholders, institutional shareholders? Yes, there have been discussions. And I think some of them see it as like a natural thing to do. And an interesting thing to sort of look at the feedback that I received since we made the announcement yesterday, anyone who is product-focused that means sort of a congratulatory note, unlike why didn’t you do it sooner sort of message. And then people like sort of finance folks focused, they were like a lot more worried about it. In long run, the value of company’s defined by value of its products. And it’s really important to bear in mind like it’s why companies exist, they shouldn’t exist otherwise. And the value of the company will follow the value of the products, company that starts making lousy products is pretty soon going to have a lousy valuation, and a company that makes great products is pretty soon going to have great valuation. Because that’s how it’s set up and it’s how should be set up.

Operator

Thank you. And our next question comes from Patrick Archambault of Goldman Sachs. Your line is now open.

Patrick Archambault

So, look, I think a lot has been laid out about the strategic vision for this longer term. But, I wanted to piggyback on one of the earlier questions and just get a sense of the possible financial sense it makes in the shorter term. And correct me if I’m wrong. I don’t cover SolarCity. But my understanding is the storage plus solar piece of that business is actually quite small. You’ve had places like the Rocky Mountain Institute put out fairly detailed studies on combining solar plus storage. That suggests the levelized cost of energy won’t be lower than the current available price for maybe call it five to 10 years. But you guys sound very confident that this makes sense sooner. So, I just wanted to get your view on that.

Elon Musk

Yes, defiantly. Yes I think the one thing is to bear in mind like it’s big world up there. And there are places where the cost of energy is much higher than other places. Like for example in Hawaii energy costs there are very high because they have to shift in all of the fuel for their power plants. So, it’s very expensive and so the economics of solar plus battery will make sense for places like Hawaii and a lot of actually island nations out there and really anyplace that’s got expensive energy cost or it moderately expense energy cost. And it’s going to make sense for many parts of Europe and many parts in United States. And so, -- and then over time, it’s going to make sense for everywhere. Everywhere it’s going to be solar battery. There will be some wind for some geothermal, hydro and there will be some long tail before the final coal plant finally stops operating and the final natural gas plant stops operating. I mean those might last. There will be some long tail because it’s going to like an S-curve as it’s typical for new technology adoption. So, it’s like in beginning of the S-curve people tend to under predict what’s going to happen and then it goes for an exponential growth phase than approximately linear growth phase. It’s usually people over-predict what’s going to happen in the steep, linear portion of the growth phase. And then, it goes back into a logarithmic, so to complete the S-shape. That’s what happened with the internet for example, cell phones, same thing will happen here.

Patrick Archambault

And I guess like within the United States, do you think like five years is a reasonable timeframe for the economics to start to work?

Elon Musk

Yes, absolutely.

Patrick Archambault

On a massive cliff? [Ph]

Elon Musk

No. I mean it just needs to be on a scale that allows our factory to operate at maximum capacity. So, we the think the factory is going to be operating at maximum capacity as far into future as we can see. This is all about production. In our meetings yesterday were all about guys, we need to figure how to ramp up our production of cells, batteries, obviously cars, faster, and addressing every limiting factor that we can. And I mentioned this whole thing about manufacturing a machine that builds a machine. I’ll tell like its order of magnitude improvements are what I think can be achieved. We won’t get there right away but by version three of the machine that builds a machine order of magnitude. That’s the sort of compared to car manufacturing, you look at that and it’ll seem like alien dreadnaught [indiscernible]. And it goes on land that people don’t realize just how much improvement potential is possible. And I mean this is thick; we’re talking about high school physics necessary to figure this out, like not mega complicated. Just go to factory and say do a volumetric density calculation; say what percentage of volume inside this building is doing useful stuff versus is either air or not doing useful stuff, you’ll be shocked at how tiny that percentage is like low single digits. And then what is the velocity, what’s the exit velocity of the products? How fast the things are moving out the exit; what’s the mass flow or mdot of the factory is really low. Like the fastest car plants in the world, the car exit velocity is basically grandma with a walker. That is real slow. 0.2 meters per second that’s really, really slow. So, we could way better than that. Like the fastest person can run 10 meters per second faster than 10 meters per second. So, why is car exit velocity only 0.2 meters per second? That’s ridiculous. And then why is the volumetric efficiency of a car factory in the -- usually it’s in the mid to low single digits I mean that’s very low Why it shouldn’t be at least -- volumetric density is 30% or 40%, 30% seems very, very achievable. Nobody would design a chip that had volumetric efficiency of 2%, would look ridiculous and yet they design factories that way.

Patrick Archambault

Are these efficiencies that you are looking to put in place for your next Tesla plants, or are these things we can see in Fremont at some stage in the near future?

Elon Musk

You’ll see things move in that direction. I mean with Model 3, I think we’re aspiring to get to version 0.5 of alien dreadnaught level of -- where alien dreadnaught is like version 3. So, you’ll certainly see that directionally. Where it’s most obvious is in the cell production. So, our engineering teams work very closely with Panasonic to make dramatic improvements to the cell manufacturing efficiency. And we think we’re probably approaching 3x efficiency of the best plant in the world. So that’s pretty good, a lot of improvement. And I think cells are going through that thing like bullets through a machine gun, like the exit rate of cells will be faster than bullets from machine gun.

Patrick Archambault

Well, we look forward to the next time you take us around.

Elon Musk

Yes, come to the Gigafactory. It will be an eye opener.

Operator

Thank you. Our next question comes from Colin Langan of UBS. Your line is now open.

Colin Langan

Thanks for taking my question. A lot of analysts that cover SolarCity are highlighting major liquidity concerns with their company. You sounded pretty confident that that was going to turn cash flow positive. What do you think they are seeing differently and are you concerned at all that the cash burn may increase after the deal?

Elon Musk

Well, I think once the deal is done the cash burn is likely reduce because of reduced cost of sales and general operational efficiencies like a lot of things are duplicated, got duplicated. So, we expect cost to decrease, and to increase the positive cash flow from the SolarCity acquisition. Yes, I mean it might take a few months for those to come into effect, but pretty short order, let’s six months after the acquisition is complete. I would expect those efficiencies to become -- to be very significant.

Colin Langan

Actually, that’s my second question. So in terms of the time horizon in terms of delivering on goals and promises particularly around this acquisition you actually think the synergy could be achieved within six months of post closing, it would be that quick?

Elon Musk

I think from the point which it is -- the deal is done, yes. It should be meaningful and noticeable, but the second full quarter after the acquisition is completed, I am highly confident that that will be the case.

Operator

Thank you. Our next question comes from Patrick Jobin of Credit Suisse. Your line is now open.

Patrick Jobin

Hi, thanks for taking my questions here. I guess the question for Elon or Todd, why not pursue a less capital intensive model at least in the near-term and proceed with more of a marketing or sales relationship between the entities I guess with the cross-sell opportunity and installation efficiencies of the integrated systems? It seems like, I think you used the term special deals, but those seem to be the norm between entities if they’re beneficial for both. Are there any legal impediments to having approached some of these energies in that fashion?

Elon Musk

I think we would certainly face some, if we do that. But I think, morally and legally we would find it very difficult to defend a unique relationship that just favored SolarCity, if we’re separate companies. For one company, then obviously that’s fine. The separate companies, we can’t do that.

Patrick Jobin

Okay. My second question, everyone’s focused on capital and cash flow here. I guess Elon from your perspective, would Tesla be receptive or would there be any plans to provide capital to SolarCity in the interim during kind of pending acquisition? Obviously, I’m thinking about it more from the SolarCity side. But given what we saw with Vivint, SunEdison with the pending acquisition disrupted some access to the capital markets in the interim. I’m just trying to understand SolarCity’s near term path and what you’d be willing to do from a Tesla standpoint?

Elon Musk

Yes. Since SolarCity is constrained in the short-term from just going out and raising equity itself, Tesla would provide bridge loan if needed. I actually don’t think it’s going to be needed to be clear, because that’s something that’s only fair and perfect to do. So, we’ll be there if needed, but I don’t think will be needed.

Jeff Evanson

We have three other callers with questions. So, let’s try to wrap them up quick. So, everybody can be brief that would be great, and we’re coming up on 90 minutes here.

Operator

Thank you. Our next question comes from Dana Hull of Bloomberg News. Your line is now open.

Dana Hull

Yes, good morning. Could you talk a little bit about how you envision this impacting Tesla’s retail footprint going forward? And if the Tesla stores are now selling solar panels and Powerwalls, is this sort of an effective end round around your dealerships battles?

Elon Musk

That’s interesting question. We’re not limited in stores in terms of selling solar and efficient stationary. We could do that and then potentially offer to sell the car there in a gallery format something like that. So, it does open up additional options on the retail front potentially that you mentioned.

Dana Hull

I’m just wondering whether a car dealer association can say that it’s a dealership, if it’s selling more than cars, if it’s also selling solar panels and Powerwalls, and if it’s going to change the look of the stores significantly enough that helps you guys out with that?

Elon Musk

Yes. I think we’ll still be prevented from actually putting a car transaction event if it’s part of a broader store. But usually there is not a limit on having galleries where you simply display the car and have information about it. And then, we could look to complete transactions for solar and batteries. So, I mean something like that, it does open up additional possibilities already mentioned.

Operator

Thank you. Our next question comes from Sachin Shah of Albert Fried. Your line is now open.

Sachin Shah

Hi. I just had a follow-up. So, you mentioned the positives of rolling up SolarCity and I think somebody earlier mentioned in so many words that the analysts have been saying that this is a bailout of SolarCity. So, can you just mention, if shareholders don’t vote for this, what happens? You mentioned that SolarCity in the next three to six months should be a net cash generator. So, it’s not as bleak as some of these analysts have been saying. SolarCity would be in a position, if they don’t vote for the potential transaction with Tesla. And then, secondly, what does this deal mean for your Gigafactory? Does it have any change; timeline has changed because you are going to have more of a capacity or not?

Elon Musk

Sure. I don’t know where this bailout comes from, because, I mean Tesla is not the one deciding what the market value of SolarCity is, it’s the stock market is. So, SolarCity could certainly raise capital, equity on its current valuation and I think without any problem. So, SolarCity is headed to I think a very healthy place from a cash flow standpoint and in short order some next three to five months, getting to a cash flow positive so. The company’s around the corner from being cash flow positive and has agreed to raise equity capital on its own. I don’t see how an acquisition is in any way bailout. That’s obviously a false description. And then, the Gigafactory proceeds independently of SolarCity, except that. Obviously we’ve geared the product -- the storage product would be geared towards, a SolarCity type system. We wouldn’t -- it wouldn’t be something that would be explicitly exclusionary to other solar companies by the way, it was just the other solar companies would have to match the SolarCity product and in order to use that battery product most effectively. So, it’s not about trying to shut up other solar companies, it’s just about being able to guide the product to where it needs to go and then will do the right thing with other solar companies, if they are also guiding their products to match. So, we’re not going to basically be a jerk to other solar companies. This is very, about being laser focused on having the most compelling consumer solution and that’s the correct thing to do.

Operator

Thank you. And our next question comes from Hank Elder of Goldman Sachs. Your line is now open.

Brian Lee

This is actually Brian Lee on for Hank. I have just three housekeeping questions, more along the deal itself. And in the interest of time, I’ll just run through these quickly. First is, given SolarCity’s relationships with various lenders and tax equity fund structures, I was hoping you could talk to any visibility into potential change in control provisions and/or exposure to clawback provisions on solar tax credits that might exist. Second question would be as part of the due diligence, will the board consider other alternatives to SolarCity? And then, third one, and I will pass it on is are there any collars or caps on the stock exchange ratio being proposed? And if not, what’s the rationale for that?

Elon Musk

Really this is beginning of the analysis, not the end. And the normally, we will be a lot closer to the end because, a lot a shareholders of our company, it’s something we have to talk about at the beginning, where we don’t have all the answers, but then we will compile those and present those to shareholders for their decision in the months to come. So, obviously part of that diligence process would be talking to lenders, making sure they are comfortable and think it’s a good got idea, pretty sure they will but you have to talk to them. And then sort of other companies, we did consider that and it’s part of the initial due diligence process. But we think SolarCity is best company out there. And it’s sort of a leader in the field. It has this Silevo technology. The product direction we believe is correct in terms of making rapid progress towards, highly differentiated products and there is not a company out there that’s like that at all.

Operator

Thank you. And our next question comes from Trip Chowdhry of Global Equities Research. Your line is now open.

Trip Chowdhry

I have a quick question for Elon. I was just wondering like how does this acquisition play out with the opportunities that Tesla may find in micro-grids and grid space.

Elon Musk

Yes, I mean, I think it’s like productize things. So, it’s like you can click here and buy your micro-grid versus like having a tailored situation for all of the phase like if you can productize it happens real fast. And so I think productizing micro-grid, just click here and you get a micro-grid and it just works. That’s a good way to go. I think consumers obviously appreciate things that are easy, simple, fast but actually corporate customers, utilities, they appreciate that too because they want to have to go through big laborious process that’s pain in the butt for them. It blows their mind they can click a button and then we sold their thing and it’s works. Just because the product is big doesn’t mean that the whole process needs to be complex; bigness and complexity are not the same thing. So, I think utility customers have been quite possibly surprised by just how easy it is to implement and it’s going to get a lot easier in the future.

Jeff Evanson

All right, I think that’s the end of the questions. Thank you, Todd, Elon and rest of the team. Thank you Tiria. And thank you investors for all the interest. If you have any closing remarks Elon, otherwise we can end it there?

Elon Musk

No, I think those were a lot of great questions, and then obviously will have a lot more information as the process concludes, hopefully reasonably near future. But, I think it’s easy to get sort of mired in the details but if I think -- the right thing is to sort of kind of look out into the future and say where it’s headed, what are the macro trends, does this action match where the tides of history are going. And that’s really what’s going to make the difference in long term. So, I’d encourage people to think in that way.

Jeff Evanson

All right. Thank you, everybody. Have a great day.

Operator

Ladies and gentlemen, thank you for your participation on today’s conference. This concludes your program. You may now disconnect. Everyone have a great day.

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