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Tesla Confident in Model 3 Ramp-Up Target, Expects Profitability in Second Half of 2018

by added on 3 May 2018, Comments Off on Tesla Confident in Model 3 Ramp-Up Target, Expects Profitability in Second Half of 2018 , posted in Grid Edge, Electric Vehicles, News,

Tesla continues to project a significant ramp-up in Model 3 production and positive cash flow in the second half of 2018, according to Q1 financial results released Wednesday.

In a letter to shareholders, CEO Elon Musk said Tesla expects to make “approximately” 5,000 units of the Model 3 “in about two months,” the same target the company had included in Q1 car production results released last month.

The automaker produced more than 2,000 Model 3 sedans for three straight weeks in April, with weekly production topping out at 2,270 units. According to Tesla, the Model 3 is already the best-selling electric vehicle and “on the cusp of becoming the best-selling mid-sized premium sedan in the U.S.”

Tesla believes it has “largely overcome” its main production bottleneck for the Model 3: the battery module production line at its Nevada Gigafactory 1. The company says it can now produce more than 3,000 car battery packs per week at the facility.

With continued refinement of the system, and increased operational uptime, Musk said on the Q1 earnings call, production could exceed 5,000 packs per week within a month or two. Tesla expects battery pack assembly to ramp up further, with lower costs, after installation of a new automated line designed and built by Grohmann, Tesla’s German engineering and automation subsidiary.

Only after Tesla hits a production rate of 5,000 Model 3s per week will the company begin offering the promised $35,000 base model with the standard-sized battery pack. Reservations for the Model 3 exceeded 450,000 at the end of Q1.

Positive cash flow expected in Q3 and Q4 2018

Tesla's quest for profitability rests on achieving the Model 3 production targets planned for the second half of 2018. If Tesla can hit the 5,000 unit weekly target for the Model 3 in Q3 and Q4, the company said it “will at least achieve positive net income excluding non-cash stock based compensation” and “achieve full GAAP profitability in each of these quarters.”

Positive cash flow also assumes Tesla can improve the gross margin on the Model 3. Gross margin for the Model 3 was negative in Q1, should break even in Q2, and is forecasted to be “highly positive” in Q3 and Q4, according to Tesla’s shareholder letter. The long-term gross margin target for the Model 3 remains 25 percent.

Despite the company’s all-out efforts to ramp up Model 3 production, Tesla said it has “significantly cut back our capex projections.” The company now expects 2018 capital expenditure to come in “slightly below” $3 billion, $400 million less than 2017 capex. Cash burn for the quarter was $1.05 billion; the quarter also saw a record net loss of $784.6 million.

Assessing the financial results, Bloomberg’s Liam Denning focused on Tesla’s cash burn. Subtract Tesla’s expected cash burn from the free cash flow analysts expect Tesla to generate for the remainder of 2018, he said, and it “implies a year-end balance of about $1.3 billion — a very thin cushion for anything unexpected, such as, for example, problems with the Model 3.”

Even so, in its Q1 car production and deliveries results, Tesla said it “does not require an equity or debt raise this year.”

On the earnings call, Morgan Stanley analyst Adam Jonas asked Musk if Tesla intended to raise capital in 2018.

“Many investors on this call would say it’s better to raise capital when you don’t need to,” he said.

“I disagree,” replied Musk.

“You may not need to, but do you want to?” Jonas pressed.

“No. I specifically don’t want to,” said Musk.

Future production plans

On the earnings call, Musk also revealed Tesla’s planned efforts beyond the make-or-break Model 3. Tesla would conduct, he said, a “reorganization, restructuring of the company this month.”

“The number of third-party contracting companies that we’re using has really gotten out of control,” he said. “We’re going to scrub barnacles on that front. We’ve got barnacles on barnacles.”

Musk confirmed that R&D and capex for the planned Model Y crossover SUV wouldn’t become significant until 2019. “It is better to spend...more time making the right design decisions and really thinking through the producibility of product before racing ahead with capex decisions,” he said.

He added, “There’s no question we could have made the Model 3 much easier to produce than we have. Model Y is going to be a manufacturing revolution. We don’t want to go through this pain again.”

Musk also dismissed a recent Reuters story that pegged the Model Y production launch, at the Fremont, California, manufacturing facility, for November 2019.

“We will not be starting production on the Model Y at the end of next year,” he said, adding that 24 months, for a target date of 2020, is more likely. 

Furthermore, the production location for the Model Y has not been decided. “We’re really crowded here at Fremont,” said Musk. “I don’t know where we would put the Model Y production. We are jammed to the gills here.”

Musk said Tesla plans to announce the location of a Gigafactory in China soon, and that all future Gigafactories will incorporate vehicle production.

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