Tesla, Inc.

Good afternoon, everyone, and welcome to Tesla's third quarter 2021 Q&A webcast. My name is Martin Vieja, Senior Director of Investor Relations, and I'm joined today by our CFO, Zachary Kirkhorn, and our Senior VP, Drew Paglino, as well as other executives. Our Q3 results were announced at about 3 p.m. Central Time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question and answers portion of today's call, please limit yourself to one question and one follow up. Please use the raise hand button to join the question queue. But before we jump into the Q&A, Zach has some opening remarks. Zach.

Yeah, thanks, Martin. We're continuing to make great progress as a company, setting new records on each of the most important financial metrics for Q3. Overall, we delivered just over 240,000 cars, 20% higher than last quarter and 70% higher than the same quarter last year. We were also able to achieve an annualized production run rate of over 1 million cars towards the end of the quarter. The increase in production rate has primarily been driven by further ramping of the Model Y at our Shanghai factory. Additionally, we have made great progress increasing production volumes of Model S and have recently started the ramp and deliveries of Model X. It will take a bit more time to get this program back to prior volumes, but based on demand, we are targeting to exceed historical production levels. We have also completed the transition of our Shanghai factory as our main export hub. This has enabled us to supply more vehicles to the North America market and to introduce Model Y to Europe. Due to part shortages and logistics variability, we have not been able to run our factories at full capacity. It's important to note that while we have roughly doubled deliveries year to date, this has been exceptionally difficult to achieve. I want to thank our supply chain team for their incredible work and our production teams for showing impressive flexibility as we make adjustments real time. This team's expertise in the chip industry across all tiers has made a huge difference when managing through these challenges. Additionally, we never reduced our production forecast with our suppliers as we're adding capacity as quickly as possible. I also want to thank our suppliers for their dedication and partnership to Tesla. Despite these increases in production and generally higher prices, our backlogs are continuing to grow and average customer wait times are extending. The only practical way to address this in the immediate term is to do everything we can to build more cars on our existing production lines, which is where we are focused. Similar dynamics are also playing out in our storage business as we are working to expand Powerwall and Megapack production as quickly as parts and cells allow us to do so. Additionally, we have made good progress on the in-house battery manufacturing program, and we're excited to have expanded the full self-driving beta program to more customers. Financially, our auto gross margins reached 30.5% on a GAAP basis, and just under 29% excluding regulatory credits, which is our strongest yet. This benefit primarily comes from higher volumes, particularly out of the Shanghai factory, increased mix of the Model Y, and we have made good progress increasing Model S volumes. The Model S has now returned to positive gross margin, and we expect this to increase with higher production and the ramp of Model X. As was the case in Q2, there was some net benefit from pricing actions. However, this remains small in the context of other contributors. Please keep in mind that given backlog, it will take time for the impact of recent changes to flow through our financials. Note that we are also not yet recognizing additional revenue from the FSD beta program. Supply chain challenges, including expedites, continue to provide cost headwinds, as was also the case with FX this quarter. While we are seeing an impact from the rise in commodity and labor costs, we have also been adjusting pricing, which should help to compensate. Overall, as I mentioned in our last call, our P&L continues to benefit from the marginal profitability of each incremental unit with higher fixed cost absorption. As a result of the great progress on margins, volume, and appropriate management of overhead costs, we were able to achieve an operating margin of just under 15%, exceeding the long-term guidance we've laid out previously. On cash, we generated record operating cash flows of $3.1 billion and continue to invest heavily in the build out of manufacturing, supercharging, and service capacity. We also continue to retire high interest rate debt, including the early settlement of our 2025 senior notes of $1.8 billion during the quarter. As we look forward, we're clearly quite a bit ahead of the pacing required to achieve our target annual growth rate of 50% this year. Q4 production will depend heavily on availability of parts, but we are driving for continued growth. We are also nearing assembly of our first production cars in Austin and Berlin. It's important to stress, while the first production car is an important milestone, the hardest work lies ahead in the ramp. Please keep in mind that we are pushing the boundaries on new product and manufacturing technologies at these factories, which makes it difficult to predict the exact pace of the ramp. These factories will also partially weigh on our margins as we work towards volume production. Overall, I'm very proud of what the team has accomplished, and I'm excited for our next phase of growth into Q4 and into 2022. The team has done a tremendous job improving our financial health in a short period of time, while also continuing to improve our precision and pace of execution. Thank you.

Thank you very much. And we will now take questions from institutional and retail shareholders that we posted on our website. The first question is, when should we expect the first vehicles to be delivered with 4680 cells?