Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.

The S&P 500 benchmark index experienced its worst performing week in a month, falling -2.39%, the worst performing week in a month. Yields tickled multi-year highs as the warring in Gaza intensified. Key economic data came in generally strong. The whirlwind of data and global events caused the market “fear index”, the VIX, to spike on Friday.

On Monday, the S&P 500 index finished up +1.06% as supportive diplomacy was enacted in an effort to moderate a contentious atmosphere throughout the Middle East. The U.S. sent multiple diplomats to Israel, and President Biden also prepared for a trip. Russian President Vladimir Putin met with Middle Eastern leaders to express support for a ceasefire. On a company level, Lululemon's stock rose by over 10% after it was announced that the company would replace Activision in the S&P 500. Meanwhile, Apple Inc. shares declined slightly on an industry report that pointed to a declining global smartphone market. On Tuesday, two-year yields skyrocketed to 5.2%, a record since 2006, as the market priced a quarter-point interest rate hike before the year's end. Retail sales showed strength, increasing by 0.7% month-over-month, surpassing economist forecasts and indicating consumer resilience. Wednesday marked the S&P's worst daily performance of the week, with a -1.3% decline. An explosion of a Gaza hospital that killed 471 people and injured hundreds more led to increased tensions between Iran and Israel, extending the fallout of the Israel/Hamas war. 10-year yields increased 7 bps to 4.9% in response. On Thursday, heightened Middle East tensions were observed by U.S. intelligence, with increased drone and bombing activity outside of Israel and attacks targeting Israel from outside of Gaza and Iran. Markets closely monitored the geopolitical risks, and the 10-year yields neared 5.0%, finishing the day at 4.99%. Federal Reserve Chairman Jerome Powell suggested that financial markets were influencing the Fed's rate hike trajectory, potentially leading to a rate hike pause if this trend continued. Initial jobless claims for the week of October 14th were lower than expected at 198,000. Finally, on Friday, the S&P index experienced a 1.24% selloff as cross-border fighting in Israel escalated, indicating further tensions in the region.

Additional company news this week:

Taiwan Semiconductor Manufacturing Corporation projected sales estimates and speculated that a bottom may be coming “very soon” on the backs of a PC and smartphone rebound.
US Bancorp made a surprise announcement on Tuesday that the Federal Reserve opted not to impose Category II regulations on the company and followed the news with an earnings beat for its third quarter with a positive outlook on net interest income and margin.
The U.S. imposed further restrictions on the sale of advanced, non-consumer semiconductor parts, leading to a 4.68% drop in Nvidia's stock.
Tesla shares fell roughly 9.0% on Thursday after the company reported that price cuts may not be enough to stimulate demand for the company’s vehicles amidst a rising interest rate environment.
Netflix shares surged over 18% on Thursday after the company reported streaming paid memberships grew by 11% year-over-year, ahead of estimates.

Weekly Performance

S&P 500 4,224.16 -2.39%

Dow Jones 33,127.28 -1.61%

Nasdaq 12,983.81 -3.16%

Key Economic Readouts This Week

Empire State Manufacturing Index — Actual: -4.6%; Estimate: -6.0%; Prior: +1.9%

Retail Sales Advance MoM — Actual: +0.7%; Estimate: +0.3%; Prior: +0.8%

Industrial Production MoM — Actual: +0.3%; Estimate: +0.0%; Prior: +0.0%

Housing Starts — Actual: 1,358k; Estimate: 1,383k; Prior: 1,269k

Initial Jobless Claims — Actual: 198k; Estimate: 210k; Prior: 211k

Continuing Claims — Actual: 1,734k; Estimate: 1,706k; Prior: 1,705k

Thank you Blue Room Analyst IAN CARTER

Elon Musk — Chief Executive Officer

So just a Q3 recap. Last quarter was impacted by downtime for global factory upgrades that will help us reduce cost per vehicle as well as increase production. We remain focused on three main objectives, which is the cost reduction of our products, investments in artificial intelligence, and other growth projects like Optimus, and continued free cash flow generation.

Regarding vehicle cost, our team was able to reduce the cost per vehicle further in Q3 despite headwinds from factory idle costs and ramp-up of new factories, and we believe there's still a meaningful room for improvement there. Regarding Autopilot and AI, our vehicles now driven over 0.5 billion miles with FSD beta, Full Self-Driving beta, and that number is growing rapidly. We recently completed a 10,000 GPU cluster of H100s. We think probably bringing it into operation faster than anyone's ever brought that much compute per unit time into production, since training is the fundamental limiting factor on progress with full self-driving and vehicle autonomy.

We're also seeing significant promise with FSD version 12 versus the end-to-end AI where its photon count-in controls out, or really you can think of it as there's just a large bitstream coming in and a tiny bitstream going out, compressing reality into a very small set of outputs, which is actually kind of how humans work. The vast majority of human data input is optics from our eyes, and so we are like the car, photons in, controls out, with neural nets -- just neural nets in the middle. It's very interesting to think about that.

We will continue to invest significantly in AI development, as this is really the mass game-changer. And, I mean, success in this regard in the long term, I think, has the potential to make Tesla the most valuable company in the world by far. If you have fully autonomous cars at scale and fully autonomous humanoid robots that are truly useful, it's not clear what the limit is.

Regarding energy storage, we deployed 4 gigawatt hours of energy storage products in Q3. And as this business grows, the energy division is becoming our highest margin business. Energy and service now contribute over $0.5 billion to quarterly profit.

The Cybertruck, I know a lot of people are excited about the Cybertruck. I am too. I've driven the car. It's an amazing product. I do want to emphasize that there will be enormous challenges in reaching volume production with the Cybertruck, and then in making the Cybertruck cash flow positive. This is simply normal for, when you've got a product with a lot of new technology, or any brand new vehicle program, but especially one that is as different and advanced as the Cybertruck, you will have problems proportionate to how many new things you're trying to solve at scale. So I just want to emphasize that while I think this is potentially our best product ever, and I think it is our best product ever, it is going to require immense work to reach volume production and be cash flow positive at a price that people can afford.

IN

Andy Cecere — Chairman, President & Chief Executive Officer

Good morning, everyone, and thank you for joining our call. I'll begin on slide 3. In the third quarter, we reported earnings per share of $0.91, which included $0.14 per share of notable items related to merger and integration charges. Excluding those notable items, we delivered earnings per share of $1.05 for the quarter.

Third quarter results were highlighted by a linked-quarter and year-over-year fee revenue growth that benefited from our acquisition of Union Bank, deepening client relationships and strong underlying business activity. We are achieving the cost synergies we anticipated from Union Bank and continue to prudently manage core expense as we identify operational efficiencies across the business.

As of September 30th, our common equity Tier 1 capital ratio was 9.7%, an increase of 60 basis points this quarter. This is the same level it was prior to our acquisition of Union Bank. Total average deposits increased 3% or $15 billion on a linked-quarter basis. Credit quality continues to normalize this quarter, in line with expectations, and we further strengthened the balance sheet by adding $95 million to our loan-loss reserve reflective of an evolving credit environment.

On October 16th, the Federal Reserve granted us full relief from certain Category II commitments made in connection with the Union Bank acquisition, given our balance sheet reduction and capital actions. As a result, we are now subject to existing capital rules or, if adopted, the same transition rules as all other Category III banks related to enhanced capital requirements under the Basel III End Game proposal. As proposed, this would include a three-year transition period for the expanded risk-based approach and AOCI regulatory capital adjustments starting in the third quarter of 2025. I will discuss the impacts of this decision further in my closing remarks.

IN

Melanie Hart

Thank you. And welcome everyone to our third quarter 2023 earnings conference call. Our discussion, comments and responses to questions today may include forward-looking statements, including management’s outlook for 2023 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ from projected results are discussed in our 10-K. In addition, we may make references to non-GAAP financial measures in our comments. A description and reconciliation of our non-GAAP financial measures is included in our press release and posted to our corporate website at -- in the Investor Relations section. We will begin today’s call with comments from Peter Arvan, our President and CEO. Pete?

Peter Arvan

Thank you, Melanie, and good morning to everyone on the call. Our third quarter results came in largely as expected. As the 2023 swimming pool season winds down, we consider our results to be solid on a standalone basis, particularly when considering the dynamic conditions we have been operating in. The third quarter carried down with typical summer weather conditions overall, allowing us to evaluate our performance in the industry environment on a mostly weather-neutral basis. Our third quarter 2023 sales of $1.5 billion is a 9% decline compared to 2022, with one less selling day, but exceeded 2021 third quarter sales by 63 million or 4%. As expected, sales declines continue to moderate in the third quarter, showing sequential improvement versus the 10% and 15% declines we saw in the second quarter and first quarter of 2023.

In view of the neutral weather conditions during the third quarter, our sales trends across our major markets were relatively consistent. Starting with year-round markets, sales declined 5% for the quarter in Florida compared to the third quarter last year, with Arizona finishing down 8%, California down 10% and Texas down 11%. For context, last year in the same quarter, Florida sales were up 20%, Arizona was up 18%, California was up 16% and Texas was up 10%, respectively, versus the third quarter of 2021. This simply highlights the difficult comps that we were up against this year. Year-round base business declined 8%, while seasonal base business markets declined 10%, a slight sequential improvement from the 9% and 11% decline in the second quarter of 2023.

Again, for comparison, last year in the same period, we saw growth in our year-round base business markets of 15% and 5% in our seasonal base business markets. Moving on to product category results. Chemical sales increased 5% in the third quarter, mostly driven by increased volume as chemical pricing came in relatively flat for our collective offering. Our strong footprint, leading proprietary products and enhanced technology tools gives us an unmatched value proposition and contributed to our share growth. Building material sales for the quarter were down 13%. This category includes products necessary for both new pool construction and renovation and remodel projects. The building material trend continues to suggest that renovation and remodel demand is stable and outperforming new pool construction and our NPT footprint and product offering enables us to outperform the industry in this category.

Equipment sales declined 9% in the quarter. As you can see, this implies solid demand for maintenance and repair despite the softer demand for new pool construction and renovation and remodel. Looking at end markets, commercial pool product demand remained strong in the third quarter, with sales up 10%. Sales to our independent retail customers were down 8% for the third quarter, an improvement from the 11% decline and 16% decline we saw in the second and first quarters of this year. Pinch A Penny franchisees collectively reported sales growth of 1% for the quarter. The franchisees generated solid sales for their maintenance products, but weaker sales of discretionary items in line with what we are seeing across our distribution business. Europe’s third quarter sales showed a 2% decline in local currency, a notable improvement from the 7% and 22% decline in the second and first quarters of 2023.

IN

THIS PAST WEEK AT BLUE ROOM

DRY STORAGE OUT IN THE WORLD

DRY LAND DISTILLERS

<<<TOUR AND TASTING >>>

WITH FOUNDER NELS WROE

Wonderful event at Dry Land Distillers Monday, October 16. Founder, Nels Wroe, invited members of his board and staff to mix and mingle with Blue Roomers as they delivered a wonderful presentation on all of the great sustainable work they are doing in the spirits industry. Super exciting to have them as a Dry Storage client and partner in this worthy effort. Thank you Naia, for coordinating such a fun evening! Cheers!

NIGHT TWO
TUESDAY, OCTOBER 17

MOVIE OUTING TO

THE EXORCIST

Blue Room has a newly developed, robust movie club. This past week as a preamble to BOO ROOM we chose to take in the new remake of The Exorcist. It was terrifyingly awesome.

THANK YOU

for joining us for an evening of
Halloween wonder at HQ.

LIVE MUSIC: THE HIGH SAINTS

SPOOKTACULAR COCKTAILS AND MOCTAILS BY AIDEN WREN

MOUNTAIN CRUST PIZZA POWERED BY DRY STORAGE FLOUR

We love pulling our community together — investors, partners, family, friends and new acquaintances. Thank you for always bringing the energy and positivity.

— NIGHT FOUR —
THURSDAY, OCTOBER 19

2023 MCA LUMINOSITY GALA

PRESENTING SPONSOR: BLUE ROOM

The MCA is our happy place — wonder, community, inspiration, creativity and the unexpected.

VISIT TOGETHERISM

10% OF ALL BLUE ROOM REVENUES GO DIRECTLY TO FUND OUR NON PROFIT TOGETHERISM.
WE CAN ACCOMPLISH ANYTHING TOGETHER.

These materials do not purport to be all-inclusive or to contain all the information that a prospective investor may desire in considering an investment. These materials are intended merely for preliminary discussion only and may not be relied upon for making any investment decision. Any discussion or information contained in this presentation does not serve as a receipt of, or as a substitute for, personalized investment advice from Blueroom or your advisor.

This publication does not constitute an offer to sell or a solicitation to buy any securities in any fund, market sector, strategy or any other product. Investing is speculative and involves substantial risks (including, the risk of loss of the investor’s entire investment). Past performance is not indicative of future results, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable.

For more information about us and our general disclosures contact us directly.

Weekend Update #149