High Noon has issued a voluntary recall of its popular vodka seltzer after it was discovered that some cans had been erroneously labeled as Celsius energy drinks. The recall, announced on Tuesday and coordinated with the Food and Drug Administration, applies to two production lots of High Noon Beach Variety packs (12-pack/12 fluid ounce cans), with the seltzers mislabeled as CELSIUS® ASTRO VIBE™ Energy Drink, Sparkling Blue Razz Edition with a silver top. No illnesses or adverse events have been reported for this recall to date, the FDA said.

The two production lots were distributed to retailers in Florida, Michigan, New York, Ohio, Oklahoma, South Carolina, Virginia, and Wisconsin between July 21 and July 23, 2025. The affected High Noon Beach Variety packs are marked with the following lot codes: L CCC 17JL25 (14:00 to 23:59) and L CCC 18JL25 (00:00 to 03:00). Celsius-labeled cans with the lot code L CCB 02JL25 (2:55 to 3:11) are also included in the recall.

According to the FDA, the labeling error originated with a packaging supplier that services both the High Noon and Celsius brands. The supplier inadvertently shipped empty Celsius cans to High Noon, resulting in vodka seltzer being packaged into cans labeled for an energy drink product.

High Noon, which is produced by E&J Gallo Winery, stated, “We are working with the FDA, retailers, and distributors to proactively manage the recall to ensure the safety and well-being of our consumers.” The company emphasized that only a “small batch” of product was affected and continues to collaborate with regulatory agencies to trace and remove the mislabeled cans from shelves as quickly as possible.

A Gallo spokeswoman told Bloomberg attributed the issue to “a labeling error from our can supplier,” declining to provide the name of the packaging supplier. Although product recalls are common, mislabeled alcohol is quite rare. High Noon has seen explosive growth, growing from a launch in 2019 into the top-selling seltzer by 2022, dethroning the incumbent Tito’s.

For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing. 

This story was originally featured on Fortune.com

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Investors looking to get into crypto have a few options. The simplest is to go out and buy some from an exchange like Coinbase or Binance. This method is fast, cheap and easy and lets you hold Bitcoin or Ethereum (or various other coins) directly. Another option is more of a bank shot approach: Buy stock in a publicly-traded company that is putting crypto on its balance sheet and hope that stock goes up.

Surprisingly, this second approach is one of the hottest trades in crypto right now and dozens of firms are clamoring to get in on the action. According to a site called Bitcoin Treasuries, there are now 160 firms around the world with Bitcoin on to their balance sheet, including 90 in the U.S. alone. Those include familiar names like GameStop, Block and Tesla as well as the Trump Media and Technology Group, which is controlled by the family of the President.

In theory, this trade doesn’t make a lot of sense. Sure, the value of a company’s assets help inform its share price but any change in the price of those assets should correlate directly.

If Nike for some reason decided to use its spare cash to buy a million bushels of corn, and the price of corn went up, its share price might increase to the same degree. But this wouldn’t mean an investor bullish on corn should buy Nike stock rather than corn—and, if anything, Nike shareholders would likely punish the firm for using its capital on something totally unrelated to its business.

For some reason, crypto is different. Firms that have piled crypto on to their balance sheets have seen a jump in their share price far out of proportion to the value of the crypto they added.

The most famous example is Strategy, formerly known as MicroStrategy, a once-obscure cybersecurity firm based in Virginia. Several years ago, the firm’s charismatic founder Michael Saylor turned away from Strategy’s core business to focus on acquiring Bitcoin, and today it owns an eye-popping stash worth around $74 billion. This pivot proved wildly successful and, as of late July, the firm’s market cap stood at $112 billion even though it’s dropped its cyber business altogether.

Little wonder that more CEOs are glomming on to the same tactic. After all, if you can achieve a huge spike in your firm’s share price simply by swapping one currency on your balance sheet for another, why not? To get a sense of how popular the tactic has become, here is a screenshot from Bitcoin Treasuries’ list of publicly-traded firms with the most Bitcoins (one Bitcoin is currently worth around $118,000):

A “meme effect”

While some of these firms were set up solely to invest in Bitcoin, many of them are operating firms whose core business involves something else. Mitchell Petersen, a finance professor at Northwestern University, likens the phenomenon to the internet stock bubble of the year 2000 when firms discovered they could boost their share price simply by adding “dotcom” to their name.

Petersen, however, is skeptical of the current trend of firms putting their spare cash into crypto. He points out that big companies like Apple and Microsoft do invest their cash as part of corporate finance operations, but that they do so as part of a broader liquidity strategy. That strategy involves earning a little extra yield by holding short-term assets like money market funds or corporate bonds, while also maintaining a rainy day fund for emergencies or opportunistic acquisitions.

Petersen added that reporting rules do not require firms to disclose the specifics of the “cash equivalents” in their financial statements, but that these almost always consist of safe, liquid assets. The only exception he can recall is mining firms that have occasionally used their cash to put gold on their balance sheet, and justified the move by claiming a special expertise in the direction of gold prices.

This same reasoning can be found in some of the firms above. Specifically, the firms that are engaged in Bitcoin mining and that are well-versed in the cyclical patterns of the crypto industry. Some investors may view it as worth it to pay a premium for their share price.

In the case of other publicly traded firms, though, it is hard to see a compelling reason to believe their Bitcoin purchases are based on any particular expertise. At the same time, the volatile nature of crypto markets means many of these firms could find themselves in a tough spot during an inevitable downturn.

This raises the question of whether the current trend of public firms buying crypto is sustainable. According to another expert on corporate finance, the answer is simple: It’s not sustainable.

“It’s a meme effect that has nothing to do with investment prowess or good corporate strategy,” says Darrell Duffie, a finance professor at Stanford University.

Duffie holds the view that firms should use their capital to invest in their core competencies rather than try to compete with hedge funds on speculative plays. He acknowledges that, in the case of Michael Saylor’s Strategy, the share price of the firm has performed extremely well—but says that, as more and more firms try a copycat approach, the market will eventually come to its senses.

“It’s a fad and it will go away and one day some other fad will take its place,” said Duffie.

This story was originally featured on Fortune.com

© Illustration by Fortune

• The Federal Reserve kept interest rates unchanged at between 4.25% and 4.5% following the most recent Federal Open Market Committee meeting Wednesday. The Fed’s decision could be felt by President Trump as a rebuke after Trump continuously called for the Fed and Chairman Jerome Powell to cut rates.

The Federal Reserve maintained rates on Wednesday, holding up against the pressure of President Donald Trump and his recently escalated rhetoric.

The Fed, while it brought down rates several times last fall, has stayed the course following the past four Federal Open Market Committee meetings. On Wednesday, the Fed did the same, holding interest rates between 4.25% and 4.5%, down from their peak over the past two years but still higher than pre-COVID levels of between 1.5% and 1.75%. In its decision, the Fed cited low unemployment and a solid labor market in its decision to hold rates steady.

Wednesday’s decision included two dissenting votes from the majority, Fed governors Michelle
Bowman and Christopher Waller. It is the first time in more than 30 years that two governors have dissented in a single meeting.

The U.S. economy has maintained some resilience despite analyst warnings about impending financial turmoil partly caused by Trump’s tariffs. The unemployment rate fell slightly to 4.1% in June and has remained basically stable over the past 12 months. Meanwhile, annualized second quarter GDP growth increased 3%, bouncing back from the 0.5% contraction in the first quarter. 

This combination of stable unemployment and a return to GDP growth likely played into the Fed’s preference for keeping rates unchanged, despite recent skepticism over data published by the Bureau of Labor Statistics, said Luke Tilley, a former Philadelphia fed adviser and chief economist at Wilmington Trust.

“When they see the unemployment rate remaining low, when GDP has bounced back to a positive, when they don’t see any imminent problems, then they’re really reluctant to start cutting, or even say that they’re going to be cutting, because it’s much harder to unring that bell once they say markets are sort of off to the races,” Tilley told Fortune.

At the same time, the most recent GDP number shows weakness when stripped down to the core components of  consumer spending and business investment, Van Hesser, chief strategist at the Kroll Bond Rating Agency, told Fortune. Core inflation, which excludes volatile food and energy prices, also increased to 2.9% in June, up from 2.8% the prior month.

While concerns about unemployment have been at the forefront for the Fed in recent months, potential signs of lagging growth are bringing more equilibrium than before to the Fed’s dual mandate, said Hesser.

Trump’s tariff policies are likely to weigh on consumers and businesses in the second half of the year, and the Fed is likely waiting for more data to assess these effects. Still, Hesser said despite Wednesday’s rate cuts, he believes the Fed will cut rates later in the year, possibly at its last meeting of the year in December. 

“I would expect to hear some commentary today acknowledging that the risks of inflation and the risks of to the labor market, which is really growth, are coming into better balance, and so it kind of sets up for what we’ve expected, which is, fourth quarter rate cuts—two cuts of 50 basis points,” he said.

As the Trump administration continues to negotiate trade deals with its allies, including, most recently, with the EU, the threat of tariffs and their effects on inflation has worried market onlookers. On Wednesday, Trump said he would impose a 25% tariff on imports from India because of the country’s high tariffs on U.S. goods. Trump also claimed India buys much of its military equipment and energy from Russia, which warranted an unspecified “penalty.” 

Since before he was elected President in November, Trump has continuously criticized Powell and the Fed for not dropping interest rates as fast as he would like. Trump has ramped up his rhetoric recently by repeatedly wishing for Powell to resign and insulting him as “Mr. Late” and “one of my worst appointees,” among others. The president has also seized upon a previously scheduled remodel of the Federal Reserve’s headquarters in Washington D.C. to publicly shame Powell and hint at his possible dismissal.

This story was originally featured on Fortune.com

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Starbucks CEO Brian Niccol is closing a convenience that was explicitly targeted toward Gen Z’s taste for “frictionless” experiences: their mobile-only “pickup” stores. The move signals a deliberate shift away from the high-speed, tech-driven model that defined much of the chain’s recent expansion. The coffee giant will convert or close approximately 80 to 90 of these mobile order-only locations nationwide by the end of 2026, Niccol said on Tuesday’s earnings call with analysts, marking the end of a six-year experiment that catered to on-the-go customers who seemed to prefer mobile ordering to lingering over a latte.

Announcing the closures, Niccol was direct about the rationale on Starbucks’ Tuesday call with analysts. “We found this format to be overly transactional and lacking the warmth and human connection that defines our brand,” he said.

Built primarily in urban centers, airports, and hospitals, these stores were designed to maximize convenience—no cash registers, limited or zero seating, and an efficient grab-and-go experience orchestrated through the Starbucks app. Starbucks wants to bring back the warm coffeehouse.

The move comes amid a period of challenge and transition for Starbucks. Sales at stores that have been open for at least one year have declined for six straight quarters, with North American sales have dropped by 2% most recently. Analysts point to customer fatigue with impersonal, tech-centric transactions and “soulless” atmospheres, especially as competitors offer new forms of hospitality and engagement. It’s also a tricky needle to thread, as Starbucks disclosed in its earnings that 31% of all transactions are mobile, making it a critical part of the business.

The company remains committed, according to Niccol, to enhancing digital and mobile experiences through technical upgrades to the Starbucks app and its Rewards program, set for rollout in 2026. But Starbucks’ other actions are suggesting that these experiences shouldn’t feel mobile.

Niccol, who took over as CEO in September 2024, has staked his turnaround strategy on restoring the brand’s emotional resonance, echoing former CEO Howard Schultz’s recognition that consumers needed a “third space” that wasn’t home or work. Niccol argued on the call that customer-value perceptions are near two-year highs, and they’re driven by gains among Gen Z and millennials, who make up over half of Starbucks’ customer base. It shows that younger consumers wanted more warmth than previously thought.

Uplift through green aprons

Starbucks has a program under way to “uplift” its coffee houses, which involves investing $150,000 per store to upgrade seating, lighting, and atmosphere in more standard locations. The chain’s new prototype stores—already being piloted in New York City—reintroduce cozy chairs, power outlets, and large tables, fostering a more communal and linger-friendly environment. Niccol said some mobile-only stores will get converted to this new setup, where it makes sense.

“We plan to complete an evaluation of our North American portfolio by the end of this fiscal year to ensure we have the right coffee houses in the right locations to drive profitability and deliver the Starbucks experience,” Niccol said on the earnings call.

Starbucks is also piloting smaller-format stores with limited seating to blend convenience with a sense of place—another sign the brand isn’t abandoning quick service, but is instead recalibrating its approach. As the company prepares to sunset its transactional pickup model, Starbucks is doubling down on its legacy: coffee shops as community anchors, not just efficiency engines. The era of the “app-only” Starbucks is ending, as the company bets that its future lies in connection, not just convenience.

These investments are part of Niccol’s $500 million “Green Apron Service” initiative, intended to restore “hospitality” to the center of its business. It involves a revamped barista dress code featuring, yes, the green apron, but also emphasizes personalized service. Starbucks believes this is what Gen Z really wants, not a frictionless mobile order that barely involves interacting with a human. There is other evidence that Gen Z craves more human connection, with 91% telling the Harris Poll they want more of a balance between remote and office work.

Starbucks COO Mike Grams spoke with CNBC earlier this week and also offered thoughts on how the company views Gen Z. He argued in favor of an approach the company describes as “hospitality” and, when asked about evolving “social cues,” he described how Starbucks is working to lean into a more subjective experience. “Connection is different things to different people,” he said, arguing that Starbucks baristas are well positioned “to understand what each individual customer wants in that moment in time.” In other words, Starbucks is risking a collision with the “Gen Z stare,” because it’s working to make sure that the human connection is front and center in its business.

When reached for comment, Starbucks referred Fortune to the earnings report and Niccol’s comments on the analyst call.

For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing. 

This story was originally featured on Fortune.com

© Zhang Peng/LightRocket via Getty Images

• Delian Alliance Industries, founded by former Apple engineer Dimitrios Kottas, announced Tuesday it’s raised $14 million in Series A funding to accelerate production of its affordable and autonomous defense systems. Kottas, who spent five years working in Apple’s secretive robotics lab, said he applied many learnings from his time in Silicon Valley to his four-year-old defense startup.

Dimitrios Kottas spent years at Apple working in its secretive “Special Projects Group” (SPG), working on autonomous systems for robots—and, for many years, was the team most closely associated with Project Titan, Apple’s since-canceled car project. But a few months after leaving Apple in 2021, he began work on Delian Alliance Industries, a defense startup designed “to protect Europe and its allies.”

On Tuesday, Kottas wrote a blog post announcing Delian had raised $14 million in a Series A funding round, led by Air Street Capital and Marathon Venture Capital, to “accelerate the production” of affordable and autonomous systems that “defend against invasion and incursion at nation scale.”

“We started Delian with a pilot of a single surveillance tower, but after just a few years we are now pursuing multiple nationwide deployments for our autonomous surveillance networks,” Kottas told Fortune. “Beyond this, we’re also helping allies to strike threats, as well as sense them. Our product lineup ranges from autonomous detection to autonomous one way effectors”

Rather than partnering with other defense companies and startups, Delian is borrowing a page from Apple, as well as Tesla, in that it’s choosing vertical integration as its key strategy around production. It makes its own hardware—targeting systems, surveillance towers, drones, and more— as well as the software and systems, which are all “designed to be low cost, deployed in mass, and sovereign,” according to the company’s website. 

“Why do we pursue vertical integration? Speed,” Kottas told Fortune. “Look at the speed that Tesla moved versus its European competitors who sub-contracted out everything to hundreds of different suppliers. By bringing everything under one roof we can move at the speed we need to equip our allies in the face of a rapidly changing geopolitical landscape.”

Kottas, who graduated from the University of Minnesota after years of studying computer science and researching machine learning, said Silicon Valley also taught him about the importance of embracing “moonshot” projects, which are ambitious ideas that may result in revolutionary, rather than evolutionary, change. Some of its prototypes reflect this concept, including explosive-laden high-speed boats that launch out of concealed locations to deter attacks by air or by sea. (Kottas told The Financial Times Delian is focused on “the maritime domain,” as airborne drones are a “very saturated market.”)

“Our adversaries are arming themselves with emerging technologies at a rapid industrial scale,” Kottas wrote in a company blog post. “We’re in a race against time and should measure deployments in days, not decades. We’ve proven our systems in mission critical environments and will now ramp up production internationally.”

Delian, which has offices in Athens and London, says it’s built to integrate with “Europe’s evolving defense priorities.” The EU is having a defense boom right now: Ever since President Trump signaled that Europe is no longer a security priority for the U.S., several EU countries have accelerated their own investments as they attempt to reduce their dependency on U.S. support.

At the NATO summit in June, all 32 member countries committed to raising security-related spending to 5% of GDP by 2035; separately, 18 EU countries have applied for billions of euros from The Security Action for Europe (SAFE) fund, which is a new $173 billion defense program aimed at providing cheap loans for member countries so they can buy military equipment together. As you might imagine, defense companies and startups like Delian are reaping the benefits of these policy shifts.

This story was originally featured on Fortune.com

© Courtesy Delian Alliance Industries

To ensure Booz Allen Hamilton’s global workforce of more than 35,000 can guard against deepfakes and avoid potential financial fraud, the consulting firm’s chief technology officer, Bill Vass, embraced an unconventional approach.

He created a deepfake video of himself.

This week, Vass will promote a 30-second deepfake video where “he” briefly speaks to the camera to show Booz Allen employees and other workers how easy it is to create fake audio and video content. Vass contends that generative AI technology has gotten so advanced that a popular refrain, “believe none of what you hear and half of what you see,” isn’t cynical enough.

“You’re at a point with AI and these deepfakes where you are not going to be able to believe any video you see or audio you hear,” Vass says. The deepfake video of Vass will be promoted internally at Booz Allen so that employees “better understand the capabilities and how strong a deepfake can be,” he adds.

Booz Allen has previously trained workers to spot deepfakes by showing videos of celebrities, who tend to be easy targets given the vast prominence of their likeness in the public domain. But there are also hours upon hours of video and audio of Vass uploaded to YouTube, and it only takes a couple of minutes of content for criminals to make a deepfake that can trick workers.

The stunt deepfake video of Vass was created by Booz Allen in partnership with Reality Defender, a deepfake detection company that sells tools to identify AI-generated content within seconds to clients including IBM, Visa, and Comcast. Last year, Reality Defender expanded its Series A funding round, raising $33 million in total capital (from investors including Booz Allen’s venture capital arm) to further develop the startup’s technologies.

Vendors like Reality Defender are betting that processes for authenticating audio and video interactions will become as essential as other cybersecurity tactics like multi-factor authentication, a two-step verification process, and zero-trust authentication, which requires continuous verification of identity.

Alex Lisle, who became CTO at Reality Defender last week, says there is a growing list of risks CEOs and other C-suite executives must confront when it comes to deepfakes. While much of the attention is on social engineering cyberattacks that prey on workers, cybercriminals can also use AI to craft audio files where a CFO “announces” manipulated earnings results, which could move the stock. AI videos can be generated that depict a CEO issuing a fake public statement that could hurt a brand’s reputation.

“Unlike other emerging cybercriminal threats, which require an incredible amount of technical knowledge and foresight, this doesn’t,” Lisle says. Deepfakes, he adds, can be done with “off-the-shelf software and a basic knowledge of technology.”

Top executives at WPP, Accenture, and Ferrari have been targeted by deepfakes, though in the corporate world, the banking sector is a favored target. Half of finance professionals in the U.S. and U.K. have reported that they’ve experienced an attempted deepfake scanning attack. Accounting giant Deloitte has estimated that generative AI-enabled fraud losses could reach $40 billion by 2027, a compound annual growth rate of 32% from 2023’s level.

The cautionary tale that security executives frequently cite is a Hong Kong incident where a financial worker was fooled into paying $25 million to fraudsters that used a deepfake video call to impersonate the company’s chief financial officer. To avoid these types of scams, chief information security officers and other technologists have been investing in defensive systems and better employee training to detect attacks.

Vass, who joined Booz Allen in 2024 after previously serving as VP of engineering at Amazon Web Services, says social engineering attacks would even trip up employees at the Pentagon, where he worked as a senior executive in the office of the CIO in the late 1990s. The Department of Defense would hire external parties to attempt attacks, and Vass says it always amazed him how many times those teams would succeed, even after all of the training.

He recalls another incident at a startup he led, where a former employee sent a deepfake email that was purportedly sent from Vass, while also pretending to loop in the CFO. The note was sent to the procurement office, and a worker ended up processing a fake $25,000 invoice payment.

Generative AI, Vass adds, will only make cases like these all that more common. “People are going to have to learn to change their psyche to be more skeptical.”

John Kell

Send thoughts or suggestions to CIO Intelligence here.

This story was originally featured on Fortune.com

© Courtesy of Reality Defender and Booz Allen Hamilton

• Eventbrite CEO Julia Hartz ditched her cushy TV career working on hit shows like Friends, Jackass, and The Shield to bootstrap the ticketing platform with her two cofounders, scaling it from a windowless phone closet. She exclusively tells Fortune they shelled out less than $250,000 to get the company up and running, reasoning that “if it’s a disaster, we’ll just be broke.” But the Gen Xer’s nail-biting sacrifice paid off, as Eventbrite now boasts a $225 million valuation and serves 89 million monthly users. 

Most people would jump at the idea of working on hit TV shows like Friends, Jackass, and The Shield, but Eventbrite CEO Julia Hartz left it all behind to pursue her passion of bringing people together. 

Just five years into her rising TV career—where she’d climbed the ranks to junior executive at FX—Hartz tossed the towel in on her 9-to-5 to launch Eventbrite in 2006, bootstrapping the company entirely with her husband and fellow cofounder Renaud Visage. 

The pitch was: “Come work on something that doesn’t exist. We’ll use our own money to fund it, and if it’s a disaster, we’ll just be broke,’” Hartz tells Fortune. 

Eventbrite is now estimated to be worth $225 million, and offers events ranging from wrestling classes, to comedy shows, to cheese raves with Queer Eye star Antoni Porowski.

But it all started when Hartz and her husband—serial entrepreneur and early PayPal investor Kevin Hartz—assembled a dream team to get Eventbrite off the ground. They recruited fellow cofounder Visage to come on board as chief technology officer, and the trio of entrepreneurs decided to chuck $250,000 of their own money to get Eventbrite running, moving to San Francisco.

Hartz had to sacrifice her job to put all her energy into Eventbrite, skirting the route other entrepreneurs have gone down: juggling a full-time job while scaling a company on the side. Instead, she found it best to wipe her slate clean and leave her TV career behind to pursue Eventbrite. It was a professional gamble that paid off in the long run. 

“I’ve seen entrepreneurs do that, and I think that that’s a clever way to gain validation and product market fit, without putting yourself in such a perilous state,” Hartz says. “I did not do that.”

Inspiration struck during her 9-to-5 job in TV working on Friends and The Shield

Hartz started working at just the age of 14—pouring coffees in cafes, and driving kids to after-school activities—and hasn’t taken her foot off the gas since. 

While attending Pepperdine University, she worked as an intern on the set of hit TV-show Friends, later scoring an internship at MTV in the series development department. It was a “magical” experience that eventually landed her a job at the station—once she graduated, Hartz went straight into developing shows including Jackass, The Shield, and Rescue Me across MTV and FX. Part of her job entailed researching fandom events, and suddenly, something clicked. 

“I remember going to this fandom event that was insanely niche, and feeling the energy of the people in the room, it just stuck with me,” Hartz says. “It was this palpable, kinetic energy…When we started Eventbrite, I was thinking about that all along: ‘How do we enable the people who gather others around these niche passion areas and create this magic?’”

While most couples may wring their hands at the idea of putting their finances on the line to launch a company together, Hartz’s partner was enthusiastic about going all-in on a light bulb moment. 

In fact, the Gen X CEO’s nearly 20-year success may have never panned out if it wasn’t for her husband Kevin—who’s success investing in the then little-known startup called PayPal—persuaded her to take the leap into entrepreneurship.

“It’s only serial entrepreneurs who can convince someone of that,” Hartz says. “We made it on less than a quarter of a million dollars…I’m really, really proud of it.”

Scaling a business idea into a $225 million ticketing giant

Once Hartz made the decision to leave TV forever, she packed her things into boxes, and drove up the coast of California to settle in her company’s new headquarters: San Francisco. The Silicon Valley hub had the tech connections and industry access to help get things off the ground. So just like that, she set up shop in Potrero Hill, the “warehouse district”.

“I was moving saw horses and plywood into a windowless phone closet on Monday, in this warehouse district in San Francisco, going in my head, ‘Wait, what if he’s crazy?’ Well, it’s a little late for that,” Hartz says. “I’ve been working since I was 14 with no break. So it was really important to me that I be working on day one.”

Eventbrite was able to get things off the ground thanks in part to perfect timing; in the mid-2000s, social media platforms were looking to bring together its users in real life. Facebook made Eventbrite one of its first connect partners, solidifying a huge new customer base looking for community events to partake in. 

Then 2008 came, and thousands of workers from all across the U.S. were being laid off in droves during the financial crisis. Hartz said “the world collapsed” in those dire years, and people were desperate for community while facing hardship. It was a tough era for corporate American workers, but was an opportunity for Eventbrite to bring them together. Over the next decade the business would amass a total of $373 million in equity funding through 11 fundraising rounds, according to Pitchbook, attracting investors like Tiger Global Management, Sequoia Capital and Square.

The ticketing platform has since amassed a fanbase in nearly 180 countries—in 2024 alone, it had distributed 83 million paid tickets for over 4.7 million events. With 89 million monthly users, people are scoring seats at events ranging from a sunset Bach concert in Central Park to a house music cruise on the Hudson river. 

This story was originally featured on Fortune.com

© Courtesy of Eventbrite

• Mercedes-Benz and Microsoft have collaborated to allow drivers in the new CLA model to record themselves with its in-car camera during Teams meetings. A video stream of the meeting visible to the driver on the car’s central display turns off once they’re in motion, though they can still contribute to the meeting through other new features like “an expanded chat function for reading and writing messages, and the integration of voice control for text input,” a spokesperson told Fortune.

Mercedes-Benz and Microsoft have teamed up to bring you more meetings. Now, with
“in-car productivity” you can join a Teams meeting while you drive to and from work.

The German automaker said its 2026 luxury sedan CLA model includes an in-car camera that allows Microsoft Teams meeting participants to see drivers that are streaming while on the road. The feature marks the latest attempt from Mercedes-Benz to offer “an even more efficient way to work within the vehicle,” according to the carmaker’s announcement. The $60 billion carmaker aims to revolutionize its in-house developed multimedia operating system that powers the central display screen in the new model. Mercedes-Benz says it hasn’t officially announced pricing for its new CLA models, but Car and Driver reports it will cost in the range of $58,000 to $76,000, depending on trim and options.

The CLA is the first model of a completely new family of vehicles to utilize the technology, a Mercedes-Benz spokesperson told Fortune. The Meetings app for Teams was already available in previous car models—but the in-car camera used to display drivers in meetings is the first of its kind. The camera is built into the screen, above the central display. However, when the car is in motion, drivers can’t see the meeting but colleagues and bosses can see the driver. After pressing the gas, the driver sees a speaker’s contact icon, as if they were just in a hands-free phone call. The feature differs from Tesla’s in-car Zoom meeting feature, which requires the car to be in park for the video feature to display the driver.

The automaker will start the process of integrating the update of the Meetings app this summer for cars with the fourth-generation Mercedes-Benz User Experience (MBUX) initially in Europe and later this year in the U.S., according to the spokesperson. Vehicles with the third-generation MBUX will also receive these features soon.

To be sure, the video stream projected on the central display turns off automatically, as soon as the vehicle is in motion, to “minimize distraction and maximize safety,” the spokesperson said. This prevents drivers from viewing slides, shared screens or other participants of the meeting. 

Yet, the safety feature doesn’t stop them from being able to listen and contribute to a meeting, like any other hands-free phone call. 

The updated Meetings app comes with features including quick access to favorite contacts, the ability to jump directly from the calendar into a Teams meeting, an expanded chat function for reading and writing messages, and the integration of voice control for text input, the Mercedes-Benz spokesperson said. 

The National Transportation Safety Board says crash data and research indicate personal electronic devices, such as cell phones and tablets, are one of the greatest contributors to driver distraction, and calls distracted driving a “public health problem.”

“Hands-free is not risk free,” the NTSB said, adding that hands-free use of devices do not reduce driver distraction, but rather contribute to “cognitive distraction.”

The National Highway Traffic Safety Administration recognizes three categories of distracted driving: visual, manual, and cognitive distraction. Cell phones and navigation devices are “often the culprit when it comes to distracted driving,” according to the NHTSA. In 2023, 3,275 people were killed in distraction-affected crashes, according to the federal agency.

The built-in camera is used for other functions including tracking the driver’s eye movement, “to prevent the driver from distraction when the co-driver is watching video streaming content or gaming while on the move,” the spokesperson said.

No state has implemented the NTSB’s recommendation for a ban on the use of all personal electronic devices while driving except in case of emergency.

“Given the Mercedes-Benz’s commitment on safety, the use of the camera abides by the laws of each country and has been approved for use on the move,” the spokesperson said.

This story was originally featured on Fortune.com

© Mercedes Benz

• Gen Z can get a one-way ticket to the millionaires’ club sooner than they may think, according to multimillionaire venture capitalist and Shark Tank star Rashaun Williams. It all comes down to three simple steps: establishing an emergency fund, maxing out retirement accounts, and keeping investments simple, he exclusively tells Fortune.

Dreams of a comfortable retirement feel increasingly out of reach for young people—especially as even boomers, who spent decades saving, are now being forced back into the workforce. For Gen Z, it’s easy to feel hopeless and turn to bad financial habits like doom spending as a coping mechanism.

But the possibility of Gen Z retiring as millionaires may not be as complicated as the generation thinks it is. With proper financial planning, Gen Z can easily have seven figures to their name, according to Rashaun Williams, a multimillionaire venture capitalist returning as a guest judge on Shark Tank this upcoming season. 

The secret, he tells Fortune, relies on just following three simple steps: establishing an emergency fund, maxing out retirement accounts, and keeping investments simple.

The ‘Shark Tank’ investor’s 3 steps for Gen Z wanting to become millionaires: 1. Create an emergency fund

The path toward million-dollar wealth can’t begin without planning for the unexpected, such as a job loss or medical emergency. Williams says an emergency fund should start with saving up three months worth of expenses into your savings account.

“Make sure you have enough cash for a rainy day, so you’re not pulling from your 401(k) prematurely,” Williams tells Fortune.

For those who want to be a little extra careful—or are unlucky enough to have  life throw wrenches their way—many financial institutions, like Wells Fargo, suggest that up to six months’ worth of expenses could be worth it.

2. Maxing out your 401(k) and Roth IRA

Saving money using tax-advantaged accounts, like a 401(k) or Roth IRA, remains one of the most efficient ways to grow your wealth. Williams says Gen Z  should try to put as much money within their budgets into retirement accounts.

“If you just do that from 25 to 50 years old, you’re going to retire a millionaire,” Williams says. “…Just by maxing out your 401(k), it grows tax deferred, and it goes in tax-free. There’s no better return than to get your returns without taxes.”

The standard 401(k) limit for employee salary deferrals is about $23,500 in 2025. The maximum amount you can contribute each year to a Roth IRA is $7,000 for those under 50 (though your income must be below a certain adjusted income threshold).

Fidelity recommends individuals save at least 15% of their annual income for retirement—something that can be a tough ask for those Gen Z early in their career. 

But, it’s a number that fellow Shark Tank star Kevin O’Leary has echoed: “Take 15% of your salary each week, or every two weeks when you get paid, and put it into an investment account, and never touch it until you turn 65,” O’Leary told Us Weekly in 2023. “That’s how you will retire a multimillionaire.”

In reality, the average savings rate is about 14.1%, according to Fidelity. Taking advantage of any employer match program is also important.

3. Keep investments simple

While there are many ways to invest money—including seemingly fun opportunities like individual stocks or cryptocurrencies—Williams encourages people to keep their choices simple. He specifically called out S&P 500 indexes as one of the best places to invest, with a long history of sustained growth. After all, it delivered an average return of about 10% over the last century, helping usher an unprecedented level of millionaires and billionaires.

“You don’t have to get cute, you don’t need international, you don’t need bonds. You’re not 90 years old. Just do S&P,” Williams tells Fortune.

4. A bonus tip for Gen Z wanting to become millionaires before retirement

For many young people, becoming a millionaire is more than just a retirement dream—it’s an aspiration they want to hit as soon as possible. And while for some, hitting financial goals will mean temporarily saying goodbye to expensive lattes or a vacation to Europe, one of the best ways to build wealth is to simply create your own venture.

“Start something that you can invest in, that you can grow, and start your own business,” said multimillionaire Shark Tank investor Robert Herjavec. “It’s the only path to wealth.”

This story was originally featured on Fortune.com

© Courtesy of Shark Tank

Meta CEO Mark Zuckerberg released a new Instagram video on Tuesday morning, laying out the vision behind the company’s new AI initiative: Meta Superintelligence Labs. The goal, he said, is to build “personal superintelligence for everyone.”

Zuckerberg acknowledged that AI is rapidly advancing and that we’re beginning to see “glimpses of AI systems improving themselves.” Superintelligence (a vague term that typically refers to AI that vastly surpasses human capabilities in virtually all domains, including scientific creativity, general wisdom, and social skills) is now “in sight,” he added, which begs what he called a big open question: What should we direct superintelligence toward?

While rival AI companies focus on scientific or economic breakthroughs, Zuckerberg explained, his vision is decidedly micro, aimed at the individual, not at society writ large. He wants to build a personalized AI that helps you “achieve your goals, create what you want to see in the world, be a better friend, and grow to become the person that you aspire to be.”

It’s a pitch that, unsurprisingly, aligns with what Meta has always built: consumer-facing experiences designed to keep people engaged—and sell more ads.

In Zuckerberg’s telling, AI won’t upend the social order or redefine civilization—it’ll accelerate existing trends. In looking at previous technological revolutions, such as the mechanization of agriculture, which allowed far fewer farmers to produce all the food the world needs, Zuckerberg said that “Most people have decided to use their newfound productivity to spend more time on creativity, culture, relationships, and just enjoying life. I expect superintelligence to accelerate this trend even more.”

To Zuckerberg, that means a future of AI-infused personal devices—specifically, augmented-reality glasses that can “see what we see, hear what we hear, and interact with us throughout the day.” Meta already makes a version of such glasses in conjunction with Ray Ban. The next phase of computing, in his view, isn’t about unlocking scientific frontiers—it’s about helping people connect, create, and wear Meta hardware.

It’s hard not to compare Zuckerberg’s parochial vision to the kind of big-picture thinking that once defined Silicon Valley. When Apple founder Steve Jobs described the computer as “a bicycle for the mind,” he offered a metaphor that felt profound—technology as a tool for human advancement. Zuckerberg, by contrast, imagines superintelligence as a pair of Ray-Bans that help you…be a better friend?

Even among today’s AI leaders, this mission seems strangely small. OpenAI CEO Sam Altman talks about human flourishing (whatever that means) and rearchitecting society. Google DeepMind’s Demis Hassabis wants to unlock the secrets of the universe. Anthropic CEO Dario Amodei believes AI could be the most important tool in human history—if it doesn’t destroy us first. Zuckerberg? It sounds like he just wants you to make better Reels.

This creates a striking disconnect. Zuckerberg has committed staggering resources to Meta’s superintelligence effort: a $14.3 billion deal with Scale AI to bring its founder, Alexandr Wang, to lead the initiative; hundreds of millions in offers to lure top researchers from OpenAI, Google, Apple, and Anthropic; and tens of billions more in annual infrastructure spending to power the massive data centers behind Meta’s AI push. The scale of the investment suggests world-changing ambition. The actual pitch—personal AI in smart glasses—doesn’t quite measure up. Shouldn’t Meta at least nod to, say, curing cancer? 

To be fair, superintelligence is still such an abstract idea that even the grandest promises about helping humanity can sound hollow or amorphous. Still, don’t even the best-paid researchers need to be inspired by the mission? 

In an accompanying blog post, Zuckerberg acknowledged the risks of superintelligence, saying it will “raise novel safety concerns” and that Meta will have to be “rigorous about mitigating these risks.” He also framed the coming years in stark terms: “The rest of this decade seems likely to be the decisive period for determining the path this technology will take, and whether superintelligence will be a tool for personal empowerment or a force focused on replacing large swaths of society,” he wrote. 

However, one might hope a vision for superintelligence would go beyond personal empowerment towards broader societal good. It’s clear that Meta has the resources, and the will, to build the infrastructure for the future of AI and superintelligence. Whether it can build a meaningful reason for it remains an open question.

This story was originally featured on Fortune.com

© David Paul Morris/Bloomberg via Getty Images

• John Hess, CEO of the Hess Corp., has struck a deal to keep the gas company’s toy line in the family following its buyout by Chevron. Hess will also join the Chevron board of directors. The Hess trucks have been a holiday offering since 1964.

The Hess gas-station chain’s acquisition by Chevron may have wrapped up earlier this month, but when it comes to the Hess toy trucks that are a regular presence each holiday season, those are going to stay in the hands of the family.

John Hess, CEO of the Hess Corp, plans to buy back the toy-truck business from Chevron. The price has yet to be determined, but the deal is expected to close next year.

News of the return of Hess trucks to the Hess family came in a filing with the SEC on Wednesday. John Hess was also appointed to the Chevron board, the company announced in that filing.

Hess and the toy trucks have been linked together for decades—and they’re popular enough that when the merger was Chevron was announced, Mike Wirth, the CEO of that company, felt the need to announce the truck sales would continue when the merger closed.

It’s not just trucks. All Hess-themed toys, which have included helicopters, rescue vehicles, airplanes and even space shuttles, will revert to the Hess family. Hess also has struck a deal to retain the trademarks associated with his family name.

Independent appraisers will determine the value of the toy business, the filing said.

Hess toys have been sold since 1964 and have a rabid fan based. Some collectors have spend as much as $2,500 for past models.

This story was originally featured on Fortune.com

© Lori Van Buren / Albany Times Union—Getty Images

No company has made as big a bet on AI agents as Salesforce. In fact, Salesforce founder and CEO Marc Benioff almost changed the company’s name to “Agentforce” to reflect just how much its future depends on AI doing tasks for workers. And Benioff has not been afraid to eat his own dog…um, drink his own champagne. He calls Salesforce “customer zero” for its own products. AI agents now successfully resolve 85% of Salesforce’s customer service inquiries and qualify its own sales leads 40% faster than before the advent of AI.

Overall, Benioff says  these AI agents are so effective that they are now doing 30% to 50% of all the work within Salesforce itself. As a result, Benioff has announced that Salesforce won’t be hiring any additional software engineers, customer service agents, or lawyers. But the company is hiring sales people and “customer success” employees. Why? Because it turns out that building AI agents effectively still requires a good deal of learning and support—so Benioff wants to make sure there’s more Salesforce folks out helping customers adopt the AI tech.

It’s just one example of why Benioff told Fortune that he doesn’t agree with prominent AI startup CEOs, such as Anthropic’s Dario Amodei, who have predicted AI will result in a huge displacement of white collar workers. Benioff says there will still be plenty of jobs for humans, but exactly what they are may shift. Earlier this month, Fortune sat down with Salesforce founder and CEO Marc Benioff while he was visiting London. What follows is our conversation, edited for length and clarity.

Fortune: You’ve said that agents are now doing 30%-50% of work within Salesforce. What does that actually look like internally?

Benioff:  I’m looking at every single function and asking: how do we become an agentic enterprise?

Support is a great example. We’ve now done over a million conversations between customers and agents, and at the same time, there’s been about a million conversations between humans and customers. This has only been going on for six to nine months, and we’ve reduced our support cost by 17% so far.

The second piece is sales. We have so many leads that we can’t follow up on them all. Sales people basically cherry pick what leads they want to call back. Thousands of leads, tens of thousands of leads, hundreds of thousands of leads have never been called back. But in the agentic world, there’s no excuse for that. Every lead can be followed up on.

Fortune: With these efficiency gains, what is happening to the people who worked in customer support? Are they being transitioned to other roles, or are you shrinking the workforce?

Benioff: I’m constantly moving people around and reshaping the company. There’s a lot of scary narratives being planted by executives saying we’re getting big AI layoffs. But the thing about the AI we have—it’s not 100% accurate because it’s built on word models. Without our data set, these models are maybe 50% or 60% accurate. When you add in our data set, we’re getting 90% accuracy, but it’s not 100%. So you need the human in the loop. The humans are not going away. We’re being augmented by these technologies. We’re getting more productivity.

Fortune: You mentioned you’re not hiring engineers, support people, or even lawyers this year—only salespeople. What does this mean for younger people trying to enter these fields?

Benioff: We haven’t seen negative impacts play out. I think there are people doing a disservice to the psyche of business by saying things that may not be true. What I’m seeing is a lot more small and medium businesses, a lot more mid-market companies. There’s going to potentially be a lot more employment because everybody is augmented and has the ability to do more.

I think there’s going to be an explosion of small and medium businesses because they can do more, it’s easier to start one, you can create value more easily. We’re definitely seeing this in our business.

Fortune: How are you managing the transition internally when people need to move to new positions due to these efficiency gains?

Benioff: I don’t think it’s super complicated. We run something called Trailhead that we make available to customers and employees—you can get trained on all our products. We encourage all employees to do that, get certified, get badges, get trained. That gives them more mobility in the organization.

People need to be more flexible in their thinking. We encourage people to have a beginner’s mind. We tell them: with a beginner’s mind, you have every possibility. With an expert’s mind, you have a few. Which one is your choice? We have plenty of options. There’s nothing but opportunity. You can see all the open jobs we post externally and internally.

Fortune: There’s concern about AI leading to mass layoffs across the economy. Do you see that happening?

Benioff: I keep looking around, talking to CEOs, asking: what AI are they using for these big layoffs? I think AI augments people, but I don’t know if it necessarily replaces them. Even in radiology departments where AI can read scans, it’s not 100% accurate. The AI can read the scan, but it might get it wrong.

The reason is because a lot of this is still built on word models. Maybe there’s a future AI model that will be more accurate, but that’s not where we are right now. This is about humans and AI working together. I feel like I have a partner. But it doesn’t always get it right.

Fortune: Some worry that companies will create more of their own bespoke software using AI, potentially threatening traditional SaaS companies like Salesforce.

Benioff: It’s always been true that companies can DIY, but only certain companies can. Small and medium companies are not going to DIY because they don’t have big IT departments. But when you’re talking to a company like Barclays with 15,000 engineers, that’s where development teams have always looked at us as a potential competitor.

Apps will become more dynamic, where you’ll have the ability to dynamically generate apps. I’m seeing opportunities in that area, but we’re not at that point yet. Nobody can give me an example where someone has dynamically built an enterprise app out of AI. You can define an app in English now, which is exciting, but it’s still going to be built on a platform like ours with the same framework requirements.

Fortune: What’s your take on the current state of AI accuracy and capabilities?

Benioff: We need to be more real about what we have. We have this concept of intelligence coming out of these tokens, but it’s not that accurate. Users might have a model help them write a story, summarize it, edit it, translate it to Spanish or Arabic. And they’re like, “Oh, this is cool.” But at the end of the day, you’re still going to have to check it.

Every AI needs its own fact checker, and those fact checkers are humans, not AIs, because AIs can’t fact check because they don’t have that level of accuracy. The human has to stay in the loop.

Fortune: How do you see AI transforming different sectors?

Benioff: In healthcare, we don’t have enough doctors in small towns. There’s a company that spun out of Salesforce called Artera that has FDA certification for prostate cancer diagnosis and treatment plans. In our small town [where Benioff lives in Hawaii], we don’t have urologists or oncologists, so this can augment capability. It’s not a substitute for having specialists, but it can help.

In education, kids are using tools like Grammarly to write papers. But it’s not an excuse for teachers not to look at the Grammarly history to make sure kids are really learning. Education can be augmented, healthcare can be augmented.

But the burger shop, pizza shop, supermarket, dry cleaner, farmers market—a lot of the core of small towns probably won’t change that much. We’re probably not going to have any robotaxis around. No one’s going to get around to mapping our town for a while. This vision that we were sold that we’re just going to flip a switch and suddenly cars will start driving themselves, it turns out that wasn’t true. And I think that’s a good metaphor for what is going on in the AI industry more broadly. This is about humans and AI working together, not wholesale replacement of human beings.

Fortune: Tell me more about how you see that partnership between human and AI working? 

Benioff: I think we are all augmented in our ability to do our jobs. I feel like I have a partner, right? So, for example, every year I sit down to write the Salesforce business plan—and we use this process we call V2MOM [Vision, Values, Methods, Obstacles, and Measures.] I always sit to do that with a Salesforce executive and now I also work with AI, as a Trinity. And I will say, okay, here’s my whole plan, give me a grade on it. And the AI will say ‘B plus’  But why is it not ‘A’?  And it says, ‘Well, you left this out, right? You left that out.’ I’m like, ‘I did leave that out!’ It’s right. It’s very good, actually, at finding things that you’ve left out. So it’s good at finding gaps in your consciousness. I’ve been very impressed with that and it has altered my thinking a couple of times. But it’s you working with the system. AndI think that is a very empowering message for people and for enterprises. This is going to help your employees to be more productive and go forward faster. But it is not a wholesale replacement of human beings. Or if that opportunity exists, somebody needs to explain it to me, because, as the CEO of a 75,000 person company, I can’t figure it out.

Fortune: How does this change the way organizations are structured?

Benioff: It allows you to increase your span of control, reduce your layers [of management]. But people keep talking about how robots are going to wholesale replace departments. Where are these robots? Because I don’t see it. Sure, there are some robots out there—we’re going to have some at Dreamforce this year, walking around—but it is going to be very constrained, and it’s going to be somewhat limited, and it’s more about a vision for what’s possible over the long term. But let’s talk about where we are right now. And where we are right now is that every company can be an agentic enterprise but we have to keep the human in the loop.

This story was originally featured on Fortune.com

© David Paul Morris—Bloomberg via Getty Images

Apple’s annual Worldwide Developers Conference (WWDC) in June left some of Wall Street’s most prominent voices feeling oddly nostalgic—and not in a good way. According to Dan Ives, a top tech analyst at Wedbush Securities known for his prescient, albeit oft-times bullish, calls on Silicon Valley’s giants, was bearish about Apple. The atmosphere at this year’s WWDC, he wrote in a July 30 research note, “felt like an episode out of ‘Back to the Future’”—especially when it came to Apple’s treatment of artificial intelligence.

While fellow tech titans are racing to put AI front and center, Apple’s WWDC presentation was notable for its near silence on the subject. “Barely no mention of AI,” Ives remarked in his latest report, calling it “the elephant in the room.” He noted this was a stark contrast to the fever pitch seen at rival developer events. Analysts, investors, and developers tuned in with expectations of a grand reveal that would clarify Apple’s ambitions for the “AI Revolution.” Instead, they watched as the company leaned on traditional strengths—hardware updates and a strong services story—leaving the future of Siri and Apple’s broader AI roadmap conspicuously vague.

This omission has become a growing concern for analysts like Ives, who believe Apple is at a crossroads. “It’s becoming crystal clear that any innovation around AI at Apple is not coming from inside the walls of Apple Park,” he wrote, referencing the company’s famed Cupertino headquarters. While Apple has historically prided itself on building transformative technology in-house, Ives argues those days may be over.

Time for an acquisition?

“The time has come” for a big acquisition, he wrote, singling out Perplexity as a “no brainer” acquisition target—even if it costs upwards of $40 billion. According to Ives, such a move could instantly supercharge Apple’s lagging AI platform and help reposition Siri as the “next AI gateway for consumers.”

To date, Apple’s biggest acquisition remains Beats, a $3 billion deal in 2014—an order of magnitude smaller than the types of deals transforming the AI sector today. Apple’s traditionally cautious approach to M&A, Ives suggests, may be holding it back at a time when speed is everything. “AI technology on the enterprise and consumer landscape is happening at such a rapid pace Apple will not be able to catch up with an internally built solution,” he warned. The stakes, Ives estimates, are high: A successful AI monetization strategy could add as much as $75 per share to Apple’s valuation. “We believe [CEO Tim] Cook needs to rip the band-aid off and finally do an M&A deal,” he wrote.

The muted AI narrative at WWDC comes during a broader period of transition for Apple. While demand for iPhones—a bellwether for the company—remains globally robust, with particular improvement in China after a year of tough competition, the company faces mounting headwinds. Trade tensions, evolving supply chain risks, and increasing pressure from lower-priced rivals in Asia have stressed Apple’s core markets.

For now, analysts are keeping faith with Apple’s near-term performance. Wedbush maintains its “Outperform” rating, with a 12-month price target of $270 per share, citing expected growth driven by the upcoming iPhone 17 and continued strength in services. The stock was trading at $211.27 at the time of writing. But Ives is steadfast: the next chapter—centered on AI—will define Apple’s future.

Cook’s extraordinary record—and mounting criticism

To be clear, Cook has had a legendary run after succeeding Steve Jobs in 2011. Over the ensuing 14 years, Cook has led Apple through a period of extraordinary shareholder value creation—transforming a $300 billion company into a $3.2 trillion titan. Under his stewardship, Apple refined its operational efficiency, reinvigorated its services division, and delivered massive profits through established hits like the iPhone, AirPods, and Apple Watch. But as Fortune‘s Geoff Colvin reported, “suddenly his weaknesses are on display in the AI era.”

A chorus of analysts has joined Ives in arguing that Cook’s operational excellence and supply-chain mastery may not be enough to win the future, as the AI era upends the tech industry’s priorities. The first half of 2025, furthermore, has been bruising. The company’s stock is down about 16%, while rivals like Microsoft and Alphabet have soared on aggressive bets in generative AI. Apple’s “Apple Intelligence” initiative, which was supposed to position Siri and other features at the forefront of consumer AI, has failed to capture investor or developer enthusiasm. Meanwhile, key AI executives have left: Apple’s top AI executive Ruoming Pang recently defected to Meta, just weeks after another top Apple AI scientist, Tom Gunter, resigned. Simultaneously, Chief Operating Officer Jeff Williams—a long-touted Cook successor—is set to retire, forcing a broader management overhaul.

These departures have intensified debate about Apple’s innovation pipeline. Critics argue that under Cook, Apple has not delivered any genuinely transformative new product since the Jobs era, with most recent hits—like AirPods or the Apple Watch—refining rather than redefining product categories. The risk, analysts warn, is existential: If smart devices shift into new AI-centric paradigms and Apple fails to respond forcefully, the company’s platform risks obsolescence.

Research firm LightShed Partners rocked investors and the tech press in July by calling for a regime change. Analysts Walter Piecyk and Joe Galone insisted Apple needs a product-focused CEO, not one centered on logistics. They warned Apple’s lack of compelling innovation in AI and the relatively stagnant progression of Siri could irreversibly erode its competitive edge as Google, Microsoft, and OpenAI press forward. 

Cook’s defenders argue Apple has a unique position: its platform lock-in gives it time to execute a measured AI response. And historically the company has rarely been first-mover—its success derives from perfecting existing technologies, not inventing them. Nevertheless, with AI’s foundational impact compared to the internet or electricity, allowing the competition to set the pace could be dangerous.

Ives is still backing Cook, with reservations. “Patience is wearing thin among investors and importantly developers,” he warned. The coming months, particularly as Apple’s product cycle heats up in September and beyond, may prove pivotal—not just for the company’s balance sheet. Ives said Wedbush believes Cook will be Apple CEO for another five years, at least, but there are mounting challenges, from the “tariff iPhone quagmire,” with Apple’s manufacturing operations in China directly exposed to trade uncertainty, to President Donald Trump’s displeasure with India as an alternate supply chain solution, to “missing the AI foundational strategy.” He concluded, “this chapter will define Cook’s legacy.”

“It’s time for Cook and Cupertino to face the new reality of this quickly morphing AI-driven tech landscape,” Ives wrote. “Because if they do not change, it will be a historic strategic black eye for Apple in our view.”

For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing. 

This story was originally featured on Fortune.com

© Justin Sullivan—Getty Images

• Apple could lose up to $12.5 billion in revenue if the DOJ forces Google to change how it pays for default search placement, according to JPMorgan. The DOJ is weighing remedies in an antitrust case against Google’s search business, and a decision is expected in August. While Apple isn’t directly involved in the case, its lucrative deal with Google is at stake. J.P.Morgan expects moderate remedies, but estimates Google’s worst-case exposure could reach $18 billion.

Apple could lose up to $12.5 billion in annual revenue if a federal judge forces Google to change the way it pays for its search engine agreements, according to a new note from JPMorgan.

The Department of Justice is demanding that corrective measures be imposed after its antitrust case against Google found the tech giant to be a monopolist in general search. The DOJ’s landmark case, which concluded in 2023, accused Google of maintaining that illegal monopoly by paying billions to device makers and browser developers, including Apple, to be their default search engine. Judge Amit Mehta found Google liable for anticompetitive conduct in general search but is still weighing appropriate remedies.

Both Apple and Google have submitted potential remedies for the case, and Judge Amit Mehta is expected to announce his judgment on them in early August. While Apple is not directly part of the DOJ’s antitrust suit against Google, the company could be deeply affected by the results due to its lucrative Traffic Acquisition Cost (TAC) agreement with Google.

Google reportedly pays Apple between $15 billion and $20 billion per year to ensure its search engine is the default on Apple devices.

The note calculates that the end of the agreement could cost Apple $12.5 billion annually, about 15% of Apple’s earnings per share, as a worst-case scenario. Analysts also suggested that a middle ground, namely that Google loses exclusivity to make deals with Apple but Apple finds alternative monetization or compensation from competitors, could be possible. The best-case scenario is that the judge only demands minor adjustments to Google’s practices, and TAC payments remain largely intact.

JPMorgan said in the note that the middle-ground scenario looked to be the most likely outcome of the case. They see a more moderate remedy as the most plausible path forward, which could include changes such as increased user choice screens (where users pick a search engine rather than defaulting to Google) or partial restrictions on Google’s default status across Apple devices.

While analysts note that the unlikely scenario of a full loss of TAC revenue would be painful, Apple has significant resources to absorb the impact or negotiate alternative deals. The company could also look to boost its own advertising and search monetization efforts if exclusivity is curtailed.

If Google loses its exclusivity with Apple, it could also leave the tech giant to strike up potential deals with competitors such as Microsoft or DuckDuckGo.

In a separate note addressing the potential impact of corrective remedies on Alphabet, analysts noted that “the ultimate impact to Google will also depend on how Apple—not technically a party to the suit—proceeds in search on Safari once the Google-DOJ case is resolved.”

While they estimated that the worst-case scenario could put Google at a potential revenue risk of $18 billion, analysts reiterated they expected the judge to impose moderate remedies rather than a full ban on default agreements, which would help Google maintain significant traffic.

Representatives for Apple did not immediately respond to a request for comment from Fortune.

This story was originally featured on Fortune.com

Key Points

• VF beat estimates on the top and bottom lines.

• Vans sales were down sharply due to channel rationalization.

• Other company brands, like Timberland and The North Face, performed well.

• 10 stocks we like better than VF ›

Shares of VF (NYSE: VFC) were moving higher today after the diversified footwear and apparel company posted better-than-expected results on the bottom line, showing that its turnaround efforts are starting to pay off.

As of 12:27 p.m. ET, the stock was up 12.6% on the news.

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VF shows signs of life

The parent company of brands like Vans and The North Face has struggled due to weakness in Vans and a broader slowdown in the consumer discretionary category.

The company's fiscal first-quarter results showed the business starting to stabilize after declining for several quarters. VF reported flat revenue at $1.77 billion, ahead of the consensus at $1.7 billion, and excluding Vans, revenue was up 6%, showing it's executing across the rest of its business.

Vans sales, meanwhile, were down 15%, due in part to channel rationalization, or cutting some points of distribution. Timberland was up 11%, and The North Face grew 6%.

Gross margins improved from 51.2% to 53.9%, showing the impact of the company's cost control efforts, but selling, general, and administrative expenses remained elevated, and the company reported an adjusted loss per share of $0.24. That was an improvement from $0.35 in the quarter a year ago, and beat the consensus at a per-share loss of $0.34.

CEO Bracken Darrell said, "As I pass the two-year mark in my role as CEO, we are on track with VF's transformation. We are lowering costs, improving margins, reducing debt, and transforming the organization."

What's next for VF?

VF's guidance makes it clear that the company is still facing challenges. It expects a 4% decline in revenue for the second quarter, but management forecast adjusted operating income and free cash flow to be up for the year, including the impact of tariffs.

Ultimately, the company needs to refocus and rightsize the Vans business before aiming for top-line growth, so it's not a surprise to see the stock being rewarded for bottom-line improvements, especially given the sharp sell-off in recent years.

There's a lot of upside potential if the business can return to its earlier levels of strength.

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• Wednesday, July 30, 2025, at 11 a.m. EDT

CALL PARTICIPANTS

• Chairman, President, and Chief Executive Officer — Katherine Gates
• Senior Vice President and Chief Financial Officer — Mark Marinko
• Chief Strategy Officer — Shantanu Agrawal

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RISKS

• Net income attributable to SunCoke Energy (GAAP) fell to $0.02 per share in 2025, driven by the timing and mix of lower contract coke sales, reduced earnings from the Granite City contract extension, declining CMT volumes, and $5.2 million in acquisition-related transaction costs in Q2 2025.
• Spot coke sales margins are "significantly lower than the contract sold coke sales margins due to the current challenging market conditions," according to Marinko.
• CMT terminal handled lower volumes in the logistics segment owing to "tepid market conditions," contributing to a decline in adjusted EBITDA for Q2 2025.

TAKEAWAYS

• Consolidated Adjusted EBITDA: $43.6 million, down from $63.5 million in the prior year period, primarily due to lower contract coke sales, less favorable Granite City economics, and reduced logistics volumes, partially offset by lower legacy black lung expenses.
• Phoenix Global Acquisition: $325 million purchase expected to close August 1, 2025, on a cash-free, debt-free basis, funded by cash and revolver borrowings, representing roughly 5.4x LTM adjusted EBITDA; projected annual synergies of $5 million-$10 million.
• Domestic Coke Segment EBITDA: $40.5 million, with adjusted EBITDA impacted by adverse contract/spot mix at Haverhill and weaker Granite City performance.
• Logistics Segment EBITDA: $7.7 million on 4.8 million tons throughput. Barge unloading expansion at KRT completed and new take-or-pay coal handling agreement to drive second-half results.
• Liquidity Position: $186.2 million in cash and $350 million undrawn revolver, yielding total liquidity of $536.2 million.
• Dividend Declared: $0.12 per share dividend payable Sept. 2, 2025; $10.2 million paid in the quarter.
• Revolving Credit Facility Extended: Now matures July 2030, down to $325 million from $350 million, with similar covenants.
• Free Cash Flow Guidance: Free cash flow guidance is now expected to be between $103 million and $118 million in 2025, lowered to reflect the Phoenix transaction, debt costs, and a new tax bill in full-year 2025 free cash flow guidance; guidance for operating cash flow unchanged.
• Full-Year Guidance Reaffirmed: Consolidated adjusted EBITDA (non-GAAP) expected to be between $210 million and $225 million for full-year 2025; Domestic coke adjusted EBITDA guidance range of $185 million to $192 million in 2025; Full-year logistics adjusted EBITDA guidance range of $45 million to $50 million.
• CapEx Guidance: CapEx guidance has been lowered to approximately $1 million in 2025 after spending $12.6 million in the quarter.
• Phoenix Integration: Will combine operations with the logistics segment to form a new industrial services segment, bringing new international reach and customer diversification, including electric arc furnace operators.
• Coke Sales Volume Outlook: 2.0-2.1 million tons projected for the second half of 2025 for an annual total of approximately 4 million tons of coke sales in 2025, with per-ton adjusted EBITDA expected to normalize to $46–$48 in the second half of 2025, based on mix.
• New KRT Throughput: The logistics volume increase in the second half of 2025 is anticipated to stem mainly from the KRT terminal's expansion project.
• Phoenix Revenue Profile: Contracts are long-term, carry fixed and pass-through revenue, and limit commodity price risk by avoiding consumables ownership.

SUMMARY

SunCoke Energy (NYSE:SXC) announced it will close its $325 million acquisition of Phoenix Global on Aug. 1, supported by a newly extended $325 million revolving credit facility now maturing in July 2030. Adjusted EBITDA of $43.6 million in Q2 2025 reflected reduced contract coke volume and logistics softness, confirming management's position that this quarter represents the earnings low point for the year. The company reaffirmed full-year consolidated adjusted EBITDA guidance of $210 million to $225 million for 2025 and updated full-year 2025 free cash flow guidance to $103 million to $118 million, citing transaction costs and tax law changes. A quarterly dividend of $0.12 per share was declared, and total liquidity stood at $536.2 million. SunCoke leadership signaled that Phoenix will be integrated as a new industrial services segment, diversifying its customer base and operational footprint.

• Chief Financial Officer Marinko stated, "We believe Q2 2025 to be the trough of the year, and with higher contract coke sales expected in the second half, we are reaffirming our domestic coke adjusted EBITDA guidance range" of $185 million to $192 million.
• Chief Strategy Officer Agrawal explained that reduced revolver capacity will not restrict Phoenix funding, as "$200 to $210 million" is expected to be drawn; the GPI project would require separate financing.
• Management is in "active discussions" regarding contract renewals with the largest customer, despite external commentary on potential reductions in third-party coke demand.
• Lower CMT volumes in May and June shifted into July, supporting management's unchanged logistics segment guidance despite market volatility.
• Phoenix's "last twelve months trailing adjusted EBITDA of about $61 million (non-GAAP, for the twelve months ended March 31, 2025)" remains a baseline as SunCoke completes integration and explores organic growth from new customer exposure.

INDUSTRY GLOSSARY

• CMT: Convent Marine Terminal, a bulk export terminal operated by SunCoke handling coal and other materials.
• KRT: Kanawha River Terminals, a logistics asset for coal and other dry bulk material handling within SunCoke's portfolio.
• Blast Coke: Metallurgical coke used in blast furnace steelmaking, distinct from foundry coke or spot coke sales.
• Foundry Coke: A high-quality coke sold to foundries for metal casting, generally with higher margins than blast coke.
• Take-or-pay Agreement: A long-term logistics contract obligating a customer to pay for a minimum volume, securing revenue for the operator.
• Electric Arc Furnace (EAF): A steel production process that uses electricity to melt scrap and reduce iron, with different coke requirements than blast furnace operations.
• Spot Coke: Coke sold on the open market at prevailing prices rather than through fixed, long-term contracts; typically carries lower, more volatile margins.

Full Conference Call Transcript

Katherine Gates: Thanks, Shantanu. Good morning, and thank you for joining us on today's call. This morning, we announced SunCoke Energy, Inc.'s second-quarter results. I want to share a few highlights before turning it over to Mark to discuss the results in detail. We delivered Q2 2025 consolidated adjusted EBITDA of $43.6 million, driven by the timing and mix of contract and spot coke sales, as well as lower volumes at CMT. During the quarter, we announced the acquisition of Phoenix Global for $325 million. We are happy to share that we received the necessary regulatory approvals faster than anticipated and now expect to close on August 1.

Additionally, we amended and extended our revolving credit facility originally due June 2026 during the month of July. Covenants are similar to the previous agreement, and it is now maturing in July 2030. Earlier today, we also announced a $0.12 per share dividend payable to shareholders on September 2, 2025. From a balance sheet perspective, we ended the second quarter with a strong liquidity position of $536.2 million. I would like to take this opportunity to review the fundamentals of the Phoenix acquisition. Let's turn to Slide four. Phoenix Global is a leading provider of mission-critical services to major steel-producing companies.

SunCoke Energy, Inc. will purchase 100% of the common units of Phoenix for $325 million on a cash-free, debt-free basis, representing an acquisition multiple of approximately 5.4 times on a March 31, 2025, last twelve months adjusted EBITDA of $61 million. This transaction is expected to be immediately accretive for SunCoke Energy, Inc. We will fund the purchase through a combination of cash on hand and borrowing on our amended and extended revolver, which is fully undrawn with $325 million of borrowing capacity. We expect to recognize between approximately $5 million and $10 million in annual synergies from this transaction.

After closing, we will plan to host investor conferences where we will share updated guidance for SunCoke Energy, Inc., including Phoenix. Turning to Slide five to revisit the transaction benefits to SunCoke Energy, Inc. Phoenix is an excellent strategic fit with the core elements of our business, namely customers, capabilities, and contracts. With the addition of these operations, SunCoke Energy, Inc.'s reach will now extend to new industrial customers, including electric arc furnace operators that produce carbon steel and stainless steel. Phoenix's global footprint will add to our existing Brazil footprint, as well as select international markets. Phoenix's operations provide high-value, site-based services that are mission-critical to operational efficiency and reliability for steel mills.

SunCoke Energy, Inc. has a reputation as a critical partner in the steel value chain and as a reliable provider of high-quality industrial services through our logistics business. Similar to SunCoke Energy, Inc., Phoenix's contracts are long-term in nature, with contractually guaranteed fixed revenue and pass-through components. Additionally, under its current contracts, Phoenix does not take ownership of major consumables, reducing exposure to commodity price volatility. Phoenix offers a well-capitalized asset portfolio, having invested approximately $75 million since June 2023 on new equipment or the refurbishment of existing equipment. New customers and new markets provide multiple paths for future organic growth.

By leveraging SunCoke Energy, Inc.'s strong financial position and operational excellence, we will build upon Phoenix's success to better serve our existing and new customers. Following the closing of the transaction, we expect Phoenix's operations will be combined with our logistics segment to form a new industrial services segment. We are pleased to have a strong operator within SunCoke Energy, Inc. to lead the new operations. He will be joined by certain Phoenix employees whose knowledge and experience will be beneficial to the successful integration. We are excited to welcome Phoenix's team members to the SunCoke Energy, Inc. family as we build on the strong foundation set by the business in recent years.

With that, I will turn it over to Mark to review our second-quarter earnings in detail.

Mark Marinko: Thanks, Katherine. Turning to Slide six. Net income attributable to SunCoke Energy, Inc. was $0.02 per share in 2025, down $0.23 versus the prior year period. The decrease was primarily driven by the timing and mix of lower contract coke sales coupled with lower economics from the Granite City contract extension in the domestic coke segment. Additionally, CMT volumes in the logistics segment were lower due to market conditions. Finally, transaction costs of $5.2 million related to the acquisition of Phoenix Global also impacted earnings per share. Consolidated adjusted EBITDA for 2025 was $43.6 million compared to $63.5 million in the prior year period.

The decrease in adjusted EBITDA was primarily driven by the timing and mix of lower contract coke sales and unfavorable economics on the Granite City contract extension in the coke segment, and lower transloading volumes at CMT in the logistics segment, partially offset by lower legacy black lung expenses in corporate and other. Moving to Slide seven to discuss our domestic coke business performance in detail. Second quarter domestic coke adjusted EBITDA was $40.5 million, and coke sales volumes were 943,000 tons. The decrease in adjusted EBITDA as compared to the prior year period was primarily driven by the change in mix of contract and spot coke sales at Haverhill.

Additionally, spot coke sales margins are significantly lower than the contract sold coke sales margins due to the current challenging market conditions. Lower economics and volumes at Granite City from the contract extension also impacted domestic coke results. We believe the second quarter to be the trough of 2025, and with higher contract coke sales expected in the second half of the year, we are reaffirming our domestic coke adjusted EBITDA guidance range of $185 million to $192 million. Now moving on to Slide eight to discuss our logistics business. Our logistics business generated $7.7 million of EBITDA in 2025, and our terminals handled combined throughput volumes of 4.8 million tons.

The decrease in adjusted EBITDA was primarily driven by lower transloading volumes at CMT due to tepid market conditions. Our previously announced barge unloading capital expansion project at KRT has been completed and is operating. We expect to see benefits from the new take-or-pay coal handling agreement starting in the third quarter and reaffirm our full-year logistics adjusted EBITDA guidance range of $45 million to $50 million. Now turning to Slide nine to discuss our liquidity position for Q2. SunCoke Energy, Inc. ended the second quarter with a cash balance of $186.2 million and a fully undrawn revolver of $350 million.

Net cash provided by operating activities was $17.5 million and was impacted by income tax and interest payments as well as $5.2 million in transaction costs. We spent $12.6 million on CapEx and paid $10.2 million in dividends at the rate of $0.12 per share this quarter. In total, we ended the quarter with a strong liquidity position of $536.2 million. Our free cash flow guidance has changed as a result of the transaction costs related to the Phoenix acquisition, extension of the revolving credit facility, and the new tax bill that was recently passed.

We did not previously include transaction or debt issuance costs in our free cash flow guidance, but we now expect to incur between $12 million and $14 million related to these transactions during the year. We are now expecting our cash taxes to be between $5 million and $9 million and have also lowered our CapEx guidance to approximately $1 million during the year. We now expect our free cash flow guidance to be between $103 million and $118 million. Our operating cash flow guidance is unchanged. With that, I will turn it back over to Katherine.

Katherine Gates: Thanks, Mark. Wrapping up on Slide 10. The acquisition of Phoenix is a result of SunCoke Energy, Inc.'s disciplined pursuit of profitable growth to reward long-term shareholders. SunCoke Energy, Inc. is well known for our best-in-class safety, advanced technology, operational discipline, and strong financial position. We remain focused on safely executing against our operating and capital plan and maintaining the strength of our core businesses while working to integrate Phoenix's operations. Phoenix is a service provider of choice for steelmakers, and we look forward to continuously engaging with their customers to find new opportunities to expand the scope of services provided as well as enter into new contracts at other sites.

As always, we take a balanced yet opportunistic approach to capital allocation. We continuously evaluate the capital needs of the business, our capital structure, and the need to reward our shareholders, and we will make capital allocation decisions accordingly. Finally, we see improvement in both logistics and domestic coke in the second half of the year, and we are reaffirming our full-year consolidated adjusted EBITDA guidance range of $210 million to $225 million. With that, let's go ahead and open up the call for Q&A. We will now begin the Q&A session. If at any time your question has been addressed and you would like to withdraw, please let us know. The first question comes from Nick Giles with B.

Riley Securities. Please go ahead.

Nick Giles: Thank you, operator, and good morning, everyone. This is Henry Hurl on for Nick Giles. So to start off, you reaffirmed your annual guidance, and my math implies roughly a 22% increase in quarterly EBITDA for the remainder of the year to reach the low end of your guidance at $210 million. So my question is, can you walk us through the drivers of the improvement from here? And what are your assumptions around last coke sales volumes?

Mark Marinko: Sure, Henry. Thanks for the question. So as we talked about, if you look at our Q1 domestic coke adjusted EBITDA per ton, it was $55, and our Q2 is around $42 a ton. Right? And if you take the average of those two, we are right in the range of $46 to $48. That is kind of our annual guidance. So in Q3 and Q4 or the second half of the year, we expect to kind of get back to our average full-year EBITDA per ton range where the mix, you know, it was all about the mix. That's why we are talking about a mix between contract and spot sales. Right?

In Q1, we were very heavy on the contract side. In Q2, we were very heavy on the spot side. So in Q3 and Q4, this will kind of become normalized, and we will have roughly 2 to 2.1 million tons of coke sales in the second half, getting us closer to the 4 million tons guidance of the total coke sales. With the average domestic coke distributor margin of $46 to $48 a ton. So that's kind of on the coke side. On the logistics side, you know, we saw surprisingly lower volumes in May and June at CMT, and we are already seeing those volumes get picked up in July.

There were a couple of shipments in June that did not, you know, the timing of the ship kind of shifted to July. So we are going to pick that up in Q3. So we will go back to our normal run rate EBITDA for logistics as a whole in the second half. And that's how we are getting to our full-year adjusted EBITDA guidance range of $210 million to $225 million.

Henry Hurl: Understood. Thanks for that.

Nick Giles: And then could you also talk about the macro drivers of Phoenix Global? So I understand you have a large share of fixed and contracted revenues in place. Hoping to get more color on what moves the needle in the long term? Thanks.

Katherine Gates: Sure. So I think the short answer to your question is that we will have a lot more to say on Phoenix when we go out and do our investor days and roadshow following the close. As I said, you know, we are going to be closing on August 1, and then we will be working through, you know, opening balance sheet, taxes, some other valuation work. So we are going through, you know, that process now. I think what I can say in terms of drivers going forward is that we are very excited about having the EAF exposure, which really diversifies our customer base.

And, you know, as I said on our call when we signed, I think it is very, very critical to us that we use this as a platform for organic growth. So when we think about drivers, we see opportunities with our technical and our engineering teams to look to the customers and expand the suite of services that we are providing at sites where we are already operating, as well as looking to new sites to bring on new business. You know, what we said when we signed is that Phoenix had, you know, a last twelve months trailing adjusted EBITDA of about $61 million.

And what I can say today is that, you know, that business, despite some of the cyclicality and some of the challenges in the steel sector right now, that, you know, that is still not an unreasonable number to put out there as you think ahead to Phoenix. So we feel good about the business today in the foundation, and then our opportunity to expand it, bringing our operational excellence and our engineering and technical expertise.

Henry Hurl: Thanks. I appreciate the color there. And then one more for me. Could you also talk about the recent conversations with your largest customer and if there is any potential for renewal of the Haverhill contract? Or any other color on how to think about your contracts that are rolling off this year and the split between contracted versus blast coke?

Katherine Gates: Yeah. Absolutely. You know, frankly, we were extremely surprised by the comments on the Cliff's earnings call, given that we are in active discussions with Cliff on contract renewal. As we said back in January, we knew that Cliff did not need more coke in 2025. And that's why we announced in January that we were sold out even though, you know, the pricing in the spot market is not what we wanted it to be, but we sold out and we sold into the spot market knowing that Cliffs would not need more coke from us in 2025. So that is unchanged.

But at the same time, we were continuing contract discussions with Cliff, and we are continuing those discussions with them today. In terms of specific detail on volumes, etcetera, as you know, we do not talk about the specifics of our contract negotiations with our customers. So I cannot really say more than that, other than that we are in active discussions with them.

Henry Hurl: Okay. Thanks for that. To you and your team, continue best of luck.

Katherine Gates: Thank you. The next question comes from Nathan Martin with Benchmark Company. Please go ahead.

Nathan Martin: Thanks, operator. Good morning, everyone. And maybe just following up on that last line of questioning. Like you said, surprised maybe by some of the comments Cliff made. You know, they indicated they have got plenty of internal coke production post the Stelco acquisition. They do not need any third-party coke, you know, kind of going forward. You know, how if that's the case, like, how do you guys go about finding another long-term contract for that production in Haverhill? Is it a case where whoever Stelco was selling to previously could be a potential option?

Or, you know, could the shift to Cliffs using more internal coke lead to a balance disruption in the market that needs to be addressed with, you know, supply curtailments?

Katherine Gates: Sure. I mean, I think, you know, just the starting point is we continue to be in active discussions with Cliff, but we have also, and you have seen this over time, we have looked for ways to profitably sell our coke when we are not selling on a long-term contract basis. So whether that is selling foundry and selling more foundry going forward, that's certainly a very profitable avenue for us, and we have continued to grow our market share in the foundry market. We would also look to profitably sell our blast coke to other customers.

So while we obviously, you know, cannot get into any sort of discussions on that front, we have been able to profitably sell our blast coke even at these depressed prices. Selling into North America. We would continue to look to sell into the seaborne market if that was profitable. So that will continue to be our focus just as it has been in the past years.

Nathan Martin: I appreciate that, Katherine. Any thoughts, like, does this potentially upset the supply-demand balance here in North America or not necessarily if they continue or start using more internal coke?

Katherine Gates: Well, I think, you know, as we have said before, you know, there is a volume of coke that is needed for the volume of steel that is being produced. So, you know, if, for example, Cliffs is now using more of the Stelco coke, Stelco coke that was being used by another customer, as you pointed out before, would be a customer that we would pursue going forward. So from an overall kind of supply-demand balance, you know, we would understand that as being there today, and we would try to take advantage of that if things were moving.

Shantanu Agrawal: Nate, I would want to add a little bit. This is Shantanu. You know, like, if they are running at full capacity, I think the question is more on the Cliffs side. You know, if there is a capacity rationalization, permanently on their side, on one of the blast furnaces, that definitely disrupts the supply-demand balance of coke. Right? Then the structure looks very different. In the long run, if one of the blast furnaces, which had been running for a longer time, goes down, then, yes, it definitely disturbs the supply-demand balance of coke within Canada and the US, and that makes it a little bit challenging for us, you know, from that perspective. Right?

But if the assumption is that they continue running the blast furnaces, which they have been running and their demand stays the same, as Katherine mentioned, there is demand for that coke to go there.

Nathan Martin: Gotcha. Shantanu, I appreciate that. Maybe shifting to the logistics business. Again, you called out the weakness at CMT. Was that mainly coal, or was that any other product there first? And then how do you view kind of export coal demand over the next few quarters? Are you guys assuming any benefit at all from price adjustment given where the indices are today?

Katherine Gates: Well, in terms of products, you know, we move products other than coal through CMT, including iron ore, including pet coke. So there is a mix of products there, but the vast majority of the volumes there are, you know, are coal for export. We have seen higher domestic pricing and higher demand, you know, as we kind of look at the market today. And so that higher demand domestically can impact volumes being shipped internationally just based on that pricing.

But at the same time, as Shantanu mentioned earlier, we look at, you know, the volumes that we are shipping in July, and we look at what we have in our plan for the balance of the year, and, you know, we are reaffirming our logistics guidance based on what we see going forward. We are comfortable with that. In terms of any sort of, you know, price adjustment mechanism, we have not had a price adjustment thus far under the new contract, and we did not contemplate that in our guidance for 2025.

Nathan Martin: Got it. That's helpful, Katherine. And then just back to the guidance for a second. I know you reiterated your full-year adjusted EBITDA guidance for the segment. But I do not think I saw any update to the volume guidance. So should we assume you still feel good about handling, I think it was around 22.9 million tons for the full year? And if so, is that, you know, increase in tonnage here in the second half versus the first half mainly expected to come from the KRT expansion?

Shantanu Agrawal: That's right.

Nathan Martin: Okay. Perfect. Maybe just one final one. Again, congratulations on successfully amending and extending your revolver. Obviously, capacity did come down a little bit to $325 million from $350 million. You previously said, I think you expected to borrow about $230 million on the revolver for Phoenix. That lower capacity, does that impact your plans at all there for financing? And then does it still leave, you know, enough room to continue pursuing the GPI project?

Shantanu Agrawal: Yeah. So, Nate, I mean, actually, our borrowing amount for the acquisition is lower. It's closer to $200 to $210 million on the revolver, being more having more cash available on the balance sheet. So we are using that. And then, you know, that leaves us more than enough to do kind of, you know, work through the working capital changes. You know, we have been undrawn on the revolver for, like, at least a couple of years. So that leaves us enough capacity for our working capital day-to-day work.

On the GPI side, now that we have done the Phoenix acquisition, if we do the GPI project, that will lead us into a separate borrowing, and it will all be, you know, some sort of term loan or a note or something like that. So that will be a separate financing deal when we get into the GPI project.

Nathan Martin: Makes sense, Shantanu. And I guess I should just go ahead and ask, you know, are there any updates on that GPI project, any additional thoughts on the discussions you guys are having with Nippon at this point?

Katherine Gates: So we are in active discussions with US Steel. I guess, at this point, we would say US Steel because it is truly, you know, US Steel with Nippon, but we are in active discussions, but I do not have anything to share at this point.

Nathan Martin: Got it. I'll leave it there. I appreciate the time, Katherine and Shantanu, and best of luck in the second half.

Katherine Gates: Thank you.

Shantanu Agrawal: Thank you.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Katherine Gates for any closing remarks. Please go ahead.

Katherine Gates: Thank you all again for joining us this morning and for your continued interest in SunCoke Energy, Inc. We look forward to announcing the completion of the Phoenix Global acquisition. Let's continue to work safely today and every day. Thank you for attending today's presentation. You may now disconnect.

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DATE

Wednesday, July 30, 2025 at 12:00 a.m. ET

CALL PARTICIPANTS

President & Chief Executive Officer — James Nesci

Chief Financial Officer — Kelly Pecoraro

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TAKEAWAYS

Net Loss—$2 million, or 10¢ per diluted share, representing a $735,000 improvement from the prior quarter.

Net Interest Income—Increased by $896,000, or 8.3%, driven by a 12 basis point expansion in net interest margin.

Loan Growth—Gross loans rose by $47.4 million, with approximately 3% growth, including a $22 million increase in commercial and industrial loans and a $12 million increase in construction loans year to date.

Core Deposit Growth—Core deposits expanded by nearly 4%, or $25.2 million, contributing to total deposit growth of $29.1 million; time deposits increased $3.9 million, offset by a $20 million increase in brokered deposits at lower rates.

Yield on Loans—Increased by eight basis points to 4.8%; yield on total interest-earning assets improved by seven basis points to 4.58%.

Cost of Deposits—Decreased by 13 basis points to 2.62%; cost of funds also fell 13 basis points to 2.72%.

Noninterest Expense—Declined by $90,000 from the prior quarter, primarily due to seasonal occupancy factors.

Provision for Credit Losses—$463,000 provision recorded, mainly for reserves on unfunded commitments scheduled to close.

Purchased Loan Activity—$45 million in credit-enhanced consumer loans and $19 million in residential loans were added to the balance sheet; consumer loans up by $76 million year to date through June 30, 2025.

Net Interest Margin Expansion—Net interest margin increased by 12 basis points, marking the third consecutive quarterly improvement.

Tangible Book Value Per Share—Rose by 6¢ to $14.87, up from the prior quarter.

Share Repurchases—406,000 shares repurchased at a weighted average price of $9.42, below tangible book value.

Capital Ratios—Tangible equity to tangible common assets at 15.1%, among the highest in the industry, according to management.

Asset Quality—Nonperforming assets and loans both increased by three basis points, reaching 30 basis points and 38 basis points of total assets and loans, respectively.

Allowance Coverage—Allowance for credit losses to total loans dropped one basis point; allowance to nonperforming loans fell to 211% from 230% sequentially.

Loan Pipeline—Letters of intent exceeded $40 million at quarter-end, mainly for commercial lending with anticipated yields above 7%.

Consumer Loan Strategy—CFO Pecoraro said, "We are comfortable going to about 7% to 8% of the loan portfolio over the next couple of quarters" for credit-enhanced consumer loans.

Expense Outlook—Noninterest expenses are expected to remain in the "mid to high $13 million range" over the next several quarters, with potential modest increases for variable compensation in the second half of the year.

Margin Guidance—CFO Pecoraro said, "We are only looking at a couple of basis point expansion probably in the third quarter," suggesting limited net interest margin expansion in the second half of 2025.

SUMMARY

Blue Foundry Bancorp(NASDAQ:BLFY) reported a sequential improvement in net loss and continued progress on strategic objectives, including portfolio diversification and disciplined capital management. Management emphasized the focus on higher-yielding asset classes, such as owner-occupied commercial real estate and credit-enhanced consumer loans, to drive returns and manage risk. Deposit growth was attributed to deepening commercial banking relationships and new product strategies in a competitive rate environment. Adjustments in deposit pricing, including the introduction of short-duration and eight-month CDs, were aimed at balancing funding cost and customer retention. Share repurchases were executed below tangible book value, and capital ratios remain among the highest in the industry. Asset quality metrics remain stable, with only modest increases in nonperforming assets and loans on a low base.

CFO Pecoraro detailed the future repricing schedule, noting approximately $75 million of loans set to reprice in 2026 at a current rate of 3.75% and $23 million scheduled to reprice in the remainder of 2025.

Purchased credit-enhanced consumer loans carry a 3% reserve, affecting allowance methodology.

CEO Nesci affirmed continued focus on operating efficiency, stating, "We are looking at everything. Constantly, especially expenses," and highlighted ongoing efforts to leverage technology and optimize staffing to control expenses.

Management highlighted strategic efforts to grow core deposits through comprehensive client relationship management, particularly within commercial banking.

INDUSTRY GLOSSARY

Core Deposits: Stable, non-brokered, typically lower-cost customer deposits considered more reliable during market disruptions.

Credit-Enhanced Consumer Loans: Consumer loans structured or purchased with additional protective features, such as third-party guarantees or reserves, to reduce loss risk.

Tangible Book Value: Book value of equity excluding intangible assets, frequently used to assess a financial institution's shareholder value and capital strength.

Full Conference Call Transcript

James Nesci: Thank you, Operator. And good morning, everyone. We appreciate you joining us for our second quarter earnings call. As always, I am joined by our Chief Financial Officer, Kelly Pecoraro, who will review our financial performance in detail following my update. Earlier today, we reported a net loss of $2 million or 10¢ per diluted share. We are pleased with the progress made toward our strategic objectives in the second quarter, and thus far in 2025. Despite the competitive environment, we are able to grow core deposits and the net interest margin for the third consecutive quarter.

This, coupled with our expense discipline of approximately $1 million versus last quarter, our strong capital liquidity position continues to support our transformation into a more commercially focused institution. This quarter's increase in core deposits reflects the deepening of our relationships with the businesses and communities we serve and marks continued progress. We achieved approximately 3% loan growth during the quarter while improving the yield on our loan portfolio by eight basis points. This was supported by $29 million in deposit growth, including an almost 4% increase in core deposits and a 13 basis point reduction in our cost of deposits. Together, these results contributed to a meaningful 12 basis point expansion in our net interest margin.

Loan production year to date totaled $180 million with $90 million produced during the second quarter at a weighted average yield of approximately 7%. Year to date, our diversification efforts have led to a $22 million increase in commercial and industrial loans, including owner-occupied commercial real estate. Additionally, construction loans increased $12 million while we thoughtfully decreased our multifamily portfolio by $37 million. We also saw a $76 million increase in consumer loans through June 30, primarily driven by purchases of credit-enhanced consumer loans at attractive yields. As we continue to execute our strategy of portfolio diversification, we remain focused on prioritizing asset classes that deliver higher yields and better risk-adjusted returns.

Growth in our owner-occupied commercial real estate and construction lending reflects our disciplined approach to supporting local businesses while managing credit exposure. Additionally, our investment in credit-enhanced consumer loans further enhances returns while maintaining a strong risk management framework. These portfolio shifts are aligned with our goal of driving earnings and long-term value creation. Our loan pipeline remains healthy, with executed letters of intent totaling more than $40 million at quarter-end, primarily in commercial lending with anticipated yields above 7%. We expect this momentum to continue in the coming quarters. Tangible book value per share increased to $14.87, up 6¢ from the prior quarter. We remain committed to enhancing shareholder value through disciplined capital management.

During the quarter, we repurchased 406,000 shares at a weighted average price of $9.42, a significant discount to our tangible book value and adjusted tangible book value. Both the bank and holding company remain well-capitalized, with tangible equity to tangible common assets among the highest in the industry at 15.1%. Our capital position and credit quality remain strong, and we are encouraged by the sustained momentum across both lending and deposit fronts. We believe these efforts will continue to support balance sheet and income growth in the coming quarters. With that, I will turn the call over to Kelly for a deeper look at our financials. After her remarks, we will be happy to answer your questions. Kelly?

Kelly Pecoraro: Thank you, James. And good morning, everyone. Net loss for the second quarter was $2 million. This is a $735,000 improvement to the prior quarter. We are encouraged by the positive momentum in net interest income, driven by unfunded loan commitments. Net interest income increased by $896,000 or 8.3%, driven by a 12 basis point expansion in our net interest margin. Interest income expanded $725,000, primarily due to loan growth. Interest expense declined by $101,000, reflecting lower deposit costs. The yield on loans increased by eight basis points to 4.8%, and the yield on total interest-earning assets improved by seven basis points to 4.58%. Our cost of funds declined by 13 basis points to 2.72%.

The cost of interest-bearing deposits decreased 13 basis points to 2.62%, and the cost of borrowings decreased nine basis points to 3.3%. Noninterest expense decreased by $90,000 compared to the prior quarter, driven primarily by seasonal occupancy expense. We are pleased that expenses have remained relatively stable over the past several quarters and continue to expect them to stay within the mid to high $13 million range. As we progress toward our growth targets and achieve corporate goals, we anticipate a modest increase in compensation expense in the second half of the year due to higher variable compensation costs.

For the quarter, we recorded a provision for credit losses of $463,000, primarily attributed to reserves required on unfunded commitments that are scheduled to close. As a reminder, in Q3, the majority of our allowance is derived from quantitative models, and our methodology continues to assign greater weight to the baseline and adverse economic scenario. From a balance sheet perspective, gross loans increased $47.4 million during the quarter. Organic growth was primarily in owner-occupied commercial real estate and construction. We also purchased $45 million in credit-enhanced consumer loans and $19 million in residential loans to support our residential portfolio. Our available-for-sale securities portfolio, with a duration of 4.1 years, declined by $2.4 million due to maturities, calls, and paydowns.

This was partially offset by purchases and a $1.7 million improvement in unrealized loss. Deposits increased $29.1 million or 2%. We experienced $25.2 million or approximately 4% growth in core deposit accounts. Importantly, growth in core deposits was fueled by full banking relationships with commercial customers, emphasizing our strategic focus on deepening client engagement in a competitive market. Time deposits increased $3.9 million as we strategically repriced promotional thinking and backfilled runoff with $20 million in broker deposits at lower rates. Borrowings increased slightly to help fund loan growth. Lastly, asset quality remains strong. Nonperforming assets increased due to a slight rise in nonaccrual loans.

Nonperforming assets to total assets picked up by three basis points, and nonperforming loans to total loans also ticked up by three basis points. Both remain low, at 30 basis points and 38 basis points, respectively. Allowance coverage decreased slightly, with the allowance for credit losses to total loans declining by one basis point, and the ratio of allowance for credit losses to nonperforming loans decreased from 230% to 211%. With that, James and I are happy to answer your questions.

Operator: Thank you very much. To ask a question, please ensure your device is unmuted locally. Our first question comes from Justin Crowley from Piper Sandler. Your line is open. Please go ahead.

Justin Crowley: Hey, good morning. Just wanted to start off on the margin and some of the drivers as you look ahead here. Can you quantify for us what loan repricing looks like through the back half of this year and then as you get into 2026? Just any detail on volume and then what the rate pickup looks like. I think you have mentioned previously that it is really next year when you see a lot of that multi-portfolio start to turn, but just wondering if you could put the numbers around that for us.

Kelly Pecoraro: Yeah. Sure. No problem, Justin. You are right. 2026 is really where we see a lot of the repricing taking place. In '26, we have about $75 million that is standing at a rate of about 3.75%. That is due to reprice not exactly equally during the year, but spread over the year in '26. For the remainder of '25, we have just about $23 million that is today at a rate of that is sitting at a rate of 75 that is going to reprice. Important to keep in mind throughout Q3 and Q4, we also have maturities that are coming in. Those maturities, the majority of them sit in the construction portfolio.

And there are current market rates while we have a nice pipeline of construction coming in, as you know, do not fund all upfront. So we will see a little lag in terms of the construction portfolio having maturities.

Justin Crowley: Okay. Got it. And then, I guess, on the CD side and maybe just assuming flat rates for a moment, through year-end. Who knows what we will get out of the Fed? But, you know, has the pricing opportunity there largely grown its course? And so would it really just take lower rates from here to see funding costs move appreciably lower? What is the thinking there?

Kelly Pecoraro: Well, from a CD perspective, we were keeping the book relatively short right around that three-month time frame. But we did introduce an eight-month CD that has extended that maturity. So we will not see that repricing of that book until January or February, as those CDs will mature.

James Nesci: Justin, I think there is also a market component to that question. It depends on what our competitors do in the marketplace. So we are obviously working through the market competition like everybody else, and we are keeping an eye on our deposit base and trying to make sure we produce products that our customers are interested in purchasing.

Justin Crowley: Okay. Helpful. And I guess just sort of putting it all together, obviously, a decent step up in the NIM through the first half of this year. Given kind of all the puts and takes, would you kind of expect expansion to be more limited through the back half of this year with 2026 really being when we start to see kind of more significant improvements in margin?

Kelly Pecoraro: Yeah. Justin, you have it absolutely right. We are only looking at a couple of basis point expansion probably in the third quarter. And then when we get to the fourth quarter, you know, that will depend upon pipeline and what is coming on and what happens in the market. But the expansion will be limited in the back half of the year.

Justin Crowley: Okay. I appreciate that. And then in terms of the consumer purchases, I know in the past, you said there is not necessarily a magic number in mind. But, you know, with the book at 5% of loans today, can you just give us a sense for thinking on adding to that portfolio from here, how that fits in?

Kelly Pecoraro: Yeah, Justin. So right. The it is right now, we are comfortable going to about 7% to 8% of the loan portfolio over the next couple of quarters.

Justin Crowley: Okay. And then can you just remind us that, you know, as far as the credit enhancements that come along with those, can you just boil down the exact structure of these credits and how much in the way of potential loss you are protected from?

Kelly Pecoraro: Right. So these come with a 3% reserve against these credits. So, you know, they do run through our normal allowance calculation. We look to see if there is any additional exposure there. But they are we have a 3% credit reserve against.

Justin Crowley: Okay. And then maybe just one last on a bigger picture question. You know, profitability is obviously still strained here, but at least moving closer to being in the black and, you know, it seems like, particularly next year, there are some margin tailwinds that will help over time. But, you know, is there anything else behind the scenes that you are looking into or weighing, whether that be from an expense standpoint? I know you gave guidance there. So either there or just wherever that could help accelerate that progress?

James Nesci: So what I would tell you is we are looking at everything. Constantly, especially expenses. And I noticed some of the early notes mentioned, you know, expense discipline. Kelly and I are very focused on looking for any dollars we can find. It is expensive to run a bank in today's age. It just takes people to run the bank. We have kept a close eye on our headcount. We have our people working as efficiently as we can. But with AI, we are always looking to gain new efficiencies. So those are the things that we are working through. What else can we do with fewer people and getting a greater output from our existing staff?

So those, I cannot give you a timing of when that happens, but I can tell you that is the type of stuff that we are constantly looking at.

Justin Crowley: Okay. Got it. Well, I appreciate everything. I will leave it there. Thanks so much.

James Nesci: Thanks, Justin.

Kelly Pecoraro: Thanks, Justin.

Operator: Our next question comes from David Conrad from KBW. Your line is open. Please go ahead.

David Conrad: Yes. Hey, good morning. Justin kind of went through the quarter pretty good there. So really just kind of have a very longer-term picture question. Kind of looking regarding, you know, the asset generation, but also kind of tied to the noninterest-bearing deposit levels. You know? I think it is kind of early days on C&I, but are you kind of thinking about, you know, how can we get that mix up and thinking about what type of assets you can generate maybe to grow the noninterest-bearing deposits?

James Nesci: Well, good morning, David. Thank you for joining our call today. Good morning. Yes. We are looking at it. The noninterest-bearing is obviously a key point for us to focus on. So we are not just looking at C&I. We are looking at our commercial real estate borrowers and we are trying to make sure that we get a full relationship from all borrowers, regardless of what asset class they may be borrowing in. And that has been working really well. We believe by providing good products to our customers, commercial or consumer, that we will get more of that core type deposit. And, again, it seems to be working. We are encouraged by that pathway.

And we will keep reaching out to our existing customers on the loan side to say, we really like your full banking relationship. So, yes, that is clearly part of the strategy, and we think it is working and will continue to work going forward.

David Conrad: Great. Perfect. Thank you.

Operator: We currently have no further questions. I would like to hand back to James Nesci for some closing remarks.

James Nesci: Thank you, Operator. I want to thank everybody who dialed in today to listen to the earnings call. Again, we are encouraged by the quarter and what we are starting to see, and it all stems from our dedicated employees out on the line working hard every single day. I want to acknowledge all of our customers and shareholders that have been with us. Some of you for a very long time have been shareholders that have stuck with us as we recreate our strategy and try to drive towards profitability. With that, I just want to say thanks again, and hope to speak with all of you again next quarter. Thank you.

Operator: This concludes today's call. We thank everyone for joining. You may now disconnect your lines.

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DATE

• Wednesday, July 30, 2025, at 10 a.m. EDT

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Albert Nahmad
• President — A.J. Nahmad
• Executive Vice President and Chief Financial Officer — Paul Johnston
• Executive Vice President — Barry Logan
• Executive Vice President and Chief Digital Officer — Rick Gomez

Need a quote from one of our analysts? Email [email protected]

RISKS

• Sales declined: Management stated, "Sales declined 4% as double-digit pricing gains for new equipment were offset by lower volumes."
• SG&A increased 6%: The company incurred extra costs from the A2L transition and the addition of new locations, with core SG&A growth higher than management's preference in a down quarter.
• Inventory peaked above expectations: CEO Albert Nahmad stated, "it's more than we had hoped for," with Inventory peaked at $2 billion before being reduced to $1.8 billion in Q3 2025.
• Residential new construction market down 15%-20%: Management cited, "RNC is probably down 15 to 20%."

TAKEAWAYS

• A2L Refrigerant Transition: Approximately 55% of historical product sales were affected by the 2025 transition to A2L refrigerants, impacting inventory, supply chain, and branch staffing.
• Sales Performance: Total sales declined 4% as double-digit equipment price gains were offset by lower volumes, with residential and international segments subdued.
• Gross Margin: management does not expect the 29% gross margin to be sustained in the back half of 2025 ("I don't want us to extrapolate that 29% into the back half").
• EBIT and EBIT Margin Growth: EBIT increased and EBIT margin expanded, driven by OEM pricing actions and digital pricing optimization, despite lower sales.
• SG&A Expense: SG&A rose 6% due to transition-related inefficiencies and acquisitions; approximately 25% of that SG&A growth was from recent acquisitions, with core SG&A trending about 4.5% higher.
• Inventory Levels: Inventory peaked at $2 billion and was reduced to $1.8 billion in Q3 2025, with less than 5% now comprised of legacy R410A and transition in progress to new A2L products.
• Digital and Technology Initiatives: E-commerce is now a $2.5 billion business, or 34% of our sales; Mobile apps now have 70,000 users and grew 17% versus last year; OnCallAir’s annual product volume increased 19% to $1.6 billion.
• Product Mix Shift: Parts and supplies, which carry higher margins, constituted about 30% of sales as of Q2 2025; management launched initiatives to expand this segment.
• AI Implementation: Two AI platforms -- internal and external -- deployed to leverage company and customer data for improved efficiency and growth strategies, with about 21 internal users weekly.
• National Customer Strategy: Watsco One sales platform targeting multi-location institutional customers is in development, planned for 2026 launch, designed to unify offerings and capture incremental opportunity outside core replacement business.
• Balance Sheet: Maintains a solid cash position and no debt, providing capacity for ongoing M&A and strategic investments.
• M&A Pipeline: Management is "having as many of those conversations as we can" regarding acquisitions, with one significant target under consideration.
• Market Mix Consistency: 85% of products sold remain at minimum efficiency levels in the first half of 2025; shift to lower-branded products has not occurred.
• Regional Weather & Demand: Weak volume performance in May was attributed mainly to adverse weather in the North; improvement was noted into July (Q3 2025).

SUMMARY

Watsco (NYSE:WSO) management directly addressed ongoing challenges related to the large-scale product and regulatory transition in 2025, highlighting operational complexity and near-term margin opportunities. Strategic technology investments are accelerating digital channel growth, data-driven pricing optimization, and sales to multiregional institutional customers. The company emphasized that recent peak inventory levels reflected temporary needs of the product transition, with systematic reductions underway. Watsco’s leadership detailed margin drivers and clarified that the extraordinary gross margin performance in Q2 2025 reflected both pricing and mix, not sustainable run rates. The management team remains focused on monetizing technology adoption and expansion of higher-margin parts, while actively positioning for consolidation opportunities in a fragmented HVAC distribution market.

• President A.J. Nahmad said, "We have accelerated adoption of our pricing platform PriceFX. Our goal is to reach a 30% gross profit margin."
• OEM pricing actions early in the quarter were cited as amplifying near-term margin, with Barry Logan stating, "there is obviously an algebraic benefit to margin when OEMs raise prices."
• Watsco’s e-commerce now constitutes 34% of sales; Mobile apps serve 70,000 users; OnCallAir drives higher attach rates for high-efficiency products when utilized by contractors.
• There was greater than 80% A2L sell-through by quarter end and less than 5% of inventory remaining as legacy
• Management’s "dream plan two" targets $10 billion revenue, 30% gross margin, and five times inventory turns, with the latter up from pre-COVID levels of 4.5x on investments in inventory systems.
• The chief digital officer stated, there has been about 200 basis points of gross margin expansion attributable to this price optimization and bringing more technology to how we price over the past two or three years.
• Tariffs and metals inflation are beginning to impact input costs for non-equipment segments, notably a 10% increase cited on copper-heavy products.
• Softness in residential new construction and international sales continues, but July showed sequential improvement over June, and management expects improved efficiency in SG&A as the transition winds down in the second half of 2025.

INDUSTRY GLOSSARY

A2L Refrigerants: New-generation, low-global-warming potential refrigerants with mild flammability used to comply with updated environmental regulations in HVAC equipment.

R410A: A widely used legacy HVAC refrigerant being phased out due to environmental regulation.

OEM: Original Equipment Manufacturer; refers to companies that produce HVAC units Watsco distributes.

OnCallAir: Watsco’s digital sales tool enabling contractors to recommend and sell HVAC products more effectively, with a proven impact on high-efficiency sales mix.

PriceFX: Watsco’s proprietary pricing technology platform used for dynamic price optimization.

Watsco One: Forthcoming unified digital sales and service platform tailored to large institutional, multi-location HVAC customers, scheduled for launch in 2026.

RNC: Residential New Construction; market segment focused on sales of HVAC products for newly built homes.

Full Conference Call Transcript

Albert Nahmad: Good morning, everyone. Welcome to our second quarter earnings call. This is Albert Nahmad, Chairman and CEO. And with me is A.J. Nahmad, President, Paul Johnston, Barry Logan, and Rick Gomez. Before we start, our normal cautionary statement: This conference call has forward-looking statements as defined by SEC laws and regulations and are made pursuant to the safe harbor provisions of these various laws. Ultimate results may differ materially from the forward-looking statements. Watsco delivered healthy second quarter results in soft market conditions. I should say 2025 marks a year of significant product transition to next-generation equipment containing A2L refrigerants. The transition affects roughly 55% of our historical product sales.

This transition affects our inventories, our supply chain, staffing levels in our branches, and other aspects of our business. Regulatory changes have historically been good for our business and good for our customers. We expect that transition to be no different than has happened in the past. The changes are substantial and complete, and we'll look forward to operations and simpler business in 2026. Let me turn to second quarter highlights. Sales declined 4% like the double-digit pricing gains for the new equipment, offset by lower volumes. We had a late start to the summer season. Sales for residential, new construction, and international markets remain subdued. On the plus side, Watsco achieved record gross profit margins.

Our performance yielded an increase in EBIT and expanded EBIT margins despite lower sales. Our results benefited from OEM pricing actions. Our pricing technology platform called PriceFX also contributed. Gross margins remain a focus. There is much potential to improve over time. SG&A increased 6% as we incurred extra costs during the transition. We also added 10 new locations from recent acquisitions. Our balance sheet remains solid. We have a strong cash position and no debt. We continue to invest in innovation and technology to separate us from our competitors. Watsco's technology journey began fifteen years ago, and we have made terrific progress.

For example, e-commerce continues to grow and is now a $2.5 billion business, or 34% of our sales. Mobile apps have now 70,000 users and grew 17% versus last year. The annual volume of products sold through OnCallAir, which is our digital selling platform for customer contractors, increased 19% to $1.6 billion. It's a great assist to our customers. But we're not standing still in terms of ideas and making further investments. We are building on or adding new initiatives to drive growth and to delight our customers. Examples include a new technology-driven sales platform being developed to capture larger national customers. We're talking about national customers here.

This would be incremental to Watsco's core replacement vehicles and is expected to be launched in 2026. We have accelerated adoption of our pricing platform PriceFX. Our goal is to reach a 30% gross profit margin. We have launched an initiative to grow the parts and supplies segment of our business, which today is roughly 30% of sales and can be much larger over time. And we launched two AI platforms, one internal and one external, to harness our data. Artificial intelligence offers the potential to further transform our customer experience, improve operating efficiency, and create new data-driven growth strategies. This is an exciting time, and these are just a few of the many initiatives underway.

Now we will expand on these themes at an investor event in Miami, which will occur after temperatures have dropped a bit. Stay tuned for additional details. Finally, we believe our culture of innovation, along with our scale, entrepreneurial culture, and capacity to invest, are unmatched in our industry. With that, let's turn to Q&A.

Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. And if at any time, your question has been addressed and you would like to withdraw it, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question here will come from Ryan Merkel with William Blair. Please go ahead with your question.

Ryan Merkel: Good morning, Ryan. Hey. Good morning, everyone. Good morning. Alright. My first question is just, you know, on volumes in the quarter. Were a little bit worse than I was expecting. I know you mentioned weather, H2L, new. Would just love it to hear from you, you know, I'm gonna ask both Paul and Barry to respond to that. Not as strong as we anticipated going into Q2. You know, what we saw was a kind of a lumpy picture in the marketplace. Where April came in strong, May ended up being very weak, mainly because of the weather patterns in the North. And then in June, they came back again. And it was sure.

You know, RNC is probably the our new construction new construction is probably down 15 to 20%. Replacement is still holding fairly strong. We didn't really see a lot of repair at the beginning of the quarter, which we saw towards the end of the quarter and continues into July. But not enough to offset, you know, the unit sales that were certainly down I mean, on international sales. Yeah. I'll comment on that. Also, on one of the exposures we talked about in the first quarter that repeated itself in the second quarter, was our international, which is Mexico, Mexico is probably the most volatile market.

It's a small part of our business, but a big contributor from a margin point of view. Mexico was down well, let's put it this way. It cost us about 10¢ a share in the quarter. 20¢ a share year to date. In June, it grew. In July, it's grown since then. So I'll take kind of one market that's been irritating which seemed to be a lot better in the last couple of months. As far as July goes, Ryan, I would say it's better. August is bigger than July in our forward-looking commentary.

So if I say that July is better than what we saw in June, that's okay, but it needs to extend itself and extrapolate itself as the year goes on. The good news is that in general, you know, what we can control is margin, pricing, and the wherewithal of our business to support all these new products in the market with our customers. I'm glad we have our balance sheet to do that with. Because it's been a pretty extraordinary product change this year. You can see the building of inventories. That's a customer-focused effort to help our customers get going in this market.

The margin speaks to capturing new pricing on as we say, over half the products we sold we sell, we had to capture price inflation since that price and get off on the right track in margins and be able to say, that's been accomplished. So we like what we can control. We'll be patient about what we can't control. And I think also maybe this is more of a 2026 discussion. But, you know, the entire industry, every OEM we sell products for have been through an extreme product cycle probably for the last two or three years.

And at what point does that serenity, you know, play itself out in terms of growth and market share development and product expansion the blocking and tackling that I think, is particularly good for us and that we're good at. So maybe that's more of a next year event, but we're kinda looking forward to it quite honestly. Yeah. That's fair. Okay. Since you mentioned gross margin, that was the other, you know, metric that was really strong this quarter.

Albert Nahmad: My sense is it's both price cost and initiatives, but you know, my question is I don't I don't want us to extrapolate that 29% into the back half. So just how sustainable is that? Was 2Q kind of temporary due to price cost timing?

Barry Logan: Go ahead, Barry. Yeah. Yeah. I think there is obviously an algebraic benefit to margin when OEMs raise prices. In April and May, we talked last quarter that OEMs had faced some inflationary realities going on with tariffs and raw materials and so on. On top of the like-for-like price increase on the new product they introduced inflationary pricing, early in the quarter. That clearly, you know, helped build a bigger margin this quarter, and the benefit of that you know, kind of. But I'm the one that probably three years ago, talked about 27% as a floor, as a benchmark.

And I, you know, I stand by that, obviously, and if I say now 27% plus I would expect that for, you know, the last half of the year. But we won't have the benefit of those pricing actions that you see in the first half of this year. So somewhere in between would be my conjecture and the market will play out and determine what it is. But so I think I think we have a chance to beat our benchmark and but not have the benefit that we saw as extraordinarily this quarter. In terms of pricing.

Ryan Merkel: Well, that's great. We had very unexpected. Yeah. Thanks. Just wanna add. I mean, this is A.J. Nahmad. Just real quickly. I mean, there is the benefit on the OEM price increases, but also the efforts we're making on our price optimization and the leadership of those teams and the pricing teams. That's also working. So it's a combination of both, but we continue to put points on the board in terms of the pricing efforts that we're taking internally. Yeah. I'll add that. As we move our product mix, which I mentioned in the opening statements, towards parts and supplies, and that's what we're focused on with our technology.

That by its nature, carries a higher margin than equipment sales. So our product mix, hopefully, sometime later this year or into next year, we'll improve margins too because parts and supplies carry higher margins.

Ryan Merkel: Thank you very much. I'll pass it on.

Operator: And our next question will come from Brett Linzey with Mizuho. Please go ahead.

Brett Linzey: Good morning. Yeah. Maybe just a follow-up on that. Let the last point there. So if you could maybe just unpack the year-over-year gross margin contribution. Is there any way to delineate that between the pricing optimization tools versus the parts mix versus some of that raw pricing in just in the marketplace in the quarter? That's an interesting question. Who wants to deal with that?

Rick Gomez: Yeah, Brett. I'll take a stab at that. This is Rick Gomez. This is directional because there's, you know, a lot of art and a lot of science to this as well. And but it's not all science. So when we look at the quarter, there was and when we look at the year as well, pretty consistent. There's about 50 to 60 basis points of gross margin enhancement that we can attribute to the day-to-day job of a distributor in the market. And so gross margins would have been in the high 27s. Absent any of that inflation, and the inflation helps but it's not something that you can underwrite, you know, perpetually, obviously.

So that's what it's amounted to. The way, that's been pretty consistent. If I look back, maybe two or three years in the data, we've been at that you know, we can aggregate and say there's been about 200 basis points of gross margin expansion attributable to this price optimization and bringing more technology to how we price. Keep in mind that the complexity of price in the industry is something that generally benefits a distributor. What I mean by that is that virtually every SKU has a different price to every customer. And so to imagine that we are optimized, well, it's the opposite. We're far from optimized.

And that's why we think there's so much room still to go. And, oh, by the way, just to finish, the thought is that during that period of time, we've also gained market share over that three-year period, if I measure it. So that's mainly attributable to all the technology. And my point there is that has not borrowed from customer acquisition and market growth at the end.

Brett Linzey: No. That's very helpful. You know, appreciate that. And then just a follow-up on the cylinder shortage. Sounds like you guys think it abates by the second half. I know some of the peers think it does persist into the second half. So maybe what was the impact do you think in quarter from the shortage situation? And then are you assuming that some of that does carry into H2?

Paul Johnston: Yeah. I think, you know, what this is Paul Johnston. What we had was we had an allocation situation where we were being allocated refrigerant. What the OEMs did was they came through and did an overcharge in the unit so that they didn't require as much, you know, field installation type refrigerant. And so it's become less and less of a concern as time goes on, as our allocations continue to increase. We feel good that sometime in August, we should be off of allocation. And I think it was very irritating. It was very disturbing that we had to go through that.

But I don't think that really is the total cause of why the market was slower than what it was.

Brett Linzey: Thanks for the color. Yeah. Just editorial on that. I you know, the like-for-like SKUs that we're selling now, A2L versus the prior is a 10% difference in price. And a speed bump on the canisters or refrigerant is that. A speed bump? And the transition itself, if we look forward again to that word serenity I used earlier. We're looking forward to it.

Operator: And our next question will come from Tommy Moll with Stephens. Please go ahead with your question.

Tommy Moll: Morning, Tommy Moll. Morning, Albert Nahmad. Thanks for taking my questions.

Albert Nahmad: Of course.

Tommy Moll: Wanted to start on inventory. Maybe you could characterize for us the investment there versus what you would have expected to need for the transition. Just in dollar terms, is it about what you would have soft circled or maybe a little elevated anything you can do to frame that for us and then also how you think it might trend over the next couple quarters?

Albert Nahmad: Well, the honest answer is that it's more than we had hoped for. And some of that is because we expected not to have the unusual demand industry demand that we the lower industry demand. So we peaked at about $2 billion. But we are now very focused on what to do about it and we've lost in terms of inventory investment, $200 million so far in the third quarter, we're down to $1.8 billion. And plus this transition of product you have to have the old and you have to have the new on the equipment side. And we'll transition out of the old before the end of the year. And that will help reduce the inventory investment.

Paul Johnston: That's a very good question. I'm very dedicated to increasing our inventory turn. And it's been a rough time to do that, but I think that.

Albert Nahmad: Yeah. Pretty stoked.

Paul Johnston: Oh, go ahead.

Albert Nahmad: Yeah. On a raw number basis, you know, we had double inventory. We had about 5% of the total inventory was four ten, and then we had the more expensive A2L product in there. So we probably had a 15% rise just between what we had in four ten left over. And what we experienced when we had price increase. The balance of it is exactly what Albert Nahmad said. You know, the demand just wasn't there to be able to take the inventory back down. That you're going to see come down at the end of the third quarter.

Tommy Moll: Thank you both. As a follow-up, wanted to ask about the M&A environment and pipeline hasn't gotten a ton of airtime lately, but how can you characterize that for us?

Albert Nahmad: That's a very good question. We are eager to see what owners of distribution businesses and HVAC are going to do with this existing very soft market. They may do nothing. They may continue or they may say, well, now it's time to do something. In terms of an M&A. And, of course, we have a great reputation with distributors because the way we treat sellers, we're very careful about relationship build continuing post-acquisition with the pristine leadership of the business acquired. So I can't say it's gonna happen, but I'm sure hoping. We have a very, very strong balance sheet. We could take advantage of opportunities as they come.

That I cannot I can only tell you that well, I can't disclose it, but there is one that we think that without disclosing much more than that, that is of size. We'll see how that turns out. It's still under study.

A.J. Nahmad: Yeah. I would say rest assured we're having as many of those conversations as we can. We're super ambitious, and we have the balance sheet. To support anything we want if we can manage to muster up. So hopefully, it can be an exciting period in M&A.

Tommy Moll: Thank you both. I'll turn it back.

Operator: And our next question will come from David Manthey with Baird. Please go ahead.

David Manthey: Morning, David Manthey. Hey. Good morning. Was wondering if you had any thoughts on consumer preference during this product transition, like are you continuing to see a premium on the R410 systems? And then as people are buying the A2L, are they gravitating to one end or the other?

Albert Nahmad: I wonder who in our Oregon who in our team can respond to that.

Paul Johnston: Well, Paul Johnston, are you the one, Paul Johnston? You always are. Yeah. The industry really hasn't popped as far as high-efficiency product. You know, it's still at the entry level. I mean, we're at you know, basically using the old SEER rating. We're at we're at above 15 SEER for minimum efficiency. So it's high-efficiency product. So we really haven't seen a change in the direction of the industry. It's still very much sliding along the idea that it's going to be whatever the minimum efficiency is. And that represents probably 85% of the market. That has not changed. And then when you get into the brands that we're selling, the brands have been consistent throughout the year.

And they continue to hold steady. You know, we're seeing the Carrier brand and the Rheem brand you know, and the Goodman brands all doing their job and holding up their share of the business. We're not seeing a migration to a lower branded product. No.

David Manthey: David Manthey, I was just to just to just to add to that for the fun of it. If I look at brands, products, markets, customers, geographies, north and south, east and west, and we're selling, you know, close to 20 brands. The first half of the year is very consistent amongst you know, that collection of data points. So nothing stands out, Dave, and I don't think this has been disruptive to what kind of the baseline products being sold is going on.

A.J. Nahmad: Yeah. The exciting anomaly, though, and I think it's in our press release, is OnCallAir. When our customers are using the tool that we've created for them, which we call a sales engine, they are selling high-efficiency systems at a much higher rate, like the inverse amount. Meaning, I think it's, like, 70 or 75% of the time, a contractor is selling using OnCallAir. They're selling high-efficiency systems. When we can help influence that through that tool, that's powerful because the consumer gets a better product, the contractor makes a bigger ticket. As do we. It's a win-win-win.

David Manthey: It sounds good. Thanks for all the color there. My follow-up it's the first time we've seen other do better than the equipment in a long time. And as Paul Johnston said, the residential new construction is not helping. I assume all the ductwork and thermostats and things in the other category. So should we not read into this that there's a stronger fix versus replace trend this quarter? Or is it I don't know, commodities, or I'm just making this up. But any thoughts on that?

Paul Johnston: That's pretty small. You know? When you take a look at the entire marketplace, you know, you just take compressors. You know? The normal demand for compressors in The US was about a million two to a million three. And the balance of them go warranty. Because you have a five and a ten-year warranty on most of the equipment. You take a look at the equipment side, it's seven to 8 million units. So for the offset of a down market, on the unit side, through additional parts, yes, it's gonna help our gross margin. But, no, it's not gonna help the top line. It's not gonna help your revenue line.

The ratio is just too great between what parts represent versus equipment. Are we seeing an uptick? Yes. We started seeing an uptick in June. Which historically is the month in which you're going to see that up. It's continued into July, but we really haven't seen a radical increase in units. We've seen an increase in dollars more than we have units.

Albert Nahmad: Now let's not mislead either. Our sales in the new quarter are not they're pretty flattish. Small incremental. Low digit increase. They're not it's nothing that does not signify a major double-digit increase yet.

David Manthey: No.

Albert Nahmad: Thanks very much, about you yeah. When we talked about unit growth of compressors and coils, things like that, year to date is single digit. It's not, you know, it was not an avalanche of transition to that. It could be us just selling more compressors in the market. And I think you heard Carrier talk yesterday very directly about that, and they're talking to you know, 150 independent distributors when they're answering your question to that. So it's obviously an opportunity to sell more parts, but the wholesale trend is not something that I think is quite in the numbers yet.

David Manthey: Yeah. Thanks, Barry. Well, and somebody mentioned earlier, the M&A. We're very eager to do more M&A. Sometimes opportunities arise when you have these kind of markets. I'm sure hoping for it. Are we shut down again?

Operator: Oh, our next question will come from Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Jeff Hammond: Morning, Jeff Hammond. Good morning, everyone. Is this Real Al or AI Al?

Albert Nahmad: It's a combination.

Jeff Hammond: You have to figure it out. You see? I know it's the real Al. Yeah. That's a good one. Yeah. To clarify on the flattish sales comment, was that parts for July, or is that overall?

Albert Nahmad: Overall.

Jeff Hammond: Okay. Overall. And then just on invent back to inventories, can you just you know, maybe talk about you know, where you wanna ultimately get your turns to? I know you were kinda running four and a half. Turns a year, you know, pre-COVID and pre all these regulatory changes, and now you're kinda three to three and a half. And know, kinda where you see that happening over and over what time frame?

Albert Nahmad: Well, first of all, let me compliment you on the day. You're right about those turns. I'd like I'm not I'm not gonna put a time limit on this, but I'd like to get to five. At some point in time, giving all the technology we're investing in it, I'd like to get to five.

Paul Johnston: I mean, you could think about it. Pre yeah. Pre-COVID, we were at four and a half. We didn't have the technology investment in inventory systems and the management systems that we currently have. So as we come out of it, I think Albert Nahmad's goal of five is very attainable.

Albert Nahmad: We have what we call the dream plan. We may have mentioned it before. Actually, dream plan two because the dream plan one was achieved after three years of effort, and dream plan two is a new. I mean, may take three years to do that. Dream plan two is $10 billion in revenue, 30% in gross profit margin, and five times on the inventory turn. And that's the those are the targets that we're focused on.

Jeff Hammond: I remember when it was 10% growth and 10% margins for a $100. You guys blew through that one.

Albert Nahmad: Believe it or not, though. Believe it or not, that was twenty years ago.

Jeff Hammond: Yeah. Boy, that's this is a hell of a history lesson here today.

Albert Nahmad: Yeah. Yeah. That's pretty impressive. Yeah. I'm so impressed. For the and for those 20-year-old listening to us, Jeff Hammond is right. We're call Pan and Chemicals a 100. It was called ten and ten equals a 100. We got our management team together and rallied around that. Many of them thought Albert Nahmad was out of his mind. And, obviously, we've blown past that, you know, some time ago.

So we reinstituted that cultural you know, kinda concept about six months ago, actually, a year ago, and got everyone together and some of the initiatives that you're not asking about today that you will ask about as we develop them is built on that dream plan two concept and if we got had 75 other Watsco core managers on this call, you would you'd be able to ask them about it, not just ask us just know that culturally, those kind of things go on, and we have fun with it.

A.J. Nahmad: Yeah. And culturally, I mean, really, the takeaway is that we're super ambitious. And that's why we're investing in these big goals that we expect to hit. In time.

Albert Nahmad: And truth is that we also have an equity culture. That really inspires people to achieve and to meet the goals set by senior management. Which means what is the equity culture? Many, many, employees hold the Watsco shares. Either through a 401k or through the different stock plans. And we like that. We like the ownership culture to be spread out. Throughout the organization. It's very unique. And it's very extensive. And so that ownership culture drives their desire to meet goals, I think. And I've always used it, and it's been working. And I expect it to continue working.

Jeff Hammond: Great. Thanks for the time, guys.

Operator: And our next question will come from Patrick Baumann with JPMorgan. Please go ahead.

Patrick Baumann: Good morning. Morning. Thanks for taking my questions. Maybe I was just curious if you could provide some examples of the large enterprise institutional customers that you cite as offering emerging opportunities for growth? Like, and what and what exactly are you doing to go after them?

Paul Johnston: Sure. Sorry? Paul Johnston? Go ahead, A.J. Nahmad. I would I would have A.J. Nahmad into that. Yeah. A.J. Nahmad? Yeah. So I'll jump in first.

A.J. Nahmad: And know, we teased some of this in our press release and also teased that we want you guys to come down to Miami and spend time with us. And see it and hear it and feel it more succinctly. But it's a there are macro trends going on in our industry including private equity, trying to buy up and consolidate contractors. And between that and home warranty companies and other institutional type customers, they're emerging and have emerged would call it, multi-location contractors who may have some business in Florida, some in Texas, some in Tennessee, you name it. And with our size and scale, we should be able to we should be their preferred vendor.

We should be the most exciting place for them to buy product. But don't necessarily have a unified experience for them to take advantage of our whole offering and our whole scale. That's what we're building. We call it Watsco One. And it will be a it'll be exactly that. It'll be one interface for these large institutional type contractors to buy and secure the products that they need from any of our locations whenever they need it.

Patrick Baumann: Interesting. Is it doesn't. Right. It huge undertaking. It doesn't sound that way just using words. But we are a very, very decentralized system. And to aggregate to meet to aggregate ours. Our inventories, and our pricing systems, and all our support systems to meet the needs of a large national customer. That is it takes a lot of lot of initiative. And we're investing to compare all those tools to do that. But it should have a very significant impact once we've accomplished it. Because no one else has these capabilities.

Patrick Baumann: A follow-up to that. Would you see selling to, like, a larger national account contractor any different than I guess, you said it is, but, like, in terms of, like, they're buying capacity, is that something that you would see as a headwind for your gross margin over time?

Albert Nahmad: Of course. That's one of the Yes. One of the elements.

A.J. Nahmad: Would say yes. But we can also we also have the opportunity to sell them a lot more parts and supplies. But which has been discussed earlier. Have a higher gross margin profile. Right. That's why I think it's not so the answer is not so linear, Pat. It's because today, when we look at those big institutional type accounts we're largely selling them equipment, and we're selling them equipment in bulk. And so to broaden that offering means we're taking all else equal we're taking a customer, and broadening the mix of products we sell them, and that's generally accretive to margin at the end of the day.

Patrick Baumann: That makes sense. Okay. Yeah. I just Pat, I'm just gonna say this again for the more for the fun of it. I mean, a great home service is business you could invest in the last fifty years as Rollins. If you don't know the company, look it up. Mean, technology you know, deployed at Rollins you know, yielded 10% higher EBIT margins for their business over time. Right? So the question is, in our partnership with any customer of any size, do we have a business model, an that can help them grow, help them price products, help them you know, operate their business twenty-four seven. You know?

So part of the visibility of what we've done for most smaller contractors, the question is, is that a pliable technology for larger accounts and larger contractors? And it's not about just selling more stuff. It's about helping any kind of size customer operate their business more profitably through us. And our products just happen to be the one they'll scale with to do that with. So this is as much of a technology play as it is a product or any other, you know, any other kind of label you might put on it?

Patrick Baumann: Thanks. Thanks for the color. Sounds interesting and exciting. Maybe just switching gears on my next question on the operating cost side. I think you cite something in the release about targeting cost efficiencies for the rest of the year. Could you provide any color on, I guess, one, the 6% growth rate in the second quarter of SG&A expense? You mentioned cost of the A2L transition. I don't don't know how that kinda made it made it to SG&A, but if you give color on that. And then can you bend that growth rate in the second half with some of the cost efficiencies you're targeting?

A.J. Nahmad: Sure, Pat. I can I'll take a stab at the so first, let's take let's start with the 6%, and we said in the release that we made some acquisitions. We've opened some new locations. So about 25% of that 6%, is attributable to that. So you can think of you know, core SG&A growth, if we call it that, more in the four and a half percent range. Which is still, you know, higher than it should be in a down quarter. But that's kind of our starting point as we think about it.

Then when you think about just the day-to-day life in a branch, during a transition, if we have more inventory, it means that we've received more inventory. It means you need more people receiving that inventory. It means that you have more trucks coming to your locations. It means that you know, you're not optimizing, you know, what you have. It's not business as usual in the day-to-day of a in the day-to-day life of a branch. During such a large-scale transition and to underscore something we said earlier and mentioned in the release, this impacted every domestic location we have in The US, about 650 of them.

So that's where there was some inefficiency, as I would say, in the you know, the labor and the logistics side. And do we think we can bring that down and bring it more into balance in the end of the year? The answer is yes. Our leaders are working on that right now. One of the things that should naturally help that is that when we look at our inventory today, about five to 7% of that inventory is four ten a product. Which means we've largely received all the new product we're gonna get, and we've largely worked out of all the old stuff.

And that means that the branch can't get back to kind of its routine and should be a little bit more efficient in the back half of the year.

Paul Johnston: Yeah. Just to say it a little. My way. You know, as we sell through four ten a product, we need to make sure that we have system matchups that are selling in location. So there's a lot of transferring product within our network to make sure that we have the right systems in place that are sellable in a market where they are selling. If that makes sense. So there's some extra cost that's gone into that as well.

Patrick Baumann: That makes a lot of sense. Thanks a lot. I really appreciate the color.

Operator: And our next question will come from Damian Karas with UBS. Please go ahead.

Damian Karas: Hi. Good morning, gentlemen.

Albert Nahmad: Good morning.

Damian Karas: I'm curious how you're thinking about pricing through the rest of the year. On the equipment side, know, our price is pretty much set. For the rest of the year, and you're just gonna continue to get that benefit of the higher value mix flowing through. Top line. And do you foresee any changes on your parts and commodity supplies that respect to price? And just thinking about you know, further metals inflation and tariffs?

Paul Johnston: Yeah. I don't think on the equipment side, we're gonna see a lot of price increases going forward. On the non-equipment side, you know, Friday is copper day. 50% tariff start on copper. We've already seen about a 10% increase on some of those products that are heavily endowed with copper. So, you know, it's just it's just a matter of wait and see on some of the non-equipment type product. I think the equipment is pretty much in place, though.

A.J. Nahmad: Understood. Yeah. I would just say, let's just make sure, you know, when we I think what we're talking about is cost. Costing you know, the cost of our products and our equipment products I don't think we're expecting much change from our OEM partners. But on price, meaning our price to our customers, that's a con that's what the tooling and the technology enables. It's because every different customer has a different price on every product we sell and every region and every market. That complexity is opportunity. Trends and patterns and anomalies and outliers and segments that should be priced appropriately.

And so we run different I call them plays where we can measure and track when we make a change and that customer's price or a customer segmentation price or a cohort of customers pricing on different products. We can take that to market. We can measure and track, and we can see the impacts. And either double down or go on to the next play. So pricing will always be opportunity just to clarify that costing versus pricing.

Damian Karas: Got it. Got it. That's helpful. And I know this is never an easy task, but if you had to guesstimate, if you will, how much of a headwind to volumes in the second quarter do you think are attributed to are attributable to weather and the canister shortage you know, versus weaker housing and underlying, market demand? You know, I'm just trying to get a sense for what underlying demand might look like as you move past these more transient issues.

Paul Johnston: Yeah. I don't I know if we can I don't think the canister is a business. Yeah? Have anything to do with, with sales the second half of the year. You know, as far as the refrigerant we receive. I think it's gonna be what the consumer feels like, what the weather patterns are gonna be like, how we're able to react and meet inventory demands that the consumer need or that the contractor needs to handle the consumer. I think it's just gonna be blocking and tackling in the second half.

A.J. Nahmad: Yeah. I mean, I think real it's all been said, but has gotta be the noisiest year in HVAC ever be between the tariffs and the weather and consumer confidence and the canister shortages and the home building changes and interest rates and trading homes isn't happening as frequently. I mean, there's just so many things going on at macro levels, most of which are out of our control.

So it's a lot of noise in the industry, and our job is to win in any environment and emerge bigger and stronger and more profitable and take more share from our competitors, and that's I like where we sit in that equation because of our scale, because of our balance sheet, because of our willingness and ability to invest in technology. You know, I'm very, very pleased to be Watsco given all this noise.

Damian Karas: Really appreciate your thoughts. Good luck out there. Thank you.

Operator: And our next question will come from Nigel Coe with Wolfe Research. Please go ahead.

Nigel Coe: Good morning, guys. Appreciate all the color. Hi, Albert Nahmad. So just I think you mentioned four ten a well, 60% or thereabouts. For the quarter. I'm just curious how that trended or maybe where that's trending you know, right time you know, right now real time. And any concerns that you're holding too much for any inventory just given the demand weakness? And, you know or do are you are you confident you'll be done with that transition, you know, this quarter?

Albert Nahmad: I'm chuckling because that's very much on my mind. And, yes, we're doing something about it. So that we don't have that risk. And, Paul Johnston, you can answer in some detail if you'd like.

Paul Johnston: Yeah. It's less than 5% of our inventory at the pleasant time. You know, where we're really, you know, working our butts off is be able to get the right combinations that A.J. Nahmad mentioned before. Gotta have an indoor unit to go with the outdoor unit. And as you sell the inventory down, the pond gets lower, you end up with an indoor unit sitting in one city, and you end up with the outdoor unit in another. So we're putting those pieces together, which is gonna be a drag on SG&A know, with freight. Know, for a period of time here. But I think each one of our companies hear about it continuously that we need to reduce.

We need to keep the focus on four ten, get rid of it, and focus then on being able to sell the A2L product that we've got.

Nigel Coe: Does that mean that you give.

Paul Johnston: Yep. Yep. Yep. Sorry. Does that mean you're incentivizing, you know, that sell through of that? Sorry. Sorry.

Albert Nahmad: For cutting off that, but any does that mean you're incentivizing that process to make that happen?

Albert Nahmad: That's not how we work. We deal with the markets on a decentralized basis. Those are local decisions made by the local entities that we have.

Nigel Coe: Okay. And, Nigel Coe, I would just add to that. Just to add very quickly in terms of the progression of A2L. It's progressing very, very well. I mean, we ended the we exited the quarter in June with more than 80% sell through of the A2L product. And so that's a function of, obviously, diminishing inventory of four ten a, It's also a function of contractors transitioning and adapting well to the product. So, at this point, it's greater than 80% of our sell through as you'd expect.

Nigel Coe: Okay. That's great color. And then my follow-up is you know, what we've seen from you and from your suppliers is tremendously strong price prices holding, which is good news, but, obviously, volumes are incredibly weak. What are you hearing from your contractors? So are they are they asking for you know, some incentives here to try and stimulate some movements? Or are they content to just wait for rates to turn and perhaps demand picks up? Are you starting to get more inbounds on price reductions or discounts or incentives?

Paul Johnston: I don't think we're really getting a lot of feedback on getting lower prices in the market. There's not elasticity to market. If we drop the price two or 3%, it's gonna it's gonna stimulate a 10 or 12% increase in volume. Ain't gonna happen. So, you know, I think the contractor always wants the lowest price, the best price in the marketplace. So that they can compete fairly. But I don't think we're getting a lot of a lot of pushback right now from most of the contractors on the price.

Nigel Coe: Okay. Makes sense. Thanks, guys. Appreciate it.

Operator: And our next question will come from Sam Schneider with Northcoast Research. Please go ahead.

Sam Schneider: Hey. Hi. Looking forward to morning. How are you? Good. Looking Thank you. Looking forward for an excuse to come down to Miami pay for by my employer. So thank Well, you heard it. You did hear loud and clear. Right? Yeah.

Albert Nahmad: Oh, yeah. Let's wait till it goes out. That was great.

Sam Schneider: We'll welcome you when you're coming.

Albert Nahmad: Oh, yeah. No. Thank you.

Sam Schneider: So, look, just focusing on the mix shift which seemed to benefit margin. On parts. I was wondering if the shift was you know, in part at all due to the canister shortage where have people do more repairs. For the time being?

Paul Johnston: You know, most of the most of the canister shortage occurred in the first and the first in the second quarter. And it was something that we worked our way through. We made it through it. Now, as I said, we're seeing a lot more inventory coming in. It's going out as quickly as it comes in. I see it stopping sometime in early August. Early August is, what, two weeks away. So I don't think it's really playing on demand right now as heavily as it was before. I don't see any bubble capening on repair versus replace because of canisters.

Sam Schneider: Got it. Okay. And then just a real quick follow-up. Sort of on the same topic. But any sort of sizable shift to R32 based systems and if so, is that a temporary thing or more permanent in your view?

Paul Johnston: Well, it's only one manufacturer. Daikin, which we represent very proudly, with our Goodman and Amano lines, is R32. Rest of the industry is four fifty-four. So what we've seen is we've seen you know, excellent response from Daikin. To be able to help us with the 32. There hasn't been a shortage of 32. You know, when you get into the four fifty-four, it's been Carrier, Rheem, American Standard, All of them sell four fifty-four units. Roughly 70% R32. It's a blend. Of 32 plus twelve thirty-four y f.

Sam Schneider: A big one. Are you seeing?

Albert Nahmad: That's happened three times, Harry. Yeah.

Operator: It paused the Operator, are you there? Yeah.

Albert Nahmad: I'm here.

Operator: Yes. I'm here.

Albert Nahmad: Is it Why are we tuning out?

Operator: We can go to the next to the next question? Okay.

Operator: Our next question will come from Chris Dankert with Loop Capital Markets. Please go ahead.

Chris Dankert: Good morning, guys. Thanks for taking the question. I guess circling back to WatscoOne, you guys sound excited and sound this is a pretty big opportunity. Is there any way to get a bigger than a breadbox sense here? I mean, we are we talking about serving 500 customer locations, 5,000, or is it too early to kinda get into that type of scaling?

Albert Nahmad: Well, maybe a better way to approach is what is our existing sales of parts and supplies? And what do we think we could provide? I don't wanna speculate too much. What kind of margin improvement do we think we can get from that? It's a very big chunk of our business, 30%. 30% of $7.5 billion. How much of that could we improve our margins on? I'm not gonna speculate, but there will be an improvement.

A.J. Nahmad: Right. You take any percent of that number and it's meaningful.

Chris Dankert: Makes sense. Makes sense. Well, thanks for that. And I guess maybe just to touch on the AI a little bit here. Can you give us maybe some examples for what the use cases are for App Watsco internally? I mean, how is this kinda helping your associates? Is this inventory positioning? Is it warranty data? What's the real use case here?

A.J. Nahmad: My gosh. There's so many. I'm at How much time do we have? Yeah. It is it's helping marketing folks design content and publish content. It's helping our software engineers write code and publish and push more technology faster. It's helping our their teams sort through data and understand trends and patterns and anomalies. It's helping our customer service folks get to more get through more cases more quickly with more accurate answers. And therefore helping our customers at a greater scale or greater rate. Increasing customer satisfaction I can go on and on and on.

And, like, it could be said in the press release, there's about 21 people a week internally who are using these tools or the tool and the ways that they're using it are more and more creative and fast.

Chris Dankert: So, I mean, it really is holistic then. It. Well, thank you so much for that, A.J. Nahmad, and thank you all for the time.

Operator: Absolutely. Chris Snyder with Morgan Stanley. Please go ahead.

Chris Snyder: K. Thank you. I wanted to on the four ten a inventory. I think you guys have less than 5% of your inventory. Do you have any sense, you know, for what that number could look like across your distributor competitors?

Albert Nahmad: No.

Chris Snyder: I don't think we really have any good intelligence on that. And we try not to figure that. That's irrelevant. But we Yeah. It's being phased out. We don't really care.

A.J. Nahmad: Fair enough. Don't care.

Chris Snyder: Chris Snyder, there's a couple data points. I mean, I think, you know, one peer of ours that also distributes their product gave a data point on that, in terms of what their sell through is, and it was pretty high. The other data point these are all anecdotal. This is not science. It's aggregating anecdotes. Is, you know, when we are talking to M&A targets, what do they tell us about their philosophy and their positioning and as a reminder, most of this stuff was built prior to December 31 and shipped in the first quarter.

So someone would have to make a pretty big bet on inventory and would have to really leverage their balance sheet to do that. And so our sense, just by having these conversations in the channel with the M&A targets, is that they're largely phasing out of four ten a at about the same pace we are.

Chris Snyder: Thank you. I appreciate that. And if I could, you know, maybe follow-up on a different sort of inventory question. I guess it's kind of surprising that volumes remain down materially, it seems like, July. You know, with the weather picking up. Does that change the way you guys think about how much inventory is downstream at your customers? You know, could they have been holding extra stock? And perhaps that's why, you know, the sell through has been softer. Thank you.

Paul Johnston: I would say some of the bigger contractors may have some inventory. Inventory at the contractor level is not really material to our industry. It's being held at the distribution point. Not at the contractor point. So I don't think it's a big deal, you know, with the contractor. I would always also remember that you know, in Florida, it's either hot or hotter. It's not it's not just hot, you know, all the time. It's hot. So we've not had a cold summer down here. We've not had a cold summer in Texas.

Where the weather really impacts us is up north where we've got know, where it's you've got a chance out of every third year that you're gonna have a hotter normal summer. Or a normal summer or a lower than normal summer. And so we are definitely seeing a lot of regional differences in the volume. Based on weather. But in the South, we're not really seeing much movement because it's hot in Florida or hot in Texas. It's always hot.

Chris Snyder: Thanks. I appreciate that, Chris Snyder.

Operator: And this concludes the question and answer session. I'd like to turn the call back over to Albert Nahmad for any closing remarks.

Albert Nahmad: Well, thank you for your interest. I love the questions, and that shows a lot of interest. And I hope we've answered your questions fully. And if not, please contact us on your own. And we'll respond to whatever questions you may still have. And other than that, look forward to having you visit us in the cold months that are coming. We'll give you more detail. Thank you. Bye-bye.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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DATE

Tuesday, July 29, 2025 at 8 p.m. ET

CALL PARTICIPANTS

Chief Executive Officer — Jonathan Stein

President and Chief Operating Officer — John Gatling

Chief Financial Officer — Mike Chadwick

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RISKS

Mike Chadwick cited an incremental $15 million in expected interest expense for full year 2025, mainly due to a higher debt balance following the repurchase transactions, as a negative driver in net income guidance.

Guidance for full year 2025 includes an incremental $15 million in expected income tax expense resulting from ownership changes, as reported by Mike Chadwick.

TAKEAWAYS

Throughput Volumes: Gas processing averaged 449 million cubic feet per day, crude terminaling reached 137,000 barrels per day, and water gathering averaged 138,000 barrels per day.

Growth vs. Prior Quarter: Gas processing and oil terminaling volumes increased by approximately 6% and 10%, respectively, from the previous quarter, reflecting strong upstream production and system availability.

Adjusted EBITDA: $316 million in adjusted EBITDA for the second quarter, up from $292 million in the first quarter, driven by a $30 million increase in total revenues, excluding pass-through revenues, primarily from volume growth in the second quarter.

Segment Revenue Drivers: Gathering revenue increased by $16 million, processing by $9 million, terminaling by $4 million, and third-party services by $1 million compared to the previous quarter.

Costs and Expenses: Excluding depreciation, pass-through costs, and LM4 earnings net, costs rose by $6 million from the first to the second quarter, mainly due to seasonal maintenance and higher third-party processing fees in the second quarter.

Adjusted EBITDA Margin: Maintained at approximately 80% in the second quarter, which is above the company's 75% target.

Capital Expenditures: $70 million in capital expenditures for the second quarter; Full-year 2025 capital expenditures guidance remains unchanged at $300 million.

Net Income: $180 million in net income for the second quarter, up from $161 million in the first quarter; Full-year 2025 expected net income range raised to $685–$735 million following updated interest and tax costs.

Adjusted Free Cash Flow: $194 million in adjusted free cash flow for the second quarter; Updated full-year 2025 adjusted free cash flow guidance is between $725–$775 million.

Distributions: Annual distribution per Class A share is targeted to grow at least 5% per year through 2027. The latest quarterly distribution in the second quarter included growth beyond the annual target after repurchase transactions.

Share Repurchases: The $200 million repurchase in May 2025 included public shareholders for the first time. The company is maintaining an approximate cadence of $100 million in share repurchases per quarter, but actual amounts may vary.

Leverage and Credit Rating: Senior unsecured debt upgraded by S&P to BBB- investment grade.

Liquidity: $273 million drawn balance on the revolving credit facility at the end of the second quarter, with management citing sufficient trading liquidity for ongoing buybacks.

Financial Flexibility: More than $1.25 billion available through 2027 for further unit and share repurchases and incremental shareholder returns.

Governance Changes: New board structure now requires approval from at least one independent director on major decisions, following GIP's full exit and Chevron’s governance participation.

SUMMARY

Hess Midstream LP (NYSE:HESM) reported record operating metrics for the second quarter of 2025, including sequential increases in both throughput and adjusted EBITDA (non-GAAP), supported by strong upstream performance and system availability. Management reaffirmed full-year 2025 guidance for volumes, capital expenditures, and adjusted EBITDA, while incorporating higher interest and income tax expenses into updated net income and cash flow projections. The company maintained its shareholder return strategy, including a targeted 5% annual distribution growth per Class A share through 2027 and a consistent share repurchase cadence, all underpinned by an upgraded investment-grade credit rating and revised board governance requirements to ensure balanced oversight after GIP's exit.

Jonathan Stein stated, Senior unsecured debt was upgraded by S&P to an investment grade rating of BBB- following the close of the Chevron Hess merger, highlighting enhanced credit quality.

Mike Chadwick confirmed, We are maintaining our adjusted EBITDA guidance range of $1,235 to $1,285 million for 2025, directly addressing second-half expectations.

Shareholder return flexibility extends to over $1.25 billion in potential excess capital available for distributions and buybacks through 2027, as stated by management.

Jonathan Stein emphasized, "key decisions require the approval of one independent director" with this mechanism designed to preserve a balanced governance model post-GIP exit.

INDUSTRY GLOSSARY

MVC: Minimum Volume Commitment—a contractual obligation between a producer and the midstream provider, ensuring baseline throughput for a set period, directly impacting revenue predictability.

GOR: Gas-to-Oil Ratio—the volume of produced gas relative to produced oil, an important factor in assessing basin maturity and infrastructure planning in oil and gas development.

ASR: Accelerated Share Repurchase—a mechanism allowing a company to buy back its own shares quickly, often from the open market and/or large shareholders, typically as part of capital return programs.

Full Conference Call Transcript

Jonathan Stein: Thanks, Jennifer. Welcome, everyone, to our second quarter 2025 earnings call. I have a few opening comments, and I will hand the call over to John Gatling to review our operations and Mike Chadwick to review our financials. I wanted to first say that we are all excited and eager to work together with our new Chevron colleagues to continue to drive value for our shareholders. Our new board members, including our new chair, Andy Walls, Chevron's President of Downstream, Midstream, and Chemicals, have significant experience across the upstream, midstream, and downstream businesses and complement the operational and financial expertise of our current board members.

I am also excited to welcome Mike Chadwick to his new role as Chief Financial Officer of Hess Midstream. I've worked alongside Mike for the past twenty years as he's progressed through various financial roles at Hess Corporation. And we are fortunate to have his experience and leadership capabilities working with the midstream. I am also excited to step into my new role as CEO of Hess Midstream. Since our IPO, we have created value for shareholders through operational excellence and execution that drives a visible trajectory of growth and supported by a financial strategy that includes a differentiated combination of balance sheet strength and a priority on shareholder return.

With the continuity of the midstream team in place, we are excited to take this strategy forward as we continue to build Hess Midstream with a unique combination of sector-leading growth and shareholder returns. Today, I want to focus briefly on three themes. First, we continue to deliver outstanding operational performance, which you can see reflected in the quarter that we reported today and also in our fourth annual sustainability report, which we issued a few weeks ago and which highlights our commitment and track record of safe and reliable execution.

In the second quarter, throughput increased across all segments, and we are in line with our annual guidance for volumes to grow by approximately 10% across all oil and gas systems in 2025, compared with 2024. Second, we continue to deliver outstanding financial performance. We are estimating an approximate 11% increase in adjusted EBITDA growth in 2025, with approximately 7% growth at the midpoint in the second half of the year. With total expected capital expenditures of approximately $300 million, we expect to generate adjusted free cash flow of approximately $725 to $775 million, which more than covers our targeted 5% annual distribution growth and generates excess free cash flow.

And third, we are committed to our ongoing financial strategy, which prioritizes return of capital to our shareholders and has made Hess Midstream total shareholder return yield one of the highest of our midstream peers, while also maintaining one of the lowest leverage ratios. Highlighting our balance sheet strength, last week Hess Midstream senior unsecured debt was upgraded by S&P to an investment grade rating of BBB- following the close of the Chevron Hess merger. Since 2021, we have returned greater than $2 billion to shareholders through accretive repurchases and have increased our distribution per Class A share by more than 60%. To 5% targeted annual distribution growth and distribution level increases following each share repurchase transaction.

We expect to generate greater than $1.25 billion of financial flexibility through 2027 for incremental shareholder returns, including the potential for further unit and share repurchases over this period. With a consistent strategy at Hess Midstream, we are excited for the future. We have a visible trajectory of growth that underpins our unique and ongoing return of capital, then Mike will review our financial results and guidance. In the second quarter, Hess Midstream delivered record operating performance. Throughput volumes averaged 449 million cubic feet per day for gas processing, 137,000 barrels of oil per day for crude terminaling, and 138,000 barrels of water per day for water gathering.

Throughputs increased across all segments of our business, with gas processing and oil terminaling volumes increasing by approximately 610%, respectively, from the first quarter, primarily driven by outstanding upstream production performance and high midstream system availability. Turning to Hess Midstream guidance, we're again reaffirming our previously announced full-year 2025 oil and gas throughput guidance. In the third quarter, we expect volume growth from the second quarter across our oil and gas systems, partially offset by higher seasonal maintenance activity. Turning to Hess Midstream's capital program.

John Gatling: Our multiyear projects continue as planned. In 2025, we remain focused on the completion of two new compressor stations and associated gathering systems as well as continuing to progress the Kappa gas plant. Full-year 2025 capital expenditures remain unchanged and are expected to total approximately $300 million. In summary, we remain focused on executing our strategy of disciplined, low-risk investments to meet basin demand while maintaining reliable operations and strong financial performance. We expect our growth strategy to generate sustainable cash flow and create opportunities to return capital to our shareholders. I'll now turn the call over to Mike to review our financial results and guidance.

Mike Chadwick: Thanks, John, and good afternoon, everyone. I wanted to say first that I'm really excited to join the Hess Midstream team and look forward to meeting you in the future. Today, I'm going to review our results for the second quarter and our financial guidance, and then we will open the call for questions. For 2025, net income was $180 million compared to $161 million for the first quarter. Adjusted EBITDA for 2025 was $316 million compared to $292 million for the first quarter.

The increase in adjusted EBITDA relative to the first quarter was primarily attributable to the following: total revenues, excluding pass-through revenues, increased by approximately $30 million, primarily driven by higher throughput volumes resulting in segment revenue changes as follows. Gathering revenues increased by approximately $16 million, processing revenues increased by approximately $9 million, terminaling revenues increased by approximately $4 million, and third-party services and other income increased by approximately $1 million. Total costs and expenses, excluding depreciation and amortization, pass-through costs, and net of our proportional share of LM4 earnings, increased by approximately $6 million, primarily from higher seasonal maintenance activity and third-party processing fees. Resulted in adjusted EBITDA for 2025 of $316 million.

Our gross adjusted EBITDA margin for the second quarter was maintained at approximately 80%, above our 75% target, highlighting our continued strong operating leverage. Second-quarter capital expenditures were approximately $70 million and net interest excluding amortization of deferred finance costs, approximately $52 million, resulting in adjusted free cash flow of approximately $194 million. We had a drawn balance of $273 million on our revolving credit facility at quarter-end. In January, we announced that we are targeting annual distribution per Class A share growth of at least 5% through 2027, which is supported by our existing MVCs.

This week, we announced our second-quarter distribution that included our targeted 5% annual growth per Class A share and an additional increase utilizing the excess adjusted free cash flow available for distributions following the repurchase. Turning to guidance. For 2025, we expect net income to be approximately $175 million to $185 million and adjusted EBITDA to be approximately $315 to $325 million, reflecting higher volumes and revenues partially offset by seasonally higher maintenance costs. We also expect CapEx to increase in the third quarter consistent with seasonally higher activity levels.

For the full year 2025, we are updating net income and adjusted free cash flow guidance to include the impact of an incremental $15 million in expected interest expense mainly on higher debt balance following the repurchase transactions completed so far this year. The updated net income guidance also includes the impact of an incremental $15 million in expected income tax expense resulting from ownership changes following the previously completed secondary equity offerings and repurchase transactions. As a result, we now expect net income of $685 to $735 million. We are maintaining our adjusted EBITDA guidance range of $1,235 to $1,285 million, implying growth of approximately 707% in adjusted EBITDA at the midpoint in the second half of the year.

With total expected capital expenditures of approximately $300 million, we now expect to generate adjusted free cash flow of approximately $725 to $775 million. With distributions per Class A share targeted to grow at least 5% annually from the new higher distribution level, we expect excess adjusted free cash flow of approximately $125 million after fully funding our targeted growing distributions. We continue to have more than $1.25 billion financial flexibility through 2027 that can be used for continued execution of our return of capital framework, including potential ongoing unit and share repurchases. This concludes my remarks. We will be happy to answer any questions. And I will now turn the call over to the operator.

Operator: Thank you. Please press 11 on your telephone. And wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Jeremy Tonet from JPMorgan Securities LLC.

Praneeth Satish: Hey. Good morning. This is, Roth and Reddy on for Jeremy. I wanted to start off with the Hess deal now closed. If you guys have any insight into Chevron's view in the '26 and '27?

John Gatling: Yeah. Maybe I'll touch on it, and then Jonathan and Mike can hit it as well. But just from our perspective, we're currently running four rigs. We've seen very strong upstream performance, well delivery with our increased laterals. The midstream availability has just been phenomenal. You know, we'll continue to execute strongly and stay focused on that. And as we do every year, we'll update our development plan as we get an update with Chevron coming in as our sponsor. So that'll happen towards the end of the year, and then we'll be issuing guidance in January.

Praneeth Satish: Got it. Thank you. And then turning to capital allocation, wondering if you could talk a little bit specifically about your appetite for buybacks at current prices and with GIP sell down now complete, if we should think about any change in the magnitude of repurchases going forward?

Mike Chadwick: Yeah. So with buybacks, as we announced in January, we have about $1.25 billion financial flexibility through 2027, and we expect to do multiple repurchases a year as we've done in the past. So there's no change to that guidance. As we previously mentioned, our January repurchase that was in lieu of not having completed a repurchase in Q4 of last year. Our May repurchase of $200 million which included the public for the first time, that got us back into our cadence of about a hundred million every quarter. However, the size of that is not set in stone. But, generally, a $100 million a quarter is what we will be completing.

We have done over the last couple of years.

Jonathan Stein: And this is Jonathan. You know, as we said at the beginning, as I said in my comments, you know, overall, there's no change to our strategy in terms of our business strategy and to our financial strategy. And you saw that just this week, we issued, as Mike said, our quarterly dividend announcement on Monday night that included our distribution level increase as well as the $200 million increase following the $200 million share buyback that we did earlier. So, you know, really no change in return on capital program going forward. You mentioned GIP. Obviously, GIP out in terms of secondaries. You know, that's not something that we expect.

But in terms of return on capital, which is really always focused on that framework that continues as is.

Praneeth Satish: Makes sense. Thank you, guys.

Jonathan Stein: Thank you.

Operator: One moment for our next question. Our next question comes from the line of Samuya Jain from UBS.

Samuya Jain: Hi, good afternoon. Congrats on the quarter. I was wondering how are you guys seeing GORs trending in the near term? And along with that, what's your outlook on the Bakken heading into 3Q?

John Gatling: Yeah. So the GORs really haven't changed you know, as the basin matures over the longer term. GORs are expected to increase, which they're acting as exactly as we would expect them to. Looking at the North Dakota pipeline authority, Justin Crinstead and the team there, kinda looking at longer term basin growth in the in the gas space And it is anticipated that Bakken Gas Is Gonna Grow Over The Long Term, And We Would Expect The Pest And Chevron Bakken volumes to basically do the same trend the same way. So we're expecting oil to remain in the in the pipeline authorities forecast. They're expecting oil to remain flattish. With gas growing over the longer term.

Samuya Jain: Got it. Thank you. And then could you detail where gas processing volumes are at now over the past month? Any changes to note? We're just trying to understand the cadence, and same with oil terminaling.

John Gatling: Yeah. I think, generally speaking, we've seen an it expect to continue to see the growth through the end of the year, as our guidance has supported that. So, again, we had a very, very strong second quarter. We do continue to expect to see growth into the third and fourth quarters and finish the year at guidance. So I would say you would continue to see that growth through 2627 as the as the MVCs have kind of outlined. And, again, if there's any if there's any changes to the development plan, that'll happen, as part of our normal annual development plan process and that'll be updated in, in January.

Samuya Jain: Got it. Thank you.

John Gatling: Yeah. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Doug Irwin from Citi.

Doug Irwin: Thanks for the question. Congrats Jonathan and Mike, on the new roles as well. I just want to start with the guidance range here. If I just take the first half of guidance, first half 25 guidance just in the aggregate, I think you're turning about $15 million above the guided midpoint here year to date. And now third quarter is pointing to a bit more growth from here. I guess is it fair to say you're turning above the annual midpoint at this point, or there may be some variances versus your initial outlook that is kind of shifted around the timing throughout the year here versus your initial second half exit patients.

John Gatling: No. Maybe I'll touch on the operational side, and I can hand it over to Mike and Jonathan. But, overall, we again, we had an extremely strong second quarter. You know, very little weather impact. Essentially, maintenance activity. You know, coming out of the first quarter, which was a bit more challenging, you know, we were really just trying to stabilize operations, and I think we were very pleased with how both the upstream performed, but also how the midstream performed.

We're gonna continue to see that growth going into the third and fourth quarters, but you know, as we transition in, we are expecting to see a little bit more maintenance in the in the second half of the year. And that'll probably be kind of in the in the later part of the year. We're still kind planning all of the all of the activity, but there's there's still there's still some room there. And we're again, I think we're we're still very comfortable with the guidance that we've got currently. Yes. Thanks, John. And I'll just tag on the back of that as we

Mike Chadwick: have seen, we're keeping our adjusted EBITDA guidance for the year, which already includes quite a lot of growth baked into the second half. You know, as Jonathan said and I said in my notes, taking the midpoint of our full year guidance, we expect about 7% higher EBITDA in the second half of the year compared to the first half. And so while revenues are expected to grow on higher volumes, as John described, you know, phasing of maintenance costs means expenses are expected to be higher in Q3, and we also retained some winter weather contingency in Q4. And while winter weather can also lower maintenance costs, Q4 also typically see some variability in our allocation costs.

So we're keeping guidance there. For the second quarter.

Doug Irwin: Okay. That's helpful. Thank you. And then maybe another on buybacks, just asking a slightly different way. It's it's obviously early on in the relationship with Chevron here. I'm just curious if he you expect them to participate in buybacks kind of similar to how Hess did Or will buybacks moving forward pretty much be entirely dependent on buying back shares from public owners? And to the extent that you are buying back more public shares, does just general liquidity of those public shares impact kind of your ability to maintain the run rate? Kind of in as smooth of a cadence as you have in the past?

Jonathan Stein: Sure. This is Jonathan. Yeah. Look. I there's no change as we had said in the past, you know, when we had secondaries and buybacks happening, simultaneously, they're really two separate objectives, while the secondaries were changing ownership levels, the buyback program is really just to return a capital program, and so you would expect over time that we'll have the same you know, participation more closer to the relative proportional levels of the public and Chevron going forward. So really no change to our approach there.

We did include, as you know, now we have the we have kind of road tested, I'll call it, or use, the ASR process last time to include the public in our buyback program. And you know, have that mechanism available for us to be able to do that going forward as well. So really no change there. And in terms of our liquidity, I think you've seen that our liquidity has, you know, continued to increase as we did all the secondary transactions and the public ownership went up.

Our, you know, our liquidity at this point and average trading volume is, you know, more than sufficient to handle our buyback program at the level we've done in the past and expect to do going forward. Great. That's all for me. Thanks, Sean.

Mike Chadwick: Thank you.

Operator: One moment for our next question. Our next question comes from the line of Praneeth Satish from Wells Fargo.

Praneeth Satish: Thanks. Good afternoon. Also, congrats Jonathan and Michael, on the new roles. Maybe can you just provide any more context around GIP's decision to exit its investment in Hess Midstream back in May? I mean, I know they were selling down their stakes, so it wasn't really a surprise. But I guess why do it in May versus maybe after the merger with Chevron?

Jonathan Stein: Sure. So, you know, as you know, we've over the past you know, three years plus, we've been executing secondaries in a very disciplined fashion, each one increasing in size generally over time, and increasingly tighter discounts. So very disciplined approach. GIP saw an opportunity, as we'd always said, The second is based on demand from investors, and then GIP would have assess that relative to their value proposition expectations, and that existed in May. And so they continued taking that opportunity. They, of course, have their own investors and timeline and really, you know, really executing relative Timing. So, really, just continuing the disciplined execution that we had in the past and the opportunity presented itself.

Praneeth Satish: some investors have viewed GIP as providing an independent, voice that kind of helped balance, the sponsor interests with those of the public. So I guess with GIP now out, how do how do you think about the new governance structure versus having that third party institutional investor at the table?

Jonathan Stein: Sure. Yeah. No. We agree that, you know, one of our differentiating strengths relative to other sponsored midstream companies has been our balanced governance. And certainly with GIP, historically, part of the board that provided some, you know, level of that. So consistent with that approach, as you saw, we updated our governance in June following the GIP's exit. And that included that certain key decisions require the approval of one independent director That includes things like leverage above a certain level, issuing equity, or major capital decision among other key strategic decisions. That mechanism is now in place.

As you know, we're adding also a fourth independent board member, but this mechanism is in place independent of the number of board members at the time or the timing of the fourth independent member joining the board. So I think it really highlights our continued belief in the value of a balanced government model that we've had historically. And then with this new mechanism in place that we will continue to have going forward.

Praneeth Satish: Got it. Thank you.

Operator: Thank you. One moment for our next question. Our next question comes from the line of John McKay from Goldman Sachs.

John McKay: Hey, everyone. Thanks for the time. I wanted to pick up a little bit more on the Chevron side. I totally understand it's early and you're you'll have your annual review of activity levels later in the year. But Hess has been talking about this kind of 200 kboe a day target for a long time. Think we've kinda thought about that as the reasonable run rate for the footprint.

Could you maybe just acknowledging that can, I guess, change, but can you maybe just remind us of how that 200 a day level was set kind of what the thought process behind it was, and then, you know, maybe from that, any read on why that might be the right level going forward?

John Gatling: Again, I think, as we think about the 200,000 barrels a day, it was really kind of hitting the over a 100,000 barrels a day of gross oil. Or of net oil and then the gas growth over time. And as we've been doing just from a overall field development pamper plan perspective is we've really been trying to optimize the upstream drilling activity with the midstream infrastructure plan. And so it's it's really about having the infrastructure in place and then keeping that infrastructure as utilized as it possibly can be.

And so where when we looked at the build over time and looked at the infrastructure development and kinda where we felt like the development the field development from a drilling perspective was happening. We felt like that 200,000 barrels a day is about the right level. So, you know, outside of the two compressor stations that we're building this year, we're you know, in the process of progressing the Capa gas plant. You know, as far as material long term infrastructure, activity, we're we're kind of at that at that level where the infrastructure is stable.

And so from our perspective, you know, we're kind of looking at this as how does the drilling activity the infrastructure system really complement each other so that you get very, very high utilization of that equipment and really optimize the system itself. So that's that's really kinda where we are and how we've we've continued to look at it. And as we continue to look longer term, we'll we'll you know, look at our development plan again, which, again, it's a it's a very integrated,

John McKay: activity between the upstream and the midstream.

John Gatling: Know, that'll happen in the fall, and then we'll be updating our longer term guidance in, January.

Jonathan Stein: This is Jonathan. You know, one thing just to highlight, John really picked it up on the end, and I think it's important to highlight this stage, which is one of the historic strengths of Hess Midstream has been the partnership that we've had between the upstream and the midstream between Hess Midstream and the upstream and Hess to be able to develop the block in the most optimal way And you know, now as we go forward with Chevron, there's no change to that partnership. There's no change to the focus on both of us. Working together to optimize the Bakken and develop it, as John described.

And as he said, you know, that the normal process will continue where we get a updated development plan, We'll figure out what's the right infrastructure required to meet that development plan going forward. And then we'll update our guidance based on that going forward. So really continuing in that strong partnership that has really been a hallmark of our relationship historically.

John McKay: That's helpful, and that's all clear. Maybe just one related one. You've seen kind of increased efficiencies on the upstream side there, just what's been the latest commentary around related inventory life?

John Gatling: Yeah. I mean, I think, you know, we're still everybody gets still hung up on rig count and well counts and all of that. And, you know, really, as we move into an extended lateral program, it really is the lateral footage drilled. And so from our perspective, the overall lateral footage that's been drilled as far as what's available to develop really remains unchanged.

And in fact, we're actually seeing a little bit of growth in that space just from the standpoint of as those extended laterals become a bigger part of the portfolio, that creates opportunities for improved economics on those wells where they may be in more challenged areas But if you're drilling a three, four mile lateral, your the economics get much better, and that unlocks some of the of the rock that may have been challenged before. So I think we're we continue to be extremely optimistic in that space, and that's something that continues to be a tailwind for us as we as we look forward, for the basin development.

John McKay: Alright. That's clear. Appreciate the time. Thank you.

Mike Chadwick: Thank you.

Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.

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