The Boston Beer Company, Inc.SAMNYSE
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Operator: Greetings, and welcome to The Boston Beer Company Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, Mike. You may begin.
Michael Andrews: Thank you. Good afternoon, and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of The Boston Beer Company. I'm pleased to kick off our 2025 Fourth Quarter Earnings Call. Joining the call from Boston Beer are Jim Koch, Founder, CEO and Chairman; and Diego Reynoso, our CFO. Before we discuss our business, I'll start with our disclaimer. As we stated in our earnings release, some of the information we discuss and that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-Q and 10-K. The company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. I will now pass it over to Jim to share his comments.
C. Koch: Thanks, Mike. I'll begin my remarks this afternoon with an overview of our strategy and operating results before turning the call over to Diego to discuss our supply chain, fourth quarter results and 2026 financial outlook. Immediately following Diego's comments, we'll open the line for questions. As I look back on 2025, I'm pleased with how our operational discipline enabled us to deliver on our financial commitments in a challenging industry volume environment. Our 2025 depletions were down 4%, in line with the overall beer industry. Our disciplined Fewer Things Better Innovation approach drove a successful national launch of Sun Cruiser, which is both revenue and margin accretive. Efficiency improvements across our breweries and our productivity agenda drove 410 basis points of gross margin expansion allowing us to increase brand investment meaningfully. Our business continued to be highly cash generative with 2025 free cash flow of $216 million or $19.72 per share, which allowed us to repurchase $200 million in shares in 2025. Looking ahead into 2026, we expect industry volume headwinds to continue. As I previously discussed, consumers are tightly managing their budgets given economic uncertainty and there is pressure on the Hispanic consumer. Moderation trends are also having an impact on demand. And in certain states, hemp-derived beverages are competing for shelf space and drinkers despite recent federal regulations, which restrict their availability after November 2026. We continue to see long-term growth opportunities in the Beyond Beer category, which is 85% of our total company volume and where we are the industry's second largest player. From 2019 to 2025, driven by growth in hard tea and hard seltzer, the Beyond Beer category has doubled in volume and now represents 9% of total U.S. alcohol consumption. We expect that Beyond Beer's volume and share of the category will continue to grow as the drinker is younger and more diverse than traditional beer. We believe beer companies are the best positioned to service the Beyond Beer category as they have the production capabilities to produce these beverages and beer wholesalers have the infrastructure to service them. The Boston Beer Company's innovation capabilities, manufacturing infrastructure, best-in-class sales force and strong wholesaler relations provide a meaningful competitive advantage. This is reflected in the performance of Sun Cruiser, which was among the top volume gainers in RTD spirits in 2025 and quickly scaled into a top 5 RTD spirits brand. However, we have seen greater competition in Beyond Beer as consumers seek variety and more players enter the category. Combined with economic uncertainty, this has been a headwind for our volume performance. We continue to believe that the macroeconomic environment is a significant driver of weaker alcohol consumption trends and the deceleration in our leading brand Twisted Tea's performance. Our 2026 volume outlook of flat to down mid-single digits assumes that macroeconomic headwinds persist. We are highly focused on controlling what we can, maintaining or growing market share and investing behind our brands to position us well for when the environment improves. Our priorities for the year will be supporting our full portfolio of brands through advertising and local in-market execution investments developing margin-accretive innovation and driving margin improvement through productivity. We continue to believe that sustained brand investment is the right strategy to drive volume improvement over time. Building on our initiatives we began in 2025, we will continue reinvesting in our brands with new creative, additional compelling partnerships, activation around key events, including the World Cup and investing alongside our wholesalers in local market activation. We are partnering with some of our wholesalers to increase local brand building capabilities and improve execution on the shelf. This includes shared development of grassroots marketing plans and on-premise promotions, sampling local radio and billboard advertising. With respect to innovation, we continue to prioritize high-growth, margin-accretive opportunities. In 2026, we are focused on scaling Sun Cruiser in its second year of national availability while expanding the distribution of Sinless vodka cocktails to additional states following a successful test launch in 2025. Sinless is a very lightly carbonated vodka-based RTD cocktail with 0 sugar, 0 carbs and less than 100 calories per can. It is positioned as guilty of flavor free of sugar and carbs and targets incremental consumer segments that complement our core brand portfolio. We've made strong progress across our margin enhancement initiatives, which Diego will discuss further in his remarks. This has been a multiyear effort across the organization, and I'm pleased that we delivered margin improvement faster than we expected in this difficult operating environment. In addition to margin improvement, these initiatives have enabled us to achieve record high customer service levels in 2025 and lower our inventory days on hand. Our efforts across procurement savings, brewery efficiency and waste and network optimization will continue in 2026, and we're also in the early stages of adding revenue management capabilities to provide further long-term margin benefit. I'll now provide an overview of our brand performance and plans for 2026. In terms of depletions, we're encouraged by the strong consumer reception to Sun Cruiser, a third consecutive quarter of growth in Angry Orchard and Dogfish Head and positive drinker reception to our higher ABV offerings. Our larger brands continue to be impacted by the headwinds I discussed earlier, particularly Twisted Tea that overindexes with lower-income households and Hispanic drinkers. After starting the 2025 year with growth, Twisted Tea was down 6% in dollar sales in measured off-premise channels for the full year 2025 in an F&B category that was down 4%. The brand gained distribution in 2025, but declined in velocities, driven by category headwinds, a decline in features and displays and some interaction with Sun Cruiser and its competitors. Single-serve continues to perform much better than large packs, which tells us that consumer interest in the brand remains strong. We are working hard to ensure Twisted Tea maintains its fair share of display space. Numerator data shows approximately 20% of the drop in Twisted Tea is due to the Vodka Tea category, which includes Sun Cruiser. To the extent that Sun Cruiser sources volume from Twisted Tea, this is revenue and margin accretive for us. Despite some headwinds, Twisted Tea is the #10 brand family in the overall beer market and remains the clear leader in malt-based hard tea with over 85% market share. We're encouraged by the performance of Twisted Tea Light and the high ABV Twisted Tea Extreme, which have seen growth in velocities and have room to gain additional shelf space. Our 2026 plans include increased advertising investment with strong creative and local activation, adding new partnerships and launching new pack sizes and Twisted Tea Extreme flavor innovation. Twisted Tea has unique and clear brand voice and attitude, and our advertising plans include continuing to run our high-performing key drop national ads across many category entry points, including sports, ski slopes, beaches, lake and pool, complemented with in-store display programs. We'll also be adding always-on media for Twisted Tea Light and Twisted Tea Extreme. In 2026, we are expanding our partnerships that are most relevant to our drinkers such as Barstool's Pardon My Take, the #1 sports podcast, DraftKings, WWE Wrestling, country music's Chase Matthew, NASCAR, AMA Supercross and Motocross racing and Realtree Camo. Lastly, we continue to increase our investment in Hispanic and Spanish language brand content, including new media and digital content to widen the brand's appeal. With respect to pack sizes, we're expanding the rollout of our entry-level price point 4-pack, launching a 16-ounce can for C-stores to add a lower price point in addition to the current 24-ounce can and adding a 24 can value pack. Building on the success of our high ABV offerings, we've added a Twisted Tea Extreme variety pack that was launched in early 2026. Twisted Tea Extreme Lemon and Blue Raz are the #1 and #2 largest FMB growth SKUs in convenience and to further capitalize on the high ABV trend, we'll be launching new extreme singles flavors, Long Island Iced Tea, Fruit Punch and Tropical Punch. Our goal for 2026 is to improve share and grow volume in the overall hard tea category through showing progress in Twisted Tea and growing Sun Cruiser. We're very excited about the outlook for Sun Cruiser, which grew volumes over 300% from 2024 to 2025 and is expected to make a strong contribution to our hard tea portfolio this year. Sun Cruiser is built in the on-premise channel, where in some markets, it represents over 40% of the brand's volume. We believe this is the right way to drive trial and build the brand and are pleased that Sun Cruiser is the leading RTD spirits and lemonade brand in on-premise bars and restaurants according to Nielsen. Bartenders have been and continue to be a very important influencer group for Sun Cruiser. Sun Cruiser continues to expand its off-premise distribution, but given its strong presence in on-premise and independents, measured off-premise data still only reflects a portion of the brand's total volume. Advertising support for Sun Cruiser includes building an organic following through social media as well as more traditional content around the Let the Good Times Cruise media campaign, which includes television, paid social and digital advertising and key influencers. We'll be present where Sun Cruiser fits into our drinkers' lifestyles across sports and music. Sun Cruiser will have committed media presence in MLB, the NFL and the sponsorship of the AEG music concert series. And in 2026, we'll add exciting golf and ski partnerships. Golf programming includes tournament activations, golf media influencers and experiential marketing programs as well as wholesaler incentives. Additionally, Sun Cruiser is a key sponsor of Teton Gravity ski film festival along with ski resort sponsorships and samplings that help reinforce its position as a brand for all 4 seasons. From a product innovation perspective, we intend to keep a disciplined number of tea and lemonade styles while continuing to expand package options. In the first quarter of 2026, we added new single-serve 12.2-ounce packages and new tea and lemonade sampler 12-packs, which we expect will help expand drinker occasions and drive further growth in 2026. Turning to hard seltzer. The overall hard seltzer category declined 5% in dollars in measured off-premise channels for the full year 2025 as consumer preferences continue to shift towards more premium RTD spirits-based beverages. Our brand strategy for 2026 is to invest in new equity building creative, capitalize on the World Cup, launch new pack sizes and varieties and continue to expand Truly Unruly. Our advertising plans include leveraging our sponsorships of U.S. soccer as its Beyond Beer sponsor with targeted World Cup activation, along with our new creative platform that we recently launched called Make Your Dreams Come Truly. The 2026 World Cup, which will take place in North America for the first time in more than 3 decades, includes 11 cities, over 100 matches and 4 billion global viewers. Our Truly World Cup plans, which have been well received by major retailers include driving visibility and displays and launching a U.S. soccer collector set of singles along with the World Cup themed rotator variety 12 pack. In addition, we have significant local investments in the 11 host cities, including local media and retail program. High ABV offerings continue to be a bright spot in hard seltzer and Truly Unruly has grown to a 3% volume share of hard seltzer. Based upon drinker demand, we added a new Truly Unruly variety 24-pack in 2026. In cider, Angry Orchard has returned to growth behind a combination of new positioning and creative and a strong Halloween program, which included Friday the 13th movie-themed advertising, promotions, packaging and displays. Importantly, Angry Orchard's success comes from driving growth of the core offering. Our beer brands, Samuel Adams and Dogfish Head have combined to hold share in a challenging craft beer category. During the first quarter, we are excited that Samuel Adams will begin programs and promotions as well as launch limited edition packaging to help celebrate America's 250th anniversary. For Dogfish Head, we're particularly pleased that Dogfish Head's Grateful Dead beer collaboration and the brand's Minute Series IPAs have helped fuel Dogfish Head's return to growth. In summary, I'd like to thank our Boston Beer team and our distributors and retailers for their continued support. I'm encouraged by the progress we made in 2025 amid a dynamic environment. While consumers remain cautious and the near-term outlook is still challenging, I'm confident in our operating plans for 2026. We're continuing to invest in our brands. We're building a strong innovation pipeline, and we're highly focused on our multiyear productivity initiatives. Importantly, we're focused on controlling what we can control. We're executing in the marketplace to improve share trends and expand our margins. These efforts, along with our innovation capabilities, strong sales force and unique culture position us well for a successful long-term future. I'll now pass the call to Diego for a detailed review of the fourth quarter and our 2026 guidance.
Diego Reynoso: Thank you, Jim. Good afternoon, everyone. 2025 was a year of continued progress for Boston Beer in a dynamic industry environment. Disciplined execution and supply chain efficiencies enabled us to meet or exceed our financial commitments, including very strong gross margin outperformance. This margin upside enabled increased investment in advertising support for all our brands while still delivering EPS ahead of our guidance. Cash conversion was strong with $270 million in operating cash flow, and we ended the year with $223 million in cash and no debt. 2025 revenue was down 2.4% year-over-year, driven by shipments down 4.7% and 2.3 percentage points of positive price and mix. Price realization for the year was within our prior guidance of 1% to 2%, with the remainder being positive mix. We delivered 410 basis points of gross margin expansion with gross margin reaching 48.5%, inclusive of $10.1 million in tariff costs. Excluding contractual prepayments and shortfall fees, the gross margin was 50%. This is the highest full year gross margin rate since 2019. EPS of $9.89 was up 4.7% year-over-year, excluding prior year impairment and onetime contract settlement charges. This EPS growth was inclusive of a $61 million increase in advertising spend, while general and administrative expenses were flat. Turning to the fourth quarter results. Depletions decreased 6% and shipments decreased 7.5% year-over-year, primarily driven by declines in our Twisted Tea, Truly Hard Seltzer and Sam Adams brands that were partially offset by growth in the Sun Cruiser, Angry Orchard and Dogfish Head brands. As we expected, volumes slowed sequentially in the fourth quarter from the third quarter. Twisted Tea volumes continue to be soft and Sun Cruiser continues to show strength, but had a lower contribution in the fourth quarter due to seasonality. We believe distributor inventory of 4 weeks on hand as of December 27, 2025, is an appropriate level for each of our brands. Revenue for the quarter decreased 4.1% due to lower volumes, partially offset by increased pricing and favorable product mix. Gross margin of 43.5% increased 360 basis points year-over-year. Gross margin primarily benefited from improved brewery efficiencies, procurement savings, price increases and product mix as well as lower inventory obsolescence. These factors were partially offset by inflationary and tariff costs and increased shortfall fees. Advertising, promotional and selling expenses increased $8.4 million or 6.0% year-over-year, primarily due to incremental brand, media and local marketing investments of $8.0 million, with the remainder driven by higher freight costs. General and administrative expenses for the fourth quarter increased $4.5 million or 9.4% year-over-year, primarily due to increased salaries and benefits costs. We are continuing to execute on our 3 buckets of multiyear savings projects ahead of our initial timing expectations. We saw significant benefit in 2025 and have more savings to come in 2026, albeit at a lower rate. To be specific, in brewery performance, we continue to see improvements in OEE driven by process improvements, which helped to increase our internal production capacity. In the fourth quarter, we produced 99% of our domestic volumes internally compared to 85% in the fourth quarter of last year. Full year 2025 domestic internal production increased to 86% of our volume compared to 74% last year. In 2026, we expect to continue increasing the rate of in-sourced production, but at a smaller year-over-year benefit due to achieving a high in-source percentage in 2025. In procurement savings, our fourth quarter results benefited from lower negotiated pricing on certain packaging and ingredients. As discussed previously, procurement savings initiatives are the area where we have made the most progress over the last 2 years. While we expect some continued benefits in 2026, the impact is expected to be moderate. In waste and network optimization, we're continuing to enhance the customer ordering and trade inventory management system that we implemented last year. These efforts helped us achieve record high customer service levels that resulted in lower inventories internally and which helped improve our cash flow. In addition, we reduced obsolete inventory 71% in the fourth quarter and 48% for the full year. In addition to our 3 buckets of savings, we are beginning to add revenue management capabilities as part of our margin agenda. These efforts are in early stages in 2026 with a more meaningful contribution expected in 2027. Turning to our 2026 guidance. Our fiscal week depletion trends for the first 8 weeks of 2026 have declined 3% from 2025. We are currently planning 2026 depletions and shipments to be flat to down mid-single digits. Where we land within this range will be impacted by the pace of improvement in the overall consumer environment and the time it takes for our brand investment initiatives to drive market share improvement. We expect price increases of between 1% and 2% and some additional benefit mix. Full year 2026 reported gross margins are expected to be between 48% and 50%. Our outlook expects that we cover commodities and non-tariff-related inflation with pricing and that the lower shortfall fees and prepayment amortization broadly offset increased tariff costs. 2026 reflects a full year tariff cost estimate of $20 million to $30 million versus a partial year in 2025 of $11 million. These tariff cost estimates are based upon tariffs in place prior to the February 2026 Supreme Court ruling. We will continue to drive our savings initiatives to help buffer any volume deleverage. Our long-term gross margin target continues to be in the high 40s with any individual year dependent upon volumes, commodity inflation and tariff environment. As Jim discussed earlier, we expect to increase our advertising levels to support our brands. The investments in advertising, promotional and selling expenses are expected to increase between $20 million and $40 million. This does not include any changes in freight costs for the shipment of products to our distributors. We estimate our full year 2026 effective tax rate to be approximately 29% to 30%. We are currently targeting a full year 2026 earnings per diluted share of between $8.50 and $11. As you model out the year, please keep in mind the following factors. Our business is impacted by seasonal volume changes with the first quarter and the fourth quarter being lower absolute volume quarters and the fourth quarter typically our lowest absolute gross margin rate of the year. We have difficult shipment comparisons in the first quarter and the first half of the year as we shipped ahead of depletions in 2025 to build wholesale inventory of our product innovation, which included Sun Cruiser and Truly Unruly. We currently expect the first quarter and first half shipments to be down towards the lower end of our full year volume guidance, but with better shipment performance later in the year. During full year 2026, we estimate shortfall fees and noncash expenses of third-party production prepayments in total will negatively impact our gross margins by 40 to 60 basis points. We expect year-over-year gross margin rate improvement to be most meaningful in the fourth quarter. We typically expense the majority of our shortfall fees in the fourth quarter. We expect lower shortfall fees in 2026 and the timing of this benefit, together with the fact that the fourth quarter is a smaller dollar quarter has an outsized favorable impact on the gross margin rate. Incremental advertising investment is expected to be weighted to the second and third quarters to support the key summer selling season. Turning to capital allocation. We ended the quarter with a cash balance of $223 million and an unused credit line of $150 million, which provides us with ample flexibility to continue to invest in our base business, fund future growth initiatives and return cash to shareholders through our share buyback program. For the full year 2026, we expect capital expenditures of between $70 million and $90 million. These investments will be primarily related to our own breweries to build capabilities and to improve efficiency. We will continue to be disciplined in our capital spending as we monitor the dynamic industry environment over the long term. During the 52-week period ended December 27, 2025, and the period from December 29, 2025, through February 20, 2026, we repurchased shares in the amount of $200 million and $14 million, respectively, for a total of $214 million of repurchase since January 2025. As of February 20, 2026, we had approximately $215 million remaining on the $1.6 billion share repurchase authorization. This concludes our prepared remarks. And now we'll open the line for questions.
Operator: [Operator Instructions] And the first question comes from the line of Peter Grom with UBS.
Peter Grom: So 2 questions from my end. Maybe one on the gross margin outlook. I would love to understand what you're embedding or expecting as it relates to kind of underlying inflation. I'm sure you're aware of one of your competitors outlined as it relates to aluminum and the Midwest premium. So just curious what impact that may be having on your margin target looking ahead?
Diego Reynoso: Yes. Thank you for the question. So as you probably know, we do not hedge in aluminum. We've seen the aluminum Midwest premium continue to grow. So we are expecting a little bit of inflation, but not as much as we've had in the past. And that's kind of what we built into next year's margins.
Peter Grom: Okay. Great. And then I was hoping to get some perspective just on the year-to-date performance and just it's running a bit better than what you delivered last year as it relates to depletions, certainly better than what you saw in 4Q. So just as we -- just based on what we've seen, do you have a view on why the category seems to be doing better thus far? And maybe just as we think about the path forward, what are you expecting in terms of category growth from here?
Diego Reynoso: Okay. So I'll start giving you our numbers, and then I'll hand it off for Jim for the category view. So in our case, the biggest difference at the beginning of the year is the improvement in trends for Twisted Tea. And we're continuing our support of the brand and our investments, and we feel pretty good about how we started the year. From a category point of view, I'll hand it over to Jim to give his perspective.
C. Koch: Thank you. Peter, it's -- the category has clearly gotten better in the last, call it, 2 months, maybe it started in December. And we're basically seeing beer category trends maybe 2 or 3 points better than they were in 2025. 2025 was just, in some ways, kind of a black swan year. I don't think anybody in the industry expected beer to be down over 5%. And I think we all went into the year thinking it was kind of going to be down 2%, which would it be consistent with the previous 5 years of up and down through COVID, and then it turned out to be down a whole lot more without obvious, clear explanations for it. So I'd have to say that the improvement is certainly welcome. I wish I could tell you what was going on. I think there's been some moderation in the clamor around health and alcohol causes cancer. We had the government guidelines come out and be pretty much consistent with previously. It said it's okay to drink, just don't drink too much. I think that might have been helpful. Maybe the Hispanic community has adjusted to some of the new realities and found ways to come back and be visible and go to the stores and not send their kids to buy things. So there's some of that perhaps. I think the bloom is a little bit off the rose with hemp, partly because of what happened in November and the hemp loophole, so-called, being closed. So that might have contributed to it. So those are the best explanations I could come up with, but the numbers are the numbers. The category trends are down -- have improved by about 300 basis points. And I would like to tell you that our depletions are up -- have improved by that same amount, and it's all this great stuff that we did. But a lot of it is the whole category is healthier than it was 3 months ago.
Operator: And the next question comes from the line of Rob Ottenstein with Evercore ISI.
Robert Ottenstein: Terrific. Two questions. One, can you talk a little bit about the improvement at Twisted Tea? It sounds like what you're seeing there may be a little bit more due to your own interventions rather than the category. So just love to understand why Twisted Tea is doing a little bit better and if those particular actions are things that you expect to see follow through for the rest of the year? And then second, if you could talk about what's going on with shelf space, both at the kind of category or macro level, given all the declines that the industry has had, is the overall industry holding shelf space? And then how are you doing on the shelf space side, particularly in terms of both beer as well as the Beyond Beer area and the key brands?
Diego Reynoso: Jim, would you like to take the first part of that?
C. Koch: Absolutely. I think we do feel good about some of the actions that we started taking towards the end of last year with respect to Twisted Tea. We did some diagnosis, and we found that our pricing might have been too aggressive in certain markets, in certain packages, in certain channels, primarily 12 packs in supermarkets and maybe 20%, 25% of the markets, and we've worked with our wholesalers to fix those. Typically, it might be we were at $22 a 12-pack and $19.95 is a really significant price point reduction. So we addressed places where we were up at Stella Artois type pricing. And that does seem to have helped us in those places. We have also been more aggressive in pushing Twisted Tea Extreme and Twisted Tea Light, both of which are growing pretty nicely. And a little bit of just trying to get displays back because we lost some displays to RTDs, and we've been mildly successful in doing that. So there have been some direct actions, and those will continue in 2026 in addition to working with our wholesalers to do more local market support in terms of our sort of share the burden program with them where for every $3 we put into additional local marketing, they put $1 in. And so that's also been helpful both in terms of the actual spend itself and getting our wholesalers involved in making sure that Twisted Tea remains a strong and hopefully growing brand going forward. It's -- Twisted Tea is the #10 brand in beer. And for a lot of our wholesalers, it's in the top 5 or 6 brands. So it's important to them, and they've gotten engaged with that. In terms of your second question of shelf space, roughly -- well, for the industry, there has been some erosion of shelf space, though the erosion of beer shelf space has gone to RTDs. And while they are liquor-based, they kind of live and operate as beer, the same type of packages, same sort of price points. They're sold out of the cold box. So if beer loses some shelf space to RTDs, most of those are coming today from beer suppliers and beer distributors. So net-net-net, from all of that, there is not a -- to my -- from what I've seen, not a significant erosion of cooler space to beer. The possible exception would be in those states where hemp-based beverages have become really strong. They're not a lot of states, but you do have places like Louisiana, Tennessee, South Carolina, Minnesota, where they're reaching 5%, even 10% of beer dollars, and they're in the cooler. And they have taken some beer shelf space and in places like total wine, beer displays as well. And while the jury is still out, I think my betting is that the repeal of the hemp loophole will probably stand in Congress. And so the impact of the hemp-based beverages will diminish and won't go away. There's -- you can still have it at a state level. It just has some federal restrictions to it. But I believe we'll get some shelf space back from that in 2026.
Operator: And the next question comes from the line of Filippo Falorni with Citi.
Filippo Falorni: So maybe first, Jim, can you talk a bit about the plans for year 2 on Sun Cruiser and like what are the incremental distribution opportunities there? Obviously, you made a big push in 2025, but there's still quite a bit of white space. And then maybe some of the flavor innovation that you launched, what are the results, early results? And like is there potential to further expand into flavors?
C. Koch: Sure. Sun Cruiser had a great 2025. It grew almost 400%, firmly established itself within the RTD category. It's about the #5 RTD from kind of nowhere 1.5 years ago. So we were very happy with the success of Sun Cruiser. And a lot of that success happened without getting chain authorizations. We really didn't kick in with Sun Cruiser until the last quarter of 2024, which means we missed the window of presenting it to the chain. So we didn't get shelf placements in many chains. We did very well in Walmart. They really got behind it. But most of the other chains were very limited, 1 SKU, no SKUs. And that's now changing in 2026. So we're getting strong distribution support from a lot of the big chains, Albertsons, Safeway, Kroger and on down that list. So we're going to be well represented in accordance with being the #5 RTD. So -- and we're going to continue very high level of support, even add to our spending on Sun Cruiser. Some of it is things like national advertising and national programs and sponsorships. A lot of it is more local sponsorships, local billboards, lots of sampling, brand ambassadors, a lot of really grassroots work, especially on-premise, something like 40% of Sun Cruiser's volume is on-premise, and we believe that's how brands are built. And so we're going to -- they may not deliver the same volume of off-premise, but the volume that they deliver is much more brand supporting, if you will, for having it in a bar than buying a 6-pack in a convenience store. So we are not slackening at all. We're actually putting more fuel on the fire for Sun Cruiser, and we're looking forward to -- it's not going to grow 300% or 400%, but we're looking for it to be a major contributor, hopefully, to overall company growth in 2026. In terms of flavor innovation and that kind of -- that pipeline, the -- I guess the big news is one of our flavor innovations in 2025 has proved very successful. And so we are rolling it out. It's not entirely national, but it's 30-plus states. So it's close to national. And that innovation is a vodka cocktail, very, very lightly carbonated. It's called Sinless. It's 100 calories. So it enables you to have a spirits cocktail and still have the sort of guilt-free, no carbs, no sugar that you would get from a seltzer, but get a much bigger flavor profile. So we will see how that does, but we're optimistic enough to roll it out in the majority of the country. And then further up in the pipeline, we have things like just Hard Squeeze, which is a 10% juice product. It's alcoholic. We have a Social Pop, which is a kind of new wave soda with alcohol and Wild Leaf, which is an upscale version of Twisted Tea with lower calories, lower sugar and more leaning into the quality of the tea in the product. Those are still just in a handful of test markets. So I really don't have anything significant to report. But I can say that from our pipeline in 2025, we have a new quasi national launch in Sinless.
Filippo Falorni: Great. That's very helpful. And maybe a quick follow-up for Diego on Peter's question on the Midwest premium and aluminum. Can you give us a bit of sense of how you source aluminum, just given the big rise in the Midwest premium, it would imply that there's maybe a little bit more impact on the inflationary side in 2026, but maybe is there some sourcing, some hedging? Can you give us some sense of why it's not a big impact for you guys?
Diego Reynoso: Yes. So what we have is we have contracts with our suppliers that have a pass-through of the Midwest premium as part of the price. So -- and since we don't hedge it, we will get the pass-through as the premium moves during the year. So again, to the question, our expectation is there's going to be a little bit of inflation on the premium, but not. If that is different, you'll see that going through our P&L given that we don't have a hedge in place.
Operator: And the next question comes from the line of Kaumil Gajrawala with Jefferies.
Kaumil Gajrawala: Diego can I just follow up on that because I'm confused. If it's a pass-through, wouldn't that mean you get hit with fully of the big spike that we've had in the increase already?
Diego Reynoso: Yes. We -- like we get hit through the pass-through, and we did last year, and that was part of the reason that our costs went up in materials, but we were able to offset it by savings. So we do get hit by the premium as we go through the year.
Kaumil Gajrawala: I see. Okay. Maybe it was implied that you have less of an impact, but okay, I get it now. Jim, I guess, as you talked about the marketing, you laid out a lot of things. And it's hard for us to perhaps get scope on, is this higher or lower than perhaps where you were last year? I believe ad spend might have been up double digits last year and it's expected to be up again this year. But when you put this all together, it seems like there's some big increases in investment. We haven't really seen volumes turn yet. So is that lack of idea? Do you feel like maybe you're investing in the wrong places? Is that course corrected for '26? Or maybe just trying to make that connection between the increases in investments and still having sort of declines on volumes?
C. Koch: That's a really good question. Let me see if I can sort of clarify it, maybe simplify it. When we think of investing behind our brands, it's -- sometimes we use media as a term, but more appropriately, you should think of it as brand support, of which media is a component, but -- and probably the biggest, but there's a whole lot of other stuff that we have, which you could think of as more sort of local market execution including salespeople and including the point of sale that they put up and that accompanies them as an expense. It includes a lot of local sponsorships. It includes things like sampling teams, brand ambassadors, distributor incentives. It's a fairly long and diffuse list of things. And media is only, I don't know, depending on how you want to run the numbers, 25%, 30%, 35% of it. But the other is a whole bunch of little -- what is meaningful to us that drives local market execution. And that's -- our brands have kind of been built with a lot of grassroots efforts since day 1 when I was selling the beer from bar to bar. And to get to your second question, well, how come we're spending all this additional brand support money and we're still declining? I think it's a really good question. And believe me, it's one that I ask to make sure that we're not wasting a lot of money on this. I guess in total, we were down last year 4%. The overall beer category was down a little more like 5%, 5.5%. So I think some of it was spent to do that. And a significant amount of the increase in 2025 was spent behind Sun Cruiser and I view Sun Cruiser as it's a strong brand now in a category that's growing double digits. And in my world, that's kind of -- in the old BCG matrix, that's a star. That's a place where you overinvest to get growth and you keep doing that as long as the categories got high single digits, low double digits growth. So we definitely overinvested in Sun Cruiser. Did that pay off? I have to say, yes, it did. I mean we went from kind of nowhere to the #5 brand, kind of close to where NUTRL is, which is a really great brand from Anheuser-Busch that they've built over the last 4, 5 years, and we were able to do that in 1.5 years.
Operator: And the next question comes from the line of Eric Serotta with Morgan Stanley. My apologies, Nadine Sarwat with Bernstein.
Nadine Sarwat: Two for me. First one on tariffs. I know you guys guided to the $20 million to $30 million of costs for this year. Can you just remind us what items are driving this? And then how that impact is going to be phased throughout the year? And then second question on gross margins. If I remember correctly, I think you guys said to get to the 50% or above point would require top line growth. So it is a pleasant surprise to see that 50% included at the top end of the range here. Could you just give us the building blocks for the gross margin guidance in particular? Where -- what would you need to get to the high end of the range versus the low end? You guys went through a similar exercise for the top line for us, which was very helpful. So any color on that for gross margins would be appreciated.
Diego Reynoso: Perfect. So let me start by tariffs. So we -- as we laid out, 20% to 30%, if you remember last year, we had bought a lot of products already. So the big impact of tariffs last year was in the back end of Q3 and Q4. So therefore, the year impact -- the year-over-year impact will be bigger at the beginning of the year, particularly in Q2, just given the size of the volume. if you break down what's included in that is aluminum is a big piece of that. And as of now, that's still in place. POS coming particularly from China is a piece of that. And we also have ingredients, sugar and for our RTD, for example, that are coming from other countries, specifically Canada that are part of it. So that's why we've decided to leave as the tariffs at the beginning of February until we see exactly what pieces might change. As I mentioned right now, the aluminum piece, for example, which is the biggest piece has not changed. So that's -- we will provide better guidance once we have more clarity on what's going to be the tariffs going forward. The second piece is you're correct. I think we're very happy with our performance in our savings agenda. I think the operations team have done an amazing job working in the buckets we laid out. As we included in our statement before, we are adding revenue management as another bucket. We are going to set it up in the back end of 2025, we started, but 2026 will -- we're really going to invest against it, and we believe we're going to get some benefits this year, but really for 2027. That will help our margin profile. The second piece, as you mentioned, tariffs is a big piece of it. So how those go forward will be the second part. And then the third piece is really being able to leverage volume. So right now, if we're in the top end of our guidance, that will help us get closer to the top end of our margin guidance because volume absorption is a big piece of where the opportunity lies going forward, given that we are producing a lot of it internal at this point in time.
C. Koch: Nadine, yes, I'll add my two cents worth on that, which is probably literally two cents. I would just observe that in the past, our gross margin has been as high as 52%. So it was sort of pre the takeoff and the chaos of doubling our production during the Truly boom. And it's my aspiration to get back into that low 50%. It's not easy, but I believe we have the best supply chain team that we've ever had. We are still kind of in the middle, maybe in year 3 of a 5-year lean manufacturing journey, which is showing very good results. We continue to look for high ROI capital investments in the breweries. We obviously are not cash starved. So if there's -- we are actively looking for high ROI manufacturing investments. And then on the other side, in the sales, we are looking to have the majority of our growth come from margin-accretive products. So my aspiration is more than just the high 40s, and we've been there before. So I don't think it's unrealistic.
Operator: And the next question comes from the line of Eric Serotta with Morgan Stanley.
Eric Serotta: Nadine beat me to the punch on the detailed tariff question. One quick follow-up, housekeeping on that and then another question. On the tariff piece, are you including in tariffs only the direct impact from tariffs? Or would higher Midwest premium, which is kind of indirectly driven by tariffs be included in your tariff bucket? I know it's a little bit of semantics, but maybe it would help us get a handle around some of this confusion around your Midwest premium exposure? And the second question would be in terms of how you're thinking about sort of midterm growth potential for Sun Cruiser, perhaps learnings from other RTDs in the space. And clearly, Truly didn't grow to the moon, how you're thinking about sort of a maturation curve for Sun Cruiser and then, Jim, how you're thinking about what the next big thing is, which I think always tends to be on your mind or lots of little things that may become the next big thing.
Diego Reynoso: Okay. I'll take the first one, and then I'll give Jim the second one. So it's hard to break out exactly which is tariffs versus the premium, but the approach we've taken to break it out is we know what the tariff percentage is. So we know right now, there's like a 50% tariff on aluminum. We'll take that tariff and count that as tariff. Any other movement in the Midwest premium, we'll take as inflation. So although they're both related one to each other, that's how you break it out as you quantify the tariff based on the actual tariff percentage and assume the rest of the movements in the Midwest premium are inflation-based. They both end up in cost of goods, but that's how we break them out when we give the tariff point of view. Jim, I'll hand it off for the second part.
C. Koch: Great. Eric, you asked about midterm prospects for Sun Cruiser, and we believe that there is certainly 1 more year, maybe 2 more years, but 1 more year of really strong growth in Sun Cruiser. We got a late start in the category. And we believe that the category itself of vodka and lemon -- vodka tea and lemon-based products, that category has probably got another year of strong growth. And we were -- we started late, so we also believe that we're going to pick up share in 2026 in the category given that we're getting disproportionate increases in our shelf space. We're getting into chains that we weren't in at all last year. And the -- with respect to next big thing, honestly, if I knew what it was, we'd already be putting it into the market. But we do pride ourselves on being an innovative company. We're sort of built for that. We have a growth mindset. We're staffed for it. We have a very -- the largest sales force in the beer business. We have a very large product and flavor development team. So there's a lot of stuff that we come up with and we're generally putting things in the pipeline, 3 or 4 a year and hoping that something is going to come out. So this year, we're looking for Sinless to see if that can become the next Sun Cruiser, but it's hard to predict. And we're looking at some package innovation as well that we're not sure if we can make it work. So there is just this -- it's in our nature to innovate and approach things as the company we are, which is smaller and more entrepreneurial.
Operator: And the next question comes from the line of Michael Lavery with Piper Sandler.
Michael Lavery: Just wanted to dig into Truly a little bit. It still had some struggles even as White Claw's momentum has recovered and improved. Can you give a sense of maybe just what your hopes for that brand are? And can it also get back to growth? Is it just managing it kind of to moderate or to some of the declines? Or how do you see it positioned? And what's the opportunity for its -- any trajectory change there?
C. Koch: I'll take that one. We look at Truly as having the potential of being a strong and viable #2 in the category, which it remains. There's really -- there's White Claw, which is the clear #1 in the category. We have been kind of, honestly, a weak #2. And so -- and I believe Hard Seltzer is a viable category. I believe it can be stable. White Claw's volume has actually grown. So they've done a great job, and you can see the payoff from that. We would like to get Truly to the point where it's no longer absorbing the category losses and where maybe it's growing low single digits a year and continues to remain a big enough product to be meaningful to our wholesalers and our retailers, which it certainly is today and off of that base, grow low single digits. So we're actually investing more in it this year than we did last year. The U.S. soccer team partnership is a very big deal. And we've got promotions around the 11 cities that are -- where the games are being played. They represent a big part of the U.S. population, those 11 metros. So we'd like to get it to be a stronger #2 than it is now with low single-digit growth.
Michael Lavery: No, that's helpful. And just one more on some of the innovation, looking at the drift towards some higher ABV products, both in your portfolio and more broadly. Can you give a sense -- it's -- it typically appears -- it's a better value for the consumer, kind of more bang for the buck. If just hypothetically or assuming the consumer isn't looking to get more intoxicated, it would have a headwind to your volumes for the same amount of alcohol in the liquid even if the liquid is less. Is there enough of a mix benefit to offset that? Or like how do you manage that trade-off? And I realize there's competitive dynamics that drive a lot of it. But is there a way to make that trade-off work that's not as maybe apparent from a distance?
C. Koch: I don't know of it. I think you raised a good point, but it's clearly -- our experience would say it's not a one-for-one trade-off as we get disproportionate growth with Twisted Tea Extreme, we are also growing the lower ABV Twisted Tea Light. So there is that trade-off. Do people drink more liquid because if they're drinking Twisted Tea Light because it's 4% ABV, Probably. Do they drink less with Twisted Tea Stream, which is 8% ABV? Probably. But -- so ultimately, I don't -- I can't give you a really good number, but it's certainly -- those trade-offs are manageable. And as we're going into vodka-based or liquor-based products, there is some expectation of maybe slightly higher ABVs. And hopefully, we are sourcing that volume from Spirits. So it's -- there's probably some -- you have to be right, there's some downward effect, but it's not really noticeable in the noise of the numbers.
Operator: And the next question comes from the line of Bonnie Herzog with Goldman Sachs.
Bonnie Herzog: I just have a couple of quick follow-up questions to some earlier points. I guess, Jim, I've talked to you about this in the past just about the cost of growth, which is increasing. So I guess in the context of that, I did want to ask about gross margin improvements. They've been impressive so far. So congratulations on that. But how should we think about the sustainability of your margins going forward, I guess, in the context of no volume growth. I mean you're guiding at the high end flat. So I'm just trying to think through that. And should we just think about, I don't know, last year, maybe this year still just big investment years as you kind of really invest in your business with the goal of returning to volume growth. I'm curious if you have a time line of when we could expect to see that.
Diego Reynoso: Okay. So I'll take the first part of the margin question, and then I'll give Jim the volume part. So as we mentioned before, we had 3 buckets of savings. We've really kind of -- 2 of them are really far ahead. We still have some opportunities we're going after this year and next for our footprint. We're also adding revenue management. So we believe those pieces will be able to, in the short term, help us continue to improve our gross margin to be high 40s, close to 50% despite where volume goes. And I think I've always been straightforward in saying like we can get there without volume. To get past it, volume is important. Now below gross margin, we are investing last year in this and we're doing the same this year in our brands because we believe that gaining share like we did last year, and we're planning to do this year in the current market is the best way to set ourselves up for success and continue to innovate. And I think that's where we believe it's the right thing to do right now for the future. Now I will hand it off to Jim to give an idea of where he sees that going forward.
C. Koch: To me, there is both onetime savings on the cost of goods sold which we're seeing those come in almost surprisingly strongly this year. And our plans for next year are not quite as big, but they're still pretty aggressive. And then -- but the onetime savings will -- eventually will exhaust those. But I believe the -- there should be significant, call it, 3% a year input productivity savings which I think you would find in most of the manufacturing sector, even in highly developed countries, there are just always more efficiencies to be gained. It's just productivity in the economy goes up every year and manufacturing productivity goes up faster than service productivity. So it's not out of the question to say we can take 3% out of our manufacturing costs forever. So that's how I would view that. It has given us fuel last year and this year, these onetime savings to increase our brand support. The rough numbers, you're talking maybe $50-plus million in 2025 and maybe $30 million in 2026, so $80 million or so. And that in some ways is the cost of growth. We are, as a company, just temperamentally and structurally oriented to try to drive growth. And you and I have talked about it. Growth is -- I guess, my view is growth is not cheap, but decline is really not cheap. So that's how I think about it.
Diego Reynoso: Sorry, I was going to add at the end, Bonnie, is obviously, as we go forward in the next few years, how we see that trend, we have the ability to change that strategy, either double down or back off. So I would say it's the right thing that we believe for right now, and that's why we're guiding to where we're guiding. But it doesn't mean that as we go forward based on where the industry is and we are a company, we have the ability to go one way or the other.
C. Koch: That's an important statement, actually, Bonnie, that Diego just made. If we came to believe that there was no possibility of growth in our category and our business, then a lot of costs come out.
Operator: Okay. And at this point, there are no further questions. So that concludes our question-and-answer session, and I would like to turn the floor back over to Jim for any closing comments.
C. Koch: Well, thank you to everybody for joining us this afternoon, and we look forward to talking to you in, I guess, it's about 2 more months. So thanks, and I hope everybody is dug out of the snow.
Operator: Ladies and gentlemen, that does conclude our conference today. Thank you for your participation. You may disconnect your lines at this time.