Boston Beer Co Inc Q2 FY2025 Earnings Call

Greetings, and welcome to The Boston Beer Company's Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you. You may begin.

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 second quarter earnings call. Joining the call from Boston Beer are Jim Koch, Founder and Chairman; Michael Spillane, our CEO; and Diego Reynoso, our CFO. Before we discuss our business, I'll start with our disclaimer. As we state 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 for some introductory comments.

Thanks, Mike. I'll begin my remarks this afternoon with a few introductory comments and then hand over to Michael, who will provide an overview of our operating results. Michael will then turn the call over to Diego, who will focus on the financial details of our second quarter results as well as our updated financial outlook for 2025. Immediately following Diego's comments, we will open the line for questions. As I mentioned on our last call, we are operating in a challenging and unpredictable macroeconomic environment. There are near-term factors such as economic uncertainty and household budget tightening, along with pressure on Hispanic drinkers that are negatively impacting consumer demand across the overall beer industry. Additionally, the second quarter had especially poor weather in key selling weeks. Despite these industry headwinds, we see long-term growth opportunities in Beyond Beer, which we often call the fourth category. Beyond Beer represents more than 85% of our volume and is outperforming the legacy 3 categories of beer, wine and spirits. We have strong brands and over the last year, 1 in 3 beer drinking households in the U.S. have purchased at least 1 Boston Beer product from our diverse portfolio. We've built a culture of innovation for over 40 years, which allows us to quickly move to where consumer demand is going. The latest example is Sun Cruiser, which was one of the top volume gainers in RTD spirits so far this year. With that as context, let's move on to our results and our updated 2025 outlook. In the first half, our depletions were down 3%, and we gained share compared to an overall beer industry that we estimate to be down over 4%. In the second quarter, our depletions were down 5%. And as expected, shipments were significantly ahead of depletions at down only 1%. This was mostly driven by the timing of wholesaler demand for our Sun Cruiser and Truly Unruly innovations, along with lower-than-target wholesaler inventory levels last June. Despite a weaker-than-expected volume environment, we delivered strong margin expansion and EPS growth in the quarter. This was driven by continued progress on our productivity initiatives, which Diego will discuss in his remarks. These efforts have allowed us to raise our gross margin guidance for the year while also absorbing tariff costs. Our business generated over $125 million in operating cash flow in the first half, which enables investments in our brands as well as $111 million in cash returns to shareholders year-to-date. We believe increased brand investments are needed to support the national launch of Sun Cruiser and to ensure our full portfolio is well positioned when the industry improves. As always, we'll be disciplined in our approach and we'll only invest where we see clear opportunities. We're encouraged by the strong consumer reception for Sun Cruiser as well as growth in our smaller brands such as Angry Orchard and Dogfish Head. However, as Michael will discuss, industry headwinds are impacting our larger brands in the near term. As a result, we do expect shipment declines in the second half of the year as shipments rebalance in line with depletion trends. In summary, I'm confident we have the right strategies and team in place. We're continuing to invest in our brands. We're building a strong innovation pipeline, and we're making progress 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. I'd like to thank our Boston Beer team, distributors and retailers for their continued support. I will now pass the call over to Michael.

Thanks, Jim, and good afternoon, everyone. Our strategy to nurture all our core brands, pursue a fewer things better approach to innovation and transform our supply chain is gaining traction. While we still have work to do, this strategy helped us deliver significant margin expansion and earnings per share growth in the second quarter while growing depletions on 4 of our 7 brands. We also hit a record high in customer service levels and reached nearly 50% in gross margin. As Jim noted, the macroeconomic environment is dynamic, and as such, our depletions have softened since the last earnings call. Beginning in May and accelerating to June, we saw higher-than-expected industry declines in the FMB category, which in measured off-premise channels was down 3% in dollar sales year-to-date after growing 7% for the full year in 2024. Our current assessment is that economic uncertainty is driving lower traffic at retail as well as fewer social occasions. Also, while we remain underpenetrated with Hispanic consumers, they are a sizable portion of the consumer base for alcoholic beverages and do have some impact on our volume performance. We've maintained healthy points of distribution for our portfolio and gained shelf space in the spring resets for Twisted Tea, Sun Cruiser, Samuel Adams, Angry Orchard and Hard Mountain Dew. However, traffic levels are down across retail channels and consumers have become somewhat more focused on absolute dollar spend. This has slowed velocity on our larger brands, Twisted Tea and Truly, which are more exposed to overall economic trends and generate a higher percentage of their sales mix from larger pack sizes. Given these trends, we've lowered our volume forecast for the year, as Diego will further discuss in his remarks. Now I'll provide an update on our brand performance and plans. Twisted Tea held share of the overall F&B category with dollar sales declining 4% in measured channels last quarter. As we expected, Twisted Tea shelf space increased mid-single digits in the spring resets as retailers began trimming their assortments. Twisted Tea brand equities remain strong with a very large organic social following and some of the highest engagement among the top 10 beer brands. The Twisted Tea portfolio continues to grow households and has improved its penetration with Hispanic consumers. While that has not provided the growth we initially expected in 2025, it should benefit the brand in the long term. Twisted Tea Light and Twisted Tea Extreme are growing shelf space and velocities. Our packaging redesign has improved sales per point of Twisted Tea Light. Twisted Tea Extreme Lemon and Twisted Tea Blue Razz are still the top 2 growth SKUs in the convenience channel among all FMBs. Twisted Tea Light and Twisted Tea Extreme will be growth drivers for the brand for the remainder of '25 and beyond. We have strong advertising plans for the rest of summer to position us well when the overall category improves. Campaigns include high-performing Tea Drop ads and our annual American Parties with Tea program. We will also come back in the fall for the fourth year of our college football program. This program now includes in-game advertising, sponsorships with ESPN and expanded retailer programs with team-specific packages in key markets. In summary, Twisted Tea is our largest brand, and we're continuing to fully support it with advertising investment and innovation. We continue to believe that despite near-term challenges, these actions, coupled with an improvement in the macro environment will return the brand to growth for the long-term. Moving to Sun Cruiser, which launched last summer and went national in January of this year, Sun Cruiser is a gross margin accretive and has been very well received by wholesalers, retailers and drinkers. Sun Cruiser has quickly grown to a 4 share of the RTD spirits category and continues to grow volumes week-over-week as distribution expands. While Sun Cruiser mainly sources from other RTD spirits, it does have some interaction with Twisted Tea. After an initial regional launch focused on independent and on-premise accounts, Sun Cruiser is now on shelf in larger national chain retailers. This has helped us triple our points of distribution this summer compared to earlier in the year. As these placements drive volume, we expect a greater presence for Sun Cruiser in measured off-premise channel data. It's worth noting that through the first half, only a small portion of Sun Cruiser's total volume was captured in measured off-premise channel data. We believe Sun Cruiser will be the next iconic brand for the company and an important growth contributor for the Beyond Beer category. Many consumers discovered it in the on-premise channel, which is a great place to build brands. It's putting up great trial and repeat numbers. It's also showing up on paid social and digital advertising as well as big sports moment television advertising and music and sports venues sponsorships like the AEG concert series in Madison Square Garden. Additionally, Sun Cruiser's presence in the AVP beach volleyball and the World Surf League further reinforce its positioning as a brand for sun, sand and fun. Turning to Hard Seltzer. The overall hard seltzer category declined 7% in dollars in measured off-premise channels in the second quarter as consumer preferences shift towards more premium RTD spirits-based beverages. While Truly continues to be a top 2 hard seltzer brand and a top 4 Beyond Beer brand, we're not satisfied with its performance. We're refreshing our marketing strategy and continuing to support the Truly Unruly high ABV innovation as we work to stabilize the brand. We will be launching a new creative platform with a significant investment in regional media in key markets later in the third quarter. Truly will continue to sponsor U.S. soccer as we begin the year-long lead up to the 2026 World Cup, which will take place in North America for the first time in more than 3 decades. Truly also will continue to sponsor Barstool Sports podcast, Pardon My Take and Chicks in the Office and activate strong retail campaigns. High ABV offerings continue to be a bright spot in Hard Seltzer. Truly Unruly has grown to a 3% volume share of Hard Seltzer and the Truly Unruly variety pack is the #1 dollar 12-pack share gainer in Beyond Beer in the last 12 months. Our second variety pack, Truly Unruly Lemonade launched in April and is helping Truly Unruly build momentum and gain shelf space. Our beer brands, Samuel Adams and Dogfish Head continue to be important parts of our portfolio. Samuel Adams American Light launched in glass bottles to support its positioning as the most premium light beer in America. American Light is also featured in our summer patriotic program along with Sam Adams Summer Ale. These initiatives have helped the Samuel Adams brand family gain shelf space even while overall craft beer shelf space declines. Dogfish Head grew depletions in the second quarter for the first time in many years behind the successful launch of Grateful Dead Juicy Pale Ale. This is the largest launch in Dogfish Head's 30-year history and continues to build volume and distribution, especially in music venues and other key on-premise accounts. Partnering with the Grateful Dead has allowed our team to gain distribution not only in our core Dogfish markets, but beyond, including the Sphere in Las Vegas for the Dead & Company concerts. We also developed a limited edition Grateful Dead's 60th anniversary single-serve package that will be sold at the Dead & Company concert series in San Francisco next month. In cider, Angry Orchard has also returned to growth behind consumer trend back to more flavorful options. Depletions grew in the second quarter, driven by a higher level of focus for the organization, including increased investment and new sponsorships. The new campaign, Don't get Angry, Get Orchard and our sponsorships of WWE wrestling positively impacted the results and helped the brand gain shelf space. Later this summer, we're launching an exciting program featuring Friday the 13th movie theme advertising, promotions, packaging and displays for Halloween and the peak fall cider season. With respect to Hard Mountain Dew, we're encouraged to see positive depletions for a fourth straight quarter. Hard Mountain Dew Code Red, which was released earlier this year, is now distributed in single-serve. Earlier this month, we launched a cross-merchandising partnership with TOSTITOS that is being utilized to help support further growth. We continue to expect growth for Hard Mountain Dew this year, but it will be a multiyear effort for this product to become a meaningful part of our volume mix. In closing, we continue to make progress as an organization. We're executing our commercial plans to take advantage of the rest of the summer selling season, and we're continuing our longer-term innovation and productivity initiatives. While current industry trends are challenging, we continue to believe we will create long-term value for shareholders through innovation, focused execution and margin improvement. I'd like to thank our team for all their hard work executing the summer season and for remaining agile in a dynamic operating environment. I'll now pass the call over to Diego to review our second quarter financial results and 2025 guidance.

Thank you, Michael. Good afternoon, everyone. Depletions in the second quarter decreased 5% and shipments decreased 0.8% compared to the second quarter of last year, primarily driven by declines in the Truly Hard Seltzer and Sam Adams brands that were only partially offset by growth in the company's Sun Cruiser and Dogfish Head brands. As Jim noted earlier, shipments were higher than depletions in the quarter due to the timing of wholesaler demand for our Sun Cruiser and Truly Unruly innovations as well as lower-than-target wholesaler inventory levels last June. We believe distributor inventory of 4.5 weeks on hand as of June 28 is an appropriate level for each of our brands. Revenue for the quarter increased 1.5% due to increased pricing and favorable product mix, partially offset by lower volumes. Our second quarter gross margin of 49.8% increased 380 basis points year-over-year. Gross margin primarily benefited from improved brewery efficiencies, procurement savings, price increases and product mix, which were partially offset by increased inflationary and tariff costs. Late in the second quarter, we did experience some tariff costs, which negatively impacted gross margin. Advertising, promotional and selling expenses for the second quarter of 2025 increased $15.5 million or 10.7% year-over-year, primarily due to increased brand investment in media. General and administrative expenses for the second quarter decreased $2.3 million or 4.7% year-over-year, primarily due to a decrease in salaries and benefits costs from lower incentive compensation. We reported EPS of $5.45 per diluted share, an increase of 24.1% compared to the prior year. Our strong EPS performance was driven by higher gross margins and lower share count, partially offset by lower volumes and increased investments in our brands. For the first half of the year, we grew revenue 3.6%, delivered a 49.1% gross margin and generated $7.58 of EPS. These results reflect shipment growth that was ahead of our depletions. As we discussed in our last call, we expect shipment trends to rebalance with depletions in the second half of the year. Post our last earnings calls, depletion trends have softened, and we have updated our volume guidance to reflect a more dynamic industry environment. Our depletion trends for the first 29 weeks of 2025 have decreased 3% from 2024. We now expect our volume to be down high single digits to down low single digits for the year. We're providing a wide volume range as there are still many weeks of the summer selling season ahead of us and the timing of any improvements in the overall beer industry remain uncertain. We continue to expect price increases of between 1% and 2%. Our strong gross margin performance year-to-date has enabled us to raise our gross margin guidance for the year to 46% to 47.3%, up from 45% to 47% previously. Our updated guidance now includes the impact of tariffs, which we estimate to be a headwind of 70 to 100 basis points. Significant progress on our ongoing productivity initiatives have been key to raising our gross margin guidance even as we absorb the impact of tariffs. Now I'll provide an update on our initiatives across our 3 buckets of multiyear saving projects, which are positioning us to better respond to potential changes in the volume environment, product mix and tariffs. We continue to expect contributions from all 3 buckets, as I discussed on our last call. In brewery performance, second quarter performance was better than we expected, driven by benefits from higher line efficiencies. Our brewery performance targets for the full year of 2025 include continued improvements in OEE driven by process improvements at our breweries and continue to increase our internal production. In the second quarter, we increased our domestic internal production to 76% of our volume compared to 69% in the second quarter of last year. In our procurement savings bucket, we continue to see opportunities on packaging and ingredients, primarily due to price negotiations and recipe optimization. Our second quarter results benefited from lower negotiated pricing on certain packaging and ingredients, which we expect will continue throughout 2025. In waste and network optimization, we're continuing our efforts to improve our processes and systems. The automated customer ordering and inventory management system that we implemented last year continues to help us further reduce waste and optimize our network. Turning to our advertising spend and EPS guidance. We continue to expect increases in advertising, promotional and selling expenses to range from $30 million to $50 million. Most of the increase occurred in the first half of the year. This does not include any change in freight costs for shipments of our products to our distributors. Exclusive of our estimated impacts of tariffs, we are reiterating our full year 2025 earnings per diluted share of between $8 and $10.50. Including tariffs, full year 2025 earnings per diluted share is expected to be between $6.72 and $9.54. Based on the information currently available and based on tariff programs announced year-to-date, we estimate that tariffs will have an unfavorable 2025 cost impact of approximately $15 million to $20 million or $0.96 to $1.28 earnings per diluted share. These estimates include an unfavorable gross margin impact of between 70 to 100 basis points for the full year, given expected buying patterns and inventory currently on hand. We expect most of the negative impacts from tariffs in the second half of the year. We'll continue to closely monitor the tariff environment and are looking across our operations for opportunities to mitigate some of the tariff headwinds. As you model out the year, please keep in mind the following factors. Our business is impacted by seasonal volume changes with the fourth quarter typically our lowest absolute gross margin rate of the year. Shipments were ahead of depletion trends for the first half, which we expect to reverse in the second half. The third quarter is a much larger volume quarter than the fourth quarter given the seasonality of our business. As you may recall, in the prior year, we were not able to fully ship to meet demand in the second quarter and caught up in the third quarter. As a result of seasonality in the comparison to the prior year, we expect most of the 2025 shipment reversal to occur in the third quarter, with shipments decline expected to be in the low to mid-teens. As I mentioned earlier, the increase in brand investment has occurred mostly in the first half of the year. Our reinvestment in brand spend began in the fourth quarter of 2024. So as a reminder, the fourth quarter of 2025 will be lapping a high base of prior year brand investments. Turning to capital allocation. We ended the quarter with a cash balance of $212.4 million and an unused credit line of $150 million, which provides us with the flexibility to continue to invest in our base business, fund future growth initiatives and return cash to our shareholders through our share buyback program. For the full year of 2025, we're lowering our capital expenditure guidance range by $20 million to between $70 million and $90 million and are focusing our spend on supporting our productivity programs. During the 13-week period ended June 28, 2025, and the period from June 29, 2025 through July 18, 2025, we repurchased shares in the amount of $50 million and $11.3 million. As of July 18, 2025, we had approximately $317 million remaining on the $1.6 billion share repurchase authorization. This concludes our prepared remarks, and now we'll open the line for questions.

Our first question comes from Filippo Falorni with Citi.

The summer started off slowly in the beer category, and the early July data appears to continue this trend. Can you provide an update on the current status of your business? What are your thoughts as you move into the important Q3 quarter regarding depletion? Additionally, we have noticed a significant slowdown in Twisted Tea, aside from the contribution from Sun Cruiser. Can you explain how you see the relationship between these two brands evolving, particularly in terms of the decline of Twisted Tea and the distribution gains from Sun Cruiser going forward?

Yes, I can address that. You’re correct that the beginning of summer was quite sluggish across the industry. The overall industry appears to be down by 4% to 5%, with our decline being slightly less. However, we have managed to gain both volume and dollar share this year. Initially, we expected a decrease of 1% to 2% this year, influenced by factors like moderation, health concerns, sociability, reduced cannabis consumption, and general macroeconomic uncertainty. Things worsened in the second quarter due to poor weather, particularly in the Northeast, where there were 13 consecutive weekends of rain. Additionally, there was increased pressure on the Hispanic community, leading to reduced outings, which further impacted the beer business. Consequently, the second quarter was more challenging than the first. Based on our 29-week results compared to the previous 26-week period, we are still down the same 3%. The added three weeks did not significantly lower our year-to-date figures, so that characterizes the industry situation. Regarding Twisted Tea and Sun Cruiser, we’re generally seeing stability in the hard tea category. Twisted Tea typically follows the trends of the broader food and beverage sector. Sun Cruiser represents a premium segment of the tea category. If we are exchanging some Twisted Tea consumers for Sun Cruiser ones, it adds to our margins and revenue. We expect that the momentum we have with Sun Cruiser as the year progresses will compensate for the challenges facing Twisted Tea, and there isn’t much overlap between the two products. Data analysis indicates that about 20% of the decline in Twisted Tea is linked to the vodka tea category, which includes not just Sun Cruiser, but also brands like High Noon and Surfside, along with smaller brands such as Happy Dad and Good Boy. We are actively assessing what’s happening with Twisted Tea, which has been a strong brand for decades. We believe some of this decline can be addressed. Over the past four years, we’ve seen a widening gap between Twisted Tea and mass domestic beers. Our price increases during COVID and the preceding years may have outstripped sustainable levels, suggesting that some adjustments might be necessary. Moreover, the Hispanic demographic is the largest segment for Twisted Tea in our portfolio, representing about 20%. We believe that some of these losses are not permanent, and as conditions stabilize, we expect some recovery.

We've also seen increases in Twisted Tea Light, and Twisted Tea Extreme has been successful. As we mentioned in the last call, we anticipate gaining additional distribution points and shelf space, especially since last year saw an influx of smaller competitors. The good news is we managed to fend them off and are reclaiming that space. Overall, we have maintained our market share despite the decline. We will continue to heavily invest in Twisted Tea, make necessary adjustments, and drive innovation within the brand family.

Our next question comes from the line of Peter Grom with UBS.

I kind of wanted to just follow up on Filippo's question. And I guess, recognizing that summer has not been off to the best start from a category standpoint, but you alluded to in the release, year-to-date depletions are 3%. So what I'm trying to understand is the updated guide seems to imply trends get a lot worse sequentially. So can you maybe just help us understand why that may be the underlying assumptions embedded in that? Is that simply being conservative? Or is there a reason that you would expect depletions to decelerate further from here?

At the beginning of the year, we aimed to be prepared to support our brands during the summer, even before the slowdown in depletions occurred. As a result, we ramped up our production compared to last year and shipped slightly ahead of that timeframe. We believed that eventually, shipments and depletions would realign by the end of the year. However, what's changed since our last discussion is that depletions in the second quarter turned out to be weaker for the industry than we anticipated. Consequently, achieving a balance will be more challenging than we initially forecasted for depletions. While the depletion forecast itself hasn't necessarily changed, the softness in Q2 indicates that the rebalancing required as we move into Q3 and Q4 will be more significant. This shift is primarily driven by the effects of the weaker depletions in Q2.

Okay. Jim, I wanted to revisit your earlier comments regarding how category growth has changed. You mentioned the structural challenges that led you to expect a decline of 1% to 2% in the category this year. You also referred to the weaker trends year-to-date, particularly due to unfavorable weather and the situation with the Hispanic consumer. This might be difficult to analyze, but from a category perspective, are the effects related to moderation or the structural challenges playing out as you expected? Or are they actually worse or having a greater impact on the category than you anticipated at the start of the year?

I would say things are playing out pretty much as I expected. Maybe D9 and THC have become more significant, but the concerns we had about GLPs seem to have lessened. It appears that 70% to 80% of people who use it regain all the weight within 12 months after stopping. Overall, those long-term structural challenges have been about what I anticipated. The more significant downturn seems to be due to weather conditions and the challenges facing the Hispanic community. However, we've experienced better weather over the past 3 to 4 weeks, which I believe has improved things by a point or two.

Our next question comes from the line of Nadine Sarwat with Bernstein.

Two for me. One straightforward. I know you called out lowering the estimate for the dollar impact of tariffs. Could you just give us the moving parts on that? And then maybe a second bigger picture question on Sun Cruiser. You called out the belief that it will be the next big growth driver for the business. The RTD space is already quite crowded, though still growing strongly. And we've seen boom and bust cycles in the past in Beyond Beer in the fourth category space. So all this to say, it's really great to see the strong performance of Sun Cruiser and another brand offering up some real growth for the group. But how do you think of the brand's long-term room for growth given those considerations and what we can learn from history in these categories?

Let me address the second part of that and then hand it over to Diego. One aspect to consider is our experience with Twisted Tea, which has seen steady growth over the past 20 years and has a strong foundation. In contrast, Truly had a different trajectory with multiple brand extensions, leading to a peak and then a decline, leaving us to find balance within that portfolio. We've applied these lessons to Sun Cruiser. A key step for us was starting with on-premise distribution, which, as Jim mentioned, gives us significant exposure to consumers, prompting them to purchase off-premise. We've initiated this rollout carefully across the country, avoiding a sudden spike. While it's the fastest ramping product we've ever launched, we are approaching growth in a controlled and measured manner. We've learned many lessons along the way and made our share of mistakes, but we are building on a strong foundation. For those who try the product, feedback indicates it stands out as best-in-class. This successful approach has historically worked for Boston Beer: making quality products and sharing compelling stories that attract consumers. We are confident about the long-term journey ahead and plan to continue investing heavily. You’ve heard some of our strategies, but we will maintain our presence in on-premise environments as well as at events like music and sports. This will be a long-term endeavor for us, and we are pleased with the progress so far. Now, I'll hand it off to Diego.

Excellent. Thank you, Michael. On a tariffs point of view, as you know, the tariffs have multiple elements. So it's the tariff assets currently announced, it's also the timing of when the products are coming in. And the third piece is some of the mitigating actions. So if you look at where we were a quarter ago to now, a few things have changed. Aluminum actually went the other way. But for example, our POS material estimates on tariffs went down significantly with some of the changes in the tariffs in the last few months. So it's a constant up and down depending on the different countries and different pieces. The third piece is we've actually worked with some of our suppliers, especially around POS to mitigate some of the POS impact for this year. So that's the third reason why we made the adjustment. So it's a combination of up, downs and timings of the announcements.

Understood. And just to confirm, you said that tariff impact is net of mitigation.

Yes. That is net of mitigation. Let me be very specific. It's net of mitigation within our suppliers. Now there's a lot of things we're doing in our gross margin and other things that are going to provide savings, and that's why we're taking our gross margin guidance up. But direct mitigation, it's net of mitigation.

Our next question comes from the line of Eric Serotta with Morgan Stanley.

I want to revisit gross margins for a moment. It's been a significant effort for you all to return to the high 40s and low 50s. Achieving that in one quarter is commendable, but we shouldn't claim victory just yet. The question then is, what are your thoughts for the future? How do you see the gross margin potential over the next year or midterm, considering the productivity improvements you've implemented so far? Additionally, I'd like to clarify if the current margins are benefiting from any hedges in aluminum or the Midwest premium. If we assess the current state of input costs, would we face increased pressure?

No problem. I want to express that our operations, finance, and procurement teams have done an excellent job with gross margin, and we appreciate your comments. The challenge we face includes headwinds from tariffs and some volume reductions we've implemented. Overall, we're pleased with the guidance we're providing, which indicates we will reach a high 40s number. If circumstances change in the future, such as a reduction in tariffs or an increase in incremental volumes, we will adjust our midterm target accordingly. At present, we're satisfied with our performance, which has helped to counterbalance some of the tariffs we've encountered. Additionally, we are benefiting from product mix contributions from Sun Cruiser, which we find valuable. As we approach 2026, we will consider these three factors when we revisit our guidance at the end of the year regarding our gross margin target for the following year.

Great. And then a question on Twisted. You seem a bit more tentative than I can remember in terms of Twisted potential and figuring out sort of exactly what's going on. I know this year has been clearly disappointing. But sort of as you diagnose the issue, how are you sort of handicapping the prospects of getting back to the historical low double-digit rates? Reading between the lines, you sound pretty confident earlier this year. But on this call, you've recognized more interaction with Sun Cruiser and overall seemed a bit more tentative.

Yes. So I'll start here, and then I think I'll pass it to Jim. But I think one of the things that we've said here as a company all along is regardless of what happens in the macro environment, we see ourselves holding or gaining market share so that regardless of what happens, we feel like we're going to compete. The bigger the business is for us, the more likely we are to track to the overall macro situation and traffic is down across most of the channels we sell in. So there are bright spots in there, as we said, both Light and Extreme are performing better than the balance of the portfolio. So Jim constantly reminds us is that we're controlling what we can control. Twisted Tea, so our investments will remain strong. We are leaning into it. We think it's really important to convert the consumers that are shopping and give them a great proposition when they are in the store. So we're staying strong and aggressive there. But the macro environment is something that we can't control.

I would break the problem down. The brand looks healthy because our singles, which make up a large part of the volume, are flat to slightly up. The issue lies in the 12 packs. There are several factors at play. One aspect is that we raised the price to be close to Sam Adams, whereas historically, it was positioned between regular domestic beer and craft beer. This price adjustment may have been too aggressive for a portion of that volume. Additionally, we have lost a significant amount of display space in recent months. I was surprised to see how retailers have increasingly favored ready-to-drink displays, such as large displays for Sun Cruiser and products from Gallo, which we never considered competitors for beer display space. This shift has resulted in lost displays for Twisted Tea, although I believe this situation might improve in the future, which gives me optimism. The brand remains healthy, and we will continue to support it vigorously. We also increased our distribution this year, indicating that retailers still have confidence in the brand, which is significant for our wholesalers. Overall, I feel more optimistic about the long term than I did in recent months.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs.

I wanted to circle back with a few questions just on your shipment and depletion guidance. I guess, first, I'd be curious to hear why you widened the ranges so much, especially considering only 5 months left in the year. I understand everything you talked about and the pressures that are out there, but what has changed with your visibility? And then trying to understand your shipment guidance, which does imply shipments will be down low double digits at the midpoint in the second half. So why so negative, especially when you suggest wholesaler inventories are in a pretty good place? And then finally, I might have missed this, but I assume you no longer expect Twisted to grow low single digits this year? And should we expect a decline of low single digits for Twisted? Is that what's implied in your guidance?

Thank you for your question. I'll address the first part and then see if anyone else wants to add. We've discussed how significantly depletions have changed over the last 8 to 9 weeks. Consequently, no one in the industry can accurately predict market behavior right now. That's why we've broadened our depletion targets; we understand what we can manage, but factors like weather and other external elements are still beyond our control. It's wise to widen our targets in this unpredictable environment. The shipments directly relate to the depletion range since we want to keep our inventory levels where they should be. If depletions improve in the second half of the year, our shipments will increase as well. However, we don’t want to set a shipment goal that would lead to higher year-end inventories if depletions do not improve. Therefore, we are focused on achieving the higher end of our range. The measures we're taking in terms of brand investment and execution are solid. Yet, we lack clear visibility into market behavior for the next 12 weeks. While it's true that we are in the middle of our selling season, with July and August still ahead, we will have more insight once we receive the July results and see how August shapes up. For now, it's sensible to adjust that range. I'm not usually one to provide guidance by brand, but I'll check with Michael and Jim if they want to comment on Twisted.

Yes, I would just anticipate that we continue to maintain our market share and grow where the opportunity presents itself. But given the macro headwinds, it's really hard to predict.

Our next question comes from Rob Ottenstein with Evercore ISI. We see the July results and see what August comes in, but right now, I think the prudent thing is to expand that range. We don't usually give guidance by brand, but I'll look to Michael and Jim to see if they want to add something on Twisted. Yes, I would just anticipate that we continue to maintain our market share and grow where the opportunity presents itself. However, given the macro headwinds, it's really hard to predict.

I have a two-part question. Beer sales have been sluggish for some time and appear to be worsening. We can dismiss factors like weather and the Hispanic consumer as excuses. My first question is about the industry: how much longer can this situation continue without more strategic actions or consolidation, considering the high fixed costs faced by many in the industry? Secondly, Jim, are you reevaluating your strategy regarding potential moves like entering the energy drinks market or making any significant changes to your current approach in light of these ongoing structural challenges?

Let me address that. We are continuously seeking opportunities. Honestly, three years ago, our focus was solely on alcohol. Now, our innovation team is beginning to explore options outside of that category. However, we have yet to identify anything that we find appealing and that fits our expertise. We are aware that in the non-alcoholic space, there are some of the top marketing firms and innovators globally. The energy drink market is extremely competitive, with countless new products launching every year. Therefore, we are examining this space, uncertain if it is the right fit for us, but we always remain open to innovations. Regarding mergers and acquisitions, that is beyond my responsibility. Many investment bankers are carefully considering potential buyers and targets, but that's not something we are currently pursuing.

But do you think we will see some of that, not naming names, but do you think the industry will see some sort of consolidation either on the beer side, beverage alcohol or beverages in general.

I have to admit that I don't have much insight into that. I can't predict what companies like Miller, Gallo, Coca-Cola, or Keurig will decide to purchase. The experts on this call know far more than I do about that, so I won't even attempt to share my thoughts.

Our next question comes from Bill Kirk with ROTH Capital Partners.

I want to round out that guidance range conversation just because year-to-date EPS is already above the low end of the full year range. So is negative earnings, is that really a possibility for the back half of the year?

So look, fourth quarter is always our lowest quarter and that's definitely a possibility. I think in Q3, it really is going to depend on the depletions of July and August. So if the market continues to be down 10% for the summer, yes, the math would say that is a possibility. Now, we've seen some changes in the trends in July. We haven't seen the final July numbers, but I'm hopeful that, that's a low probability. But it's still a chance if we don't see a change in the industry trends.

Okay. And then, Jim, you mentioned D9 maybe being bigger than you initially expected, and you obviously have a history of being very quick with innovation as these adjacent segments kind of materialize. So do you have any D9 plans for the U.S. market? And separately, given your comment on displays at retail, are you seeing the D9 folks buy like slot for shelf space at retailer and pay the retailers, which obviously alcohol can't do? Are you seeing any of that?

Let's see. I'll break it in half. We do have a cannabis business in Canada, which we ventured into with the intention of being prepared if opportunities arose in the United States. Until the emergence of hemp-based THC, we hadn't seen much promise in the U.S. market, and currently, few are making significant profits in that sector. Consumers generally do not visit dispensaries. However, hemp-based THC, which is available in a few states now, presents a different scenario. It's comparable to being sold in a beer cooler, making it readily accessible as an alternative to beer. It's gaining some traction in a small portion of the country, such as Minnesota, recently Tennessee, and within the last year, Louisiana, where there exists some regulatory framework. My overall view on this opportunity is that it was established by the farm bill, and the political landscape is highly unstable, changing day by day, especially with recent developments in Texas. Therefore, it’s uncertain whether this will still be a viable business in six months. One of my distributors mentioned that there is only a 50-50 chance it will continue, as some influential individuals who never meant to create this loophole might entirely shut it down. Given the unpredictable nature of the political process at both state and federal levels, and the FDA's regulatory authority over beverage ingredients, the risks extend beyond just the farm bill. Presently, the situation is too unstable for us. However, we are usually quick to seize opportunities, and we possess the experience and capabilities to engage in this area. That said, I wouldn’t anticipate any volume from us this year, but that could change at any moment.

And are they paying slotting fees at retail? Like are those beverages buying cooler space, the D9 guys? That's a really good point. The current regulatory practices suggested by our trade organizations, such as the BA, the BI, and the general MBWA position, have not really focused on trade practices as a regulatory requirement, and I believe they should. It would be very concerning if companies were allowed to purchase as much shelf space as they wanted, including refrigerators, coolers, and doors. From what I've observed, the market is highly fragmented, and no one is generating enough profit to compete with brands like Red Bull or Monster in acquiring that shelf space.

We have reached the end of the question-and-answer session. I would like to turn the floor back to Jim Koch for closing remarks.

Well, thank you all, and I hope you enjoy and drink a lot of beer in the remaining months of summer, and we'll talk to you after the third quarter closes.

Thank you. And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation.