Boston Beer Co Inc Q3 FY2025 Earnings Call

Greetings, and welcome to the Boston Beer Company Third Quarter 2025 Earnings Call. This conference is being recorded. It is now my pleasure to introduce Mike Andrews, Associate General Counsel and Corporate Secretary. Thank you, Mr. Andrews. Please go ahead.

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 third 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 reflect 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 an overview of our strategy, operating results and brand updates and then turn the call over to Diego, who will focus on our supply chain and the financial details of our third quarter results, as well as our updated financial outlook for 2025. Immediately, following Diego's comments, we'll open the line for questions. I would like to start by thanking Michael Spillane for his service as CEO and for continuing to provide counsel to me as a member of our Board of Directors. While I've now stepped back into the CEO role, our company priorities remain unchanged. They continue to be innovation, supporting our full portfolio of brands with advertising investment and focused execution and driving margin improvement. I'll personally be particularly focused on our high-impact areas, including our innovation pipeline and ensuring that we are appropriately investing in our brands through both advertising and local end market execution. We've made strong progress on our margin improvement initiatives and to help continue those efforts, Phil Hodges has been named Chief Operating Officer. Phil has 30 years of operations experience in consumer packaged goods at Carlsberg, Mondelez and Kraft Foods, and he has led our supply chain efforts for the last 3 years. His team has delivered strong efficiency improvements in our breweries, which have positively impacted our gross margins. In his new role, Phil will continue to report to me and will focus on continuing to improve execution across all functions and implementing our previously announced margin enhancement initiatives. I'm excited to be back in the CEO seat and to partner with our highly experienced executive leadership team to execute our plans to improve volume trends and create long-term shareholder value. Now turning to the current industry environment. I mentioned on our last call that we were experiencing a challenging macroeconomic environment. And those trends continued into the third quarter. Economic uncertainty that has consumers more tightly managing their budgets as well as pressure on Hispanic consumers continues to impact consumer demand negatively across the overall beer industry. Moderation trends are also having an impact on demand and in certain states, hemp-derived beverages are competing for shelf space and drinkers. Despite these current industry headwinds, we continue to see long-term growth opportunities in the beyond beer category, also known as the fourth category. Beyond beer represents more than 85% of our volume. We believe that the beyond beer category share will grow as the drinker is younger and more diverse than traditional beer. Our brands are well positioned to participate in this growth and our strong innovation culture allows us to move quickly to add to the portfolio as consumer trends evolve. The latest example is Sun Cruiser, which was one of the top volume gainers in RTD Spirits so far this year. We're continuing to innovate and invest across our portfolio of brands to position us well for when the industry environment improves. As Diego will discuss in his remarks on our guidance, we are reinvesting some of our gross margin over delivery into additional advertising spend. This includes media spend as well as a new local market activation program. As part of this local activation, we're investing alongside our wholesalers to support local sponsorships, local radio, sampling teams, brand ambassadors and grassroots events support. With respect to innovation, we're currently testing a number of brands, and our goal is to further expand Sun Cruiser in 2026 and launch an additional innovation brand. With that as context, let's move on to our results and brand performance. In the first 9 months, our depletions were down 3% compared to an overall beer industry that we estimate to be down over 4% in volume. In the third quarter, our depletions were down 3% and as we expected, shipments were significantly below depletions at down 14%. As we mentioned in our last call, this was mostly driven by shipping ahead of depletions in the first half of the year due to the timing of wholesaler demand for Sun Cruiser as well as lower than target wholesaler inventory levels last June. In terms of depletions, we're encouraged by the strong consumer reception to Sun Cruiser, a second consecutive quarter of growth in Angry Orchard and positive drinker reception to our higher ABV offerings. However, industry headwinds are impacting our larger brands, particularly Twisted Tea, which are likely to persist for some time. Despite a softer volume environment that we planned at the start of 2025, we have delivered strong margin expansion and grown our EPS for the first 9 months of the year. This was primarily driven by continued progress on our profitability initiatives, which Diego will discuss in his remarks. And to a smaller extent, a positive product mix from our new product innovations. These efforts have allowed us to raise our gross margin guidance for the year, while we continue to absorb tariff costs. We also hit record high consumer service levels and reached over 50% gross margin in the third quarter, which is our highest gross margin since 2018. Our business generated over $230 million in operating cash flow in the first 9 months, which enables us to both invest in our brands and repurchase over $160 million in shares year-to-date. I'll now provide an update of our brand performance and plans. Twisted Tea had strong growth for many years and is the #10 brand family in the overall beer market with over $1.2 billion in annual retail sales in measured off-premise channels. Going into the year, we planned for the brand to grow consistent with an FMB market that grew 7% in dollar sales in measured off-premise channels during 2024. During 2025, the brand has gained distribution but has declined in velocity and retail displays and features. Year-to-date, in measured off-premise channels, Twisted Tea is down 5% in dollar sales and losing share in an F&B category that is down 3%. We continue to believe that the macroeconomic environment is a significant driver of weaker alcohol trends and the deceleration in Twisted Tea performance. Inflation and general economic uncertainty below the middle-income consumers has resulted in lower traffic at retail and fewer social occasions. The Twisted Tea drinker profile is particularly sensitive to these impacts as they typically have less household income than drinkers of our other brands. Hispanic consumer buying rates remain challenged across the industry. Twisted Tea is slightly over-indexed with Hispanic shoppers compared to overall alcoholic beverage shoppers. They are a sizable portion of the Twisted Tea drinker base and have an impact on the brand's volume performance. In addition to these macro factors, we believe the Twisted Tea retail displays are being impacted negatively by retailers making additional space for RTD Spirits, which are currently their key category growth driver. As I mentioned on our last call, according to numerator data, approximately 20% of the drop in Twisted Tea is due to the Vodka tea category, of which Sun Cruiser is one of the brands. To the extent that Sun Cruiser sources volume from Twisted Tea, this is revenue and gross margin accretive for us. Twisted Tea brand equities remained strong with growing distribution of a very large organic social following and the highest organic engagement among the top 10 beer brands. It is a clear leader in malt-based hard tea with over 85% market share in measured off-premise channels. So far this year, single-serve is performing much better than large packs, which tells us that the consumer interest in the brand remains strong. We believe that softness in larger pack sizes is driven by its higher absolute price point with more cost-conscious shoppers. To address this, we will refine our pricing in certain markets, as necessary. In addition, in certain markets, we have recently added an under $10 for package 16-ounce four pack to help increase lower price points and drive demand. 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 Blue Raz are still the top 2 growth SKUs in the convenience channel among all FMBs. To meet drinker demand, we're planning to add a Twisted Tea Extreme variety pack early in 2026. We expect Twisted Tea Light and Twisted Tea Extreme to be growth drivers for the brand for the remainder of 2025 and beyond. We have strong advertising plans for the rest of the year to position the brand for future growth. Key campaigns to drive awareness for the balance of the year include our high-performing key drop ads along with our college football and fall fest programs with spends across ESPN, ABC and CBS during key college football matchups. Our college football program includes in-game advertising, sponsorships with ESPN, and expanded retailer programs with team-specific packages in key markets. In the coming months, we're adding other promotions, key programs and partnerships and media that resonate with our drinkers, including country music, NASCAR and WWE Wrestling, as well as NFL-related promotions. And lastly, we're increasing our investment in Hispanic and Spanish language brand content, including new media and digital content to continue to widen the brand's appeal to more drinkers. In summary, Twisted Tea is our largest brand, and we're continuing to support it with advertising investment and innovation. We continue to believe that despite near-term challenges, these actions, coupled with an improvement in the macroeconomic environment will return the brand to growth in the long term. Moving to Sun Cruiser now, which launched last summer and went national in January of this year. Sun Cruiser has been very well received by wholesalers, retailers and drinkers, particularly in the highly visible on-premise channel. Many consumers were introduced to Sun Cruiser in this channel, and we believe it is the right place to build the brand. According to Nielsen data, Sun Cruiser is the leading RTD spirits, tea and lemonade brand in on-premise bars and restaurants. Sun Cruiser has quickly grown to become the fourth largest brand in the RTD spirits category, continues to increase distribution and has one of the highest velocities of the leading RTD spirits brands. It is now on shelf in larger national chain retailers and has tripled its points of distribution compared to earlier in the year. This expanded presence is beginning to be reflected in measured off-premise channel data. However, given Sun Cruiser's strong presence in on-premise and independence, measured off-premise data still only reflects a small portion of the brand's total volume. We believe Sun Cruiser will be the next iconic brand for our company and an important growth contributor for the beyond beer category. We are focused on building the brand's distribution, displays and retail promotion while investing in media and key sponsorships that keep the brand relevant throughout the 4 seasons of the year. From a product innovation perspective, we intend to keep a disciplined number of tea and lemonade styles while continuing to expand package options. Sun Cruiser will be available in the 19.2-ounce can format in New England this month, which will be expanded nationally in early 2026. Advertising support for Sun Cruiser is built around the "Let the Good Times Cruise" brand campaign as well as sponsorships of sports and music venues, including NFL, PGA Golf and MLB media and sponsorship of the AEG music concert series. The media campaign also includes paid social and digital advertising and key influencers. Additionally, Sun Cruiser's presence in AVP Beach volleyball and the World Surf League further reinforce its positioning as a brand for sun, sand and fun. In summary, it is early, but we are very excited about the outlook for Sun Cruiser and its contribution to our hard tea portfolio. We will continue to increase investment in both Sun Cruiser and Twisted Tea with our goal for 2026 being to increase our share and grow volume in the overall hard tea category. Turning to Hard Seltzer. The overall Hard Seltzer category declined 4% in dollars in measured off-premise channels in the third quarter as consumer preferences continue to shift towards more premium RTD spirits-based beverages. While Truly continues to be a top 2 hard seltzer brand and top 4 Beyond Beer brand year-to-date, we're not satisfied with its performance. We are focused on improving Truly's brand message and relevance, promoting our lead flavor wildberry, bringing variety through seasonal rotator packs and building on the momentum of our high ABV innovation Truly Unruly. Our new creative platform we recently launched is built around "Make Your Dreams Come Truly." This includes new creative content and a significant investment in regional media in key markets and new retailer campaigns. Truly will continue to leverage its relationship with U.S. soccer as its Beyond Beer sponsor and its recently announced sponsorship of the American Outlaws, the official fan club of U.S. soccer. Truly will launch a U.S. soccer collector set of singles to help promote 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 and include 11 cities and over 100 matches. 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 number one 12-pack share gainer in Hard Seltzer in the last 12 months. In Cider, Angry Orchard has returned to growth behind the consumer trend back to more flavorful options. Depletions grew in the third quarter and year-to-date, driven by a higher level of focus across the organization including increased investment and new sponsorships. The new campaign, "Don't Get Angry, Get Orchard" and our sponsorship of WWE Wrestling positively impacted results and helped the brand gain shelf space. The brand's current programming is focused on owning Halloween, and we are executing an exciting program featuring Jason from Friday the 13th movie-themed advertising, promotions, packaging and displays for Halloween and the peak fall Cider season. Our beer brands, Samuel Adams and Dogfish Head have combined to hold share in a challenging craft beer category. We are excited that in early 2026, 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 are particularly pleased that Dogfish Head's Grateful Dead beer collaboration has helped fuel Dogfish Head's return to growth. 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 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 to expand our margins. I'd like to thank our Boston Beer team, our distributors and our retailers for their continued support and remaining agile in a dynamic operating environment. I will now pass the call over to Diego to review our third quarter financial results and 2025 guidance.

Thank you, Jim. Good afternoon, everyone. As expected and as Jim noted, during the third quarter, our shipments rebalanced relative to our depletion, which unfavorably impacted third quarter shipments and revenue. Depletions decreased 3% and shipments decreased 13.7% compared to the third quarter of last year, primarily driven by declines in our Twisted Tea, Truly Hard Seltzer and Samuel Adams brands, that were only partially offset by growth in the company's Sun Cruiser and Angry Orchard brands. We believe distributor inventory of four and 1.5 weeks on hand as of September 27 is an appropriate level for each of our brands. Revenue for the quarter decreased 11.2% due to lower volumes, partially offset by increased pricing and favorable product mix. Our third quarter gross margin of 50.8% increased 450 basis points year-over-year, and it's the highest level we've had since 2018. Gross margin primarily benefited from procurement savings, improved brewery efficiencies, price increases and product mix, as well as a favorable comparison against higher inventory obsolescence in the prior year. These factors were partially offset by increased inflationary and tariff costs. Advertising, promotional and selling expenses for the third quarter of 2025 increased $16.8 million or 11.3% year-over-year primarily due to $20.9 million in increased brand media and local marketing investments that were partially offset by lower freight costs. General and administrative expenses for the third quarter increased $1.1 million or 2.5% year-over-year, primarily due to increased salaries and benefit costs. For the first 9 months of the year, the strong progress we have made in our supply chain initiatives enabled us to deliver a 49.7% gross margin and generate $11.82 of EPS. Our three buckets of multiyear savings projects, which we are executing ahead of our initial timing expectations, are positioning us to respond better to potential changes in the volume environment, product mix and tariffs. We are continuing to execute projects across all three buckets, which I'll now discuss. In brewery performance, we continue to see improvements in operating efficiencies driven by process improvements, which helped to increase our internal production capacity. In the third quarter, we produced 90% of our domestic volume internally compared to 66% in the third quarter of last year. Year-to-date, our domestic internal production increased to 83% of our volume compared to 71% in the first 9 months of the last year. In our procurement savings, our third quarter results benefited from lower negotiated pricing on certain packaging and ingredients. Our efforts year-to-date have resulted in procurement savings more than offsetting inflationary impact. In waste and network optimization, we're continuing our efforts to improve our customer ordering and inventory management system that we implemented last year. These efforts resulted in a 28% reduction in obsolete inventories year-to-date. Turning to our guidance. Given that three quarters of the year are behind us and our fourth quarter is seasonally smaller quarter, we are narrowing our volume guidance range and raising our gross margin and EPS guidance for the full year, inclusive of higher investment spending in our brands. We now expect our volumes to be down mid-single digits for the year. Our depletion trends for the first 42 weeks of 2025 have decreased 4% from 2024. We continue to expect price increases of between 1% and 2%. Based on strong gross margin performance year-to-date, combined with a lower-than-expected impact from tariffs, our gross margin guidance for the year is now 47% to 48%, up from 46% to 47.3% previously. We now expect tariffs to have an unfavorable impact of $9 million to $13 million, which is a gross margin headwind of 40 to 60 basis points. The change to our tariff estimate is due to lower-than-anticipated tariffs primarily on material sourced from Canada and exempt from the tariffs as U.S. MC compliant goods. In the first 9 months, we have incurred $7.1 million in tariff costs. Given our strong margin performance, we are using some of the upside to increase our advertising investments in our brands in the fourth quarter. We now expect increases in advertising, promotional and selling expenses to range from $50 million to $60 million, an increase from our previous estimate of $30 million to $50 million. This does not include any changes in freight costs for the shipment of the products to our distributors. We are revising our full year 2025 EPS guidance range inclusive of tariffs to $7.80 to $9.80, up from $6.72 to $9.54. Tariffs are expected to have an unfavorable impact of $0.60 to $0.80 on earnings per diluted share. As you model our fourth quarter, please keep in mind the following factors. Due to seasonality, the fourth quarter is our smallest revenue quarter with the lowest absolute gross margin rate of the year. Meaningful improvement in our gross margin performance began in last year's fourth quarter, which we will be lapping. Additionally, we expect volume deleverage in the fourth quarter combined with a higher year-over-year shortfall fees. Turning to capital allocation. We ended the quarter with a cash balance of $250.5 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 2025, we are lowering our capital expenditure guidance range by $20 million to between $50 million and $70 million, with a portion of the reduction driven by timing. We continue to focus our spend on supporting our productivity programs. During the 13-week period ended September 27, 2025, in the period from September 27, 2025, through October 17, 2025, we repurchased shares in the amount of $50 million and $12.1 million, respectively. As of October 17, 2025, we had approximately $266 million remaining on the $1.6 billion share repurchase authorization. This concludes our prepared remarks. And now we'll open the line up for questions.

Our first question comes from Nik Modi with RBC Capital Markets.

I have a couple of clarifications. Diego, Jim, could you discuss the timing of the promotional spend, particularly for Twisted Tea? I assume it will focus more on the 12-pack. Also, Jim, regarding the local marketing spend you mentioned at NBWA, is that just for this year, or will it extend into next year? My broader question is about consumer affordability. I've heard a lot about pack size innovation from Boston Beer, but what about smaller pack sizes? The carbonated soft drink industry has seen success with 8-ounce cans, and Constellation has had some success with 7.5-ounce bottles. I'm curious about your thoughts on possibly offering some of your core brands in those pack sizes.

Thank you, Nik. I'll start the question a little bit with the numbers and then I'll hand it off to Jim to talk a little bit more about the spend and where we're doing it. So I think if you remember at the beginning of the year, we said this year, we're really going to take up our spend and really support our brands. And so we've started this year. You've seen in our results, how part of it has already been in our numbers, and we're going to double down in the balance of the year, and that's why we're taking up a little bit our A&P spend guidance. We're working on next year's plan, but there's no reason why we wouldn't continue to invest in our brands, given some of the things that we're seeing in some of the innovation like Sun Cruiser and some of the great results we've had there. So I would say we'll come back in more detail for 2026, but definitely in the back end of this year, and we expect to kind of keep going into next year. We'll continue to support our brands, and we like the results we've seen coming back from. Jim, I'll hand it off to you a little bit more in the detail of what we're doing around that.

Sure. We are working on how to enhance promotional spending on Twisted Tea. One of the initiatives we announced is introducing a 4-pack of 16-ounce cans priced below $10, with market prices ranging from $8.99 to $9.99, which offers a more appealing entry point. Additionally, while singles are performing reasonably well, the 12-packs have shown significant weakness in some markets. We believe their pricing has increased beyond what is typical for Twisted Tea, which traditionally sits between mass domestic brands and craft or import beverages, targeting a more blue-collar audience. In some cases, I've noticed 12-packs priced higher than Modelo or Stella, which is likely a misstep. We aim to strategically readjust the pricing of 12-packs to be below imports, craft, and in some instances, other flavored malt beverages. Regarding smaller beer sizes, I'm not convinced they offer much value as consumers typically prefer 10 to 12 ounces. For example, a 7-ounce bottle, like Coronado, does not cost significantly less than a 12-ounce one, making it more expensive on a per-ounce basis. In terms of our pricing strategy, we are exploring ways to provide comparable or greater value. Thus, we'll introduce a lower entry point with the 4-pack of 16-ounce cans while also offering 18-packs and 24 loose packs in the right markets to enhance value for consumers.

And the next question will come from the line of Filippo Falorni with Citi.

I wanted to talk on the gross margin performance, very strong performance again. So congratulations on that expansion. Maybe like what levels were you able to extract considering the volume deleverage this quarter that came in better than you expected? And then just more broadly, Diego, maybe like you talked about the high 40%, low 50% gross margin target in the next couple of years. Are you feeling better in terms of getting there maybe a little bit faster than you initially anticipated? And maybe what are the drivers of potentially getting to the target?

Thank you for your question, Filippo. First, to clarify, I believe I've consistently mentioned high 40s, so I'm uncertain about mentioning low 50s. We're very pleased with our gross margin. We haven't experienced a quarter like this in quite some time, and it's a result of ongoing projects, cost-saving initiatives, and the efforts of our operations team and the entire organization, along with price mix and revenue management. A couple of years ago, we stated that we could reach the high 40s regardless of volume changes because we focused on three main areas: procurement savings, brewery efficiencies, and our distribution setup. What you're observing now is a quicker progress than we initially expected in delivering some of these projects, but it still derives from those same areas. I am confident in our capability to reach and sustain the high 40s. To surpass that threshold, we need to consider several factors, including volume and tariffs. This year, we have only a small portion of what the impact would be if nothing changed. Internally, we definitely aim to move beyond the high 40s into the 50s. To achieve that, we must continue our current projects and cost-saving efforts, but we also have to consider dependencies related to volume, costs, and inflation. We will strive to reach the highest possible number, but at this moment, we're very pleased with our current position.

Great. That's helpful. Did you manage to offset the shipment challenges this quarter? What actions did you take to mitigate the negative impact this quarter?

Yes. That's a great question. And one of the things that I think it's important to remind people is it's really hard to look at quarter-to-quarter because although we talk about shipments and depletions, there is one other volume that we don't talk enough about, which is production. And therefore, it's not just how much you ship, but it's also how much you produce. And we had a strong production number, especially in our own footprint. So if you look at our percentage internal and external, it was up significantly versus last year. And therefore, that helped us that plus the brewery efficiencies plus the other buckets that I mentioned, helped us offset that from a volume point of view. So going back to some of the numbers we had 90% in Q3, internally, we had 66% last year, as just a matter of how we plan out the volume. So that helped us in the quarter.

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

So I wanted to get some perspective on just how you see the top line growth evolving within your portfolio as you look out over the next 12 to 18 months. Obviously, some cruiser momentum has been impressive this year. You've been able to partially stem the declines that you're seeing in Truly. But you highlighted some of the challenges which are likely to linger. It seems like Truly could be under pressure as well. So just as you think about the path forward, and I know we'll get guidance ever. But just how do you think about the move pieces as you look ahead given what we know today? And maybe specifically, whether you think the growth or the contribution from Sun Cruiser can be as strong next year versus what we're seeing this year.

Perfect. Thank you for the question. I'm going to start the answer, and then I'm going to hand it off to Jim. So as you've mentioned, we're working on our 2026 plan. But there are things we're very happy with. Sun Cruiser, we're very happy with. It's one of the top brands, and we still think it has a lot of runway. So from that part of your question, yes, we still have strong hopes for the brand. We also have other innovations and things that we feel strongly about. But it's also important where the total market is. We like our portfolio. We like the ability to win share, but there is a question of where the market is going to go, and I think that will be a piece of it. So in that tone, I'm going to hand it off to Jim, and Jim, please, if you can share your view.

Yes, we aim to at least maintain our market share for each of our brand families within their respective segments. For instance, we successfully maintained our positions with Sam Adams and Dogfish Head in the Craft Beer segment, while Angry Orchard and Hard Cider are actually gaining share as they grow. However, we're facing challenges with Twisted Tea and Truly. Twisted Tea caught us off guard; it showed positive growth of about 5% for a couple of months early in 2025 but quickly turned around and has recently dropped to double-digit declines. We believe Twisted Tea should be able to hold its position as one of the largest brands in the FMB category, backed by strong marketing support, including effective national advertising and local promotions with our wholesalers. We aim to restore its share within the category. Similarly, Truly has been losing share in Hard Seltzer, although we have seen some positive growth from the Truly Unruly styles, and we intend to get that closer to the category average. We are increasing brand support for Truly across various channels, including our sponsorship of the U.S. soccer team, anticipating that the World Cup will be a significant event. We are making special efforts in 11 cities, and our wholesalers and retailers are enthusiastic about Truly as the World Cup approaches. As for Sun Cruiser, we believe it has considerable growth potential. Next year, we plan to have full representation in all major chains, after only partially participating this year due to distribution challenges. Despite this, we performed well, achieving the top position in tea and vodka lemonade at Walmart where we had good distribution. We're targeting underpenetrated markets, particularly in the Atlantic region, where we believe our share can improve. Therefore, we anticipate another strong year for Sun Cruiser in 2026, potentially seeing double-digit or even triple-digit growth.

Great. Regarding brand support, how do you view the balance between reinvesting and letting savings contribute to profits? I realize you have more flexibility and want to support the brand for the long term, but it doesn't appear to be improving depletion performance in the short term. How should we think about this as we move forward?

Go ahead, Jim.

You should think of us as focused on growth. That’s our perspective. We believe that we need to increase our revenue. As a company, we are significantly moving away from traditional beer and towards what is often referred to as beyond beer. I prefer to call it a fourth category because it encompasses more than just beyond beer; it includes beyond liquor and beyond wine as well. There are various definitions of beyond beer. From our viewpoint, there’s a significant growth gap between traditional beer, which appears to be declining by around 5.5% this year—we’ll see the final figures at year-end—and beyond beer, which is down by about 1 or 2%. This indicates a 4% gap. We anticipate that next year, the overall beer category will not decline by 5.5%, and we expect it to decrease by a lesser amount, although we can’t predict exact numbers. We believe that the fourth category will see a modest growth next year. Therefore, we operate more heavily in a segment of the overall beer and beer-like markets compared to the traditional beer industry as a whole. We are confident that we are participating in a growth segment for the long term, and we're investing accordingly.

Yes, I want to expand on Jim's point for clarification. If you look at this year, you might consider the balance between what has gone to profit versus our brands. However, if you look back two or three years, we've actually generated savings for both. We've improved our profitability while also investing in our brands. I believe we have demonstrated our strength in responding to market conditions. As we plan for next year, we will focus our investments on areas that are performing well, and where we feel it's appropriate to boost profits or invest elsewhere, we will do so. We will keep you updated on our capital allocation moving forward.

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

Great. A couple of housekeeping items. First on the year-to-date, I think it's 42-week depletions were down 4% versus down 3% through the 39 weeks. Is that just rounding and maybe a case of down 3.4% versus down 3.6%? Or did the business slow in October?

So, I mean, the numbers are very close. So it's not that there was a significant change in the last period. It's, to your point, more about where the numbers end up.

Okay. And then, Diego, your comment on the higher volumes and your own production footprint in the quarter and the higher production volumes overall. Do you see that as sustainable into the fourth quarter and early next year? And more broadly, where do you stand in terms of reconfiguring the third-party production that you guys have put in place several years ago now?

Let me address the different parts of your question. We do not anticipate that trend continuing into the fourth quarter, and our guidance reflects that expectation. The fourth quarter is typically our lowest production volume period of the year and consequently brings the lowest margins. Additionally, we are up against last year’s fourth quarter when we began production of the Sun Cruiser. Therefore, we are not forecasting that production strength to carry into the fourth quarter. This is why we emphasize our full-year guidance, as quarterly fluctuations can occur without significantly impacting the annual outlook. We will provide more information during our 2026 guidance update. Regarding your third question, we continuously update our relationships with third-party producers. However, it’s important to note that our need for co-packers goes beyond just volume; it also serves as a contingency, allowing us to avoid constructing facilities for emergencies that could halt our production. This backup is vital, particularly for certain products where geographical advantages play a role. We regularly review our partnerships and will keep you informed as contracts approach renewal.

Great. And then just one last housekeeping item. I believe you gave the shortfall fee outlook in the Qs, I'll have to check the latest, but can you just remind us the amortization of the prepaid expense. Does that step down next year? And sort of what's the magnitude there?

Yes, you are correct. Like there's two pieces to the shortfall fees. So the amortization does go away, but we continue to have the regular shortfall piece. So you can see in our 10-Q, you can see year-by-year what our forecast is for each one of the shortfall fees. And I'm happy to send it to you if needed.

And the next question comes from the line of Robert Ottenstein with Evercore ISI.

This is Greg on for Robert. I was wondering if you could just talk a little bit about the impact from both hemp beverages and then the Hispanic consumer on your products. You talked about them both on like a higher level. But have you guys done any work into like how much of this 5% to 5.5% decline in the beer category is due to the weaker Hispanic consumer and then how much you think hemp beverages is impacting demand for your products?

Jim, would you like to answer that question?

Sure. There isn't much reliable data on this, so I'm going to estimate. I believe around 20% of our Twisted Tea consumers are Hispanic, which is similar to the overall market. To me, the main factors are the general economic situation, which is somewhat okay overall, but for 80% of the population in the lower income brackets, it's not good, and that's where beer consumption is prevalent. The second factor is health concerns. There is a lot of media coverage relating alcohol to cancer, despite the opinions of the National Academy of Sciences. So these are the two major issues we face. As for hemp, its impact is smaller, perhaps around 1% of that 5.5% decline, since its availability is restricted to a limited number of states. Thus, economic conditions and health concerns seem to contribute significantly to that decline, alongside the Hispanic demographic and hemp beverages. Beyond that, there are other minor influences, like GLP-1. Does that help?

Yes. That's great. And then just maybe within the hemp beverages, when you guys see consumers moving towards some of those products and like which of your products do you think are most exposed to those market share losses?

I don't think we have that level of detail, to be honest, just by each one of the brands because to Jim's point, it's such an evolving legal framework and category like every day you wake up and a state is in, it's out, etc. So that would be a hard question to answer. But as we go forward and things clarify, we can share that.

Thank you. And our final question comes from the line of Bill Kirk with ROTH Capital Partners.

So I asked a very similar question last quarter, but now year-to-date EPS is almost $12 a share. Full year guidance implies a fourth-quarter loss of $4 a share to $2 a share. So when you look at fourth quarter, is there really no scenario where you see positive EPS? And I asked because before 2021, fourth quarter was always a positive earnings quarter. Since 2021, it hasn't been positive once, I don't think. But I guess, what changed with the earnings seasonality that makes the fourth quarter a negative earnings quarter?

Clearly, you were not satisfied with my previous response. However, we've consistently communicated that the fourth quarter tends to be our weakest. This year, we aimed to align production with demand to prevent the challenges we faced last summer and at the year's end. We also had high expectations for Sun Cruiser. Consequently, you may have noticed our production days extended in the second quarter and began to decrease in the third quarter. This indicates a change in our production and shipping patterns as we worked to ensure our distributors and customers had adequate access. Additionally, we've increased our marketing spend guidance for the full year, with a significant portion expected to occur in the fourth quarter. Therefore, we will invest substantially more this fourth quarter compared to last year's investments. When you consider all these factors, it explains why we're improving our full-year guidance, although Q4 differs from the previous year.

Bill, I can provide some additional insight. Over the past five or six years, our product mix has shifted from primarily craft beer and hard cider to being dominated by Truly and Twisted Tea. This shift means we are focusing more on summer-oriented beverages like Truly and Tea, along with Sun Cruiser, rather than Sam Adams and Angry Orchard. For Angry Orchard, October and November are particularly important months due to Halloween, Thanksgiving, and Apple Harvest. Therefore, our key products have transitioned from being more summer-focused to less of a focus in the fourth quarter.

That makes a lot of sense. And then a few years ago in Vermont, right, they put spirit-based RTDs next to the malt products. At the time, I would guess that you wouldn't have supported that change. But now with Sun Cruiser, where does Boston Beer stand on channel access initiatives for spirits or even tax equivalency proposals? And are there any large legislative changes out there that are possible in the near term?

Jim, I will hand that over to you.

Yes. Our position hasn't changed. We think that historically, going all the way back to, I think, 1794, the first sort of broad taxes in the U.S. that were not import duties were on whiskey, not on beer. Beer did not get a federal tax to believe it or not to fund the civil war, which was a little while ago, but the tax hasn't gone away. So we support the historical tax structure and availability structure that's served the alcohol industry quite well since prohibition. So our position on equivalency hasn't changed. We believe there's a difference between beer as the beverage of moderation and our friends over in the spirits industry. We're still with the Beer Institute on this.

And at this time, there are no further questions. And now I'd like to turn the floor back over to Jim Koch for any closing remarks.

Thank you all for joining us, and I'm looking forward to talking to you again in February when we can sum up this crazy year in the beer business. Cheers.

Thank you. And this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.