Operator: Greetings, and welcome to The Boston Beer Company Q3 2026 earnings call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Mike Andrews, Associate General Counsel and Corporate Secretary. Please go ahead.
Mike Andrews: Thank you. Good afternoon, and welcome. This is Mike Andrews, Associate General Counsel and Corporate Secretary of The Boston Beer Company. I am pleased to kick off our 2026 Q3 earnings call. Joining the call from Boston Beer are Jim Koch, CEO, Brewer and Founder, and Matt Murphy, our Interim CFO. Before we discuss our business, I will 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 is 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 10Q and 10K.
Mike Andrews: 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 over to Jim for some introductory comments.
Jim Koch: Thanks, Mike. I will begin my remarks this afternoon with an overview of our strategy and operating results before turning the call over to Matt Murphy to discuss the Q3 financial results and our financial outlook for the remainder of 2026. After Matt's comments, we will open the line for questions. Now, let us start with a look at industry trends. The overall beer market continues to face demand pressure, reflecting a range of factors, particularly the impact of higher gas prices and the cumulative effect of inflation on our consumers. We estimate that the combined total beer and beyond beer market declined approximately 3% in volume in Q3 and 2% year to date. Beyond beer continues to outperform traditional beer, with volume growing 1% year to date, compared with a 3% decline in traditional beer.
Jim Koch: We expect continued macroeconomic pressure on consumers to weigh on industry volumes throughout the balance of 2026. With respect to the Boston Beer portfolio, our volume trends trailed the broader category in Q3, with mixed performance across our portfolio. Depletions in shipments declined 5% in the quarter, with total hard tea and lemonade depletions up slightly and growth in cider, primarily offset by declines in beer and hard seltzer. On a more positive note, Sun Cruiser grew approximately 60% in tracked channels in the quarter. Angry Orchard grew for the sixth consecutive quarter, and on-premise trends were up low single digits across our portfolio. For the full year, we expect shipments to be slightly ahead of depletions. This reflects a prior year comparison to inventory reductions associated with our supply chain improvements that Matt will discuss further in his remarks.
Jim Koch: Despite a soft industry volume environment, softer than we planned at the start of the year, we continue to make strong progress on our margin enhancement initiatives. Q3 gross margin of 51.7% was up 90 basis points year over year and is our highest gross margin rate since 2017. Our savings agenda has enabled us to absorb higher aluminum, energy, and tariff costs as we are tracking ahead of our planned full year 2026 savings. The business is generating strong cash flow, and we have repurchased $80 million in shares year to date through 16 October 2026. Today, we are narrowing our full year guidance ranges, which reflect our performance through the first three quarters of the year and our view of the industry trends, as I discussed earlier. We now expect depletions and shipments to be down mid-single digits, which is the low end of our prior range.
Jim Koch: Based on our strong gross margin performance year to date, we are raising the low end of our gross margin and EPS guidance. This is particularly notable given continued elevated freight costs and reflects the productivity mindset we have built across the organization during the past several years. Our priority for the balance of the year remain improving market share trends, launching strong innovation, and driving gross margin expansion. We continue to support our brands through strong partnerships, compelling programming, and effective local market activations in partnership with our wholesalers. At retail, we have made modest progress on increasing total portfolio shelf space, while display space remains an area of opportunity as it continues to over-index to RTD Spirits.
Jim Koch: Before I review our brand performance and upcoming plans, I'd like to take a moment to welcome Allison Stransky, who joined Boston Beer earlier this month as our new Chief Marketing Officer. Allison brings a unique blend of consumer brand building and data-driven digital marketing expertise. She has held prior positions at Google, Samsung, L'Oréal, and Johnson & Johnson, and she's also a big fan of craft beer. We're excited to have her on the team as we continue to strengthen and evolve our marketing capabilities. Now turning to our brands. In the hard tea and lemonade category, we're continuing our work to improve share trends and grow total combined volume of our two leading brands, Sun Cruiser and Twisted Tea.
Jim Koch: Sun Cruiser has become a top 4 spirits RTD in just over 2 years and continues to rank among the category's fastest-growing brands in combined measured on and off-premise channels. It also continues to be the leading RTD Spirits tea and lemonade brand in the measured on-premise channel and has the highest growth in velocity among leading RTD Spirits tea and lemonade brands in the off-premise channel. Sun Cruiser is building on its strong summer US Open Golf Championship activation as we reinforce its position as a year-round brand that will grow in both existing and new markets and across channels. Sun Cruiser continues to increase its media presence in sports and other events, including the PGA, Major League Baseball, the world champion New York Knicks, and sponsorship of numerous music concert series.
Jim Koch: Last month, the brand expanded its on-premise sports presence through a partnership with MetLife Stadium, the New York Jets, and the New York Giants. Advertising support for Sun Cruiser includes content around the Let the Good Times Cruise media campaign across television, paid social and digital advertising, and key influencers and creators. Sun Cruiser is leaning into ski season with in-market displays, retail, and on-premise POS material, branded hard goods such as snow suits and snowboards, partnerships with major ski areas, and a winter-themed media campaign that begins in December. We continue to see strong velocity and distribution opportunities for Sun Cruiser, giving us confidence in the brand's continued growth potential. Twisted Tea continues to be the clear number 1 brand in the malt-based hard tea market, with more than 85% market share, while the next largest brand has only a low single-digit share.
Jim Koch: We believe the brand's volume declines reflect a combination of factors, including some interaction with spirits-based hard teas like Sun Cruiser, a shift in retailer display and feature focus towards RTD spirits, and the brand's higher exposure to value-conscious consumers. The largest volume headwind for Twisted Tea continues to be on 12-packs, which have been impacted by reduced FMB displays and shifting consumer purchasing behavior. From a share perspective, Twisted Tea Singles, Twisted Tea Light, and Twisted Tea Extreme all continue to grow share of the FMB category year to date. This year, we have increased advertising investment for Twisted Tea while adding new partnerships, launching new pack sizes, and expanding Twisted Tea Extreme. We are continuing our disciplined test and learn approach to revenue management on the brand, including targeted pricing adjustments and smaller pack size offerings. We will continue to assess their impact as we gather additional data.
Jim Koch: Twisted Tea has also launched a partnership with Realtree Camo, a popular brand of camouflage clothing and outdoor gear that helps us deepen the brand's connections to outdoor drinking occasions and drive displays. There are 3 limited edition camo-wrapped packs in the market now. We are backing this partnership with significant media, as well as a Field & Stream sponsorship, creator partnerships, and shopper media support in C stores to drive conversion on Twisted Tea single-serve cans. We are also capitalizing on football season, which is one of the brand's most important consumption occasions. We are running our high-performing Tea Drop ads on marquee college football match-ups, continuing our title sponsorship of Barstool's Pardon My Take, and investing in shopper media to drive party pack conversion at retail.
Jim Koch: While there is some interaction between Twisted Tea and Sun Cruiser, they each play a role in our portfolio, and we believe their differentiated positioning provides an opportunity to improve the combined performance of the two brands over time. As we mentioned previously, to the extent Sun Cruiser sources some drinker demand away from Twisted Tea, it is still both revenue and margin accretive for us. Turning to Hard Seltzer, while Truly continues to face challenging trends, it remains the number 2 brand in the hard seltzer category. We continue to assess the brand strategy and are taking actions to improve its performance over time. In the near term, we are reprioritizing 12-packs around our core best-selling flavors. We are rethinking our rotating variety packs, and we are expanding packages around our core style, Truly Wild Berry.
Jim Koch: In cider, Angry Orchard is seeing growth across both core flavors and seasonal packs for the second straight year. The fall seasonal The Thriller Variety Pack, which launched in August, has grown triple digits in measured off-premise channels. The brand's partnership with the iconic Scream horror movie series includes Scream and Angry Orchard integration across all marketing programs, limited edition Crisp Apple and Crisp Imperial single-serve packaging, and celebrity media integration through Halloween. Turning to beer, our Samuel Adams brand. This fall, we launched two new remastered vintage ads from our independent Since Forever campaign. They have tested extremely well with our consumers. We saw strong improvement in Boston Lager velocity trends over the summer, driven by America 250 program. Octoberfest season is underway, featuring the launch of the new Samuel Adams Non-Alcoholic Octoberfest.
Jim Koch: Support includes a national partnership with Snyder's Pretzels, on-premise stein hoisting events, and major Octoberfest festival activations. For our Dogfish Head brand, we continue to expand our Grateful Dead beer collaboration and invest behind the Minute Series IPAs. We have also recently introduced a new partnership with Rolling Stone magazine to further bolster our connection with music. Turning to innovation, we have multiple brands in development that are aligned with our strategy to develop high growth, margin, accretive opportunities. Rally Dog Vodka Ade is the newest ready-to-drink cocktail from our innovation incubator. Joining the emerging vodka ade space, it was launched last month in four states with unique packaging, easy-to-understand flavors, 100 calories per can, and 5% ABV. Rally Dog is expanding to seven additional states over the next month, with plans to go national in 2027.
Jim Koch: As we expand, we are focused on building awareness, deepening distributor engagement, and establishing a larger retail footprint as we head into next year. Lytt Electric Coolers, which initially launched in five states, has now expanded to an additional 18 states and will be available nationally in 2027. Lit is 15% ABV, malt-based, and offered in six flavors in a resealable and recyclable 6.8-ounce package. This concept targets the pre-event occasion, with potential to be largely incremental to our portfolio. Additionally, Lit took home the 2026 Best New Alcoholic Beverage High ABV award at the annual National Association of Convenience Stores show earlier this month. Sinless Vodka Cocktails continues in test as a zero sugar, zero carb, 100-calorie offering.
Jim Koch: These innovation brands are still in the early stages of development and are not expected to have a significant impact on our results this year, but we see an opportunity for innovation to become much more meaningful as we move into 2027. In closing, despite a challenging operating environment, we have made significant progress strengthening our operations and advancing our savings initiative. That progress is helping us offset significant unplanned commodity and freight inflation while maintaining our brand support and bringing new accretive innovation to market. We remain disciplined in how we manage the business, and we are working closely with our wholesaler partners to strengthen marketplace execution to drive sustainable long-term growth. I would like to thank our Boston Beer team and our distributors and retailers for their continued support.
Jim Koch: I will now pass the call to Matt Murphy, who has assumed the role of interim Chief Financial Officer and brings a deep financial knowledge of Boston Beer. The board and I appreciate Matt stepping into this additional role while we conduct a comprehensive search to identify our next CFO.
Matt Murphy: Thank you, Jim. Good afternoon, everyone. I will begin with a discussion of our Q3 results, followed by an update on our savings initiatives, and then turn to our updated full-year outlook. Depletions decreased 5% and shipments decreased 4.9% compared to the Q3 of last year, driven by declines in Twisted Tea, Truly, and Samuel Adams, partially offset by growth in our Sun Cruiser and Angry Orchard brands. Distributor inventory at the end of the quarter was four weeks on hand, slightly below the 4.5 weeks on hand at the end of the prior year quarter. Revenue decreased 3.2%, with lower volumes being partially offset by favorable product mix and price increases. Product mix continues to benefit from strong growth in Sun Cruiser. Gross margin was 51.7%, our highest quarterly gross margin since 2017, and an increase of 90 basis points year over year.
Matt Murphy: The improvement was driven by higher brewery efficiencies, favorable product mix, procurement savings, and price increases, partially offset by inflationary commodity and tariff-related costs. Advertising, promotional, and selling expenses were flat year over year. This reflected $9.5 million in higher freight costs, with higher freight rates more than offsetting the benefit of lower shipment volumes and a $9.1 million reduction in advertising spend. General and administrative expenses decreased $2.1 million year over year, primarily due to lower salary and benefit costs. Current quarter expenses included $400,000 of legal fees associated with the previously disclosed supplier dispute litigation. Brewery asset impairment expenses were $2.9 million, an increase of $1.5 million from the comparable period of 2025, reflecting higher non-cash write-offs of equipment at company-owned breweries.
Matt Murphy: Non-GAAP operating profit declined 6% year over year as strong gross margin performance and disciplined advertising spend were offset by lower volumes and freight rate inflation of over 50% year over year. The Q3 supplier dispute litigation expense of $1.8 million reflects post-judgment interest expense. Year to date, pre-tax litigation expenses, including related legal fees, totaled $200.3 million. As previously announced, we intend to continue to pursue all post-trial motions and appellate remedies that are available to us on the supplier dispute litigation. We cannot estimate when or if damages or interest will ultimately be paid or when this matter will ultimately be resolved. But we do not expect it to have a material impact on our operating plans.
Matt Murphy: These litigation expenses and related legal fees represent a $0.16 unfavorable impact to our Q3 GAAP EPS and a $14.51 unfavorable impact to our year to date GAAP EPS. Excluding the litigation-related expenses, Q3 non-GAAP EPS was $4.37. Now we will provide an update on our ongoing productivity initiatives. We continue to make steady progress and remain on track to deliver our 2026 saving targets across the four buckets that we have discussed previously. I will provide a few highlights on our initiatives within each bucket. In brewery performance, we continue to see improvements in OEEs driven by process improvements, which has increased our internal production capacity. In the Q3, we produced 98% of our domestic volume internally, compared to 89% in the Q3 of last year. For the full year 2026, we continue to expect domestic internal production to exceed 90%, compared to 86% in 2025.
Matt Murphy: In procurement savings, our Q3 results benefited from lower negotiated pricing on certain packaging and ingredients. While our procurement savings initiatives are further along than other work streams, we do expect continued savings into 2027. In waste and network optimization, we continue to enhance our customer ordering and inventory management processes. These efforts have helped us maintain high customer service levels while reducing inventory and improving cash flow. Revenue management capabilities were added this year as part of our margin agenda. These efforts are in the early stages in 2026, with a more meaningful contribution expected in 2027. Turning to our 2026 guidance. Given that three quarters of the year are behind us and our Q4 is a seasonably small quarter, we are narrowing our full year guidance ranges.
Matt Murphy: Our updated volume expectation of down mid-single digits is at the lower end of our previous guidance and reflects the category trends that Jim discussed in his remarks. Fiscal week depletion trends for the first 42 weeks of 2026 have declined 5% year over year, and our updated outlook assumes this trend largely continues in the Q4. We expect shipments to be slightly ahead of depletions for the full year, with shipments meaningfully ahead of depletions in the Q4. As we discussed on our last call, we implemented supply chain improvements in 2025 that enabled more consistent distributor inventory levels. As a result of the impact of these changes on prior year shipment flows, together with the expected timing of orders in 2026, we currently expect modest shipment growth in the Q4.
Matt Murphy: We continue to expect price increases of between 1% and 2% and some additional benefit from mix. The strong productivity we have delivered year to date, along with our updated projection of lower tariff costs, enables us to raise the low end of our gross margin and EPS guidance despite softer volume trends and higher freight costs. We do not hedge commodities and have updated our cost assumptions for freight and aluminum to reflect the current pricing environment. We will continue to monitor commodity markets. Although the impact of further cost volatility on our full-year outlook is more limited with only one quarter remaining in the year. Our updated gross margin guidance of 49% to 50% represents 50 to 150 basis points of margin expansion year over year. This reflects benefits from positive pricing, favorable product mix, productivity savings, and lower shortfall fees.
Matt Murphy: These benefits are partially offset by headwinds from ongoing tariff costs, commodity inflation, and lower volumes. As a reminder, the majority of our freight expense is booked in advertising, promotional, and selling expenses. Stronger productivity savings and lower tariff costs, including the benefit of a $3 million tariff refund in the Q3, are enabling us to raise the low end of our gross margin guidance, even with lower than expected volumes. We now expect full year tariff costs of $18 million to $22 million, compared with our previous guidance of $20 million to $30 million and a partial year impact of $11 million in 2025. The lower outlook primarily reflects ingredient and packaging tariffs coming in below our previous estimate. Our guidance assumes the tariff rates currently being charged by our suppliers remain in place for the balance of the year.
Matt Murphy: From a phasing perspective, at the midpoint of our guidance, we expect year over year gross margin rate improvement to be the most pronounced in the Q4, reflecting lower shortfall fees and higher shipments year over year. We typically recognize the majority of our shortfall fees in the Q4. The reduction in these fees, combined with the Q4 being a seasonally smaller dollar quarter, results in an outsized favorable impact to the gross margin rate. We remain disciplined in our approach to advertising investment, closely monitoring returns and adjusting spending accordingly. Based on this ongoing evaluation, we now expect advertising, promotional, and selling expenses to be approximately flat, which is at the low end of our prior guidance range. The estimate does not include any changes in freight costs for the shipment of products to our distributors.
Matt Murphy: Importantly, we continue to invest meaningfully behind our brands with advertising building on a strong base following increases of $61 million in 2025 and $6.5 million in 2024. Q4 advertising spend in 2026 is expected to decline year over year as we have reduced investment levels in Truly and have difficult comparisons. As we mentioned previously, the Q4 of 2025 included meaningful production costs associated with preparation for 2026. Q4 2026 spend is expected to be comparable to the spend in the Q4 of 2024. We continue to estimate our full year 2026 non-GAAP effective tax rate to be approximately 29% to 30%. We have raised the low end of our non-GAAP EPS guidance and narrowed the range to $9 to $10.50, compared to our prior range of $8.50 to $10.50.
Matt Murphy: Turning to capital allocation, we ended the quarter with a $308 million cash balance and $150 million available on our line of credit. These balances, together with our projected future operating cash flows, enable us to maintain operating investments in our business and cash returns to shareholders, as well as the potential litigation related payment. We expect capital expenditures of between $55 million and $70 million in 2026, a reduction from our previous estimate of between $60 million and $80 million. These investments will be primarily related to our owned breweries to build capabilities, improve efficiencies, and support innovations. We will continue to be disciplined in our capital spending as we monitor the dynamic industry environment over the long term.
Matt Murphy: During the 39-week period ended 26 September 2026, and the period from 27 September 2026 through 16 October 2026, we repurchased shares in the amounts of $73.5 million and $6 million respectively. As of 16 October 2026, we had approximately $149 million remaining on the $1.6 billion share repurchase authorization. This concludes our prepared remarks, and now we will open the line for questions.
Operator: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Due to the interest of time, we ask that each analyst limit themselves to one question and one follow-up. Thank you. One moment please while we pull for questions. Our first question comes from the line of Filippo Falorni with Citi. Please proceed.
Filippo Falorni: Hi. Good afternoon, everyone.
Jim Koch: Afternoon.
Matt Murphy: Good afternoon.
Filippo Falorni: Jim, I wanted to go back to your initial comment on the category. Obviously, we started the year with some optimism in January and February, then we really seen a material deceleration into the summer. You called out some of the macro impacts and gas prices. How are you seeing those impacts evolving as you exit the quarter? Have you seen any signs of slight improvement? I know you're expecting still soft in Q4, but any sequential improvement that you're seeing? Bigger picture, do you think, next year we could see a bit of an improvement relative to this easier comparison on a 2-year basis? Or how are you thinking about the category evolving from here? Thank you.
Jim Koch: It's a really good question. I wish I had a crystal ball. But I'll just give you my observations. Again, I don't have any more expertise than some of my industry colleagues and peers that have commented on it. What we have seen, as you alluded to, Filippo, is the year began reasonably strong in the sense of a big improvement from last year when it was down on the order of 4%. It's deteriorated since then a little bit. These are not huge numbers, and our definitions may be different from other people's definitions. We sort of define it as our addressable market, which is both beer, as traditionally defined, and then this fourth category of beyond beer type products. Bottom line, they were, in the beginning of the year, improved.
Jim Koch: The numbers we're looking at is year to date, traditional beer down 3%, beyond beer up 1%, which should advantage us since about 80% to 85% of our volume is in the beyond beer category, depending on your definition. 15% is traditional beer, which is the opposite of the rest of the beer industry. But in the third quarter, it looked like traditional beer, which, instead of being down 3% is down 4%, and beyond beer is up the same 1%. So much of the deterioration is in the traditional beer category. So we're looking at a situation where Q3 is noticeably worse than Q1. Whether that will continue to deteriorate, stabilize, I don't know. If I were to think about last year versus this year, a couple of things have gotten better.
Jim Koch: For example, we're no longer reading about alcohol causes cancer on a regular basis, though that idea is still stuck in a lot of people's heads. Luckily, Dr. Oz, in talking about the dietary guidelines, mentioned that social isolation and loneliness are also not good for your health, and beer plays a part in bringing people together. So there's a more complex discussion of the health effects. The pressure on the Hispanic population from ICE and other agencies putting pressure on them has let up a little bit. On the other hand, the economy got noticeably worse, especially for kind of the bottom 80% of the population, which over-indexes in many ways on beer. Their wages did not keep up with inflation, so pressure on their discretionary income. GLP-1 drugs are still out there. Hemp is still out there.
Jim Koch: I don't know that those have changed that much since last year. I guess the bottom line is the year has gotten worse rather than better, mainly due to something cyclical, which is the price of gas and inflation being above wage growth. Does that help?
Filippo Falorni: Great. No, that's very helpful. Jim, I'd love your perspective on the vodka-ade category. We've seen, obviously a lot of launches there. You have Rally Dog. How are you seeing this category evolve compared to prior ones that you've had strong success, like hard seltzer or hard teas? It seems like it's very competitive, just very early in the development of the category. Just I'd love your perspective on the progress for the category and the competition there. Thank you.
Jim Koch: Yeah. Again, I don't have a crystal ball, but my observation would be that this vodka-ade category has exploded faster than hard tea, hard seltzer, even RTDs like NÜTRL and Cutwater and High Noon. All of those were around for years before they really hit everybody's radar screen and caused a land grab. Vodka-ade, in a year, has basically gone from this little curiosity, primarily in New Jersey, to the next big thing in people's minds. Now, will it be like something that had a similar rocket ship curve, which was way back 10 years ago, hard root beer, which was boom, splat, and disappeared all in a 24-month period. Hard to tell now. It feels like it's got more legs. It doesn't have the vulnerabilities that hard root beer had, where it had 320 calories in 12 ounces.
Jim Koch: I don't know how big it can get, but it's certainly gotten a lot of support from retailers. The next 12 months, there will be a lot of activity in it. I think I counted a dozen entrants, all of which have come in in the last year or so. Pretty much everybody has an entrant, except Molson Coors and ABI, and I would guess that they will probably throw something or buy somebody. It's certainly going to be where a lot of the action is, both at the retailer level and the wholesaler level, as well as the supplier level over the next 12 months. How big is it going to get? Hard to know. I doubt that it would get as big as hard seltzer or hard tea. If it did, that would make it a real player. We'll have to see.
Jim Koch: We're very happy with our entrant. It's called Rally Dog. We've gotten significant commitments from major chains who are making it their number 2 or 3 bet in the vodka ade category. It's distinctive in terms of its brand presentation. It's not a generic name. It's a personality. The flavor profile tests better than the competition, so we're confident in the quality of the liquid. As opposed to just about anybody else, we have a track record of innovation with the retailers and the wholesalers. We have a very large sales force that can execute at retail. There's going to be a lot of number 4, 5, 6, 7, 8, 9, and 10 out there that I think will struggle to get the distribution and the prioritization at wholesale and retail with all these new entrants.
Jim Koch: I think it'll very quickly sort down to maybe four players and maybe down to two or three from there.
Filippo Falorni: Great. Thanks so much, Boston.
Operator: The next question comes from the line of Peter Grom with UBS. Please proceed.
Peter Grom: Great. Thank you. Good evening, guys. Hope you both are doing well. I wanted to just shift to maybe profitability, just in the context of the environment we have been in from a cost and volume standpoint. The gross margin performance has been impressive and you both kind of touched on the productivity mindset, but you have benefited from mix, brewery efficiencies and other factors as well. I just ask this in the context of, it does not really seem like the inflationary backdrop or the volume backdrop is really shifting. How much more room is there for you to push on these other drivers to kind of keep gross margin expansion, especially now that you have internal production kind of north of, I think you mentioned, north of 95%?
Matt Murphy: Yeah. Thanks, Peter. Great question. We have been on a voyage here. Started around 42% margin, and over the last three years, we have taken it to where it is now, and we feel really good about being at or very near 50% on an an annual run basis. We have absorbed some big headwinds, particularly this year. When you look through what we provided, we have had aluminum, just this year, up $30-plus million, and we have been able to offset that negative.
Matt Murphy: We have had to offset some higher freight costs as well. Those typically do not show up in our margin. They are mostly in AP&S as we present them. We have been able to continue to demonstrate some great efficiencies at our breweries. Our supply chain has improved considerably, and we are not done for sure. We are going to keep trying to grow our margins. We will see what the volume environment is.
Matt Murphy: That is a big factor, as we have talked about before. We will always have some level of co-packing. It is part of our model, and it makes a ton of sense when we are trying to provide product, particularly in the West Coast. We see opportunity. We will come back to you in February with what we think will improve between 2026 and 2027. But we do see opportunity and continued progress past the 50%.
Peter Grom: Great. You know what? I will leave it there. Thank you so much. I will pass it on.
Operator: The next question comes from the line of Eric Serotta with Morgan Stanley. Please proceed.
Eric Serotta: Great. Thanks for the question, and good afternoon, everyone. Just wanted to, Jim, get your impressions and expectations for Sun Cruiser and the spirits-based or vodka-based tea category as we look to next year, and we are in year 3 or year 2 and a half. You seem to be cycling the national distribution very well. Can you talk about puts and takes, and what it will take to continue this growth in 2027?
Jim Koch: Yeah, we think there is continued room for double-digit growth in 2027. We believe we are going to get more shelf space both from the chains and from independent liquor, where we are seeing a growth rate. It started as triple digits this year. I think in measured channels in the last 13 weeks, it is still close to 60%. Obviously, it is coming down and will continue to come down. But we continue to believe that there is significant growth next year, both from expanded distribution and more of our SKUs in each store. We are probably the leader in the tea part of this vodka tea and lemonade, and we believe there is growth and we are seeing it now, stronger growth in the lemonade piece of it.
Eric Serotta: Great. As you just turning to the cost side, Matt, I think that freight was something like a $9.5 million, $10 million year-on-year headwinds in your AP&S line in Q3. How are you thinking about that for Q4? Do you think this is a reasonable run rate based on where freight rates are today? I know forecasting it for next year is anybody's guess at this point. But if we mark to market with where rates are today is kind of a $10 million year-on-year impact reasonable for the next couple of quarters?
Matt Murphy: Yeah. We have projected out for the remainder of 2026 that it is going to continue. We used the high rates that we experienced in Q3. In Q3, it grew $9 million. There is a little less volume in Q2, so maybe it is a little lower than that. We are always working on freight optimization, so maybe we get a little benefit from that. But in general, we are just assuming we have that same level of increase.
Eric Serotta: Great. Thanks so much. I will pass it on.
Operator: The next question comes from the line of Kaumil Gajrawala with Jefferies. Please proceed.
Kaumil Gajrawala: Hey, everybody. I guess a couple of questions. The first is, with depletions down 5%, advertising flat, I feel like the history of the company has often been to accelerate advertising during more difficult times. I am just curious, maybe it is because of Allison Stransky’s arrival, it is better to throttle back until there is enough time for her to lay out her own plan, or is there something else going on with what the right level of advertising should be to try to turn overall top line around?
Matt Murphy: Yeah. Hi, Kaumil. Great question. I will start off and then hand it off to Jim. We had a big increase between 2024 and 2025. It was around $60 million. We are projecting flat between 2025 and 2026. We think we are at the right level right now. There is a little timing involved with, we sort of front-loaded the H1 of the year and have because of the World Cup and other timing items.
Matt Murphy: So we were down in Q3, and we will likely be down in Q4, and that will work to flat for the full year. As we have said, we are trying to optimize the spend, and reduced some spend that was non-performing, particularly around Truly, as we talked about in July. We will continue to look at it, try to optimize. Certainly, Allison has joined, and we are really excited about that and her skill set.
Matt Murphy: We are going to take a lot of time to think through what we need for 2027, look at where our volume projections are, and what we need to support our brands and invest as we see.
Jim Koch: Yeah, I would add to that, if I may. Our approach to advertising maybe is a little different, in that we think less in brand terms. Like, okay, we have all these brands, and each one of them has an advertising budget. We may start the year that way, but we are pretty fluid among brands, essentially depending on whether we believe the creative and the campaign is actually driving sales. The effect of that approach is somewhat visible in what you have seen this year. Basically, we had what we felt was a good campaign behind Truly, especially with our sponsorship of the US team in the World Cup, and we had special ads around that. Bottom line, they did not work. The depletions did not respond to the campaign that we have behind Truly.
Jim Koch: We cut it significantly and reallocated that money, some to Twisted Tea, where the evidence we have is that people exposed to the ads will in fact increase their purchases of it. So in that sense, the advertising is working, though there is some category trends pushing things the other way. The advertising does seem to get a sales response. We put some money behind Samuel Adams, where we were also appearing to get a sales response, as well as Angry Orchard. So that is what you saw, was essentially we cut advertising that was not working, and we reallocated it to where the advertising was working.
Kaumil Gajrawala: Got it. That is very useful. If I could also ask about, you mentioned something very interesting earlier on display activity and maybe Twisted getting boxed out with so much focus on the vodka-based teas. How do we think about that in 2027 in the context of we are likely to have something similar happen with all the aids, whether it is your own with Rally Dog or maybe some of the others. It is probably going to be a big merchandising display feature category. How do you fit Twisted or try to turn Twisted in that environment?
Jim Koch: Yeah, I think you are right. It is going to happen. I do not know if it will be worse than this year, because I do suspect that there is going to be a slowdown in the Surfside, Sun Cruiser market. High Noon, which a couple of years ago was getting disproportionate of the big displays, High Noon appears actually to be in decline now. NÜTRL for the same kind of thing. So I do not see it being worse for Twisted Tea in 2027 than 2026.
Jim Koch: It will just be a different cast of characters that the retailers are going to be jumping on because it is growing. It will be the vodka aids, but I think those will largely take away from the High Noons, the NÜTRLs, even the Surfside and Sun Cruisers. So I do not see it being worse for Twisted Tea, just a different set of competitors grabbing the display space.
Kaumil Gajrawala: Got it. Thank you very much.
Operator: The next question comes from the line of Bonnie Herzog with Goldman Sachs. Please proceed.
Bonnie Herzog: All right. Thank you. Hi, everyone. I had a quick question on Truly. The brand continues to be quite pressured, so I guess I would love to hear your strategy for the brand and maybe whether you are considering implementing bigger changes. You touched on this, Jim. You are pulling back a fair amount on advertising on the brand, but are there other things you could do, like SKU rationalization on the brand? I guess I am ultimately trying to understand, do you think Truly volume can stabilize, or will you maybe manage the brand to optimize margin and cash flow? Thanks.
Jim Koch: To answer your question directly, our approach would be to stabilize or even grow the brand. I mean, it is too big to give up on it. We could not easily replace that volume if we just liquidate it. That said, that essentially means that we are committed to do something. Doing nothing is not an option. In that context, that sort of puts everything on the table. Beyond SKU rationalization and new taglines and stuff like that, it puts the liquid on the table. It puts the positioning, the packaging, all elements of the brand identity are basically being reassessed in an effort that we started right after the World Cup.
Jim Koch: Allison, well, this is her first week, but it is one of her top priorities, is let us just open it up to any change in Truly that would stabilize the brand and provide a longer-term basis to grow from there. In my point of view, it is unnaturally low in market share. We are, what, a fourth or a fifth of White Claw. Usually, things stabilize at a leader, and then the second biggest brand is roughly half of that size, and we are not seeing that kind of stability here.
Jim Koch: So we basically have said we are willing to look at everything. We are looking at turnarounds of other brands and what they have entailed. You have got to put even the liquid itself on the table. So that is what we are asking ourselves. It is a 10-year-old category. It may be time. There has kind of not been a lot of news.
Jim Koch: Our question is there a next generation of hard seltzer?
Bonnie Herzog: That is interesting. No, that is helpful. Maybe just a quick follow on that, in thinking about the guidance and CapEx, you did lower it again. Just would love to hear from you how we should think about that decision and maybe what it suggests about either the growth outlook or the health of your business. Thanks.
Matt Murphy: Yeah, Bonnie, I will take that. It is just timing. We have a number of projects in flight and there is details related to suppliers and availability of equipment, and we just pushed out some spend from 2026 to 2027. We spend to optimize our breweries, to spend on innovation. We feel like we have been at this $50 million to $70 million range for a few years. We do not expect that to change dramatically, but there will be different points within that range each year as the projects come. We have a particularly large wastewater project in our Pennsylvania brewery, and I think some of that has been pushed out and is the major factor for the call down this year.
Bonnie Herzog: All right. Thanks for that. I will pass it on. Thank you.
Operator: The next question comes from the line of Rob Ottenstein with Evercore ISI. Please proceed.
Rob Ottenstein: Great. Thank you very much. Jim, scoping out to total beverage alcohol, are you surprised that there hasn't been more consolidation among suppliers over the last few years? If so, what do you think the reason is? Looking forward, do you think that's going to change, more consolidation? Thank you.
Jim Koch: I think the lack of consolidation has come from the growth opportunities being taken by new entrants, smaller entrants, or entrants from outside the beer category. So, you've got people who are big players in Beyond Beer who are not in the traditional beer category. That would be like a Sazerac or a Gallo or a Stateside, or even a Boston Beer Company. So those would be hard to consolidate. ABI is not going to buy Gallo. Molson Coors is not going to merge with Sazerac, for example. I think you will see, going forward, some of these new players being bought. I mean, many of them, as you saw with SpikedAde, that followed a pattern you see in the non-alcoholic beverage business where the entrepreneurs build the brands and grow them, but they grow them to sell them.
Jim Koch: There are great synergies when it goes to a Pepsi or a Coke. So I suspect it's going to happen what you saw with SpikedAde, where the brand was sold for a very attractive return on the initial capital, and it consolidated. You saw that with Juice Box. That was built, and you knew it was eventually going to be sold. It wasn't going to be a legacy brand that they were going to pass down to their grandchildren or anything. They were going to sell it at what they felt like was the peak. So I think you're going to see brands built to do that. Long Drink, same thing. So bunches of examples of consolidation. In this case, it looks like the high-growth emerging companies being sold to the people who have the long-term synergies. I think that's what consolidation will be.
Jim Koch: I think the beer industry is pretty consolidated.
Rob Ottenstein: Great. Thank you.
Operator: The next question comes from the line of Nadine Sarwat with Bernstein. Please proceed.
Nadine Sarwat: Thank you for taking my question. I have two, please. First, Jim, you always provide a really thoughtful diagnosis on what is driving the trends in the market, and at the start of the call, you called out gas prices and inflation being a key factor. Could you share specifics on how you are seeing this manifest in your different markets, whether that is channel, pack dynamics, or other consumer behaviors? My second question is with regards to pricing. You guys have maintained your guidance for 1% to 2% for the full year. As you look out over the next 12 months, various costs are increasing from inflationary pressures. What are your early expectations for pricing, whether for you or even just more broadly for the market in the next 12 months? Thank you.
Jim Koch: Let me go after the first question. Some of the things that we have seen that reflect the pressures on the beer consumer would be, for example, in Twisted Tea, in the convenience channel, the singles are becoming a bigger part of our volume because the consumer might not have the money for a 12-pack. We are. Second example would be dollar stores, where we got, I think, 4,000 points of distribution for a $9.99 four-pack of 16-ounce cans. Another sort of price pack architecture. That is how it is manifesting itself. We are seeing with Twisted Tea, again, a reasonable amount of spread in the shelf price, range from $22.99 to $19.99, and $19.99 seems to be a price point. We have had good responses from going from the over $20 price point to the $19.99 price point, though not universally.
Jim Koch: So that would be how I am seeing those manifest itself. In terms of raw consumer behavior, what we are seeing is real wages are going down. Inflation is higher than wages. As a result, that disproportionately strikes discretionary income. So one of the things that people cut out, they just buy less alcohol in general. This pressure is strongest on the bottom 80% of the income strata, and that is where a lot of our drinkers are. So that just pushes overall consumption down. In terms of pricing, we are seeing something interesting that we have not seen for a while, which is a significant drop in the real cost of beer. If inflation is up 3.5% and beer prices are up 1.5%, that is basically, in real dollars, coming down 2%.
Jim Koch: In long, long term, it has probably been 75 basis points of real price decline in beer, which can be absorbed through productivity. I think long term, brewers are not going to be able to take 2% of their cost structure out every year. You are not going to see 200 basis points in real price decline on beer. When that will happen, I do not know. We are roughly 4% of the market, so we do not have any pricing power. It is a very competitive market, and if we have to eat cost increases and cannot pass them on because it is such a competitive market, there is nothing we can do about it. We eat them. But I do believe that cannot go on for the next five years. Eventually, prices are going to have to reflect all of the cost inflation that we are seeing.
Nadine Sarwat: Very helpful. Thank you.
Operator: As a reminder, everyone, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from the line of Michael Lavery with Piper Sandler. Please proceed.
Michael Lavery: Thank you. Good evening. Just wanted to come back to some of the innovation. You talked about the vodka Aides a good bit earlier. Lit at the convenience store show was very prominent and got a lot of attention just in showing off how it can be displayed and banners and everything. I guess just curious, maybe, I would imagine some of that is just that it has been in market a little further already, so maybe it is a good moment to amplify its message a little more. How should we think about maybe that or Rally Dog and how big they could be? You touched on how important Truly is just because of its size. How would these fit into your thinking for how much it can offset other declines?
Michael Lavery: How those pieces come together, and how big of a push you will put behind either one or both of those?
Jim Koch: Sure. Basically, we are going to push what moves. We cannot predict if something is going to catch fire. I have been doing this 42 years, and I have been wrong as much as I am right in terms of looking out a year. You can look out three weeks, and if something is moving, you know it. For 2026, negligible. You probably do not even need to put it in your model.
Jim Koch: For 2027, I do not see them getting to the place where Truly is now for several years, even if they are wildly successful. Lit is kind of a unicorn. That is probably why it got so much excitement. It is extremely innovative product in multiple ways. It is not just a different liquid or anything like that. You just have to look at it and you are going, "What? That is pretty interesting." It puts a smile on your face. Wow. Booze in a light bulb.
Jim Koch: Where did you think of that? It sort of has some moats around it for that reason. You cannot make it in a normal production facility. We had to create the capacity. There was not contract capacity out there to do this. Nobody makes conveyor belts to move little light bulbs along. They are set for things with various kinds of cylinders. Having a round bottom is weird. Of course, having a screw top is not common among the normal set of contract producers. It has to be merchandised differently. You cannot put it on the shelves. We take advantage of the fact that it is in the sweet spot for retailers. It is an incremental purchase. People do not go to the liquor store to buy three light bulbs of Lit. They see it, and they put three of them in their basket.
Jim Koch: But they didn't go there to buy Lit. So it's an incremental purchase, and it's extremely high margin. The margins per case are extraordinary, both for the retailer and for the wholesaler. The margin per case equivalent might be five times what a normal beer is, and similar margin for the retailer. So again, they don't need to sell tons of it. One ball may be as much margin as they make on a six-pack of a low-end beer, just one of those bulbs, and there's 24 of them in a case, and 40-something in a case equivalent. So it's a very out-of-the-box product that has to be made differently and distributed differently. The distributor's got to put up suction cups. We have a variety of racks and dump bins, and countertop displays that will support this instinctual buying.
Jim Koch: We ask for three points of interruption in an account that carries it rather than just one spot on the shelf. So I don't know. There's a lot that's new and interesting.
Jim Koch: For it. So we're going to find out. But it has a lot of potential, and like I said, the margins are multiples of everything else in our product mix. The vodka ade category is a little more traditional. It's kind of priced at vodka RTDs, like Sun Cruiser. It fits on the shelf. You can merchandise it the same way. But it has gotten out of the gates faster than anything I've seen.
Michael Lavery: Okay. That's really helpful. One slightly related follow-up, just talking about the color on how some of the setup for Q4, you think shipments will be up. How much of that might be pipeline fill related, just given Rally Dog and Lit both going national next year?
Matt Murphy: Yeah, thanks. Very little is the simple answer. The impact of the higher inventory in Q3 2025 at wholesaler, given the improvements in our supply chain, we reduced the levels. We had less shipments in Q4 last year. I think we were down -7%. We are up against an easy comp, and we have had a consistent level of inventory at wholesalers. There is some impact of load-in, probably more for Rally Dog than Lit, but it is mostly just the timing of shipments given our supply chain improvements.
Michael Lavery: Okay, thanks. I will pass it on.
Operator: Thank you. This concludes the question and answer session. I would like to turn the call back to Jim Koch for closing remarks.
Jim Koch: Thank you all for very thoughtful questions today. I look forward to speaking to all of you in February when we are going to have wrapped up 2026, and we will have guidance for 2027. Cheers.
Matt Murphy: Cheers. Thanks, everyone.
Operator: This concludes today's conference. You may disconnect your lines at this time, and enjoy the rest of your day.
