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 Q4 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 state in our earnings release, some of the information we discuss and that may come up on this call reflects the company's or management's expectations or predictions of the future. Such predictions are forward-looking statements. It's important to note that the company's actual results could differ materially from those projected in these forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the company's most recent 10-Q and 10-K.
The company does not undertake to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. I will now pass it over to Jim to share his comments.
Thanks, Mike. I'll begin my remarks this afternoon with an overview of our strategy and operating results before turning the call over to Diego to discuss our supply chain, Q4 results, and 2026 financial outlook. Immediately following Diego's comments, we'll open the line for questions. As I look back on 2025, I'm pleased with how our operational discipline enabled us to deliver on our financial commitments in a challenging industry volume environment. Our 2025 depletions were down 4%, in line with the overall beer industry. Our disciplined, fewer things, better innovation approach drove a successful national launch of Sun Cruiser, which is both revenue and margin accretive. Efficiency improvements across our breweries and our productivity agenda drove 410 basis points of gross margin expansion, allowing us to increase brand investment meaningfully.
Our business continued to be highly cash generative, with 2025 free cash flow of $216 million or $19.72 per share, which allowed us to repurchase $200 million in shares in 2025. Looking ahead into 2026, we expect industry volume headwinds to continue. As I've previously discussed, consumers are tightly managing their budgets given economic uncertainty, and there is pressure on the Hispanic consumer. Moderation trends are also having an impact on demand, and in certain states, hemp-derived beverages are competing for shelf space and drinkers, despite recent federal regulations which restrict their availability after November 2026. We continue to see long-term growth opportunities in the beyond beer category, which is 85% of our total company volume and where we are the industry's second-largest player.
From 2019 to 2025, driven by growth in hard tea and hard seltzers, the beyond beer category has doubled in volume and now represents 9% of total U.S. alcohol consumption. We expect that beyond beer's volume and share of the category will continue to grow as the drinker is younger and more diverse than traditional beer. We believe beer companies are the best positioned to service the beyond beer category as they have the production capabilities to produce these beverages, and beer wholesalers have the infrastructure to service them. The Boston Beer Company's innovation capabilities, manufacturing infrastructure, best-in-class sales force, and strong wholesaler relations provide a meaningful competitive advantage. This is reflected in the performance of Sun Cruiser, which was among the top volume gainers in RTD Spirits in 2025 and quickly scaled into a top 5 RTD Spirits brand.
However, we have seen greater competition in beyond beer as consumers seek variety and more players enter the category. Combined with economic uncertainty, this has been a headwind for our volume performance. We continue to believe that the macroeconomic environment is a significant driver of weaker alcohol consumption trends and the deceleration in our leading brand, Twisted Tea's performance. Our 2026 volume outlook of flat to down mid-single digits assumes that macroeconomic headwinds persist. We are highly focused on controlling what we can, maintaining or growing market share, and investing behind our brands to position us well for when the environment improves. Our priorities for the year will be supporting our full portfolio of brands through advertising and local in-market execution investments, developing margin-accretive innovation, and driving margin improvement through productivity.
We continue to believe that sustained brand investment is the right strategy to drive volume improvement over time. Building on our initiatives we began in 2025, we will continue reinvesting in our brands with new creative, additional compelling partnerships, activation around key events, including the World Cup, and investing alongside our wholesalers in local market activation. We're partnering with some of our wholesalers to increase local brand building capabilities and improve execution on the shelf. This includes shared development of grassroots marketing plans and on-premise promotions, sampling, local radio, and billboard advertising. With respect to innovation, we continue to prioritize high growth, margin-accretive opportunities. In 2026, we are focused on scaling Sun Cruiser in its second year of national availability, while expanding the distribution of Sinless Vodka Cocktails to additional states following a successful test launch in 2025.
Sinless is a very lightly carbonated vodka-based RTD cocktail with zero sugar, zero carbs, and less than 100 calories per can. It is positioned as guilty of flavor, free of sugar and carbs, and targets incremental consumer segments that complement our core brand portfolio. We've made strong progress across our margin enhancement initiatives, which Diego will discuss further in his remarks. This has been a multi-year effort across the organization, and I'm pleased that we've delivered margin improvement faster than we expected in this difficult operating environment. In addition to margin improvement, these initiatives have enabled us to achieve record-high customer service levels in 2025 and lower our inventory days on hand. Our efforts across procurement savings, brewery efficiency, and waste and network optimization will continue in 2026, and we're also in the early stages of adding revenue management capabilities to provide further long-term margin benefit.
I'll now provide an overview of our brand performance and plans for 2026. In terms of depletions, we're encouraged by the strong consumer reception to Sun Cruiser, a third consecutive quarter of growth in Angry Orchard and Dogfish Head, and positive drinker reception to our higher ABV offerings. Our larger brands continue to be impacted by the headwinds I discussed earlier, particularly Twisted Tea, that overindexes with lower-income households and Hispanic drinkers. After starting the 2025 year with growth, Twisted Tea was down 6% in dollar sales in measured off-premise channels for the full year 2025 in an FMB category that was down 4%. The brand gained distribution in 2025, but declined in velocities driven by category headwinds, a decline in features and displays, and some interaction with Sun Cruiser and its competitors.
Single serve continues to perform much better than large packs, which tells us that consumer interest in the brand remains strong. We are working hard to ensure Twisted Tea maintains its fair share of display space. Numerator data shows approximately 20% of the drop in Twisted Tea is due to the vodka tea category, which includes Sun Cruiser. To the extent that Sun Cruiser sources volume from Twisted Tea, this is revenue and margin accretive for us. Despite some headwinds, Twisted Tea is the number 10 brand family in the overall beer market and remains the clear leader in malt-based hard tea, with over 85% market share. We're encouraged by the performance of Twisted Tea Light and the high ABV Twisted Tea Extreme, which have seen growth in velocities and have room to gain additional shelf space.
Our 2026 plans include increased advertising investment with strong creative and local activation, adding new partnerships, and launching new pack sizes and Twisted Tea Extreme flavor innovation. Twisted Tea has unique and clear brand voice and attitude, our advertising plans include continuing to run our high-performing tea drop national ads across many category entry points, including sports, ski slopes, beaches, lake and pool, complemented with in-store display programs. We'll also be adding always-on media for Twisted Tea Light and Twisted Tea Extreme. In 2026, we are expanding our partnerships that are most relevant to our drinkers, such as Barstool, Pardon My Take, the number 1 sports podcast, DraftKings, WWE Wrestling, country music's Chase Matthew, NASCAR, AMA Supercross and Motocross Racing, and Realtree Camo.
Lastly, we continue to increase our investment in Hispanic and Spanish language brand content, including new media and digital content, to widen the brand's appeal. With respect to pack sizes, we're expanding the rollout of our entry-level price point 4-pack, launching a 16-ounce can for C-stores to add a lower price point in addition to the current 24-ounce can and adding a 24-can value pack. Building on the success of our high ABV offerings, we've added a Twisted Tea Extreme variety pack that was launched in early 2026. Twisted Tea Extreme Lemon and Blue Razz are the number 1 and number 2 largest FMB growth SKUs in convenience. To further capitalize on the high ABV trend, we'll be launching new Extreme Singles flavors: Long Island Iced Tea, Fruit Punch, and Tropical Punch.
Our goal for 2026 is to improve share and grow volume in the overall hard tea category through showing progress in Twisted Tea and growing Sun Cruiser. We're very excited about the outlook for Sun Cruiser, which grew volumes over 300% from 2024 to 2025, and is expected to make a strong contribution to our hard tea portfolio this year. Sun Cruiser was built in the on-premise channel, where in some markets it represents over 40% of the brand's volume. We believe this is the right way to drive trial and build the brand, and are pleased that Sun Cruiser is the leading RTD spirits and lemonade brand in on-premise bars and restaurants, according to Nielsen. Bartenders have been, and continue to be, a very important influencer group for Sun Cruiser.
Sun Cruiser continues to expand its off-premise distribution. Given its strong presence in on-premise and independents, measured off-premise data still only reflects a portion of the brand's total volume. Advertising support for Sun Cruiser includes building an organic following through social media, as well as more traditional content around the Let the Good Times Cruise media campaign, which includes television, paid social and digital advertising, and key influencers. We'll be present where Sun Cruiser fits into our drinkers' lifestyles across sports and music. Sun Cruiser will have committed media presence in MLB, the NFL, and the sponsorship of the AEG music concert series, and in 2026, we'll add exciting golf and ski partnerships. Golf programming includes tournament activations, golf media influencers, and experiential marketing programs, as well as wholesaler incentives.
Thank you, Jim. Good afternoon, everyone. 2025 was a year of continued progress for Boston Beer in a dynamic industry environment. Disciplined execution and supply chain efficiency enabled us to meet or exceed our financial commitments, including very strong gross margin outperformance. This margin upside enabled increased investment in advertising support for all our brands, while still delivering EPS ahead of our guidance. Cash conversion was strong, with $270 million in operating cash flow, and we ended the year with $223 million in cash and no debt. 2025 revenue was down 2.4% year-over-year, driven by shipments down 4.7% and 2.3 percentage points of positive price and mix. Price realization for the year was within our prior guidance of 1%-2%, with the remainder being positive mix.
We delivered 410 basis points of gross margin expansion, with gross margin reaching 48.5%, inclusive of $10.1 million in tariff costs. Excluding contractual prepayments and shortfall fees, the gross margin was 50%. This is the highest full-year gross margin rate since 2019. EPS of $9.89 was up 4.7% year-over-year, excluding prior year impairment and one-time contract settlement charges. This EPS growth was inclusive of a $61 million increase in advertising spend, while general and administrative expenses were flat. Turning to the Q4 results, depletions decreased 6% and shipments decreased 7.5% year-over-year, primarily driven by declines in our Twisted Tea, Truly Hard Seltzer, and Samuel Adams brands that were partially offset by growth in the Sun Cruiser, Angry Orchard, and Dogfish Head brands.
As we expected, volume slowed substantially in the Q4 from the Q3. Twisted Tea volumes continue to be soft, and Sun Cruiser continues to show strength, but at a lower contribution in the Q4 due to seasonality. We believe distributor inventory of 4 weeks on hand as of December 27, 2025, is an appropriate level for each of our brands. Revenue for the quarter decreased 4.1% due to lower volume, partially offset by increased pricing and favorable product mix. Gross margin of 43.5% increased 360 basis points year-over-year. Gross margin primarily benefited from improved brewery efficiencies, procurement savings, price increases, and product mix, as well as lower inventory obsolescence. These factors were partially offset by inflationary and tariff costs and increase in shortfalls.
Advertising, promotional, and selling expenses increased $8.4 million, or 6.0% year-over-year, primarily due to incremental brand, media, and local marketing investments of $8.0 million, with the remainder driven by higher freight costs. General and administrative expenses for the Q4 increased $4.5 million, or 9.4% year-over-year, primarily due to increased salaries and benefits costs. We are continuing to execute on our three buckets of multi-year savings projects ahead of our initial timing expectations. We saw significant benefit in 2025 and have more savings to come in 2026, albeit at a lower rate. To be specific, in brewery performance, we continue to see improvements in OE, driven by process improvements, which help to increase our internal production capacity.
In the Q4, we produced 99% of our domestic volumes internally, compared to 85% in the Q4 of last year. Full year 2025 domestic internal productions increased to 86% of our volume, compared to 74% last year. In 2026, we expect to continue increasing the rate of in-source production, but at a smaller year-over-year benefit due to achieving a high in-source percentage in 2025. In procurement savings, our Q4 results benefited from lower negotiated pricing on certain packaging and ingredients. As discussed previously, procurement savings initiatives are the area where we have made the most progress over the last two years. While we expect some continued benefits in 2026, the impact is expected to be moderate. In waste and network optimization, we're continuing to enhance the customer ordering and trade inventory management system that we implemented last year.
These efforts helped us achieve record high customer service levels that resulted in lower inventories internally and which helped improve our cash flow. In addition, we reduced obsolete inventory 71% in the Q4 and 48% for the full year. In addition to our three buckets of savings, we are beginning to add revenue management capabilities as part of our margin agenda. These efforts are in early stages in 2026, with a more meaningful contribution expected in 2027. Planning through our 2026 guidance, our fiscal week depletion plans for the first eight weeks of 2026 have declined 3% from 2025. We are currently planning 2026 depletions and shipments to be flat to down mid-single digits.
Where we land within this range will be impacted by the pace of improvement in the overall consumer environment and the time it takes for our brand investment initiatives to drive market share improvement. We expect price increases of between 1% and 2% and some additional benefit mix. Full year, 2026 reported gross margins are expected to be between 48% and 50%. Our outlook expects that we cover commodities and non-tariff related inflation with pricing, and that the lower shortfall fees and prepayment amortization growth broadly offset increased tariff costs. 2026 reflects a full-year tariff cost estimate of $20 million-$30 million, versus a partial year in 2025 of $11 million. These tariff cost estimates are based upon tariffs in place prior to the February 2026 Supreme Court ruling. We will continue to drive our savings initiatives to help buffer any volume deleverage.
Our long-term gross margin target continues to be in the high forties, with any individual year dependent upon volumes, commodity inflations, and tariff environments. As Jim discussed earlier, we expect to increase our advertising levels to support our brands. The investments in advertising, promotional and selling expenses are expected to increase between $20 million and $40 million. This does not include any changes in cost for the shipment of products to our distributors. We estimate our full year 2026 effective tax rate to be approximately 29%-30%. We are currently targeting a full year 2026 earnings per diluted share of between $8.50 and $11. As you model out the year, please keep in mind the following factors.
Our business is impacted by seasonal volume changes, with the Q1 and the Q4 being lower absolute volume quarters, and the Q4 typically our lowest absolute gross margin rate of the year. We have difficult shipments comparisons in the Q1 and the first half of the year as we shift ahead of depletions in 2025 to build wholesaler inventories of our product innovation, which included Sun Cruiser and Truly Unruly. We currently expect the Q1 and first half shipments to be down towards the lower end of our full year volume guidance, but with better shipment performance later in the year. During full year 2026, we estimate shortfall fees and non-cash expenses of third-party production prepayments in total will negatively impact our gross margins by 40 to 60 basis points.
We expect year-over-year gross margin rate improvement to be most meaningful in the Q4. We typically expense the majority of our shortfall fees in the Q4. We expect lower shortfall fees in 2026, the timing of this benefit, together with the fact that the Q4 is a smaller dollar quarter, has an outsized favorable impact on the gross margin rate. Incremental advertising investment is expected to be weighted to the second and Q3 to support the key summer selling season. Turning to capital allocations. We ended the quarter with a cash balance of $223 million and an unused credit line of $150 million, which provides us with ample flexibility to continue to invest in our base business, fund future growth initiatives, and return cash to shareholders through our share buyback program.
For the full year 2026, we expect capital expenditures of between $70 million and $90 million. These investments will be primarily related to our own breweries to build capabilities and to improve efficiency. We will continue to be disciplined in our capital spending as we monitor the dynamic industry environment over the long term. During the 52-week period ended December 27, 2025, in the period from December 29, 2025 to February 20, 2026, we repurchased shares in the amount of $200 million and $14 million, respectively, for a total of $214 million of repurchases since January 2025. As of February 20, 2026, we had approximately $250 million remaining on the $1.6 billion share repurchase authorization.
This concludes our prepared remarks, and now we'll open the line for questions.