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 2026 second 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 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 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'll now pass over to Jim for introductory 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 second quarter financial results and our financial outlook for the remainder of 2026. Immediately following Diego's comments, we will open the line for questions. In the H1, the overall beer market improved modestly, although demand was uneven throughout the period. The category was nearly flat in the first quarter before softening in the second quarter, with May proving particularly challenging. Trends improved in June as consumer demand benefited from increased drinking occasions around the World Cup and America's 250th anniversary celebrations. We estimate the combined total beer and beyond beer market was down 2% in volume in the H1, compared to a decline of 4% for the full year of 2025.
Beyond beer continues to outperform traditional beer in volume in measured off-premise channels, decreasing 1% for the H1, compared to traditional beer, which declined 4%. We anticipate industry volume headwinds for the remainder of 2026 as consumers remain under pressure from the cumulative effects of inflation and a significant increase in gas prices. With respect to Boston Beer portfolio volume trends, our performance continues to lag the pace of improvement in the broader category. In the second quarter, we delivered triple-digit depletion growth in Sun Cruiser, continued growth in Angry Orchard, and strong on-premise results across the portfolio as major events helped drive incremental drinking occasions. However, Twisted Tea and Truly continued to face declines and market share challenges. Our second quarter depletions were down 6%, and shipments were down 4.5%. H1 shipments, at down 5.6%, modestly trailed depletions at down 5%.
For the full year, we expect shipments and depletion trends to be broadly aligned. Improvements in our supply chain that we activated in the H2 of last year have enabled us to reduce wholesaler inventory levels consistently to approximately four to four and a half weeks while reducing quarter-to-quarter variability. These improvements will affect the timing of shipments compared to the prior year across the third and fourth quarters. Diego will provide additional detail on these shipment timing dynamics in his remarks. We continue to make strong progress on our margin enhancement initiatives, delivering 50.4% second quarter gross margin despite higher aluminum energy and tariff costs, and we are on track to achieve our planned full year 2026 savings. The business is generating strong cash flow, and we have repurchased over $55 million in shares year-to-date.
Our priorities for 2026 remain focused on strengthening our category leading brands to improve market share trends, launching strong innovation, and driving continued gross margin expansion. With a significant number of key summer selling season weeks still ahead, we are focused on executing our plans with urgency to improve our share performance. We have maintained our earnings guidance while navigating a dynamic demand environment and cost inflation headwinds. Based on our evaluation of the category environment and the return on our brand investments year-to-date, we have decided to reduce our planned incremental advertising investment range by $20 million by eliminating some lower performing advertising. Even with this adjustment, we continue to invest in our brands at levels well above historical averages, reflecting the meaningful step-up in support we made last year while continuing to take a disciplined approach to additional investment.
We remain focused on delivering our marketing plans through strong partnerships compelling program and effective local market activation in partnership with our wholesalers. At retail, we have slightly gained shelf space this year, but lost display space. I'll now provide an overview of our brand performance and plans. As I mentioned on our last call, a key priority for 2026 is to improve share trends and grow volume in the hard tea category through progress in Twisted Tea and the continued expansion of Sun Cruiser. On a combined basis, Twisted Tea and Sun Cruiser volume is very slightly positive, and revenue is growing year-to-date through 29 weeks. Sun Cruiser is revenue and margin accretive for us, and the brand continues to expand distribution and recruit new drinkers.
Twisted Tea continues to dominate the malt-based hard tea market with an over 85% share and no single competitor having more than a 5% share. Twisted Tea is facing volume and share pressures with lower velocities reflecting broader FMB category headwinds, reduced feature and display activity, primarily due to the expansion of RTD spirits, and interaction with spirits-based hard teas. The largest volume headwind continues to be concentrated in 12-packs, which have been impacted by reduced displays in the FMB category, together with consumer purchasing behavior away from larger pack sizes. Across the Twisted Tea portfolio, Twisted Tea Singles, Twisted Tea Light, and Twisted Tea Extreme all grew share in the FMB category. Far this year, we've increased advertising investment, added new partnerships, launched new pack sizes, and expanded Twisted Tea Extreme offerings and distribution.
We are also taking a disciplined test-and-learn approach to revenue management on the brand, including targeting pricing adjustments and smaller pack size offerings. These initiatives are still in the early stages. We will continue to assess their impact as we gather additional data. Recent promotional activity included sponsorships of "Pardon My Take's" Tahoe Week. "Pardon My Take" is Barstool's number one sports podcast. Twisted Tea was front and center across all content during Tahoe Week, including customer merchandise and advertising. Late in the second quarter, we launched a Hispanic summer retail program across key markets that include Spanish language sweepstakes and point of sale, complementing our Hispanic summer media campaign and focused on growing household penetration, awareness, and relevance with Hispanic drinkers.
Later this quarter, we'll be running our high performing T Drop national college football themed ads, complemented by our game day variety packs, college football team specific packaging, in-store display programs, and always-on media for Twisted Tea Extreme and Twisted Tea Light. Beginning this fall, we are expanding our partnership with Realtree Camo. We'll be launching Twisted Tea Realtree Camo themed national packaging and promotion. Sun Cruiser has quickly grown to a top 5 spirits RTD and is among the fastest growing brands by volume in the category across combined measured on and off-premise channels. Built in bars and restaurants, Sun Cruiser is the leading RTD spirits tea and lemonade brand in the measured on-premise channel, where we are continuing to invest.
The brand is also seeing strong growth as it further expands in off-premise, with the highest growth in velocity in comparison to leading RTD spirits tea and lemonade brands. We expect strong distribution gains for Sun Cruiser in 2026. We continue to expect measured channel off-premise data coverage to be lower versus our other brands due to Sun Cruiser's strong presence in on-premise and off-premise independence. Advertising support for Sun Cruiser includes content around the Let the Good Times Cruise media campaign, which includes TV, paid social and digital advertising, and key influencers and creators. Our key influencers content includes our summer long partnership with creator, TV personality, and outdoor enthusiast Dylan Efron, with events and promotions built around the simple idea of enjoying getting outside with friends and drinking Sun Cruiser.
Sun Cruiser continues to have a growing media presence in sports this summer, including the PGA, the MLB, the world champion New York Knicks, and sponsorship of numerous music concert series. Our multi-year partnership with the USGA made Sun Cruiser the official ready-to-drink cocktail of two of golf's most notable championships, the U.S. Open and the U.S. Women's Open. We continue to see strong velocity and distribution opportunities for Sun Cruiser, and we're committed to keeping a disciplined level of tea and lemonade styles as we continue to grow our volume. We expect the brand will continue to grow for the remainder of 2026, with further runway for long-term expansion. Turning to hard seltzer, Truly has maintained its number two share position in the hard seltzer category. However, volume and share trends remain challenged.
Within the Truly portfolio, high ABV Truly Unruly and the Wild Berry flavor continue to significantly outperform our other styles. The investments we made in new brand creative and soccer-related promotions have improved our marketplace presence, particularly in display activity. However, the impact on consumer demand has not yet met our expectations. We are adjusting the level and timing of our investments in Truly as we reassess the most effective approach to accelerating brand performance. We maintain our focus on strengthening the brand and will continue to refine our marketplace approach while taking a disciplined approach to investment. In cider, Angry Orchard grew for the fifth consecutive quarter behind our lead styles, Angry Orchard Crisp and Crisp Imperial. Crisp Imperial volume has increased more than 60% in the second quarter in measured off-premise channels.
Angry Orchard growth is supported by its brand positioning around "Don't get angry, get Orchard," our refreshed creative, and strong retail programming. Angry Orchard will continue to focus on building the momentum behind its successful Halloween programming and its recently announced partnership with the iconic "Scream" horror movie series. For our Samuel Adams brand, to support and help celebrate America's 250th anniversary, we launched limited edition retro packaging and Drink Like It's 1776 retail programming and promotions. In our home market of Boston, we had record sales at our taprooms this summer as soccer fans from Scotland and all over the world celebrated and discovered Samuel Adams Boston Lager and our Samuel Adams Summer Ale. For our Dogfish Head brand, in the second quarter, we slightly lost share and had our first quarter of decline after four consecutive quarters of growth.
Thank you, Jim. Good afternoon, everyone. Depletions in the second quarter decreased 6% and shipments decreased 4.5% compared to the second quarter of last year, primarily driven by decreases in our Twisted Tea, Truly, Samuel Adams, Hard MTN DEW, and Dogfish Head brands that were only partially offset by increases in our Sun Cruiser and Angry Orchard brands. As Jim noted earlier, at down 5.6%, shipments declined at a slightly higher rate than depletions in the H1. Distributor inventory at the end of the quarter was four and one half weeks on hand and was consistent with the weeks on hand at the end of the second quarter last year. Revenue for the quarter decreased 3.3% due to lower volume, partially offset by price increases and favorable product mix.
Pricing was below our full year guidance range in the second quarter, as list price realization was moderated by the timing of distributor incentives related to the World Cup programming. Positive product mix was driven by strong growth in Sun Cruiser. Our second quarter gross margin of 50.4% increased 60 basis points year-over-year. Gross margin performance primarily benefited from our brewery efficiencies, favorable product mix, procurement savings, and price increases, partially offset by inflationary commodity and tariff costs. Advertising, Promotional, and Selling expenses increased $26.2 million or 16.4% year-on-year, resulting from increased local brand marketing and point of sale investments of $17.5 million, and a slightly higher than planned freight cost increase of $8.6 million, with higher rates partially offset by lower volumes. General and administrative expenses increased $3.1 million, primarily due to increased legal fees and salaries and benefit costs.
These increases included $1.4 million of legal fees related to the previously discussed supplier dispute litigation. Operating profit reflected strong gross margin performance, offset by significant advertising investment and freight rate inflation, which increased more than 35% year-over-year. The supplier dispute litigation expense adjustment of $19.3 million consists of a favorable adjustment to prejudgment interest of $21 million and a post-judgment interest expense of $1.7 million. Year-to-date, pre-tax litigation expenses plus related fees total $198.1 million. As previously announced, we continue to intend 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, but do not expect this issue to have a material impact on our operating plans.
The impact of these litigation expenses and related legal fees represent a $1.31 favorable impact to our second quarter GAAP EPS and a $14.27 unfavorable impact to our year-to-date GAAP EPS. Excluding the litigation related expenses, second quarter non-GAAP EPS was $3.65. I'd like to provide an update on our ongoing productivity initiative. We continue to make progress and are on track to deliver our 2026 savings target across the four buckets that I've discussed previously. I'll now provide some highlights on our initiatives in each bucket. In brewery performance, we continue to see improvements in OEE driven by process improvement, which help to increase our internal production capacity. In the second quarter, we produced 84% of our domestic volume internally, compared to 76% in the second quarter of last year.
For the full year 2026, we continue to estimate domestic internal production will be over 90%, compared to 86% last year. In procurement savings, our second quarter result benefited from lower negotiated pricing on certain packaging and ingredients. As discussed previously, procurement savings have been a significant contributor to our gross margin improvement over the last two years. While we expect some continuous benefit in 2026, the impact is expected to be more moderate versus 2025. In waste and network optimization, we are continuing to enhance our customer ordering and inventory management system. These efforts helped us achieve high customer service levels, lower inventories, and improve our cash flow. We've reduced obsolete inventories 42% in the H1 of this year. Revenue management capabilities were added this year as part of our margin agenda.
These efforts are in early stages in 2026, with a more meaningful contribution expected in 2027. Our 2026 guidance, we are maintaining our full year volume guidance range of down low single digits to down mid-single digits. Fiscal week depletion trends for the first 29 weeks of 2026 have declined 5% year-over-year. Our volume range reflects varying assumptions for the pace of improvement in the H2. Based on our current total company trends, we would expect full year performance toward the lower end of the range. We believe our operating plans can drive improvement from current trend levels. The high end of the full-year range would require stronger category and market share trends. In the H2, we expect continued strong growth from Sun Cruiser.
Adjustments to the timing of our Samuel Adams seasonal transition, as well as slightly more contribution from our innovation and international brands, are expected to be volume tailwinds in the H2. We continue to expect price increase of between 1% and 2%, and some additional benefits from mix. While managing through a dynamic volume and commodity environment, we are raising the low end of our full-year gross margin guidance and maintaining our non-GAAP EPS guidance, driven by strong cost savings delivery and disciplined adjustments to our planned advertising investments. We do not hedge commodities and have updated our cost assumptions for freight and aluminum to reflect the current pricing environment. We are closely watching market cost changes and will update EPS outlook as we move through the year if commodity inflations continue to increase.
Our updated gross margin guidance of 48.5%-50% reflects tailwinds from positive pricing, favorable product mix, productivity savings, and lower shortfall fees, with headwinds from tariffs and commodity inflation. As a reminder, the majority of our freight expense is booked in advertising, promotional, and selling expenses. Our 2026 guidance continues to reflect the 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 the tariffs that we are currently being charged by our suppliers and that we expect to continue going forward. As Jim noted, we've updated our outlook for advertising, promotional, and selling expenses and now expect them to be flat to up $20 million versus the prior year, compared to our previous expectation of an increase of $20 million and $40 million.
This amount does not include any changes in freight costs for the shipment of products to our distributors. We may choose to spend at a lower end of our range, depending on the commodities and energy cost environment and the returns we are seeing on our investments. We estimate our full-year 2026 non-GAAP effective tax rate to be approximately 29%-30%, with non-GAAP EPS of $8.50-$10.50. As you model out the year, please keep in mind the following factors. In 2025, we implemented supply chain improvements that enabled more consistent distributor inventory levels. The impact of this change on prior year quarterly shipment flows, combined with our expected timing of shipments to meet our customer demands in 2026, will affect the quarterly pacing of shipments in the H2 of the year.
We currently expect shipments in the third quarter to decline low to mid-single digits, followed by a modest shipment growth in the fourth quarter. Due to the typical seasonality of our business, we expect the fourth quarter to have the lowest absolute gross margin of the year. However, year-over-year gross margin rates improvements is expected to be the most meaningful in the fourth quarter, driven by lower shortfall fees and volume performance. We typically expense the majority of our shortfall fees in the fourth quarter. The timing of this benefit, together with the fact that the fourth quarter is a smaller dollar quarter, has an outsized favorable impact on the gross margin rate.
Advertising investment levels are expected to decline year-over-year in the fourth quarter as we've reduced investment levels in Truly, and we are lapping high investment levels in the fourth quarter of 2025, which included meaningful production costs associated with preparation for 2026 programs. Turning to capital allocation. We ended the quarter with a cash balance of $266 million and $150 million of availability in our credit line. 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 payments. We expect capital expenditures of between $60 million and $80 million in 2026, a reduction from our previous estimate of between $70 million and $90 million. These investments will be primarily related to our own 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. During the 26-week period ended June 27, 2026, and the period from June 29, 2026 through July 17, 2026, we repurchased shares in the amount of $48.5 million and $5.6 million. As of July 18, 2026, we had approximately $174 million remaining on the $1.6 billion share repurchase authorization. This concludes our prepared remarks. Now we'll open the line for questions.