Greetings, and welcome to The Boston Beer Company Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn this conference over to your host, Mr. Jim Koch, Founder and Chairman. Thank you, sir. You may begin.

Thank you. Good afternoon and welcome to everyone. This is Jim Koch, Founder and Chairman, and I'm pleased to here to kick off the 2021 second quarter earnings call for The Boston Beer Company. Joining the call from Boston Beer are Dave Burwick, our CEO; and Frank Smalla, our CFO. I'll begin my remarks this afternoon with a few introductory comments, including some highlights of our results and then hand over to Dave who will provide an overview of our business. Dave will then turn the call over to Frank who will focus on the financial details of our second quarter [Technical Difficulty]…

…and showcasing Truly’s superior variety of flavors and the colorful and adventurous nature of Truly drinkers. Based on the brand's innovation leadership, strong brand building and growing cultural relevance, we believe Truly is well positioned to continue to grow share. We overestimated the growth of the hard seltzer category in the second quarter and the demand for Truly, which negatively impacted our volume and earnings for the quarter and our estimates for the remainder of the year. We increased our production of Truly to meet our summer peak and have had lower than anticipated demand for certain Truly brand styles, which has resulted in higher than planned inventory levels at our breweries and increased supply chain costs and complexity. At the same time, we've been experiencing out of stocks on certain of our camp products, most significantly on our Twisted Tea brand family. We expect wholesaler inventories of Twisted Tea to remain tight for the rest of the summer. Our outlook for the hard seltzer category in the second half of 2021 is uncertain, and we planned our capacity and spending based upon several volume scenarios. We'll continue to manage our capacity requirements through a combination of internal capacity increases and higher usage of third party breweries. We continue to work hard on our comprehensive program to transform our supply chain with the goal of making our integrated supply chain more efficient, reduce costs, increase our flexibility to better react to mix exchanges and allow us to scale up more efficiently. While we're in a very competitive business, we're confident in the continued growth of our current brand portfolio and innovations, and we remain prepared to forsake short term earnings as we invest to sustain long term profitable growth. Based on information in hand, year to date depletions reported to the company to the 20 weeks ended July 10, 2021 our estimates were increased approximately 32% from the comparable weeks in 2020. Now Frank will provide the financial details.

Thank you. Thank you, Jim and Dave. Good afternoon, everyone. For the second quarter, we reported net income of $59.2 million, a decrease of $0.9 million or 1.6% from the second quarter of 2020. Earnings per diluted share were $4.75, a decrease of $0.13 per diluted share from the second quarter of 2020. This decrease was primarily due to increases in operating expenses, lower gross margins and higher tax rate, partially offset by increased revenue growth driven by shipment growth. Shipment volume was approximately 2.45 million barrels, a 27.4% increase from the second quarter of 2020. Shipment volume for the first half was significantly higher than depletions volume and resulted in higher distributor inventory as of June 26, 2021 when compared to June 27, 2020. The company believes distributor inventory as of June 26, 2021, averaged approximately five weeks on hands and was an appropriate level for each of its brands, except for Twisted Tea, which has significantly lower than planned distributor inventory levels for certain [Technical Difficulty] packages. Our second quarter 2021 gross margin of 45.7% decreased from the 46.4% margin realized in the second quarter of 2020, primarily as a result of higher processing and other costs due to increased production in third party breweries, partially offset by price increases and cost saving initiatives at company owned breweries. Second quarter advertising, promotional and selling expenses increased by $61.3 million from the second quarter of 2020, primarily due to increased brand investments of $41.2 million, mainly driven by higher media, production and local marketing costs and increased freight to distributors [Technical Difficulty] million that was primarily due to higher rates and volumes. General and administrative expenses increased by $3.3 million from the second quarter of 2020, primarily due to increases in external services and salaries and benefits costs. Based…

[Operator Instructions] Our first question comes from line of Bonnie Herzog with Goldman Sachs.

I guess, I don't maybe even know where to begin. I understand that the category has been flowing, everyone is aware of this. That said, I'm truly struggling and yes, pun intended, with how meaningfully your results have deteriorated? I guess I'm saying this because even as recently as May, your tone and comments suggested that even with a slowdown in the category you could still deliver relatively strong growth and hit your full year guidance. So I guess for me this begs the question. How confident are you that you're going to be able to hit your new guidance, and really how much visibility do you have in your business?

Let me take a shot at that. I think first of all, when we spoke in our call in April, everything at that point we’ve hurdled that first big COVID stock up period of March and April, we hurdled it really well at sort of the category. And even to the moment of our call, we felt really confident in where the category was going. And what seemed to happen really, the May, June stock up overlap, we really hit -- we kind of hit that inflection point in the S curve where things went from high double digit growth rate to low double digit growth rate. And that was the first signal really as we got into May and June, and we had expected to hit that second bump better. Now when you look at -- if you look at the brand's performance, okay, just for perspective; Truly has outgrown the category for 11 months, straight to last September; Truly has outgrown the category by 2x since January; Truly, we have grown out -- outgrown the category by 3x in the last 13 weeks. It's increased -- it's the one brand that’s increased household penetration significantly, so we've grown our user base by almost 40%, for Truly, which means -- and the innovation is working. So as we mentioned just earlier, teas performance very well, punch performed very well. So we're growing the business, we're growing the -- we're actually bringing in younger and more multicultural consumers. We're seeing that with tea and with punch. So the category, I think, I guess to go back the question, the categories took -- went down to like basically over the last 13 weeks, let's call it, 10% and we were growing between 20 and 30. So it did take a more…

Our next question comes from the line of Vivien Azer with Cowen.

Thanks very much for that very fulsome answer. That's a great place to pick up. In terms of the on-premise penetration, can you just help dimensionalize that please? Like 4,000 draft lines that Truly compares to what for your portfolio, or is there an ACV measure we should be thinking about? Just to understand how incremental that could be.

So I think -- well, I mean, there's about -- to be really precise, there's about 262,000 accounts out there. We're in almost half of them with at least one brand. So we'd say we're in 125,000 accounts, not a full portfolio but at least one of our brands. So 4,000 is pretty -- we think it’s pretty significant. And again, we'll see how it plays out. Certainly, cans are going to be the predominant form of package that we deliver. But there seems to be a lot of interest among our customers for Truly on draft, and we switched -- if you remember, when we first tested this idea right before COVID, we had a flavorless version that was intended to be mixed by bartenders. The feedback we got was that's too much effort. So we have a wildberry version, which our customers are liking a lot better. So there's no need for mixology or anything like that. So that's the extent right now. And Truly -- and again, one more data point for you, we've more than doubled our penetration for Truly in our accounts, so it's in about 22% to 23% of our accounts, more or less, at the moment and growing…

On-premise…

And then just on the margin side, given the reduction to your volume outlook for the full year on ships and depletes, surprised that maybe there wasn't a little bit of improvement in your gross margin outlook. Is that a function of you guys being locked in the contract with third-party manufacturers? How do we think about that?

So yes, we definitely have -- like when you look at versus prior year, with the volume growth, it was pretty clear that we're going to grow the Truly variety pack more externally than internally, because we're full out internally and externally, at this point, it’s still more expensive. So there was a margin decline because of that. Now with the volume slowdown that we have experienced in Q2, that relationship or ratio has improved. And depending on where the volume is going to go for the rest of the year we’ll probably improve based on the revised guidance that we have given. In Q2, you don't see the full benefit of it because there were certain adjustments costs. We have flexible contracts but the slowdown of the category came pretty suddenly. And so there are some adjustment costs and we adjusted the production and incurred some costs for that. That's why you don't see the full extent of that. But what I can tell you is that we see the benefits in our internal breweries of our cost reduction efforts and the automation efforts that we're putting in. So we haven't changed the full year guidance yet but we see the savings coming through and expect them definitely for next year.

I'll try to squeeze in one last one. You noted that you'll continue to focus on innovation, but also predicted that there will be a category shakeout. I think you guys have been good at predicting cluttered categories. Jim talked about in the past with craft beer proliferation and that's certainly, as you guys predicted. So how are you guys thinking about innovation in the back half of this year and into 2022 given that the category does look very crowded right now?

I mean, the way -- first of all, we’ve gained about 60% more space year-over-year on shelf. We think we're expecting that we could probably pick up another 25% in the fall. There will be some change in fall resets. We think given our performance -- by the way, we have the highest penetration of any brand in the category now. And so we think -- our flavor innovation has been able to bring new consumers into the category, into the brand. So on that strength, we think we can get more space in the fall. As it relates to innovation in general, the consumers in this category, they like innovation. And I think we figured out how to do it different than others have, and we'll continue to bring innovation. And I think the challenge for us is how do we keep doing it in a way that makes it differential and incremental, both to the category and to our brand. And thus far, we've been successful in doing that. But we're not going to -- we're certainly not going to rest on our laurels or think that maybe the same formula is going to work going forward. We're going to look at other ways to do it. And again, because we're a very strong number two now, we think -- and we performed this year, significantly outperformed others, we think we have a lot of latitude and support from our customers to do more.

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

First, a quick one for Frank. Your inventories were up pretty substantially, something in the order of $90 million sequentially. I know that I think it was Dave called out increased inventory at the breweries. How much of that sequential increase in inventories on the balance sheet was related to finished goods at the breweries? And what's the risk of inventory obsolescence costs here? And then a follow-up for Dave and Jim afterwards.

So the inventory, to your point, we have internal inventory that has clearly increased, that's a function of the business. So three reasons. One is the function of the business growth that we have experienced in absolute terms and we're managing it really in terms of retail supply. And then the second thing is as we have done in the previous two years, we've prebuilt inventory and that's what you see at wholesaler inventory, which has gone up. Now there's a limit to how much wholesalers can take, so we had to build a little bit more internally rather than passing it to the wholesalers and then came the slowdown. So what we have done, and typically, that was the curve in the previous two years, we're building up until April where we reached the peak in inventory and then we start decreasing our inventory as the demand picks up and eclipses our production capacity, that has happened as well. What has happened though in May and June that, that pace has slowed versus what we have predicted. But from a weeks of supply forward-looking perspective, at this point, we don't expect any write-off, so everything is reflected. So there shouldn't be -- unless there's another significant slowdown, which we don't expect because our guidance has reflected and that's why we increased the guidance a little bit also to the lower end to account for that.

And then Jim and Dave, I was a little bit surprised that in your detailed explanation for the slowdown of the seltzer category that you didn't explicitly call out RTDs. Maybe that's partway what you're referring to in terms of some of the consumer confusion, although, I think that was referring within the hard seltzer categories. So the question for you is, do you guys think that some of the hard seltzer slowdown is related to the explosion that we've seen in RTDs? Drizly is obviously talking quite bullishly about what they're seeing on their platform for RTDs. And what sort of interaction are you seeing and what's the plan to participate in a bigger way?

Actually, I'll be honest. Right now, we're -- you're right, I was referencing the hard seltzer proliferation, not RTDs or canned cocktails. At this point, we don't see it having an impact on the hard seltzer category or Truly. And then just to put it in perspective, you have to break it apart. So High Noon actually plays as a hard seltzer, no question about that. In High Noon, if you were to put that into the hard seltzer category, would be about a two share. High Noon is also about a quarter of the entire RTD business, canned cocktail business. So consider the canned cocktail business as about 8%, right, of hard seltzer, of which High Noon has two of it. High Noon does play in that space, and there's no question, you look at the occasions. And again, we're still learning because it's obviously very new. It's a nascent thing but we're talking to consumers and we're learning. High Noon does deliver on sort of sessionability, better-for-you, but if you look at the other canned cocktails, they do not. And if you look at the -- it's more special occasions not the same occasions that hard seltzer are satisfying. And if you look at the repeat data, and again, it's early. But if you look at the repeat data and the buy rate data on canned cocktails, they are very low compared to hard seltzer. So again, I would say canned cocktails is kind of like it's just jumble of stuff right now. We're all trying to figure out what is it, where does it go, but it's -- and they're not all the same. And honestly, the first thing you got to do is take High Noon out of that equation because it plays very differently. Now having said that, we're going to -- we'll participate there because we have to. We have to learn it -- and I think it's -- we think it's important that we do that. And we'll do it in our own way. And we've talked about taking [seltzer] into an F&B format as part of our partnership with Beam Suntory, that's one of the things we're going to do. Also, of course, we have Dogfish Head out there now. So we're going to learn and we're going to play. But I think this kind of noise that’s being created now that, oh my gosh, canned cocktails -- it's going to be bringing down the hard seltzer category, we don't see it in the data. And when we talk to consumers, we don't see it either with that.

Our next question comes from the line of Laurent Grandet of Guggenheim.

Two questions from me, and one is a follow up from Vivien’s questions earlier on on-premise. So I would need you to help me reconcile the numbers here. I mean, it looks like -- I mean, as depletion in the quarter was about 24%, that's pretty much what we are seeing in the Nielsen retail business. So it will mean that actually on-premise didn't deliver any upside if you look at those numbers. So maybe you could share, I mean, for the entire company, maybe the performance in on-premise by brand? And then more specifically on Truly, I have got some follow-up questions for the on premise, but help me reconcile basically the growth of on-premise during the quarter with what we have seen in retail.

So we'll answer the question, so the question is what's happening with on-premise, if our total number looks like retail, are we growing in on-premise or we're not growing on-premise?

Correct, you said…

So yes, I mean, right now, we're approaching -- like the last several weeks, we've been selling it to the same levels as 2019. And obviously, 2020, we were not selling what we were selling in 2019. So we are growing on-premise. And one of the primary reasons why both Sam and Dogfish are back to growth is we're getting top handles and we're growing. So I'm not sure how to, other than sharing the data that we don't normally share, how we can kind of reconcile that other than to say we are growing in on-premise as well. And we believe -- we use IRI, I'm not sure what Nielsen is saying. Like you said, it says 24%. So there's -- I'm not sure how to reconcile those two numbers, to be honest.

In the quarter, we very definitely grew faster on-premise than we did off-premise pretty much for every brand.

Well, difficult to understand this in the numbers. So then specifically maybe on Truly. Last year, I mean, [Technical Difficulty] Truly was about 2%, 2% to 3% and you're saying it's about 3%. So it's not a huge kind of upside versus last year. Where do you think a brand like Truly or Hard Seltzer in general could become in terms of size versus retail? I mean, should we think about this being kind of 8%, 10% of the retail sales of Truly or Hard Seltzer? I'm not thinking that it will go up to 15% like in beer. But should we think about Truly being ultimately 8% to 10% of what it is in retail?

I think that's reasonable. I think I would start with the likelihood that hard seltzer, in general, including Truly, will under-index on-premise for the foreseeable future unless the draft takes off as big volume driver. If you don't play on draft, you're missing a sizable hunk of the on-premise low ABV type volume where beer has historically played. So I think your numbers are -- and we're all begging for a crystal ball here and none of us has it. But if on-premise historically, it's been between 15% and 20% of the business. If you held a gun to my head, I'd say it's going to be 10-ish, maybe a little less of the seltzer business for the next year or two. But longer term, there may be upside from innovation that we haven't seen yet.

And then, I mean, it's more on innovation. Sorry if I didn't understand it. But could you please maybe explain the nature of the deal with Beam Suntory and what we should expect, I mean, for what will be the upside for you? And I'm not trying to understand what's Truly in the [bubble] lead to be frank.

So I mean, we deliberately didn't put a lot of information out there because we don't want to share with our competitors. But basically, we have a partnership and it's not like a licensing deal. It's a partnership where we can take some of their brands into the FMB space. And we do know that there are FMB drinkers who like spirit brands and would like to see those spirit brands in the FMB space. So through our distribution network, collaborative R&D, collaborative marketing, but through our distribution network is where we would take those brands. And in return, we think we have a couple of brands, the first one being Truly that have a possibility and the potential to live in the spirits world. But to do it the right way, we're going to go through them and their distribution and use their knowhow and expertise in helping us craft, in the first case, a version of Truly that could go -- it could be a bottled spirit. So it's we're mutually helping each other take some of our iconic brands into other worlds where consumers will recognize them and hopefully gravitate toward them.

And I'd add to that, I think it is our mutual beliefs, us and our partner, Beam Suntory, that a spirits based product will find its best route to market through the spirits system of supplier and distributor. So we believe there could be some traction for a Truly vodka but not through us, not through our production and distribution system. It should go through a spirits producer. If you go through a spirits producer, we're fortunate to have someone of the quality of Beam Suntory to partner with in this endeavor. And similarly, a malt based product, even if it has a tequila brand on it, will find its most success leveraging the beer system, a beer supplier like us and beer wholesalers like our network. So it kind of keeps, despite the brand names, it keeps the products in their most successful lanes, spirits through the spirit system and malt based products through the beer system.

Our next question comes from the line of Filippo Falorni with Morgan Stanley.

So first question, maybe can you explain and give a little bit more color on your expectations for Truly in the second half. I know you said for the full year, you expect at least to grow at the low end, 2 times to 3 times the low end of the 20% to 50%. But just any thoughts on the second half as you cycle more normalized comparisons, that would be helpful for us to start.

I think the best way to look at it is as a relationship to where the category is going, because at least we have some good historical data over the last year in how we perform relative to the category. What I don't want to do is say what the category is actually going to do because we've proven we're not very good at that. But we do think that, again, we've been, for the last 13 weeks, we've been about a 3:1 clip versus the category. So we think whichever the way the category goes, we'll ride it. We do think -- look, we believe this in our last call, but we do think that obviously, comps ease up, we're lapping -- and there's some serious out of stocks that were occurring. On-premise, we'll start to take hold, the category will winnow out. So some of this consumer confusion and retailers supporting everything will start to fade to the back half of the year. And again, we think through our innovation and through our brand building, we've established ourselves as a brand with a lot of momentum that that should take advantage of these things that will happen back half of the year. How that translates into the exact growth, we don't know. And by the way, we can go -- if it goes up, we're ready to go there. We can handle either -- whatever occurrence happens, we'll be ready to take advantage of that. So I'm sorry, that doesn't really give you a definitive answer but that's sort of the best we can do.

Maybe kind of to add on to that, like we were expecting a slowdown in May and June because it's really hard to predict and that's why it's really hard to answer your question, 2020 was such a roller coaster and had a tremendous volatility. And if you recall, May and June was a tremendous stock-up, first by the consumer then by the retailer, because they wanted to be ready. And that was reflected in the depletions and in our volumes, shipment volumes, of course. So we were expecting a moderation that was -- and I think that coincided with a few other factors that Jim and Dave have laid out. So the slowdown was a little bit stronger than what we had expected. Now that is moderating in the back half but we don't exactly know what the composition is between the natural slowdown of the category and what happened in May, June and going into early July. So we'll have to see that. What we put out is our range is our best estimate based on what we have seen and what we believe, but we are clearly prepared to go beyond that on the upside. So we are ready to move there, if need be. So we're planning for more than what we have or for a broader range than what we gave you as a guidance.

And then, Dave, you talked in the past about wanted to build Truly as a mega brand, and you've clearly done a lot of progress in the US market. But thinking about internationally and the potential there, particularly given the US categories starting to slow. Why not go a little bit more aggressive on trying to expand internationally and starting with Canada and then potentially in other markets? And whether you can make some investments to do it in-house or potentially partner with another beverage company on a global basis.

Well, we do have a business in Canada that's growing rapidly. So we feel good about the progress we're making there. We are just now launching in the UK. We have a partner in the UK Shepherd Neame, the oldest brewer in the UK and our partner for Boston Beer there. And they are launching in the UK and Ireland right now, as we speak. And we'll learn, because we're not quite sure where hard seltzer is going to play outside of North America. We're a little bit hopeful but we're not betting the firm on it, but Shepherd Neame is going to go out there and the benefit of that is we also have Dua Lipa, who is a UK citizen and obviously very well loved in the UK. So we have a great marketing platform to go out there to see what we can do in the UK. And then we'll see from there. I mean, we'll see from there. There are other things obviously out there. But we're focused on winning in North America and that's our goal. And I think you can see the effort we've made and what's happened over the last year is we're in a much different place than we were a year ago, because we've been really focused on the market that matters the most.

Our next question comes from the line of Kevin Grundy with Jefferies.

Just had a question for Dave and for Jim. I was just hoping you could unpack the -- I'm coming back to the seltzer category. Maybe you could just unpack the factors a little bit driving the slowdown. And I hate to belabor this, but I guess going back to your initial guidance to where we are now, as you look at your key performance indicators and household penetration, frequency of consumption. If you could just sort of maybe departmentalize this in some order of magnitude, what you think is driving the slowdown? And then at a 20,000-foot level, as the industry sort of moves out its euphoria phase and we move into a more normalized level of growth. And I apologize, Dave, I know you said you don't want to forecast the category anymore, but being a company that's helped pioneer this category, I think the industry will be curious to hear your views. Where do you think we go now from here? I think the bogey had been like 15% of beer. Does that still seem like a reasonable ambition? So your thoughts on both of those would be helpful and then I have a follow-up.

Well, I can start and then Jim or Frank can jump in. I think in terms of the category, so it is kind of that S-curve moment. And I think what makes it even harder to recognize is because of all the weird overlaps in COVID, first stock-up, second stock-up, on-premise opening, et cetera. But if you look at the household penetration, so year-to-date, the penetration is still growing in the category and so is the buy rate. So you have a lot of people who come in, I think year-to-date this is -- I'm using numerator data for those who care, but it's up 7% household penetration increase. Now a year ago, it was 73%. So that's the inflection point. It's still growing but it's slowed down. Buy rates are also increasing. So people who are in the category and staying in were actually, they're buying more. So that's good. So I think -- my sense is, I mean, we obviously went from close to triple digits, nine months ago or whatever to high double digits. Now it's low double digits. And we think it will stay and we're banking it's going to stay there. We think it could go up a bit. We said that 20% to 50%, again, that's not our forecast. That's all the experts’ forecast and that seems reasonable to us given all the things we've seen. So yes, I think it's going to make a difference really to getting normalized. We'll know more, obviously, as we get through the summer. But again, there are too many brands out there, not enough shelf space, too much focus, too much sameness. I think this is -- I really believe this firmly that in categories like this where there's high growth and everybody jumps in, it's not just in our industry, the more people -- the more companies try to create something that's different, they create nonessential differences and benefits. And the problem is everything becomes the same. And it does, from a consumer perspective, look the same. And I think a lot of those brands will be gone. So I think retailers are seeing that now, it’s going to -- it started happening in the fall. Still the top two brands are [70] share of the category, more or less, and that will continue. So I think the smoke will start to clear and we're seeing -- what we're hearing from the other third party folks, they're saying basically CAGR 15% to 25% over the next few years coming out of it. But I might -- I don't want to go there yet, let's just get through the next three to six months and see where if it ends up where we think it will. We obviously have more information now than we did even three months ago, a lot more and hopefully, we're closer. And Kevin, I don't know if that came close to answering to your question.

No, that's helpful. Jim, did you have anything to add on this front? And particularly where you think the category goes over time now that you kind of -- you reassessed here with the slowdown, we moved at the euphoria phase. Anything to add?

We're just at a really choppy point, we may be it. And we'd be totally honest, we're surprised at the sharpness and the suddenness of the change in trajectory. It happens as we're lapping crazy times from last year. We're past the first month of pantry loading. But when we look at May this year versus May of last year, it was a crazy time last year. And all the volume has shifted to the off-premise. So the numbers are really hard to read, May, even June of this year versus May and June of last year. So we are -- I mean, we're probably as surprised as you are. It shows up in the inventory numbers. And from our point of view, we launched Truly Punch, which was quite successful, but it hasn't added as much to our volume as we thought, cannibalized it. Some of the other packages maybe a little more than we thought it would. So it's a really, really murky crystal ball. It's more like looking into a bowling ball. You can't see much.

One quick follow-up and then I'll pass it on. Just given the slowdown, there is a major brand [Technical Difficulty] out there. They've decided to pull the plug on it. So one would think that there will be some interest in [Technical Difficulty] that inventory through the system. Understanding that we're in a difficult commodity cost environment, how do you sort of view those cross currents, category slowdown, higher input costs and specifically, the risk that the promotion kind of picks up here given the magnitude of investment and inventory [Technical Difficulty] channel [Technical Difficulty]?

I'll give you my guess. Generally, when brands end up being discontinued like that, there's not that much volume out there. I think when you're talking about, it was maybe 0.7% share. So a lot of them just winnows. So there's not a lot of inventory that gets dumped and puts downward pressure on the category. It's from retailers and wholesalers and suppliers, it's a very attractive category and we've all made major investment to it. So there's not that we need to pay back. So I'm not anticipating price wars in the seltzer category. So I'm not that worried about it. We all have more inventory than we would like, but it's still selling a lot of products. So we're not really worried about and it has long shelf life, six to 12 months. So we're all able to cut our production and work off that inventory in a relatively short period of time.

I would add to the inventory. Last year, it would have been more than happy if we had that level of inventory, because we went out, and there's just a lot of seasonality to it. So that's one thing. The other thing is also on the pricing. You see also in our [Technical Difficulty] financials. I mean, we delivered quite a bit of pricing in the category. The category so far has shown that it's not really a price driven category. It's not price, it's the quality of beverage and the strength of the brand and the innovation that wins, but price has been really a factor and we don't expect that to change.

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

I wanted to go back and touch on your comments on the S curve and really taking a step back and looking at the long term. So are you seeing any evidence that the early adopters of the category are switching out of hard seltzers, or is what we're seeing now in Q2 really just at the rate of attracting new customers have slowed?

I think it's much more the latter. So the early adopters are actually, they're there, and as I mentioned, the buy rates are increasing so they're actually buying more. And they're moving to the category. And actually, they're experimenting with a lot of different things that were there. I'd say it's the more recent -- the [seltzer] penetration is like around 27% now. So it's probably the more recent ones that jump in are more likely to fall out. Also, when you bring in -- we're bringing in younger -- the good news is we're bringing in younger consumers. We're bringing in Latinos, African-Americans. The buy rates for some of those consumers coming in actually a little bit lower than the first ones in. But this is still going to be an $8 billion or thereabout business this year at retail. So it's the only real category that's growing within beer and it's growing double digits. And the question is how far does it go up, hopefully. So again, just to put that in perspective as well.

[Operator Instructions] Our next question comes from the line of Eric Serotta with Evercore.

Just a quick follow-up. You cut the CapEx guidance pretty significantly for this year. I know you're not going to give us a category forecast for this year or next year. But what sort of range of additional capacity do you have coming online between your own breweries and your co-packers between now and year end and now and, call it, summer of 2022?

Right now, we've got a couple of big pieces of capacity coming on in the next few months. Actually, this month, we're starting to get production out of the city brewery in Irwindale, California, right outside of LA. And in the fourth quarter, we will get production from Rauch, basically the people who produce Red Bull all over the world, they have -- they're bringing up a greenfield facility in Arizona specializing in slim cans. So one part of the margin improvement that will be starting in the second half of this year is those markets we currently supply, largely from Memphis and from Pennsylvania, a little bit from a smaller facility in Arizona. So all of those freight costs will be reduced as we begin to supply the western half of the United States from western breweries. And then we put capacity in place for the back half of this year and then especially going into 2022 for very significant growth in seltzer, and that is primarily contract capacity. So that was all that contract capacity coming on stream, which is very favorably located and actually well designed to make a variety of packs at Rauch, doesn't involve a great deal of capital compared to building it internally. So one of the things we have reduced is high capital cost capacity, which is the internal capacity, because we believe we have really good contract partners with favorable terms and locations and very efficient production.

And Eric, to your question, we started that in the last earnings call, where we had to reduce that when we were in this really extreme growth period. When you plan your capital, you look at different options of putting the capital in. And there are basically two big buckets of capital that we're looking at, one is increasing capacity and the other one is investments to bring down the cost. That's the automation of the variety bag, that's the main component, which will drive the cost down. So when you put that in at the beginning, the plans weren't all specified. As we move through the year, we found better solutions, as Jim said, that allowed to get to the same result with less capital. So if you look at the capital reduction in the guidance, the way I would think about it is three quarters is really because we found better ways in implementing our plans and about one quarter is a delay and that depends really on the capacity that we really need. We have sufficient capacity for next year, but everything will go forward that will decrease our variety pack and cost, and that's the major cost block. And that's also the major difference that you see in the current P&L between external manufacturing and internal manufacturing. But those are the plans that we have and that's going to be a key driver for the margin improvement.

But just coming back to the risk with all of this additional capacity that you're going to have access to. Could you talk about what degree of flexibility that you have with your partners in other locations and your own breweries to just make sure that you're not too long on capacity or supply next year if the category growth disappoints?

We believe we have very flexible contracts with our primary partners. There are shortfall fees but they don't kick in for a while. For the first piece of volume, we have to go way below our projections before they kick in and they are reasonable. And because our contract partners are very good producers, they're in demand. They make lots of different things. We are the principal customer for most of them and looked at as the most desirable, stable, sizable volume. But if we cut some of that back, we've been told by our contract partners that they've got other demand for it. So we're lucky in that flex capacity, the last third of it, we basically have options on that and the contracts were structured that way, because we were uncertain about just how high was up. So we locked in adequate capacity to cover very ambitious upside goals, but the shortfall fees are not sizable.

[Operator Instructions] Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Jim Koch for closing remarks.

Thanks, everyone, for joining us for this call, and we look forward to speaking to you in another three months when we think we'll have a little more clarity. Maybe the bowling ball will have turned a little more translucent. Thanks, everyone.

Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.