Welcome to the Constellation Brands second quarter 2017 earnings conference call. At the time, all participants have been placed in a listen-only mode. Following the prepared remarks, the call will be opened for your question. Instructions will be given at that time. [Operator Instructions]. I'll now turn the call over to Patty Yahn-Urlaub: Vice President of Investor Relations. Please go ahead.

Thank you, Jackie. Good morning, everyone, and welcome to Constellation’s second quarter fiscal 2017 conference call. I am here this morning with Rob Sands, our President and Chief Executive, and David Klein, our Chief Financial Officer. This call complements our news release, which has also been furnished to the SEC. During this call, we may discuss financial information on a GAAP, comparable, organic and constant currency basis. However, discussions will generally focus on comparable financial results. Reconciliations between the most directly comparable GAAP measure and these and other non-GAAP measures are included in the news release or otherwise available on the company's website at www.cbrands.com. Please also be aware that we may make forward-looking statements during this call. While those statements represent our best estimates and expectation, actual results could differ materially from our estimates and expectations. For a detailed list of risk factors that may impact the company's estimates, please refer to the news release and Constellation’s SEC filings. Before turning the call over to Rob, I would like to ask that we continue our practice of limiting each Q&A session participants to two questions. That will help us end our call on schedule. Thanks in advance. And now here is Rob.

Thanks, Patty. And good morning and welcome to our discussion of Constellation’s second Quarter Fiscal 2017 sales and earnings results. Before I begin a review of the quarter, I'd like to focus your attention on the press release issued earlier today, reporting that we have an agreement to purchase Utah-based High West Distillery for approximately $160 Million. Now, this acquisition includes a portfolio of award-winning, high-end American straight whiskeys and other spirit brands at the greater than $30 retail price point. With the addition of High West to our portfolio, we are entering the profitable high-end craft whiskey market segment. High West sells approximately 70,000 cases annually and has experienced double-digit volume growth for each of the last three years. The portfolio includes four core products – American Prairie Bourbon, Double Rye!, Rendezvous Rye and High West Whiskey Campfire. High West will be an excellent addition to our spirits portfolio as we expect it to bolster our position in the dynamic and growing spirits category. Now, let’s turn to our discussion of our quarterly results, which reflect excellent performance across our businesses, especially our beer business which is significantly outperforming the US beer market and our own expectations. As a matter of fact, during the quarter, Constellation’s beers contributed 60% of the total US beer industry IRI dollar growth, driven by the excellent performance of our top brands. And we remain the number one share gainer in the high-end segment of the US beer market, with double-digit depletion growth of almost 14% for the second quarter. These results were driven by excellent execution by the beer team during the peak summer selling season. Our 120 days of summer marketing campaign drove marketing share gains during the Fourth of July and continued throughout the heart of the summer and into the…

Thank you, Rob, and good morning, everyone. As highlighted by Rob, we’re pleased with our impressive results for Q2 and first half of fiscal 2017. Strong execution and smart investments continued to fuel our growth and solidify our leadership position in total beverage alcohol. This is demonstrated by the 17% comparable basis diluted EPS growth we generated during the first half of fiscal 2017. As a result of this performance, we are increasing our full-year comparable basis diluted EPS target to a range of $6.30 to $6.45 versus our previous guidance of $6.05 to $6.35. Looking at our Q2 fiscal 2017 performance in more detail where I will generally focus on comparable basis financial results, you can see organic beer net sales increase 15%, primarily due to volume growth of 13% and favorable pricing. Beer depletion growth for the quarter came in at 14%. Wine and spirits net sales on an organic constant currency basis increased 8%. This primarily reflects 6% volume growth and favorable mix. Our US depletions grew a little more than 3% in Q2. Our US shipment volume outpaced depletions during the first half of fiscal 2017. This is mostly timing related as we expect US shipment volume to generally align with depletion volume for the year. As a result, we expect wine and spirits net sales and EBIT growth in the second half of the year to be lower than the first half, with Q3 net sales expected to be flattish to down slightly and EBIT down further due to anticipated marketing and SG&A investment during the key holiday selling period. Beer operating margin increased 200 basis points to 36.9%. This reflects benefits from pricing, volume, freight and foreign currency. These positive factors were partially offset by an increase in depreciation expense, driven by our capacity…

[Operator Instructions] Our first question comes from the line of Nik Modi with RBC Capital Markets.

Yeah. Thanks. Good morning, everyone. So just two quick questions for me. On premise, Rob, maybe you can give us some context on kind of state of the union on premise generally? And then the second question is just when you think about the overall portfolio, obviously, you have a beverage alcohol play here across all the segments. And when you think about the beer industry and a lot of areas that you're actually not competing in today, some of the new areas like cider or spiked seltzer what have you, can you just give us your thought process on how you think about some of those verticals as white space over the coming years? Thanks.

Sure. First of all, as relates to the on premise, right, I would say that the condition of the on premise remains fairly poor, in that to the extent that it’s measurable, the on premise I think continues to be sort of on the down-ish – slightly down-ish side. For us, our on premise business is very strong. So we’re clearly gaining share in on premise. So while the channel is not performing particularly well, we’re extremely pleased with our performance in the on premise. Then to your second question, Nik, there’s definitely whitespace that we think is very good whitespace that we don't participate in. You mentioned, for instance, the FMB category. That’s a very good category in terms of its premium positioning margins and growth, so that's clearly a subcategory that we’ll be looking at in terms of developing our portfolio for the future. And then secondly, there's other areas of white space. A good example of our filling whitespace in our portfolio is our High West acquisition, right? That has put us in the craft brown spirits, right – American straight whiskey category and that is a fantastic category in terms of growth and margins, which we see no abatement in that trend in any time in the near future. So we've got a great entrant there and we’ll be continuing to look at other areas of whitespace that would be available to us and makes sense in terms of our portfolio and from a synergy perspective, which really anything in beverage alcohol really fits that bill because, obviously, we have strong sales organizations across wine, beer, and spirits and extremely strong distribution networks in wine and spirits and beer. So we’re really in a position to attack anything that meets our criterion in the wine, spirits, and beer business, which is pretty simple, right? High growth and high margin are really the two things that are critical to us.

Thanks a lot.

Our next question comes from the line of Judy Hong with Goldman Sachs.

Hi, Judy.

Thanks. Hi, good morning. So, first, I guess, on High West, I just wanted to get a sense of how we should think about your ability to really scale up the brand, kind of similar to what you've done with wine acquisitions like Meiomi and Prisoner just in terms of supply, if you can also give us some color on what the supply situation looks like on High West, that would be great. And then just more broadly, as you think about your spirits portfolio, what is sort of your latest thinking in terms of the scale that you would need to really compete effectively in kind of the high-end spirits segment?

So to your first question, High West, the way to think about how we can scale that up is to look at examples like some of the ones that you pointed out, Meiomi, The Prisoner, growing – both of those growing super high single digits. I think Casa Noble is another great example, right, fastest growing luxury tequila – of any luxury tequila, growing in IRI at 45%. Basically, what we’re able to do with these brands, and we will be able to do with High West, is use our sales organization, our expertise and execution and our extremely strong distribution network to take a brand like a High West and really grow it into something material in the category that it participates in. So I think that we’ll be very successful in scaling that brand. And the brand already has fantastic momentum and it already is of significant size at 70,000 cases. So you apply these kind of high double-digit growth rates for the next several years and you can definitely see this being scaled into a material brand, especially when you think about the price point and the high margins that are associated with the brand and the category. And then – what was the second question?

The supply situation, High West.

The supply situation, we don't see any issue there. Obviously, part of our due diligence was making sure that we had the supply to grow the brand. So we didn’t wake up and fall off a log on that one. Obviously, we made sure that we would be able to supply the brand growth going forward.

Just in terms of your view on how much scale you think would be needed to compete effectively in the high-end spirit, do you think that you’re kind of there and it's really more…?

Yeah. I don’t think that that’s really a relevant sort of measure. It’s not competing in high-end spirits per se, right? It’s really a brand by brand kind of thing. We’re going to compete and out-compete the competition with the brands that we have. The whole point of sort of our selection process as we make these sort of smaller tuck-in acquisitions is to buy brands that stand on their own and have the momentum to be of a scale to contribute materially to Constellation’s growth and margins. And I am quite confident that High West will be one of those brands as are the other brands in our spirits portfolio. So just like we bought SVEDKA years ago and have grown that to be the second largest vodka in the entire United States and the number one import brand and fundamentally changed the vodka category with that brand, I think that our other spirits additions have a lot of great potential similar to that. So, I guess we don’t really think about the – how do we compete effectively in a whole category. We think about what’s the quality of the brands that we’re buying and how can they contribute to Constellation’s continued stellar growth in the top line and the bottom line.

Okay. Got it. Thank you.

Our next question comes from the line of Mark Swartzberg with Stifel.

Hi, Mark.

Hey, Rob. Good morning, everyone. Two questions. One on wine and spirits. You had about a $28 million SG&A increase. And, David, you touched on that, but could you give us a little bit more on what was going on there beyond the effect of just factoring in these new businesses? So that's one. And then number two on Nava, what's the capacity there right now and where are we in relation to getting to the 20 million by the end of this fiscal year?

So I'll start with the second question first, so in terms of 20 million hectoliters at Nava, we’re producing 20 million hectoliters both from a brewing perspective and a packaging perspective. And, in fact, we’re on our way to our next milestone of 25 million hectoliters. So I would say that the Nava expansion work is on track. We revised our capital spend primarily based upon outflows related to Nava for this fiscal year. That’s just simply a timing thing as we manage our way through the build-out process and manage our cash flow. So then on the wine and spirits SG&A number, it really is just incremental spend in investment areas within our wine and spirits business, like marketing, innovation and having the right talent on board for our wine business.

Okay. It’s a little vague to me. Could you give a little more on that?

This is Rob. Look, the virtuous cycle. Our performance enables us to invest more in our businesses, in particular our wine and spirits business, which is now driving significant growth in that business and enabling us to both leverage the P&L and achieve market share growth as our focus brands are now growing at a rate that more than offsets the decline in our tail brands, which are in categories which are fundamentally not growing. So we’re over-investing. And when I say over-investing, I mean we’re investing more than we have traditionally, specifically in marketing of our wine and spirits brands. And so, what you're seeing is advertising campaigns that we've initiated to drive brands like Kim Crawford. We’ve got tests going on in various states like Taxes, for instance, to really have a consumer way type advertising program like Kim Crawford to see how that drives the brands, which by the way is driving the brand fantastically and I think that we’re proving that our investments in media advertising, on wine, on brands by Kim Crawford and – Woodbridge is another one that we really have beat up our advertising on, that these are paying back at a rapid rate, meaning a rate greater than what you traditionally see in consumer products, which is very similar to our beer brands, in particular Corona and Modelo Especial, where we see sort of the payback rates on our advertising activities at a much faster rate than what would typically be seen in consumer products. So we’re both testing what we can do through marketing and we’re increasing marketing where we know that it already works. So, hopefully, [indiscernible].

It’s helpful and encouraging.

It is encouraging. It’s super encouraging as a matter of fact.

I would also want to point you, Mark, to – we still believe in, and it’s implied in our guidance, that we’re going to get leverage from net sales to EBIT in our wine and spirits business, despite a spending increase.

And share gains.

That’s great. It’s helpful. And just plain encouraging. All right. Thank you, gentlemen.

Our next question comes from the line of Tim Ramey with Pivotal Research.

Thanks so much. Good morning. David, you mentioned that the tax rate would come in at 29%, I think, you said for the full year, which implies a pretty low rate for the 3Q and 4Q. Is there anything lumpy about the split between those quarters, so that we don't get our estimates too confounded here.

No, I think as is always with tax planning, I'm sure anything I say will be wrong, but I would suspect that the way we have our initiatives planned over the rest of the year, you can expect it will be roughly flat to bring you around to that – between the quarters to bring you to that 29% guidance.

Got it, okay. And, Rob, as you pointed out quite rightly, your wine business has been pretty dramatically outperforming, but the category has been pretty good too. How would you describe the category outlook? Are we still in kind of an acceleration mode or just sort of growth is stable, but okay?

Well, I think the category is performing very well. I think that we’ll continue to see sort of mid-single digit volume type growth in the category, right? And I think that we’ll see the spread between volume and sales and, therefore, premiumization in trade, I think we’ll continue to see that grow. I think we’re a real shift, whereas five years ago we were sort of talking, what they used to call, the super-premium category, which was the $8 to $12 range, is really being the hot and premium segment of the industry. We’re seeing a definitive shift up in that regard. And, now, you’re sort of seeing this $15-$25 segment really coming on strong, as well as segments above that. So this is what is driving the wrong of brands like Meiomi, which are about $20 a bottle, or even Prisoner, closer to $40 a bottle, is this premiumization trend, which we think is going to continue unabated in certainly the mid-term. So I’d say that the outlook for the category continues to be extremely positive.

Just relative to the crop, generally, when we get a bigger crop, as it looks like we might this year, that does put some pressure on bulk line prices, which I would think might have good impacts on brands like Mark West, not right away, but perhaps for fiscal 2018, any thoughts on the state of bulk line and some of the brands that are sourced from bulk line?

Yeah. Look, a bigger crop is – definitely bodes well for lower prices. Supply, especially like you mentioned Mark West for pinot can be tight, so larger crop is going to be better all the way around. Could there still be a little price – a little cost inflation associated with it? Yeah. But we’re – as typical, we just don't see cost inflation on the wine side of the business as being a big material factor in driving anything. We're expecting very normalized, pretty low cost inflation that we’ll be able to pass on one way or another. So we don't see it impacting margins. And as I said, the bigger crop is a positive thing, yes. That will even help that. So it’s a good thing.

Thanks so much. Congratulations.

[indiscernible] cost.

Yep.

Sure, Tim.

Our next question comes from the line of Caroline Levy with CLSA.

Good morning. Thank you very much. I was just wondering, David, if you could walk us through again the moving parts for margins in beers and also in wine in the back half because you did chart a lot of different things that were favorable in the first half and then some kind of spending. But it would be really helpful, the peso, the depreciation, all those things, if you could just run through that.

Yes. So as we said, the real change in our guidance was driven by a move in the peso and slower ramp-up of the depreciation charge into the business. Right? So that explains why we slid our guidance up a little bit. So that's the first bit. I would say, in the second half, we really would expect that gross margins would be flattish to the first half. We would expect that our marketing spend, which we say is between the 8.5% to 9% of net sales, that will be flattish in the second half. However, a big chunk of that will be spent in Q3 versus in Q4. So there’ll be a little bit of volatility in that. And then when you get to the remainder of SG&A, if you think about as SG&A in a growing business, you start out and say, well, if you’re not going to grow it at all, it’s going to be straight line throughout the year. And in our business, SG&A is actually growing a little bit because the business is growing. And it's really that SG&A drag, which you’re going to see affecting the beer margins in the second half.

Is that depreciation? Is it a bit of a catchup versus the first half not being up?

Yeah. When we get into the second half, you start to have more depreciation come on line. You get a little bit more noise on line commissioning. You have less throughput at the plant. So there are a lot of puts and takes, I would say, in the second half. But as I said, I would still expect that our gross margins in beer will remain somewhat consistent. And then, our wine – for the most part, our wine expansion in the US has been driven by mix, and mix in the form of non-organic such as Meiomi and the Prisoner, but also mix within our base portfolio has improved as well or our organic portfolio has improved as well. In addition to that, we have had some benefits from freight savings in the US on wine. But I would say that we would expect wine margin trends to remain somewhat consistent in the second half, although as I called out in my script we can expect that since over the course of the year shipments will roughly equal depletions that will have a slowdown in the shipments line in the second half, even though consumer pull continues to be very strong and depletions will continue to be healthy.

Thanks so much.

Our next question comes from the line of Bill Chappell with SunTrust.

Thanks. Good morning. I may have missed, but can you give us maybe some update on the Canadian wine business in terms of decisions to IPO versus for divestiture? And the reason I ask that is, I would've thought if we were in a process for sale that you would have maybe separated the revenue out as available-for-sale and not be part of the numbers. So I'm just trying to – any update and kind of thought process or where that process stands?

So I'll start out and then Rob can add some color. So where we are from an internal standpoint is we’re still evaluating the IPO route and I would say that in the last quarter we finished our carve-out statements, which I will admit took longer than we had expected when we first started the process. And then beyond that, I would say that as we do with every decision the company has to make, we consider all of our alternatives, but as of this moment we’re still doing the work to prepare for an IPO.

Okay.

Yeah. I guess I would only add that as we have sort of gone down the IPO, right, the myriad of opportunities relative to the Canadian business are numerous. So we are in the process of evaluating all of the opportunities that are available to us and I would venture to say that we’ll have something to say about all of that in the relatively near future when, I would say, our decisioning and the opportunities crystallize. So as I said, more to come on that in the relatively near future. All very positive, though.

Good to hear. Good to hear. And a follow-up on the whiskey side, just kind of future plans of – whiskey can be segmented with a lot of brands, stand for a lot of different things, including I'm sure Old West. Do you look to add a variety of brands to build up the portfolio or do you really wanted to get behind Old West for the near-term?

We’ll look at other brands as they become available. We’re really kind of attacking, I'll say, whiskey from a couple of different perspectives, right? So number one, we bought High West in its entirety and, in essence, we’ll be integrating that into the Constellation wine and spirits platform, albeit we will be keeping and utilizing the resources that High West already has, which is the one of the attractive things about that particular acquisition. And then, on the Ventures side of the business, we’ve made an investment in – we’ve made an investment in another Bourbon brand, the Greenbrier company which currently has released its Belle Meade brand of American straight whiskey, right, Bourbon and will be introducing other brands as they continue to distill and age the whiskey. So that was a minority investment on the Green Brier side. We think that’s got some real attractiveness as well. So we’re able to help them out more as a minority partner and on a consultation perspective. And then on the High West side, as I side, we’ve taken full ownership of that and will be in essence integrating that into our wine and spirits platform. So we will continue to look at the category and look at it both through our Constellation Ventures lens as well as our normal sort of M&A lens.

Great. Thanks for the color.

Our next question comes from the line of Rob Ottenstein with Evercore ISI.

Great. Thank you very much and then congratulations on another terrific quarter.

Thanks.

So in terms of the High West, can you talk to us a little bit about the product’s brand proposition, what makes the brand attractive, why you think it has a national appeal? And then separate – or related to that, just kind of the thinking about actually buying the brand and the business in total as opposed to having a distribution agreement, in which you distribute the product for them and take a nice payment for the ability to use your system as opposed to buying it straight out?

Yeah. So in terms of the brand and the proposition, we think that the brand, number one, has a great image. The proposition is all about the founders of the company going into the business before bourbon and rye had reached the level – craft bourbon and rye, in particular, reached the level of popularity that it has today. They took a view that much like the Scotch whiskey category, that sort of a combination of distilling and aging their own whiskey and then combining that with blending could create a product that was really superior, so that they did create those products. And I'll say through the expertise of master blenders that they brought in created a product that really appeals to the luxury American straight whiskey and bourbon and rye consumer and was able therefore to take advantage the whole sort of craft trend in that area. So we think it’s a relatively unique proposition and that certainly is reflecting itself in the way that the company has been able to grow the brand and we think that we’re going to be able to really take that platform and accelerate. Distribution agreements, we have no interest in whatsoever, okay? Number one, you don’t own the brand. Number two, distribution agreements are short term. Nobody is going to sign up and give you distribution rights for a life. Number three, distribution margins are small relative to the kind of margins that we at Constellation generate through our owned brand portfolio and certainly the type of margins that we’re talking about on luxury spirits. So we don't have really any interest at all in distribution, low margin, short-term distribution agreements that would utilize probably one of our most valuable assets, which is our sales and marketing organization. So we don't see distribution arrangements as an add-on for the future. As I said, way, way, way too low margin and no brand equity related there too.

Terrific. Very clear. And then just on the beer side, could you please give us an update in terms of where things stand on various draft initiatives. There’s a lot of talk about that a year ago and maybe where you are in terms of rolling out – I think it was mostly Corona Light in terms of how you’re doing with tap handles penetration, what sort of growth and size of that business today versus a year or two ago?

Yeah. Draft is going to fantastically. The bottom line there, our total draft volume increased 30%, for example, in the second quarter. It’s a significant contributor to our growth. Most of that growth was driven by Modelo Especial draft, for instance, was up almost 50% year-on-year and we're seeing these kind of positive trends across our whole draft portfolio. So draft, which was something that we almost didn’t participate in at all, and nevertheless a significant segment of the beer industry, is another area that’s – we’re sort of infantile, but will contribute significant growth to the business going forward. So we're very excited about the draft proposition. We’ve been running tests with Corona draft. Obviously, Corona Light draft is an area that is also providing growth to the company. So nothing, but up there.

That’s great. And just what percentage of your business now is draft and where do you think it could go?

It’s small. And I think that it could start eventually to reflect the industry on amount. So, for us, it’s less than 5% and for the industry I think it’s closer to 15% to 20%, something like that.

Thank you very much.

10% to 15%.

Thank you.

Our next question comes from the line of Bonnie Herzog with Wells Fargo.

Good morning.

Hi, Bonnie.

Hi. I just wanted to follow-up a bit on wine pricing opportunities which you touched on. Clearly, you’re driving a premiumization of your portfolio with your recent acquisition. But I guess – I was hoping you could talk a little bit more about potential pricing opportunities you have with some of your larger brands such as Mondavi which has generally seen price deflation over the last several years?

So we’re beginning – we’re maybe three years into a pricing journey in our wine business where we’re trying to apply the same sort of pricing discipline that we apply to our beer business on a year-in and year-out basis. And I would say that, so far, wins have really been at the low end of the portfolio and at the luxury end of the portfolio. But we do believe that over time that we will continue to get pricing opportunities across the portfolio, right? So this will be the third year we’ve taken price in various brands in our wine portfolio and this will be the year where we have the biggest effect of those price increases. But I would say that we’re just beginning that journey. I would also say that we’re – you’re also seeing some ability to take price in certain segments of the wine category that haven’t taken price in the past. So we remain cautiously optimistic, but we need to get some wins behind us before we want to talk about that much more.

I would just point out just a couple of interesting statistics which we track which is, if you look at IRI and year-to-date pricing for the top 20, we call premium SKUs, the percent change – now this is excluding Constellation, the top – the percent change versus a year ago is about 1.3%, okay? And then if you looked at year-to-date pricing for our top ten SKUs in the premium category, meaning Woodbridge and above, we’re at plus 3.5%. So I think that the sort of journey that David was talking about is reflecting itself and working relatively well at the current time.

Okay, that makes sense. And then just one final question on Corona cans. Could you just update us on the progress you’ve made with your cans and then maybe touch on your penetration or ACV and consumer acceptance?

So we continue to see can grow. So as a percentage of Corona extra sales, they’re still around 6%. But we saw – from a depletion standpoint, we saw high teens growth in cans for depletions in the quarter. So we continue to see increasing consumer uptake of the brand. And I would say that from an ACV perspective, our cans are not distributed anywhere near the level of kind of the total 80 ACV that brand Corona as distributed out. So we think there’s still a lot more runway for that.

All right. Thank you.

Our next question comes from the line of Steve Powers with UBS.

Great, thanks. Maybe first, David, just any color on what drove the CapEx shift into 2018? And then back to [indiscernible] in beer, should we expect that too to kind of ramp and catch-up in fiscal 2018, commensurate with the CapEx moving?

So as we indicated earlier, I just want to reiterate, we are on track with all of our buildout activity. I would say that it just – we have a multi-billion-dollar activity going on in Mexico and it's really difficult to forecast to get the actual dollar amounts of cash payments nailed down to a specific quarter. So I think we’re seeing a little bit of that going on. And so, anything that slips out of this year we can expect will end up coming through our cash flow statement in FY 2018. And in terms of depreciation and amortization, in my comments earlier, I said that we would be at $125 million of depreciation and amortization for the beer business. That will, just by definition, that growth from about $65 million last year to $125 million this year, that will be somewhat back-end loaded, just given the fact that we’re behind a little bit on a year-to-date basis.

Okay.

The other thing, I think, to keep in mind now is that, as I also indicated, we would expect that our margins – our gross margins in beer will remain roughly flat first half to second half. So there are just a whole bunch of moving pieces there, depreciation just being one of them.

Okay. Okay, fair enough. And then separately, I was wondering if you could comment a bit more on the response to recent marketing, especially in Modelo. You’ve mentioned earlier, it’s a great payback on that. And, obviously, we see the business results. I just wonder if there are any other ways that you can underneath that mess [ph] of the ROI on these marketing investments, whether in terms real time or relatively real time increases in brand equity or other indicators that give you confidence about the longevity of the ROI related to this investment. Thanks.

Yeah. So this is something that we spend a fair amount of time on and I would say that our team is outstanding at understanding the returns they’re getting from their marketing investments. And we continue to see payback from our investment in Model Especial. Let me give you an example. When we were talking about our thoughts for the second quarter at the end of the first quarter, we actually thought that we would see a spike in marketing spend in Q2. We did spend more in marketing. But as a percentage of sales, it ended up being in line with our projections simply because we got a significant short-term payback from that investment. So we continue to monitor that on an ongoing basis and that’s our work on the beer side. And as Rob talked about the marketing investment on the wine piece of our business, we’re bringing that same rigor to marketing spend in wine.

Great. Thank you.

Our next question comes from the line of Brett Cooper with Consumer Edge Research.

Hi, guys. Thanks. I just wanted to ask you on shelf placements, retailer acceptance as we get into fall shelf resets, what you guys have seen? I have heard kind of rumblings that craft has lost some space and you guys in F&B may have picked up. Just wondering if you could give any color.

Yeah. I think that there's some truth to that. We’re certainly trying to drive that trend through our category management efforts. I would say that, as a general proposition, we probably think craft is over SKU-ed and over-spaced. And imports – given the importance in the growth, high-end imports are under-SKU-ed and under-spaced. And premium domestics are way over-SKU-ed and over-spaced. That’s something that we spend a lot of time sort of thinking about, which is assortment in the high end especially, and I think we’re in a very strong position to advise our retail customer through our category management initiatives as to ways that they can improve their velocity as well as their profit per-unit space that they’re devoting to beer. So that's a big part of what we’re doing. And I think the trend that you’re alluding to is definitely occurring. And I think that that bodes really well for us in a couple of areas. Craft, even though you are going to see some shake out there, I think that what will also occur there simultaneously is that the bigger, stronger, faster growing brands like Ballast Point will and should be given more space, more SKUs sort of for the obvious reason because it's moving and it’s highly, highly profitable. And I think that you can say the same about imports because it’s going to become obvious to the retailer that that’s the best way to maximize, as I say, their velocity and profitability for the unit space that they’re devoting to the category. The trend you mentioned is occurring and it bodes extremely well for our entire beer business because we only play in craft and the high end.

Thanks. And if I can follow-up on pricing, from the data that we see, your pricing is going up much – or going up more than we’re seeing from others. As you head into, I guess, calendar 2017, thoughts on expanding price gaps, given that you guys continue to drive some meaningful share gains.

Yeah. I'm not sure that our price is really going up more than others. It’s going up to the extent that we’re taking pricing. We’re right in line with sort of the typical, I’d say, inflationary increase that occurs every year and we continue to look at it on a market by market basis. We’re probably under the 2% when we combine everything, sort of between 1% and 2%. I would say that that's normal just to keep up with the pace of – with cost of goods and inflation and so on and so forth. So nothing different, I would say, is occurring on the pricing front – period – industrywide from what we can see.

Great, thanks.

Our final question comes from the line of Laurent Grandet with Credit Suisse.

Good morning, everyone. Great quarter. Congrats, guys. I’ve got a question regarding Ballast Point. You previously stated that – a goal to have Ballast in 50 states by the calendar year-end. Where are you on this progress? And still on Ballast Point, it seems like the growth is coming from ACV – it’s coming from, sorry, distribution and ACV, what about the velocity and same-store sales. It seems to be flat to us. So what are you doing to increase the repeat purchase here, which would be critical for that brand?

So, first of all, on distribution, the brand is in 43 states, plus D.C., and we continue to plan to expand that for the remainder of the year. And as it relates to what sort of runway we have on distribution, it’s a brand that has an ACV of, say, in the low 20s versus some other major crafts that are more in the mid – low to mid 60s, right? So we think that there's a lot of opportunity on the distribution front. And I would say, as it relates to just overall velocity, I think we have a little bit of an effect as we grow points of distribution that we’re driving down our own brand’s velocity. But we continue to be pleased with the brand, as Rob mentioned. We’ve got depletions that are up 40% on a year-to-date basis. We have – we’re very pleased with where we are from a profitability standpoint, as we continue to get leverage in the production environment at Ballast Point. So we’re just generally very happy with where we are with Ballast Point.

Got it. Thank you. And last one, final, on Ballast, if I may. What would you say to those who said that, with Ballast Point management team leaving, you lost some kind of know-how and craft credentials?

Yeah. I guess I’d say I think it’s the opposite. I think that team certainly had some knowledge and credentials, but I don't think that they have anywhere near the level of the of sophistication and knowledge, okay, that the team that we supplanted them with has. First of all, as far as that team goes, okay, we replaced the CEO with Marty Birkel, who is the guy who ran national sales for our beer business for eight years and probably the fastest growth period in our entire beer business and, therefore, is really one of the stars in the beer business – period – and also was our sales president for our wine and spirits business as well for many years. He brings a level of knowledge and expertise in growing brands and in wholesale and distributor relations and sales execution that far exceeds what the previous management team had. And then if you look at the sales side of the business, we replaced the sales guys with the number two sales guy that was heading California already at Ballast Point. And California represented a very large proportion of the business and this is the guy that was driving that portion of the business. And then the other changes aren’t going to have any real commercial effect on the business. So I would say, if anything, we’re really excited about the changes that have been made and we think that it is going to lead to even stronger results on Ballast Point as it grows into a much larger business and needs a degree of professionalism that I don’t think that the old management team could bring. And then as it relates to the products itself, we have the same production team, the same expertise in the making, what really is, the highest quality and most award-winning craft beer brand of any size in the country. And they're just – they’re going about their business and doing what they've done in the past and they are probably doing it better than they’ve ever done it before. So there's a lot of really exciting stuff. And then sort of culturally, everybody is acutely aware of the type of culture that needs to be maintained in sort of that fast-moving, craft type business where it’s important to continue to proliferate new products and new types that the consumer is really interested in, that particular craft consumer. So I don't think that we’re going to see anything lost there. We’re very optimistic and very pleased with the changes that we’ve made.

Thank you very much for your candid response. Thank you.

That was our final question. Now, I’d like to turn the floor back over to Rob Sands for any additional or closing remarks.

All right. Well, thanks, everybody, for joining our call today. And as we close out the discussion of our second quarter results, I want to reiterate that I am extremely pleased with our performance and our accomplishments for the first half of the year. [indiscernible] our new guidance reflects the confidence that we have in our ability to execute in the second half. Now, we look forward to seeing many of you at our upcoming New York City Investor Meeting scheduled for November 9. At that time, we plan to outline Constellation’s strategic business initiatives and outlook for the future. So thanks again and have a great rest of your day.

Thank you. This concludes today’s conference call. You may now disconnect.