Duckhorn Portfolio : Transcript

Corrected Transcript

08-Dec-2021

The Duckhorn Portfolio, Inc. (NAPA)

Q1 2022 Earnings Call

	Total Pages: 16
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The Duckhorn Portfolio, Inc. (NAPA)	Corrected Transcript
Q1 2022 Earnings Call	08-Dec-2021

CORPORATE PARTICIPANTS

Sean Sullivan	Lori Beaudoin
Executive Vice President, Chief Administrative Officer & General	Chief Financial Officer & Executive Vice President, The Duckhorn
Counsel, The Duckhorn Portfolio, Inc.	Portfolio, Inc.
Alex Ryan
Chairman, President & Chief Executive Officer, The Duckhorn Portfolio,
Inc.

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OTHER PARTICIPANTS

Robert Ottenstein	Peter T. Galbo
Analyst, Evercore Group LLC	Analyst, BofA Securities, Inc.
Kevin Grundy	Lauren R. Lieberman
Analyst, Jefferies LLC	Analyst, Barclays Capital, Inc.

Drew N. Levine

Analyst, JPMorgan Chase & Co.

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MANAGEMENT DISCUSSION SECTION

Operator: Greetings and welcome to The Duckhorn Portfolio's First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and- answer session. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Sean Sullivan, Executive Vice President, Chief Administrative Officer and General Counsel.

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Sean Sullivan

Executive Vice President, Chief Administrative Officer & General Counsel, The Duckhorn Portfolio, Inc.

Good afternoon and welcome to The Duckhorn Portfolio's first quarter of fiscal 2022 earnings conference call. Joining me on today's call are Alex Ryan, Duckhorn's President, CEO and Chairman; and Lori Beaudoin, our Chief Financial Officer. In a moment, we will give brief remarks followed by Q&A.

By now, everyone should have access to the earnings release for the period ended October 31, 2021, the first quarter of fiscal year 20221. This went out at approximately 4:15 PM Eastern Time. The press release is accessible on the company's website at ir.duckhorn.com. And shortly after the conclusion of today's call, a webcast will be archived for the next 30 days.

Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it and, as such, does include risks and uncertainties. If you refer to Duckhorn's earnings release, as well as the company's most recent SEC filings, you will see a discussion of factors that can cause the company's actual results to differ materially from these forward-looking statements.

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The Duckhorn Portfolio, Inc. (NAPA)	Corrected Transcript
Q1 2022 Earnings Call	08-Dec-2021

Please remember the company undertakes no obligation to update or revise these forward-looking statements in the future.

We will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business, and have included in our earnings release and our earnings presentation a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.

With that I will turn it over to Alex.

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Alex Ryan

Chairman, President & Chief Executive Officer, The Duckhorn Portfolio, Inc.

Thank you, Sean, and good afternoon. We really appreciate you joining us today. We are excited to discuss quarterly net sales and adjusted EBITDA that are the highest in our history. Following my opening remarks, I will turn things over to Lori, who will take us through our fiscal year 2022 first quarter financial results and our outlook in greater detail before we open the call for questions.

Reflecting upon our first quarter results, I am extremely proud of our team's operational excellence. We delivered all-time highs in quarterly net sales and adjusted EBITDA. There are a few points I would like to specifically highlight first. We realized strong double-digit growth on both the top and bottom line. This reflects Duckhorn's continued momentum to profitably drive sales well in excess of the high growth luxury wine market on the top line. We realized growth of thirteen point seven percent in net sales.

Last year, in the first quarter, we had nearly 40% organic volume growth. Despite this daunting comp, we successfully grew first quarter 2022 shipments by 7.5% over the prior year quarter. This excellent performance against a tough comparison is a testament to the power of our luxury wine portfolio and sound execution of our differentiated go-to-market strategy. Consumer demand for our high quality luxury wines remains robust as well with depletions modestly outpacing shipments up double digits in the quarter when compared against the same quarter of the prior year.

These impressive results reflect broad strength across all elements of our portfolio. That said, on-premise sales once again served as the primary driver of growth when we look at the on-premise,off-premise channel mix. Accordingly, we realized a greater contribution from our other winery brands versus the same period in the prior fiscal year. This proved accretive to both our price mix and margin profiles. As a reminder our other winery brands include all winery brands other than Duckhorn Vineyards and Decoy.

By channel our higher margin, California direct to retail and our overall DTC business led the way with net sales of both growing in excess of 30% as compared to the first quarter of the prior year. While our wholesale to distributor business demonstrated consistent growth for the period, our home state of California observed an outsized benefit from the recovery of on-premise activity.

At the same time, DTC saw solid contribution from wine club member sales as well as continued improvement in performance at our tasting rooms. These favorable mix shifts both for brand and for channel helped us expand our gross margin by nearly 200 basis points. We expect these trends to persist over the foreseeable future and to help deliver modest gross margin expansion for our full year results.

Heading into fiscal year 2022, we knew we would be facing formidable year-over-year comparisons as a result of the prior year's growth. At the same time, we also had confidence in the superior quality of our luxury wines and

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The Duckhorn Portfolio, Inc. (NAPA)	Corrected Transcript
Q1 2022 Earnings Call	08-Dec-2021

our business model to deliver continued growth upon the great successes we realized in fiscal year 2021. Although COVID influence on the society remains present, we were encouraged to see travel and the on-premise trade show further signs of recovery during the first quarter. It is far too early to conclude how the latest Omicron variant of COVID may influence dining out. However, whatever the impact, we see ourselves as well-positioned to continue to drive on-premise distribution at new and existing accounts over the long-term.

As we have talked about previously, we made a strategic decision to invest in our sales force during on-premises darkest days. We believe these investments from last year continue to bear fruit today. In spite of the narrowed down wine list that many restaurants are offering these days, we are seeing considerable net growth at on- premise accounts and the company benefit to our margin as we revert toward on and off premise proportions closer to historic norms. We are also seeing margin expansion because of the more than 30% growth we're observing in our California direct to retail channel, which is partially due to more relaxed pandemic rules in California relative to the prior year quarter.

Our off-premise approach business continues to be strong, building on considerable gains made during the pandemic for all key metrics, cases, accounts sold, and points of distribution, showing good growth and nice balance between independent and national accounts. We view this as further confirmation that the considerable uplift in at-home consumption and new customers discovering our high quality wines during the height of the pandemic has created a lasting impression on consumers.

The Duckhorn Portfolio is top of mind for consumers looking for a luxury wine experience. As awareness of our brands continues to grow, we expect our presence in the off-premise channel to continue to expand. We saw evidence of this in our strong distribution gains during this fall's more normalized shelf resets. Ultimately, our one- stop luxury wine shop go-to-market approach should position as well for the coming spring's shelf resets.

Our success relies on a highly diversified and flexible supply chain, and flexibility enables us to reliably meet the growing demand for fine wine. Our trade partners take comfort knowing that our offerings will sell based on strong velocities and brand strength. Importantly, they can also trust that we will be a reliable supplier, providing them with ample product to keep shelves and wine list in stock. The wholesale and retail community has confidence in our ability to ship our wines out to them reliably, especially during times of serious supply chain disruption. We believe that our reliability is a key enabler to our continued distribution growth and consistent market share gains.

While we won't make it a habit to speak to brand level performance, we view it as important to highlight the power of our Decoy winery brand and the long runway that lies ahead. As we've discussed in our prior conversations, Decoy is our primary winery brand ambassador for continued distribution growth. Decoy pairs exceptional quality with an accessible price point to provide a highly compelling offering to a broad swath of consumers. Accordingly, this brand opens up doors for our entire collection, serving as one of the broadest points of entry for the portfolio.

Over the last decade, Decoy has transformed into a powerhouse and a platform of its own. This winery brand has broad shoulders and the ability to expand into new price points and category adjacencies. Decoy Limited, our prestigious blue label Decoy offering which was launch across the three varietals a little over a year ago, is a classic example of this winery's brand strength. In fact, at the beginning of this calendar year, we introduced a fourth well-received varietal to the Limited label, Chardonnay.

Decoy Limited has far exceeded our initial expectations, demonstrating our established brand power with consumers who are willing to trade up even in challenging market conditions. And because we are still very early in the story of this winery brand, distribution opportunities remains considerable. ACV of the Decoy Limited is roughly half of the white label counterpart.

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The Duckhorn Portfolio, Inc. (NAPA)	Corrected Transcript
Q1 2022 Earnings Call	08-Dec-2021

Importantly, Decoy Limited is building upon the continuing success of our Decoy white label. Decoy white label continues to grow at a rate well in excess of the industry average. As we introduce and expand the availability of our Decoy Limited blue label, we are seeing good growth in dollars per ACV. In other words, Decoy Limited is proving to be an incremental growth driver and not cannibalistic to the overall Decoy Winery brand. Additionally, because of blue label's $5 to $10 higher per bottle ring versus its white label counterpart, it's a win for both the trade and our P&L.

Let's take a moment to discuss our high margin DTC channel. Strong growth in wine club sales continued to drive good momentum in our DTC channel. Additionally, we are benefiting from increased visitation at our tasting rooms as a result of the improved travel situation and consumer growing desire to enjoy a high quality luxury experience in-person in our tasting rooms. Perhaps more importantly, sales in the tasting rooms are up versus the first quarter of fiscal year 2020, even when you exclude the sales from our newly opened Migration tasting room, driven by a notable increase in average spend per tasting room guest.

I would also like to take a moment to point out that we published online our inaugural Responsibility and Sustainability Report last week. Our commitment to excellence continues to shape every facet of our business from how we sustainably grow grapes and make our wine to how we holistically support our employees and communities. This first ESG report continues this tradition and highlights the impact we aspire to make through our work in the vineyards, wineries and the communities in which we live and work. It also exemplifies our commitment to create a sustainable corporate culture of long-term value creation for our stockholders.

We also are excited to welcome Adriel Lares to our board of directors. Adriel brings a wealth of knowledge and experience as a CFO with public company experience who is familiar with how to best approach the opportunities present to growing newly public companies,. He also has a keen interest and experience in the wine industry, and we all warmly welcome him to Duckhorn.

Stepping back, I'm very pleased with our first quarter results. We've gotten off to a strong start for the fiscal year. Even with the unpredictable backdrop of the ongoing Omicron variant, I remain confident in our ability to execute our full year outlook. We are well-positioned to continue to capitalize on the recovery in on-premise and the premiumization effect taking hold across the broader market, and that's because of the strength of our luxury wine brands, our scaled yet nimble supply chain, and our highly differentiated one stop luxury shop go-to-market strategy. This mix should continue to allow us to consistently outpace the high growth luxury wine subsegment and continue to take share from our competitors.

With that, I will now turn it over to Lori to discuss our first quarter performance and fiscal year outlook.

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Lori Beaudoin

Chief Financial Officer & Executive Vice President, The Duckhorn Portfolio, Inc.

Thank you, Alex, and good afternoon, everyone. Let me open by describing the details of our strong performance to start off the fiscal year. Beginning with our top line, net sales for the quarter were $104.2 million, an increase versus the prior year quarter of 13.7%. The increase in net sales reflects 7.5% volume growth, which laps the nearly 40% organic volume growth we experienced in the prior year quarter.

In addition to our volume growth, we saw positive 6.2% price mix contribution with our higher margin California direct to retail and DTC channels, outpacing the growth of our wholesale to distributor channel. Our price mix contribution was also aided by on-premise growth, which improves the rate of growth of our other winery brands.

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