Fine Wine

Edited Transcript of NAPA.N earnings conference call or presentation 8-Dec-21 10:00pm GMT

Q1 2022 Duckhorn Portfolio Inc Earnings Call Dec 9, 2021 (Thomson StreetEvents) — Edited Transcript of Duckhorn Portfolio Inc earnings conference call or presentation Wednesday, December 8, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Alex Ryan The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board * Lori Beaudoin The Duckhorn Portfolio, Inc. – Executive VP & CFO * Sean Sullivan The Duckhorn Portfolio, Inc. – Executive VP, Chief Administrative Officer & General Counsel ================================================================================ Conference Call Participants ================================================================================ * Drew Nolan Levine JPMorgan Chase & Co, Research Division – Analyst * Filippo Falorni RBC Capital Markets, Research Division – Senior Associate * Kevin Michael Grundy Jefferies LLC, Research Division – Senior VP & Equity Analyst * Lauren Rae Lieberman Barclays Bank PLC, Research Division – MD & Senior Research Analyst * Peter Thomas Galbo BofA Securities, Research Division – VP & Research Analyst * Robert Edward Ottenstein Evercore ISI Institutional Equities, Research Division – Senior MD, Head of Global Beverages Research & Fundamental Research Analyst ================================================================================ Presentation ——————————————————————————– Operator [1] ——————————————————————————– Greetings, and welcome to the Duckhorn Portfolio’s First Quarter 2022 Earnings Conference Call. (Operator Instructions) 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. ——————————————————————————– Sean Sullivan, The Duckhorn Portfolio, Inc. – Executive VP, Chief Administrative Officer & General Counsel [2] ——————————————————————————– 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 2022. This went out at approximately 4:15 p.m. Eastern Time. The press release is accessible on the company’s website at 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 could cause the company’s actual results to differ materially from these forward-looking statements. 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 a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. With that, I will turn the call over to Alex. ——————————————————————————– Alex Ryan, The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board [3] ——————————————————————————– 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 13.7% 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. By 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 ’22, 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 our business model to deliver continued growth upon the great successes we realized in fiscal year ’21. Although COVID influence on 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 lists that many restaurants are offering these days, we are seeing considerable net growth at on-premise accounts and the accompanying 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 are 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 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 us well for the coming spring shelf resets. Our success relies on a highly diversified and flexible supply chain. That 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 lists in stock. The wholesale and retail community has confidence in our ability to shift 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 have 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-labeled Decoy offering, which was launched across 3 varietals a little over a year ago, is a classic example of this winery 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. 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 ’20, even when you exclude the sales from our newly opened Migration tasting room driven by a notable increase in average spend per tasting room guests. 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 had 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 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. ——————————————————————————– Lori Beaudoin, The Duckhorn Portfolio, Inc. – Executive VP & CFO [4] ——————————————————————————– 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 a 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. This consistent performance is the result of the strength of our luxury winery brands and our ability to drive distribution with differentiated go-to-market efforts. Our sales growth was supported by strong increases in cases, accounts sold and points of distribution. And on a like-for-like basis, price changes were immaterial to our results. We were encouraged by depletions which were up double digits versus the same quarter in the prior fiscal year and modestly outpaced shipments in the quarter. As Alex noted, we did not experience material inventory or shipment issues, which have affected much of the wine and broader consumer product sectors. Our retail partners trust that we will reliably meet their needs for our luxury wines. We are proud of that reputation for reliability, and it allows us to take market share and shelf space in a challenging environment. All channels contributed positively to the top line with our California direct-to-retail and DTC channels leading the growth as both were up over 30% versus the first quarter of fiscal 2021. This growth rate is in excess of the luxury wine category. In California direct to retail, on-premise recovery was the predominant driver to growth, with net sales continuing to exceed pre-pandemic levels as more patrons return to dining and entertaining outside the home. Growth in our DTC channel benefited from a favorable shift in club shipment timing, healthy club member sales and increased visitations at our tasting rooms. For wholesale to distributor, the channel performed well in all metrics, cases, accounts sold and points of distribution. We are proud of our growth during the quarter, especially in light of the tough year-over-year comparison. Gross profit was $52.4 million, an increase of $8.1 million or 18.3% versus the prior year quarter. Adjusted gross profit for the quarter was $52.8 million, an increase of $7.8 million or 17.3% versus the prior year quarter. Gross profit margin was 50.3%, up approximately 200 basis points versus the prior year quarter. The majority of this margin expansion was driven by favorable brand and channel mix as we saw better-than-expected recovery in on-premise activity driving growth of our ultra-luxury other winery brands. We also saw significant growth coming from both the California direct-to-retail and the overall DTC channels in the first quarter. Total selling, general and administrative expenses were in line with our expectations, up $6.4 million or 38.1% to $23.2 million. The increase was partially driven by $1.8 million in public company costs namely incremental professional fees and D&O insurance; $1.7 million in equity follow-on offering and other transaction expenses and $1.2 million in equity-based compensation costs, which were not in the comparable period prior year quarter when we were a private company. The remaining increases in operating expenses were primarily attributable to the higher compensation costs of our larger workforce to support our growth plans plus a modest uptick in direct selling activities as travel restrictions eased. Our effective tax rate was 25.9%, and which was in line with the 26.1% effective tax rate in the prior year quarter. Net income was $21.3 million and diluted EPS was $0.18 per share, which compares against net income of $17.5 million and diluted EPS of $0.17 per share in the prior year quarter. Adjusted net income was $23.5 million and adjusted EPS was $0.20 per share, which compares against adjusted net income of $18.6 million and adjusted EPS of $0.18 per share in the prior year quarter. These favorable results reflect our higher sales volume and positive contribution from price/mix, which was partially offset by an increase in selling, general and administrative costs, including public company costs versus the same quarter in the prior year. On a comparative basis, when fully burdening the first quarter of fiscal 2021 results with public company costs and our current share count, fiscal 2021 adjusted EPS would have been $0.15 per share, which indicates fiscal 2022 adjusted EPS growth of 32% versus the prior year quarter. Adjusted EBITDA for the quarter increased 13% and to $38.1 million, which represents 36.6% of net sales. This is compared against the prior year quarter’s adjusted EBITDA of $33.7 million, which represents 36.8% of net sales. That said, it’s important to remember that results for this first quarter include approximately $1.8 million in public company costs that did not exist in the prior year quarter when we were a private company. If we look at this on a comparative basis and burden the fiscal 2021 first quarter results with similar level of public company costs, last year’s first quarter adjusted EBITDA margin would have been 118 basis points lower. This apples-to-apples comparison would imply a 94 basis point improvement in adjusted EBITDA margin for the first quarter of fiscal 2022. At the end of the quarter, we had cash of $5.2 million and net debt of $231.9 million with a leverage ratio of 1.9x net debt. Turning to our outlook. We are pleased with our strong performance in the first quarter and appropriately thoughtful in how we think about the remainder of the fiscal year, especially because of the unpredictable evolution of the pandemic as it impacts the global community and economy. This leads us to bring a principled approach to guidance. Through this lens, we are reaffirming full year fiscal 2022 guidance, which calls for net sales of $353 million to $360 million, reflecting 5% to 7% organic growth; adjusted EBITDA of $118 million to $122 million or 1% to 4% growth; adjusted EPS of $0.54 to $0.57 per share which assumes a 25% effective tax rate; and $114.5 million to $116.5 million diluted shares outstanding. In addition, our initial outlook called for $16 million in capital expenditures. We now see that figure coming in modestly higher at $19 million. Please note that this does not include any potential purchases of production assets or vineyards. We are strategic in executing on production assets and/or vineyards as they become available for consideration to purchase. In fact, we expect to close on the purchases of 3 vineyard parcels in the Napa Valley AVA for approximately $14.5 million in the current fiscal quarter. We are excited about the opportunity to bring these outstanding vineyards into our estate holdings. Consistent with past views, we anticipate our Duckhorn and Decoy winery brands will continue to outpace the growth of our full portfolio. As we observe signs of reopening, we believe our on-premise businesses will continue to recover, resulting in increased sales of our other winery brands. which have historically sold in larger volumes on-premise. With higher margins than the rest of our portfolio, the increased sales of ultra-luxury wines should continue to positively influence our gross margin. And as Alex noted, the ultra-luxury is outpacing the overall wine industry. From a balance sheet perspective, we expect our leverage to continue to decline over the course of the fiscal year and anticipate a leverage ratio well below 2x net debt by the end of the fiscal year. This doesn’t account for future purchases of production assets other than the vineyards I mentioned. It also does not include any acquisitions we may make in the future. As I look forward, I am very encouraged by our strong start to the fiscal year. Our consistent growth across all channels, margin expansion and continued share gains are the results of our continued hard work. We are proud of our ability to successfully navigate through these uncertain times and come out stronger. We are in an advantaged position within the high-growth luxury wine industry, and we are confident that we will further build on this position while remaining committed to creating long-term value for our stockholders. With that, I will turn the call back over to Alex for his closing comments. ——————————————————————————– Alex Ryan, The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board [5] ——————————————————————————– Thank you, Lori. Consistent with out-performance over the past decade, we have continued to thrive in this unpredictable environment. We have become stronger and more agile during the pandemic, adapting to the challenges and capitalizing on the opportunities that have presented themselves. Our meaningful expansion in distribution and consistent market share gains have allowed us to achieve a level of net sales that is well in excess of pre-COVID levels. We are proud to have achieved this while also having significantly outpaced the high-growth luxury wine segment and doing so while delivering industry-leading margins. With that, Sean, Lori and I are available for your questions. ================================================================================ Questions and Answers ——————————————————————————– Operator [1] ——————————————————————————– (Operator Instructions) Your first question comes from the line of Rob Ottenstein with Evercore ICI (sic) [Evercore ISI]. ——————————————————————————– Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division – Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [2] ——————————————————————————– Great, and congratulations on a strong performance. A couple of questions. One, you mentioned that you had increased points of distribution. Can you quantify that at all? And also maybe talk about the number of wine club members that you have versus 2020? Just trying to get a sense of how the — your footprint is progressing. ——————————————————————————– Lori Beaudoin, The Duckhorn Portfolio, Inc. – Executive VP & CFO [3] ——————————————————————————– So your first question with regard to distribution. So we saw really nice increases in distribution most significantly as we have mentioned in the past across our Decoy and Duckhorn brands. But also, we saw a nice increase in distribution with regard to on-premise. So we’re really encouraged and happy to see the performance this quarter. With regard to our DTC business and our visitations, we saw a nice revenue growth across our DTC business, and we’re really happy to see that we have increased spend per visitor. ——————————————————————————– Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division – Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [4] ——————————————————————————– Are you able to quantify in any way like the number percent increase in points of distribution or the percent increase in club members? ——————————————————————————– Lori Beaudoin, The Duckhorn Portfolio, Inc. – Executive VP & CFO [5] ——————————————————————————– Yes. No, we don’t really guide toward that. I appreciate the question, but that’s not something that we generally speak to. ——————————————————————————– Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division – Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [6] ——————————————————————————– Okay. And then I realize, and you’ve done a terrific job, right, in the past, explaining how you’re relatively immune to cost pressures or at least you have a lot of visibility on them. But it’s hard to believe that you aren’t seeing some pressures in different areas. Brown-Forman today was talking about not being able to get glass bottles. Can you talk and give us maybe a little bit of update of what you are seeing on the cost side, whether any of those pressures are reflected in the higher CapEx numbers? Just kind of give us an update of those sorts of pressures, please. ——————————————————————————– Lori Beaudoin, The Duckhorn Portfolio, Inc. – Executive VP & CFO [7] ——————————————————————————– Sure. Yes. So if you’ll recall, the biggest piece of our cost of goods is our grape and our bulk win which, for the current fiscal year, our cost of goods, those were layered in a year, 2, 3 years ago. So we don’t have pressures there with regard to the biggest piece of our cost of goods. In the past we’ve talked about our packaging, our materials potentially having some costs there. And you specifically wanted to know about glass. We have a great glass manufacturer that we’ve had great relationships. We have contract with them. We did see an increase when that was up for renewal in September but we have layered in a backlog of bottles that we have in-house and that we have committed so we won’t be incurring that price increase in our cost of goods for the majority of the current fiscal year. Oh, I’m sorry. You wanted to know about CapEx. ——————————————————————————– Robert Edward Ottenstein, Evercore ISI Institutional Equities, Research Division – Senior MD, Head of Global Beverages Research & Fundamental Research Analyst [8] ——————————————————————————– Yes, just whether that was related to inflationary pressures or there’s some new projects. ——————————————————————————– Lori Beaudoin, The Duckhorn Portfolio, Inc. – Executive VP & CFO [9] ——————————————————————————– Sure, yes. So some of that was, we have seen some increases mostly around equipment — brand equipment that we’re acquiring and so it’s a small piece of it. ——————————————————————————– Operator [10] ——————————————————————————– Your next question comes from the line of Kevin Grundy with Jefferies. ——————————————————————————– Kevin Michael Grundy, Jefferies LLC, Research Division – Senior VP & Equity Analyst [11] ——————————————————————————– Congratulations on the strong start to the year. I wanted to pick up on the sales guidance, if we could. So obviously, really strong start to the year, up mid-teens. Your sales guidance obviously still implies 5% to 7% year-over-year growth. So then the implication is for the balance of the year that you expect low to mid-single-digit type growth. Maybe just walk us through that a little bit. What are some of the key assumptions that you’re using and to what degree there’s a healthy level of conservatism in your outlook? And then I have a follow-up. ——————————————————————————– Lori Beaudoin, The Duckhorn Portfolio, Inc. – Executive VP & CFO [12] ——————————————————————————– Yes. So Kevin, thank you. Sure. Happy to chat with you about that. So we’re really very pleased with the start of the year, but the one quarter doesn’t make a year. And seasonally speaking, Q2 generally seems to be a bigger quarter for us than the rest. So we would like to see how that quarter comes in. Also, we’re really confident in our ability to deliver against our plan and really profitably to outperform the high-growth luxury wine segment. But with the pandemic ongoing and new variants coming out and just we really want to remain principled in how we view the full year. So we really think that it’s appropriate at this time to reaffirm our guidance. ——————————————————————————– Kevin Michael Grundy, Jefferies LLC, Research Division – Senior VP & Equity Analyst [13] ——————————————————————————– I see. So Lori and Alex, you as well, nothing specifically that you’re seeing from a business perspective that’s concerning. I mean it seems quite the opposite that the first quarter was great and particularly in businesses like D2C and recovering the on-premise, where you’re seeing some improvement in margins. So there’s really nothing there overly alarming. There’s just sort of a healthy level of conservatism just given 3 quarters to go just kind of playing back, Lori, a little bit of what you said. And then we don’t know. We don’t know the new variant. Is that sort of a fair characterization? ——————————————————————————– Alex Ryan, The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board [14] ——————————————————————————– Yes, Kevin, that’s spot on. ——————————————————————————– Kevin Michael Grundy, Jefferies LLC, Research Division – Senior VP & Equity Analyst [15] ——————————————————————————– Okay. Very good. And then just a real quick follow-up for me, and then I’ll pass it on. With respect to profitability, Lori, and how you see that playing out for the balance of the year. I understand there’s probably 1 quarter, if I’m not mistaken, a public company cost that caused some comparability. But even with that, if you sort of normalize that, you’re expecting sort of flattish EBITDA growth, if I’m not mistaken, in the balance of the year, and that would be normalized for the public company costs. So very clearly, Lori, so 2Q through 4Q, you’re expecting sort of flat EBITDA and I just wanted to kind of drill down that a little bit and see, a, is that correct, which I believe it is; b, why is that the case? ——————————————————————————– Lori Beaudoin, The Duckhorn Portfolio, Inc. – Executive VP & CFO [16] ——————————————————————————– Yes. So one of the things that we saw this quarter, and we had forecast some margin expansion, and we did see some nice margin expansion with regard to on-premise opening up a little faster and to a larger extent than we had expected. But we did bring some of our Q2 DTC shipments into Q1, and that will normalize a little bit into the next quarter. So we shouldn’t see that margin expansion continue. So we do expect to see modest margin expansion for the full year. To the extent that, that drops down, we do have, as you mentioned, the public company costs that we didn’t incur in the prior year. In addition to that, we have some outsized professional fees, D&O, those types of things and public company costs as well that we need to bear this year. So we think it’s prudent to continue to guide on the EBITDA as we had in our original guidance. ——————————————————————————– Kevin Michael Grundy, Jefferies LLC, Research Division – Senior VP & Equity Analyst [17] ——————————————————————————– Okay. I’ll leave it there. I have a follow-up but I can take that offline. ——————————————————————————– Operator [18] ——————————————————————————– Your next question comes from the line of Nik Modi with RBC Capital Markets. ——————————————————————————– Filippo Falorni, RBC Capital Markets, Research Division – Senior Associate [19] ——————————————————————————– This is Filippo Falorni on for Nik. First question, I wanted to check if you can give a little bit more update on the on-premise business and the recovery you’re seeing there. And more broadly speaking, how the wine category is performing in the on-premise business relative to other alcoholic beverages such as spirits? ——————————————————————————– Lori Beaudoin, The Duckhorn Portfolio, Inc. – Executive VP & CFO [20] ——————————————————————————– Yes. Thank you. So yes, on-premise is picking up nicely. And we saw that really benefit our business in terms of California picking up quicker and having a pretty soft comp last year, same quarter as California had experienced a little bit tougher shut down a year ago. So on-premise did quite well for us, which helped us in our margin in terms of our other winery brands’ growth picking up as well as on-premise picking up in California, which does have a higher gross profit margin for us as well. So those two things with regard to on-premises health. Now in the past, we’ve also talked a little bit about on-premise helping us in that we did retain our on-premise sales team during some of the tougher days of COVID and that’s paying dividends now. Those folks are out there. They have their contacts, their relationships. And we’re seeing that as restaurants are coming back online, they are keeping a smaller wine lists. They’re paying attention to their cash flows, building smaller wine lists and that we are doing quite well, getting our wines on there as they know that our wines will sell and consumers will be familiar with them. ——————————————————————————– Filippo Falorni, RBC Capital Markets, Research Division – Senior Associate [21] ——————————————————————————– Got it. And then in terms of the category overall, the wine category on-premise, what are you seeing in terms of competition with other alcoholic beverages? You seem to have a strong recovery on a relative basis. Any thoughts there? ——————————————————————————– Lori Beaudoin, The Duckhorn Portfolio, Inc. – Executive VP & CFO [22] ——————————————————————————– Yes. So we are seeing that wine is picking up on-premise that talk about competitors, but we are seeing our wines are doing quite well. We’re getting them on the list, and they are selling through. So we are — as I mentioned, that it’s a shorter wine list. So we have a bigger piece of the consumers’ mind when they are in the restaurants and that the wine is doing nicely. ——————————————————————————– Operator [23] ——————————————————————————– Your next question comes from the line of Andrea Teixeira with JPMorgan. ——————————————————————————– Drew Nolan Levine, JPMorgan Chase & Co, Research Division – Analyst [24] ——————————————————————————– This is Drew Levine on for Andrea. Alex, I wanted to go back to something you said last quarter. Just in early October, it sounded like maybe some more conservatism around the overall industry and on-premise noted kind of a slowdown. So I guess I’m curious, has anything changed directionally in October. I would think it does. And then kind of how is that playing into November, if you could comment on that. ——————————————————————————– Alex Ryan, The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board [25] ——————————————————————————– Yes, I remember the comment and I think you need to step back and that was a little bit of a Delta virus reactionary comment. Since that time, we’ve seen really positive results with on-premise and our business overall. So we’re conscious about the Delta, or the pandemic impacts. However we our taking share, which is evidenced in the IRI data you’ve seen, significantly taking share over most of our competitors, the largest 20 competitors for sure. So we think that we’re well positioned in both on and off to continue to grow on that momentum. And I don’t want to overstress this a lot, but there’s an unknown with the pandemic that we all have to just kind of keep in the back of our mind. I’m past that comment and that the Omicron variant that we’re dealing with now, I think that we, as a society, are just better at moving forward with our lives than we’ve been 4 to 6 months ago. So we’re in an optimistic mode about kind of where we’re heading, and that’s why we’ve reiterated guidance the way we did. ——————————————————————————– Drew Nolan Levine, JPMorgan Chase & Co, Research Division – Analyst [26] ——————————————————————————– And then just on the competitive environment, it sounds like you guys have really good visibility, obviously, and have some nice contracts with suppliers that you have long-term relationships with. I’m curious if you could comment maybe anything related to your competitors if they’ve been maybe seeing some more pressure and — with supply chain and cost and if that’s leading to any sort of price increases or changes in promotional strategies and retail for those competitors and allowing you to kind of take advantage and take more share? ——————————————————————————– Alex Ryan, The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board [27] ——————————————————————————– That’s a multipronged question. And I’m not going to comment on what may or may not be affecting our competitors. The luxury wine industry has always been very competitive. That’s the category we’re in. So I think from sales to customer acquisition to proper pricing planning, proper cost management, that all plays into our overall competitive strategy. I feel we’re all feeling a lot of the same pressures. I’d like to think that we have looked forward enough on a long-term basis to make sure that we’re set up to remain at the top of the competitive chain. So well, I’m not going to comment on our competitors, we are perfectly positioned to continue to stay competitive at all levels within the luxury wine space. ——————————————————————————– Operator [28] ——————————————————————————– Your next question comes from the line of Peter Galbo with Bank of America. ——————————————————————————– Peter Thomas Galbo, BofA Securities, Research Division – VP & Research Analyst [29] ——————————————————————————– Alex, I think I don’t want to get lost in the commentary, and I know it’s come a couple of times, but is there any way at least to quantify or just give us a sense, the investment that you made in keeping the on-premise sales force, just how much do you feel like it’s helping you outpace other competitors? Is it you’re on 95% of wine list you were on before and others are only on 80%? Is there a way for us to kind of frame it in our mind just why that investment was so worth it and how it’s paying dividends now. ——————————————————————————– Alex Ryan, The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board [30] ——————————————————————————– Peter, that’s at the core of our business, right? I invested in people during the pandemic. And the investment was perfectly in support of people and what they do for us. So I can’t — there’s no data points, especially with on-premise, there’s no good data collection agency on independents and on-premise, so I can’t do that. But I can tell you, we feel it’s been a meaningful way to stay ahead of our competition. We kept the connections. We kept the relationships. We did whatever the customers wanted, met across the table, met with masks on during the darkest days of the pandemic. And that relationship-building because it’s a very person-to-person business has allowed us to either retain or add facings on a significant amount of on-premise restaurants nationwide. So you know me, I’d be reluctant to tell you numbers, but I can say it’s meaningful in our positioning to pull out of the pandemic and continue to not only delight customers but take share. ——————————————————————————– Peter Thomas Galbo, BofA Securities, Research Division – VP & Research Analyst [31] ——————————————————————————– Okay. No, that’s helpful. And maybe, guys, there’s been a number of assets that are trading hands in the private markets in the wine space. Alex, I know that you have the vineyards that you’re closing on and. I’d love to get a little bit more detail just around what brands they’d be going towards. But again, just curious, as the M&A market kind of heats up in at least in the private space, are you any closer? Do you feel like the pipeline is fuller or hot right now? Just kind of give us your lay of the land from that perspective. ——————————————————————————– Sean Sullivan, The Duckhorn Portfolio, Inc. – Executive VP, Chief Administrative Officer & General Counsel [32] ——————————————————————————– Sure, Peter. This is Sean. I hope you’re well. So I think that, in answer to your first question on the 3 parcels of land, so we’re excited about those. This should probably come to a close during Q2. They are all Napa Valley AVA properties, and they are really nicely planted with Sauvignon Blanc, Chardonnay and other varietals that will be earmarked toward a number of our ultra-luxury wine brands, including Duckhorn Vineyards and Migration. So those are very exciting to us, both for their sort of agricultural use, but also for the entitlements, and one of them is adjacent to a current property that we have and combined with those entitlements are very attractive to our future growth plans as well. In the broader M&A branded winery perspective, we do see a continuation of the pipeline getting thicker, potentially active 2022 on the horizon, and that’s something that we’re eagerly focused on. I would be remiss if I didn’t remind you that we are disciplined and we have the flexibility to be disciplined in M&A because our organic growth is so strong and sustainable. But we do look ahead to the year to 2022 and to be very active and to be looking at things closely on that front. ——————————————————————————– Operator [33] ——————————————————————————– Your next question comes from the line of Lauren Lieberman with Barclays. ——————————————————————————– Lauren Rae Lieberman, Barclays Bank PLC, Research Division – MD & Senior Research Analyst [34] ——————————————————————————– Great. I was curious if we could talk a little bit about foot traffic in California on-premise, knowing that you guys are comfortably outpacing the industry, and you’re already ahead of 2019 levels. So I was curious if you could give us a sense of where you think the overall on-premise channel fits versus 2019. And even anything you can offer on that front in front of — in terms of tasting room traffic. And I would think return of tourism, things that are still kind of yet to unfold as we go into calendar ’22. ——————————————————————————– Alex Ryan, The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board [35] ——————————————————————————– I think the evidence would indicate that the foot traffic on on-premise is — I don’t know if it’s going to go back to normal, but I think it’s redefining kind of a new balance, a new on, off balance, and it continues to — and we expect it to continue to increase and stabilize what that ultimate traditional split between on and off will be, I’m not really sure. I don’t think it’s going back to ’18, ’19 levels, but it will create a new opportunity, and I think it’s going to continue to improve. Similarly, in our tasting rooms, we’re seeing more normalized traffic patterns. There are still some remaining COVID restrictions, but that’s forced us and allowed us to increase the sales per person. So we’ve been able to really capitalize on near normal and slightly lower-than-normal visitor accounts with increased attention and translating into increased higher rings per customer. So that, really, that’s not only doing a good job for us in the tasting room, but it’s doing a great job in creating future customer evangelists once they leave. So the trends are good. People seem to want — they’re resonating with our brands and our lines and the — and I think that travels to wine country quality and quantity are both improving. And so we’re encouraged by that and it will most likely continue. ——————————————————————————– Lauren Rae Lieberman, Barclays Bank PLC, Research Division – MD & Senior Research Analyst [36] ——————————————————————————– That’s great. And then I also had a question on just the further development of the outside of California business and the steady improvement in distribution, you spoke to a lot of the drivers of that. But I was curious if you could offer any perspective on kind of key account types or states, regions of the country where you’re making particular headway just since it’s so hard for us to kind of track the progress you’re making in any substantive way, just prospective channel type states, hotspots would be really interesting if you’re able to offer. ——————————————————————————– Alex Ryan, The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board [37] ——————————————————————————– I’ll answer both questions, I think, I heard. On a regional basis, Lauren, we’re — I’m proud to tell you and I’m excited to say that it’s pretty even. I think that just bodes well for the general acceptance of the brands and the wineries and the labels. So on a — I wouldn’t say there’s any disproportionate imbalance, if you will. So I think that the balance across the country approach is excellent data point for us as our companies being — our brands are becoming more and more accepted throughout the region. So that’s good. In terms of — we have a very aggressive and very well-positioned national accounts team that works with national accounts as well as a separate whole team that works with independents. So we’re kind of attacking all potential customers at all angles. We manage our distribution footprint in a very broad base. We continue to make adjustments where necessary, but our distributor partners have been extremely — we’ve been good to them, and they’ve been very good to us and the partnerships and the understanding of our goals and how we can support our distributors to hit the goals and how they — and they’re demonstrating to us, how they can hit our goals, is being met at plan and at expectations. So we feel very confident and very comfortable with our ability to continue to manage our distribution goals over the long haul. ——————————————————————————– Operator [38] ——————————————————————————– There are no further questions at this time. I’d like to turn the call back over to Alex. ——————————————————————————– Alex Ryan, The Duckhorn Portfolio, Inc. – President, CEO & Chairman of the Board [39] ——————————————————————————– All right. I want to thank you again for joining us today to review our first quarter performance. I would like to close by noting the 5 factors I see as driving our relative strength: our disciplined focus on quality, high-growth luxury wine; the strength of our brand portfolio; our scaled and diversified supply chain; our differentiated go-to-market strategy and the unrivaled talent we have at all levels of our organization. These place Duckhorn in an advantaged position. Relative to the broader market, we are confident that our proven playbook will allow us to continue to lead the luxury wine market for years to come. I’d like to wish you all a happy and safe holiday season and look forward to speaking with you again in March when we report our fiscal year 2022 second quarter results. ——————————————————————————– Operator [40] ——————————————————————————– Thank you, everyone. This concludes today’s conference call. Thank you for participating. You may now disconnect.

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