The Duckhorn Portfolio, Inc.

Greetings and welcome to the Dockhorn Portfolio Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. 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.

Good afternoon, and welcome to the Duckhorn Portfolio's third quarter 2021 earnings conference call. Joining me on today's call are Alex Ryan, Duckhorn's president, CEO, and chairman, and Lori Bedoin, our chief financial officer. In a moment, we'll hear brief remarks from both, followed by Q&A. By now, everyone should have access to the earnings release for the period ended April 30th, 2021, that went out this afternoon at approximately 4.15 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 risk 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 as a result of 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.

Thank you, Sean, and good afternoon. We really appreciate you joining us today. I'm very excited to kick off our first earnings call as a public company after our successful IPO launch in March. On behalf of our talented employees, our leadership team, and our board of directors, I would like to welcome all of our new and prospective investors. I've spent my entire 30-year professional career pursuing my love for winemaking at this illustrious company, and I can promise you that we'll continue to work hard to grow in a profitable, sustainable, and responsible manner for all of our stakeholders over the long term, as we've always done. Following my opening remarks, I will turn... things over to Lori Bedoin, who will discuss our Q3 financial results in greater detail before we open the call for questions. I'd like to begin by offering a few highlights from our third quarter performance to emphasize and reinforce the strength of our business and to serve as a lead-in to the five core pillars of our long-term growth strategy that I'll elaborate more on in a few minutes. Our Q3 net sales were very strong. We grew our top line by over 31% on top of 9% growth in the prior year period. And in looking at volumes, we delivered 41% growth versus 23% growth in the prior year. Nearly as impressive as our sales growth, our depletions grew generally at a similar rate, highlighting what strong consumer demand we're seeing for our high-quality luxury wines. Our diversified, scalable, omnichannel platform once again was a source of strength in the quarter, with positive sales growth contribution from all channels. As consumer mobility increases, we realized considerable momentum in our on-premise business, roughly 3x the growth rate seen in off-premise. This was led by nearly 50% growth in our wholesale to distributor channel, which, in all fairness, did compare to a prior year period when distributors showed some initial hesitation in making purchases as the pandemic began. Nonetheless, the results well exceeded our expectations. Off-premise was impressive in its own right, as the resiliency of its sales far exceeded our expectations. Our unique California direct retail model delivered over 20% net sales growth and saw a consistent two-year stack versus Q2. reinforcing our belief that consumption habits acquired during the pandemic will remain somewhat sticky, while our high-margin DTC business realized a nice sequential acceleration in net sales, even in the face of continued capacity restrictions at our tasting rooms that could have impeded our ability to grow club memberships. Led by Decoy and Duckhorn, we saw robust evidence of our winery brands taking share as consumers and trade enjoyed our well-regarded brands. These strong results in our first quarter as a public company are merely a continuation of how we have consistently executed over our 45-year corporate history. Since our founding in 1976 by Dan and Margaret Duckhorn as a family business, we have prided ourselves on driving sustainable and profitable growth while also making consistently excellent luxury wines. We've done this by combining a diversified, scalable, omnichannel platform with a highly flexible sourcing and production model and a high-growth portfolio of iconic luxury winery brands. We are now the premier scaled producer of luxury wines in North America with our portfolio exclusively focused on the fastest-growing segment in the $53 billion U.S. wine market, which is luxury wines sold at $15 per bottle and up. Luxury wines represent 10% to 15% of the total market, which is fragmented and affords us considerable opportunities to continue achieving industry-leading growth. We have driven an 18% CAGR in net sales over the past five years, but to sustain our momentum and continue to grow market share, the first element of our long-term growth strategy, we tapped into the strength of our platform. We carefully developed a curated yet comprehensive portfolio of high-quality wines to cover the full luxury spectrum across a wide range of price points and varieties. Each of our wines comes with its own distinct attributes and story, and we believe we have a rare ability to appeal to a broad and diverse demographic of consumers with a luxury wine for every taste and every occasion. This breadth and depth of our portfolio allows for us to offer our retail and distribution partners a one-stop luxury wine shop that we believe differentiates us from our competition and will allow us to continue to take share from the fragmented tale of the luxury wine industry over time. It's not just about what we sell, though. It's also equally as important in how we sell it and have sold it for the past 45 years. Through our large and growing sales force, we've developed longstanding relationships with our distributor and trade partners and have built a diversified, scaled, omni-channel platform that provides us with multiple complementary paths to reach consumers. These channels include... Wholesale to distribution, sales to our distributors who, in turn, sell to on- and off-premise accounts across the country and internationally. California direct-to-retail, a unique self-distribution avenue to market in California that offers significantly stronger margins than traditional wholesale and gives us increased control, connectivity, and visibility on demand in the state of California. And finally, direct-to-consumer, our highest margin channel, which captures sales in our world-renowned tasting rooms, exclusive wine club offerings, and e-commerce sales. The second component to our long-term growth strategy is to leverage our marketing and brand strength. We go to market as a one-stop luxury wine shop, including well over 100 wines that stand many regions and varietals. We have trusted brands that both the wine connoisseur and recreational consumer can enjoy, with our iconic waterfowl theme offering a sense of familiarity and certainty of high-quality luxury experience. And as a result, our retail and distributor partners take confidence in our made-by-Duckhorn branding. This has historically afforded them attractive margins at strong throughputs, which we expect will continue into the future. Once we penetrate an account with one of our wines, our intentions are to expand our presence with other brands and varietals. While we have multiple on-ramp store portfolio, we view Decoy as our gateway duck and primary brand lever for continued distribution growth, both in terms of new doors and further penetration with existing, giving its wide appeal to consumers looking for exceptional wines at more accessible prices. To ensure that we can sustain our industry-leading growth at industry-leading margins, we must continue to evolve our portfolio. Our founders were pioneers of their time choosing to produce Merlot in the Napa Valley, which was a bold and daring choice. As a result, the desire to innovate and the willingness to be bold is part of our DNA, and it is the third pillar to our growth outlook. It is foundational to our continued success, and we will never rest on our past accomplishment always striving to bring new experiences and high-quality luxury wines to our growing consumer base. Although innovation permeates our entire portfolio, a prime example of our ability to innovate has been with our decoy brand. Having originally started as a red blend produced with grapes from the Napa Valley, we repositioned and expanded the brand in 2010 as a more attainable luxury wine while maintaining its exceptional quality and taste. This strategic shift has transformed Decoy into our flagship power brand and a market leader within luxury wine, where we now offer a number of varietals and source grapes from Appalachians all across California, providing greater sourcing flexibility and ensuring we procure only the highest quality of grapes. While we are pleased with the strength that DecoA has already demonstrated, we believe that there continues to be several compelling opportunities to elevate the brand and increase its dominance within the luxury market through brand extensions and entry into new categories, with the most recent notable example being that of hard seltzer. While still early in its rollout, the January launch of our decoy hard seltzer has been highly encouraging, with positive feedback from both our distributor and retail partners. Having earned the right to transcend any one variety or category, we have carefully crafted a premium-priced, wine-based set of seltzers that are differentiated from mainstream malt and spirits-based seltzers. We believe our hard seltzer will not only have broad appeal to the current decoy wine drinker, but it will also afford us the opportunity to participate in new additional drinking occasions. The fourth pillar of our long-term growth strategy is to invest in our DTC business. Not only is the channel highly accretive to our overall margin profile, but it also serves as a marketing engine, providing an important opportunity for us to engage with consumers, create duct-worn evangelists, and drive adoption across all channels, as well as our broader portfolio. Despite continued challenges on capacity restrictions, depressed consumer travel and visitation, and challenging social distancing protocols, the DTC business has performed consistently well, delivering an 8% in net revenue growth in Q3. This is especially impressive growth given that a considerable amount of Costa Brown wines, normally destined for the wholesale, were sold through DTC Channel last year at the peak of COVID's impact on U.S. restaurant wine sales. Thanks to our creative efforts in a difficult operating environment this fiscal year, our marketing and DTC teams have launched several new offerings, including curbside pickup, corporate virtual tastings, and additional courtyard outdoor seating to maintain and deepen customer relationships and deliver growth. Moving forward, we will seek to build upon our recent successes, and we continue to invest in this very important channel. Just recently, we opened our eighth high-touch tasting room for the Migration Winery brand in the Carneros region, a premier wine destination in the Napa Valley. As the country continues to reopen and given our view that there is considerable pent-up demand for social engagement and an in-person luxury experience, we view ourselves as well-situated to capitalize on this increased mobility. Because of the highly fragmented nature of the luxury wine producer landscape, we view strategic M&A as the fifth and final component to our long-term growth strategy. While we do not see M&A as necessary to our growth, we do see M&A as another lever at our disposal to accelerate growth, expand our margins, and bolster our luxury wine portfolio. We believe that there is a strong pipeline of winery brands, vineyards, and standalone production assets that will become available in the next few years. And we are well-positioned as a buyer of choice. Our 45-year history and well-known leadership team gives us credibility with potential sellers and an early look at many assets coming to market. That said, our experienced team is disciplined, and we maintain high thresholds when we look at potential acquisitions. We look at the target brand's strength in the luxury wine segment. We look into our ability to accelerate the brand's growth as part of the Duckhorn portfolio. We look at the expected positive trade and consumer reaction to the acquisition. We also look at the unique attributes of the target, such as access to premium grapes, a diversification of supply, or increased production resiliency. And we look for that asset to have an accretive long-term financial profile as part of our portfolio. We're laser focused on price and value and are not interested in M&A that does not align with our commitment to grow our margins. We are very proud to have acquired and successfully integrated two winery brands in the past four years. Costa Brown and Calera each possess a strong, engaged consumer following, and their acquisition allows us to further diversify our luxury offerings and broaden our production footprint. As we look to the future, we're focused on finding the right assets at the right price. The fact that we view M&A as additive but not necessary underlies our approach that we believe will lead to results accretive to growth and margins over the long term. Underlying our past successes and expectations for continued profitable growth are our ESG practices. We have always prided ourselves on being stewards of the land, champions of our employees and communities in which we work and live, and committed to the practices and of risk management that are central to good governance. The tenets of ESG are rooted deeply in our 45-year history and the areas in which we focus on, such as our diversified grape sourcing model and also specific characteristics of our stakeholders are completely aligned with our business and growth strategy. The focus areas It's important to note also aligned with the preferences and worldview of the customers that buy our luxury wine. Importantly, it includes the growing millennial consumer community as well. Make no mistake, we don't do this for popularity's sake. We do it out of necessity and because it's the right thing to do. We are very proud of our ESG initiatives, and we view it as being core to our mission, a key contributor to our growth, and a competitive advantage for us in the market. So as we begin our life as a public company, I'm very excited about our future growth and our advantaged position in the industry. Our strategy is to continue to do what we've been doing because for nearly half a century, we have proven that it works. We plan to continue to lead with the power of our decoy and duct floor brands, organically expand our distribution, complement growth with strategic acquisitions, lean on our high margin DTC channel, seek out efficiency gains, and reinvest in our platform with a mentality of driving long-term value creation. We strongly believe that because of our scaled, highly resilient business model and a proven track record of sustained growth in a variety of macroeconomic climates, not to mention our strong brand portfolio and fantastic leadership team sets Duckhorn up well for sustainable, profitable, long-term growth. Now, I will turn it over to Lori Bedoin to go through the quarter's financial results in greater detail.

Thanks, Alex, and good afternoon, everyone. It's great to be speaking with you on our first earnings call as a public company, and I am delighted to share with you our strong results for our third quarter. Net sales for the quarter were 90.4 million and increased from the prior year of 31.6%. The increase in net sales is primarily attributable to 41% volume growth, which compares to 23% volume growth in the prior year. However, this was partially offset by a negative 9.4 mixed contribution as our leading decoy and duckhorn brands outpaced the rest of the portfolio and wholesale to distributor sales growth exceeded the growth of our unique California direct to retail and VTC channels. On a like-for-like basis, pricing changes were immaterial to our results. Versus our 31% net sales growth, depletions in the quarter were generally in line, coming in a few percentage points below net sales growth, with regional performance being nearly similar across the East and West, excluding California. All channels contributed positively to our top line, with wholesale to distributor proving to be the driving force at just over 48% growth as a result of a much faster than anticipated recovery in on-premise and an encouraging resiliency in off-premise as society reopens for business. In addition, we realized continued growth in both points of distribution and, to a lesser extent, velocities. Gross profit was $46.9 million, an increase of $10.6 million, or 29.1%, versus the prior year period. Adjusted gross profit for the quarter, which accounts for purchase accounting adjustments related to prior acquisitions, was $47.2 million, an increase of $8.7 million, or 22.6%, versus the prior year period. The vast majority of the realized margin compression was driven by continued shifts in channel and brand mix, as noted by our outsized wholesale-to-distributor growth and as Decoy and Duckhorn continue to grow at a faster rate than our other winery brands. Total selling, general, and administrative expenses were notably higher versus the prior year, up $18 million, or 137%, to $31.1 million. However, I'd call out that most of the increase was related to our recent IPO in the form of $8.6 million in equity-based compensation, $2.3 million in non-capitalized transaction expenses, and additional increased public company costs such as D&O insurance and professional fees. Our effective tax rate was 38.4%, which was higher than the 26.5% effective rate in the comparative prior year period due to equity-based compensation expense in connection with our IPO. Excluding the impact of equity compensation, our blended effective tax rate was 25.9% for the quarter. Net income was $9 million and diluted earnings per share was $0.08. Adjusted net income and earnings per share were $17.9 million and $0.17 per share, an increase of 15% and 13% respectively, versus the prior year period results as a result of higher sales volume, partially offset by channel and brand mix, and increased adjusted EBITDA for the quarter was 32.9 million or 36.4% of net sales versus 31.2 million or 45.5% in the prior year period. The margin decrease was primarily attributable to increased public company costs in the current quarter and reduced SG&A expenses in the prior year quarter which was at the beginning of the pandemic. Overall SG&A charges were normalized for COVID related expenses and public company costs are in line with historical margins. At the end of the quarter, we had cash and cash equivalents of $5 million and net debt of $260 million with a leverage ratio of 2.3 times. Looking ahead, we feel confident in our ability to profitably sustain our industry-leading sales growth over the long term. While our rate of growth is not likely to remain at levels realized in Q3, our strong depletions in the quarter, in addition to distributor inventory days on hand still well below normalized levels, suggests a continuation of healthy consumer demand. From a balance sheet perspective, given strong fundamentals, consistent operating cash flow, and minimal near-term capital needs, while comfortable at current levels, we expect our leverage to continue to gradually move lower over time absent any disciplined M&A we may undertake. In summary, The business is performing very well. We're excited by the opportunities ahead of us, and we remain committed to executing our long-term value creation strategies. With that, I will turn the call back to Alex for closing comments.

Our track record of consistent execution against whatever backdrop, remarkable brand strength, clear ability to innovate and grow through successful acquisitions, in addition to our scaled, highly diversified platform and exceptional leadership team are foundational to our future success. We are deeply committed to sustainable, profitable, long-term growth, and we are confident that we will continue to deliver for our shareholders. As we move forward, our strong and growing cash flow positions us well to unlock shareholder value. While our priority will be to reinvest in the business to support sustained future growth at industry-leading margins, we will also seek to reduce our leverage and maintain financial flexibility to pursue strategic M&A if the opportunity presents itself. We remain stewards of capital and will always strive to optimize shareholder value. With that, Lori and I will be available for your questions. Thank you.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Again, that is star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have our first question coming from the line of Kevin Grundy with Jefferies. Your line is open.

Great. Thanks. Good afternoon and congratulations to you and your team on the strong quarter. I want to start on the strength of the wholesale business outside California. I think it would be helpful to spend some time there as it was really the key driver of upside in the quarter versus expectations. You both mentioned strength in both the on and the off-premise areas. Can you unpack the factors a bit more for us in terms of where you were really seeing the strength in the quarter? What were the key drivers of upside versus your own internal models and versus the street and how this is informing your view here for what we can expect for growth of the business in the near to intermediate term? Maybe just comment on what you're seeing in the business here in May and early June.

Great, sure, Kevin. Thank you, and thanks for joining us today. So we did exceed our internal expectations for Q3 with our decoy and decorum brands driving much of the exceptional growth in the wholesale to distributor channel, as we mentioned. Our other winery brands exceeded our expectations as well, as on-premise is coming back stronger than we had originally anticipated. Additionally, our DTC channel exceeded expectations as our visitor center saw traffic increases, although they continued to be restricted due to capacity limitations. With regard to your question of how we see this for the future, so we're still navigating through times domestically and globally. And in the quarter, we made some investments in marketing, our new product innovations. We're excited to see the on-premise open and consumers getting back to normal. And we can say that we feel really good about our growth and our underlying business overall.

Thanks, Lori. Just a brief follow-up, and then I'll pass it on because I know there's questions from others. Is there anything you can help us with? So the growth number was really strong. If I'm not mistaken, it was over 40% in the wholesale distribution business outside of California. What's sort of the expectation here in the near term? And maybe I'm not sure if you can do anything to help us there between growth rates and the on- and off-premise, understanding the comparisons and the – for the on-premise are going to be pretty easy here in the coming months. So anything you can provide there I think would be helpful for us. Thanks.

Sure, yeah. So our Q3 growth was led by off-premise growth in points of distribution as well as velocity. We did see significant growth in on-premise depletions in Q3 with our on-premise depletions above the pre-pandemic levels and growing at a rate three times the growth rate of our off-premise depletions. And as on-premise rebuilds, we are gaining wine listing placements and continue to see opportunity as on-premise remains far from pre-COVID levels. So we do feel that we'll experience So we don't feel that we'll experience the same rate of growth in Q4 as Q3. Remember that Q3 is comping against a very unique quarter with the onset of the U.S. impact of the pandemic and related business and consumer concern. That being said, we are very excited about Q3 growth rate, and we feel really good about our future growth and our underlying performance.

Thank you. We have our next question coming from the line of Kamil Gajwalala with Credit Suisse. Your line is open.

Hey, everybody. Congratulations. Welcome to the public markets. I guess the first question is on great volume growth in the 40s. Can you maybe just talk about the impact of that kind of growth on your supply chain? Laurie, I think you mentioned that inventories at distributors still are quite low. You're up quite notably going into the recovery. So how, maybe not prepared, but in terms of what is your capability to deliver as we kind of enter this recovery model, which, as you had mentioned, is happening a little bit faster than planned?

Hey, Kamil, how are you? It's Alex. We feel very confident with our supply position. Your observations are obviously very correct. Our diversified production plan and our fixation on managing inventory very, very carefully, we don't think we're in a position to have any type of shortcomings at all as this recovery continues to move forward. So we're confident our ability to supply the market.

And I just might add on all that. So our internal inventory levels are within our target ranges, and inventory levels for our distributors are on average below our target levels. However, they're not really significantly low. And we are working with our distributors, and they've agreed to revise order plans to reflect a longer lead time on receipt of goods and they're aware that out-of-stock situations aren't good for any of us, and we're all committed to make sure that doesn't happen.

Okay, great. So it actually sounds like distributor inventories are low not because you can't supply them but because of their ordering, how much they've been ordering.

That would be a better way to look at it, yes.

So we have noticed some – impact on distributor levels due to some freight and availability of trucks. And we've discussed it at length. They're very aware of it. And we don't really see any significant concerns there.

Okay, great. And if I may ask, really it's the topic of the moment for all companies on and around inflation. From the time kind of when you were going public to now, things are really looking just a bit different. Can you maybe just talk about your input cost environment, how that may have changed, how you plan to deal with it?

Yeah, sure. So our business really isn't susceptible to traditional inflationary risk like you may find with many food or beverage companies. So let me just explain that a little bit. So we have full visibility into our cost of goods for bottled wine, which is to be sold over the next couple of fiscal years. And we also have really good visibility into our near-term bottlings. So the current inflationary pressures will not really impact our gross profit margin immediately in the near term. In addition to that, packaging really is the only material item that will have a potential near-term rates as we are bringing in our current materials. So packaging materials costs range from 10% to 20% of our total cost of goods. And we have capped, we contract for these materials and capped our inflationary rate at 3% annually. And like I said, the wines we're going to be selling over the next two years or so are already bottled.

Thank you. We have our next question coming from the line of Andrea Teixeira with JP Morgan. Your line is open.

Thank you. Good afternoon. And I wanted to echo the congrats on the strong results out of the gate. So I wanted to follow up on your comments about points of distribution increase in velocity, Laurie, before, and also on the margin commentary. So if we see, as you said, you had a huge increase on the distributor side of your business, right? And once we normalize more of the direct-to-consumer and continue to go on that, and then the mix normalized. Should we actually see margins become better in the first quarter and ahead?

So, thank you, Andrea, for your questions, and again, welcome for joining us today. So as we predicted with regard to your question on points of distribution and velocity, our points of distribution were the primary driver of sales growth in the quarter, and that is in line with our expectations. And then to a lesser degree, our growth was around velocity. And remind me of your second question, please.

Oh, yeah, so on the margin commentary that you gave, so you said obviously you're contracted for the next two years, but now that the mix, you have a headwind on the mix side, and basically Costa Brown is probably one of the reasons. Like, if you can kind of, like, give us, like, it's not guidance but basically give us an idea if from here we will see uh your mix normalizing in other words who fail do a lot so you had that nine percent headwind on the average pricing so going forward is that nine percent headwind gonna persist or get better and then potentially improve your margin sure okay thank you so

The gross profit margin pressure is in line with our expectations, Andrea. However, our growth exceeded our growth estimates. As we mentioned, the vast majority of the margin compression was driven by mix, both in terms of channel, as noted by our outside direct-to-distributor growth, And then also by brand, as our decoy and duckhorn brands continue to outpace the growth of our other winery brands. The growth is exciting for us, and we're very happy to see it. However, it's a little bit different margin profile.

Thank you. Again, in order to ask a question, simply press star, then the number one on your telephone keypad. Please also note to limit your questions to one question and one follow-up only. Thank you. We have our next question coming from the line of Peter Galbo with Bank of America. Your line is open.

Hey, good afternoon, Alex and Lori. Thank you for taking the questions. Alex, in your prepared remarks, you know, a couple of times you mentioned just, you know, on-premises come back much faster than you anticipated. And I guess just Can you dimensionalize that for us a little bit? You know, are you seeing activity levels that you expected in, you know, October and they were pulled forward to May? Just kind of help us, you know, think through how you would plan for it internally versus what you're actually seeing on the ground. And then, you know, with some of the other commentary around kind of on premise outside of California versus in California, if you could kind of delineate that for us.

I think that, again, Peter, it's a good question. You know, I don't think anyone had a really strong crystal ball into how the world was going to kind of come out of shell shock and reenter. Most of the United States has been probably a little faster than we thought, coming back, getting out, moving around. Restrictions are all over the board, but generally loosening. So we're probably a little faster than we thought and quite encouraging. As it relates to California, California has been slow to open up, right? So that's kind of another big market that's going to open up here pretty quick, we think, by the middle of July, I mean, middle of June. So we feel that it's going to kind of follow the general positive trend of people mobilizing throughout the country, and we're encouraged by that as well.

No, thank you. That's helpful. And maybe just on the M&A commentary that you gave as well, you know, where kind of private valuations are sitting today, what you're seeing if the pipeline is still relatively full and, you know, kind of how you're thinking through that over the next six to 12 months. Thanks very much, guys.

Sure. This is Sean. Good afternoon. You know, we continue to thoughtfully consider all M&A opportunities on the horizon. We're excited about it in the long term. But we've discussed it. It's important to remember we see it, as Alex mentioned, as additive but not necessary for our continued growth. Valuations vary widely, and as you'd expect in a disaggregated market with players of different sizes, capabilities, and categories of focus in wine. In the luxury winery brand segment, valuations remain relatively strong, although there really are few wineries of scale trading hands, making the discernment of a broader trend a little more difficult. Given our discipline in determining how best to grow the business, we evaluate potential transactions with a view to the long-term accretive nature of the deals we're looking at. And accordingly, evaluation is a key litmus test, but it's just one of the many factors that we look at.

Thank you. We have our next question coming from the line of Wendy Nicholson with Citi. Your line is open.

Hi, guys. Congrats on the great quarter. So my first question is on the seltzer business. I think initially, you know, your expectations were very muted, but it sounds like the product is off to a great start. So can you talk about kind of whatever, out of stocks or whether your ability to service the demand, meet the demand, and kind of any plans to expand distribution based on how well it's doing out of the gate. Just give us sort of the state of the union on where the seltzer business is.

Sure. Hi, Wendy. Welcome. So, yeah. So, you know, CELTR has just been launched within the last three months. It's a really extremely small piece of our business. And we won't be reporting on specific products in the future. But regarding Seltzer in general, I can tell you that we have been looking at our initial orders, our depletions, and our reorders. And we see really strong depletions in the three months following the launch. We're really encouraged by seeing reorders across a number of accounts. And so we really see some positive, and we're receiving, Wendy, in addition, positive feedback from both our distributors and our retail partners. So we continue to be encouraged and excited by this new product innovation of ours.

Got it. And just in terms of out of stock at this point, no issues? I mean, you're still able to meet the demand?

That's correct. Yeah, we haven't had any out of stock with regard to our seltzers at all. Great. Or other products, for that matter.

Perfect. My last question is just, Alex, I know you said the tasting rooms are opening up gradually, but can you kind of dimensionalize that? And would you say kind of relative to capacity? I assume you're still having relatively small numbers of people into the tasting rooms. When do you think you'll be at full capacity and be able to have them sort of act and feel the way they did pre-COVID?

Oh, great question, Wendy. Throughout the pandemic, we've been treated similar to restaurants and then not so similar to restaurants. So we've been operating at 50%. We just moved up to about 70 some odd percent with outdoor seating. And, you know, it's been all over the board. So we're not back to where we want to be. We're not back to kind of that 2019 levels. We think there's a chance they'll get back middle of the summer. We think that domestic travel, just by the nature of what we're hearing about human beings, human nature, local domestic people are going to be doing a lot of traveling. We'll see about international travel. That's a little unclear right now. So to answer quickly, we think by about the middle of summer, unless something else weird happens in the public health arena, we'll kind of get back to what we would call normal travel.

Thank you. We have our next question coming from the line of Nick Lottie with RBC Capital Markets. Your line is open.

Thank you. Good afternoon, everyone, and congrats on a strong quarter out of the gate. I guess the question for me is just some consumer dynamics. I mean, we've heard, obviously, there's a lot of trading up that has occurred during COVID across the entire beverage alcohol industry. And I'm wondering, you know, what you've noticed so far as consumers are starting to get a little bit more mobile and Are you seeing consumers that maybe traded up trade down, or do you, you know, how sticky are you seeing the trade-up as being?

Hey, Nick, how are you? Good question. We're seeing, you know, we're slowly kind of getting, you know, our best visibility into that is what people are doing in our tasting rooms with a lesser degree of what we see kind of wholesale. We think people are I don't want to say celebratory mood. I think that people want to continue their wine journey, and we think that we have a great platform to offer anything they want along the luxury wine journey. So our indications right now are people are staying with high-level wines and interested in trading up and experimenting. So we're feeling pretty good about that it's not going to be a dive to the bottom, that luxury is still going to stay really popular.

Koi. Obviously, it's a lot cheaper at home than what you'd be paying for glass or a bottle at a restaurant. And so, you know, I call this COVID elasticity. Are you seeing any of that? Are you seeing any price shock with consumers more on the restaurant side? Has it not shifted as much out of the home as you would have thought, given the mobility has really, I think, beaten most of our expectations?

Hey, Nick, sorry. I think we got a technological glitch. I think I only picked up about half of that last question. I apologize. Can you repeat?

Oh, yeah. Sorry about that. So I'm just wondering when it comes to the at-home versus away-from-home dynamics. Obviously, it's much cheaper to buy a bottle of Duckhorn and Decoy at home to consume versus going out and having the same brand at a restaurant. So I'm just wondering if you're seeing any elasticity, any price shock in those on-premise venues that you sell your portfolio.

Yeah, that's a good question. As of today, I can report we're not really seeing that. We're feeling that the people's need to celebrate might be overriding any concerns that are there. So no evidence of sticker shock. Got it.

Okay. Thanks.

Thank you. We have our next question coming from the line of Lauren Riverman with Barclays. Your line is open.

Great, thanks. I think a lot has been covered, but I guess one last follow-on would be just thinking about the DTC business and the headwinds from Costa Brown that you guys have very clearly articulated, but as we think forward to... tasting rooms reopening at full capacity, you know, how should we think about balancing that with what you already know, you know, in terms of that there's just going to be cost of brown constraints and how much of an offset might that be to sort of more, let's call it explosive recovery type growth, you know, in the DTC channel when you get those tasting rooms going again?

I don't think... Lauren, it's good to hear from you. How are you? I don't think we're going to see a lot of challenges. We're trained to make sure that our tasting room customers have access to what they want, and yet we will get from time to time certain production challenges with certain DTC wines, but they are not going to be material in kind of what we offer for our customers. We will get through quickly this little blip with some Costa Brown, and I don't think that's going to be a long-term issue for us. And so I see once people come back full tilt to the tasting rooms, which I believe they will, we'll have a full range of products at all the flavor profile levels and price levels and luxury that they want to select from.

Okay. What's interesting though right now is that when you look on the tasting room website, you can't make a reservation, so it looks like the limited capacity is selling out.

That is generally a good way to characterize it, yes.

Okay. And I may have missed it, but what type, if any, visibility do you have into being able to open at more complete capacity?

We think from what we understand in the California regulations that it's going to be around June 15th with the state of California, you never know. So let's say we're thinking midsummer.

Okay. All right, great. Thank you so much.

Thank you.

Thank you. There are no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

All right. Thank you all for joining us. It's been an exciting day. It's been an exciting presentation. And in closing, I just want to say that we appreciate you taking the time to be with us. We've come such a long way since 1976 and so much more to accomplish. Our mission at Duckhorn... to have our wines served wherever fine wines are poured and enjoyed throughout North America and the world. With every bottle we sell, we're offering an experience and a source of connection with each other. Few companies have proven capable of bridging the two, but we have a lengthy track record of having done so, and we fully intend on continuing to build upon our past successes by leveraging our brand strength and scaled luxury platform to the benefit of our loyal customers and long-term stakeholders. Thank you very much again, and we'll speak with you in early October for our Q4 call. Good afternoon.

This concludes today's conference call. Thank you for participating. You may now disconnect.