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.