The Duckhorn Portfolio, Inc.

Thank you for joining the Duckhorn Portfolio Inc. Q2 2022 earnings conference call. Please remain holding. Again, please remain holding. Thank you. Thank you. Thank you. Thank you. Thank you. Greetings and welcome to the Duckhorn Portfolio's second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. As a reminder, this conference call 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 second quarter 2022 earnings conference call. Joining me on today's call are Alex Ryan, our President, CEO, and Chairman, and Lori Bedoin, our Chief Financial Officer. In a moment, we will give brief remarks followed by Q&A. Everyone should have access to the earnings release for the period ended January 31, 2022, the second quarter of our fiscal year 2022. It went out at approximately 4.15 p.m. Eastern Time. The press release is accessible on our website at ir.duckhorn.com. And shortly after the conclusion of today's call, a webcast will be archived for the next 30 days. Before we begin, Let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. If you refer to Duckhorn's earnings release, as well as the company's most recent SEC filing, 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 that the company undertakes no obligation to update, will 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 perspectives 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. Please note that all IRI consumption data cited on today's call will refer to dollar consumption for the 12-week period and to January 23rd, 2022, and growth versus the same period in the prior year, unless otherwise noted. And with that, I'll turn the call over to Alex.

Thank you, Sean, and good afternoon. We appreciate all of you joining us here today. The Duckhorn portfolio continues to set the standard for American fine wine. I'm proud of the beautiful luxury wines we make, and today I'm excited to share with you another great quarter of outstanding financial results, both on the net sales and adjusted EBITDA lines. Later in the call, we will also be discussing our upwardly revised outlook. I will start with an overview of our second quarter results. In this unpredictable environment, I'm very appreciative of our team's unrelenting ability to adapt and outperform the high-growth luxury wine markets. In spite of Omicron's short-term disruption to the economy, we were able to deliver continued strong performance in on-premise while our off-premise business showed great resiliency and actually accelerated on top of solid positive growth observed earlier in the year. The continued introduction of new luxury wines and the strategic investments we've made in our sales force over the course of the pandemic have afforded us an immeasurable benefit. Continued profitable share gains across all channels. Specifically, I would like to highlight five notable data points from the quarter. First, we generated 18% net sales growth on an organic basis, and our adjusted EBITDA also grew by approximately 12% when comparing against the prior year quarter, burdened by public company costs. This performance underscores our ability to sustainably deliver on both the top and bottom line for stakeholders. Second, our top line strength was driven by 24.8% volume growth, and our depletions were broadly in line with the shipments, highlighting the fact that consumer demand for our high-quality luxury wines remains robust. In fact, according to IRI, the Duckhorn portfolio was the fastest-growing wine supplier among the top 15 wine suppliers in the U.S. We are growing dollars by high teens and at over 3.5 times the rate of our closest competitor within the top 15. Third, our Duck Run Vineyards and Decoy brands continue to lead our portfolio of high-growth luxury wines. Combined, our two leading winery brands grew dollar and volume consumption by high teen percentages, on average approximately three times faster than the broader $15 per bottle U.S. wine market. Fourth, Our decoy winery brand, the Gateway Duck, has proven itself to be a sustained powerhouse. Not only was it the number two winery brand within the over $15 per bottle U.S. wine segment in dollar consumption, but it was also the fastest growing winery brand within the top 15 U.S. brands across all price points. And yet, we believe we still have considerable addressable white space relative to our scaled peers. Finally, On-premise was once again a growth driver for our wholesale to distributor channel. However, our off-premise channel continues to build atop the high level of growth we achieved during the COVID-19 restrictions as well. Much like our broader results, off-premise also showed continued sequential strength with double-digit growth and depletions bolstered by strong results in shipments, accounts sold, and points of distribution. Now, let's focus on some of our channel dynamics. When we last spoke in early December, COVID's latest variant, Omicron, was spreading rapidly across the country and creating considerable uncertainty about how it would influence consumption patterns and the supply chain. The data from this past quarter shows that in our primary markets, the variant did little to dissuade consumers from dining out. The on-premise channel has continued its recovery while we are seeing further share gains for our wines on narrowed-down wine lists with distribution growth coming from both new and existing accounts. In addition to the outsized growth seen on-premise as it continues to move back toward pre-COVID levels, our off-premise business performed exceptionally well in the quarter. Compared against the first quarter of this fiscal year, results accelerated nicely with off-premise depletions up by double digits from the prior year quarter, supported by strength in key sales performance metrics, such as accounts sold and points of distribution. This is another example of how we are not simply holding our share of at-home consumption, but we're continuing to grow it. We believe we are well positioned to continue to be the preferred choice of retailers seeking a partner capable of providing both the convenience of a one-stop luxury wine shop, as well as the quality and brand strength of our portfolio of fine luxury wines. Although we are seeing broad-based strength across our portfolio, our Duckland Vineyards and Decoy brands continue to serve as the most significant drivers of our growth and luxury wine share gains. In aggregate, when compared to luxury portfolios of our peers, we are amongst the highest contributors to dollar growth within the over $15 per bottle price point for U.S. wines. with both brands up double digits. As the number two winery brand in luxury wine dollar consumption, Decoy drove the lion's share of this growth. At the same time, Decoy's distribution opportunity for the future is considerable because we believe Decoy has a lower ACV relative to its key scaled peers. And accordingly, we believe we can narrow this distribution gap over the coming years for three reasons. First, decoys rise to luxury prominence as a result of its compelling offering of exceptional quality at an accessible price, a combination that appeals to a broad array of consumers. Second, our data analytics have found that the decoy consumer over-indexes as more affluent, educated, and younger than the average for luxury wines. These favorable demographics bode well for the brand in our continued effort to drive trade-up into new price points as we've seen with the highly successful Decoy Limited Blue Label. Third, as a result of these demographics, which are equally attractive to on-premise and off-premise retailers, we believe our partners will be further incentivized to offer our Decoy and Decoy Limited wines additional space on the win list and the shelf. Because decoy serves as the gateway duck for the rest of our portfolio, we are also optimistic that future decoy distribution growth will lead to distribution growth for the other winery brands in the portfolio as well. I would also like to take a moment to address what we are seeing in the current inflationary environment. As a function of our scale, as well as our diversified sourcing and production capabilities, we are afforded relatively good visibility into our cost of goods and have been somewhat insulated from recent cost pressures observed across the supply chain. Relatedly, keep in mind that our largest COGS input is grapes, the cost of which rises and falls based on the unique dynamics of the grape market for each varietal and location. As you know, we have a thoughtful pricing strategy for our wines that is designed to enhance the long-term growth of the business. We do not expect to deviate from this long-term strategy, although the timing of some of those increases has been and may continue to be hastened by the broader environment, and our goal is keeping our healthy margin profile in line with our cost structure over time. Keeping in mind our goals for competitive brand positioning and the maintenance of margins, we make changes when prudent. Let me be clear that our laser focus on growth will always take priority as we look at these pricing questions. In summary, I'm very encouraged by our second quarter and first half results. While decoy continues to outperform our expectations and serves as the driving force behind our robust growth, we also see broad-based strength across the luxury portfolio and in all channels. And it's because of this broad strength, as well as our advantage position within the high-growth luxury wine market, that I am confident in our ability to achieve the results discussed in today's upperly revised full-year guidance. This growth will be supported by our agile and experienced leadership team that continues to grow and strengthen our business. To that end, as you may have seen in a separate release this afternoon, we are pleased to announce that Gail Barger will be joining the executive team as Executive Vice President, Chief Marketing, and DTC Officer in the next few weeks. Gail has over 20 years of experience in the luxury wine industry and brings a deep understanding of luxury wine marketing, and the DTC business. Most recently, Gail served as Senior Vice President, International Sales, Marketing, and Business Development at Jackson Family Wines. We are thrilled that Gail will be joining our team and look forward to working with her and benefiting from her notable experience in DTC. On behalf of the board and the executive team, I'd also like to thank Carol Reber for her outstanding work as Duckhorn Portfolio's Chief Marketing Officer. Her 11-year tenure strengthened our brand equity and vastly grew our DTC presence. We owe numerous successes to Carol. We are in a stronger position as she leaves the CMO role, and we are grateful for her continued help during this transition. With that in mind, I would like to turn it over to Lori to discuss our second quarter performance and updated fiscal year 2022 outlook.