The Duckhorn Portfolio, Inc.

And welcome to the DuckCorn Portfolio's third 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 Strategy and Legal Officer. Please go ahead.

Good afternoon and welcome to the Duckhorn Portfolio's third 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 April 30th, 2022, the third quarter of fiscal year 2022, that went out at approximately 4.15 p.m. Eastern Time. The press release is accessible on the company's website at ir.duckhorn.com. And shortly after the conclusion of today's call, a webcast will be archived for the next 30 days Before we begin, let me remind everyone that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. If you refer to Duckhorn's earnings release, as well as the company's most recent SEC filings, you will see a discussion of factors that 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. In addition, Please note that all IRI consumption data cited on today's call will refer to dollar consumption for the 13-week period ended May 1st, 2022, and growth versus the same period in the prior year, unless otherwise noted. With that, I will turn the call over to Alex.

Thanks, Sean, and good afternoon, everyone. We really appreciate you joining us today to discuss our strong third quarter financial results and our raised guidance for the full year. As we begin our second year as a public company, I am pleased by the track record we have established for our sustained, sound execution and strong financial performance. Our third quarter results exemplify that, having firmly outperformed our internal expectations. Let me take a moment to highlight a few notable items from the quarter. First, our net sales growth remains strong. When looking at three-year compound annual growth rates, which we believe is indicative of the underlying health of the business, without pandemic-related noise, we continue to deliver double-digit growth supported by broad-based strength across all major metrics, cases, accounts sold, and points of distribution. Second, the story behind our strong top-line growth remains largely a volume-driven one. our three-year volume CAGR was 19.9%. Importantly, our depletions showcase similar growth. This speaks to both the power of our well-known and respected brands and the healthy consumer demand for our high-quality luxury wines. Third, On-Premise continues to provide outsized growth, benefiting both our top line and gross margin profile. In fact, Our on-premise depletions are seeing an accelerated rate of growth on a three-year basis, supported by gains in shipments, accounts sold, and points of distribution. Perhaps most importantly, this on-premise growth is occurring at a time when our off-premise business continues to deliver double-digit growth on a three-year CAGR basis. And that brings me to my fourth point. When looking at IRI consumption data as a proxy for certain types of off-premise sales, the Duckhorn portfolio remains the fastest-growing supplier of scale in the over $15 per bottle U.S. luxury wine segment, having posted mid-teens growth in both dollars and units. This is another point of pride for me as we continue to take share in this growing category. As the primary driver of this robust level of growth, our Decoy Winery brand, the number two brand and the fastest growing among the top ten within the over $15 per bottle U.S. luxury wine segment grew similarly, also up mid-teens growth in both dollars and units. Growth for both our broader portfolio and the Decoy Reiner brand was four to five times faster in dollars and considerably faster in units relative to the over $15 per bottle U.S. wine market. Lastly, we are driving robust top-line growth and at the same time delivering modest margin expansion, all against a backdrop that continues to be a highly demanding operating environment. Our adjusted gross profit margin and adjusted EBITDA margin expanded versus the prior year quarter when fully burdened by public company costs for an apples-to-apples comparison. I would like to make an important point. I'm proud of how the team was able to execute through what we all know to be a very challenged environment. to not only grow top-line, but also expand margins. Laurie will discuss this in a bit more detail in a few minutes. Now I'm going to take a minute to talk about on-premise and off-premise channel dynamics. As noted, on-premise was a primary driver of our growth, and we are seeing no slowdown in our momentum within the channel. In fact, looking at a three-year CAGR, we are seeing accelerating growth on all three key metrics, cases, accounts sold, and points of distribution. Our on-premise velocities continue to strengthen as well. Overall, we continue to make good progress toward returning to our historic proportion of on- and off-premise sales. Interestingly, we are not back to our historical 80-20 ratio of off-premise to on-premise because of the resiliency of the strong off-premise growth we experienced during the height of the pandemic, which has reset the baseline upwards to the off-premise part of the business. Turning to off-premise, it is evident that consumers that tried our luxury wines for the first time during the pandemic or rediscovered an old favorite among our wines have become loyal consumers in the off-premise channel. In the quarter, we observed solid, positive year-on-year growth, and on a three-year CAGR basis, we drove strong and steady double-digit growth across cases, accounts sold, and points of distribution. Our growth between national and independent accounts was balanced and in line with our expectations, which we believe speaks to the appeal of our one-stop luxury wine shop model as well as the quality and brand strength of our portfolio of fine luxury wines. Keeping pace with our level of robust demand can be a challenge for any high-growth company, especially in times where global supply chain is in considerable disarray like today i'm tremendously proud of how our entire organization continues to execute strategically through the team's hard work we have avoided some of the common pitfalls we see elsewhere which include inventory out stocks for core wines shortages of labels corks and glass and significant cost increases our dedication to diversification and focus on consistent supply chain management allows us to supply the consumer's growing appetite for high quality luxury wines wherever fine wines are sold or enjoyed. We believe that this reliability has enabled and will continue to enable our distribution growth and the resulting market share gains. To ensure that we uphold this level of trust with both our trade partners and customers, we have strategically built out a highly diversified and flexible supply chain, our nimble sourcing practices drawing upon grapes from our renowned estate vineyards and the vineyards of more than 200 other long tenured grape growers provides a number of benefits including first our practices ensure that we continue to source ample high quality fruit that meets the specifications needed to produce our luxury wines additionally when coupled with our diversified wine production capabilities in combination with the scale of our platform our approach to sourcing provides us with good line of sight into our cost of goods this not only allows us to manage our margins but it also affords us the ability to offer our trade partners clear visibility into their pricing as well. In the spirit of diversifying our supply and ensuring access to high-quality grapes, we recently purchased 289 acres of a state vineyard in the Paso Robles AVA along California's Central Coast. This exciting purchase marks the 33rd vineyard in our state portfolio and ensure greater access to high-quality fruit to support the continued growth of our luxury wines, most notably decoy. In closing, I'm very pleased with our third quarter performance and the momentum we have shown year to date. However, we believe in continually challenging ourselves, and there remains considerable opportunity to continue to drive distribution and outsized growth, irrespective of the macro environment. and we are focused on doing just that. It is important to remember that we make wine solely in the fastest growing segment of the industry, luxury wine. Additionally, our growth is faster than the luxury wine industry average. The strength of our brands, our stable supply chain, and the sustained commitment we have made to our sales force and DTC business combine to provide a durable and elastic growth, which we believe will continue into the future in any macro environment. Over our 45-year history, we have thoughtfully curated a portfolio of wineries, with each offering unique experience, but all standing for luxury and exceptional quality. Given that backdrop, we are well positioned to capitalize on the growing demand for luxury wine, and I'm confident in our decision to raise our fiscal year 2022 guidance for the second time this year. With that, let me turn it over to Lori to discuss our third quarter performance and updated fiscal year 2022 guidance in greater detail.

Thank you, Alex, and good afternoon, everyone. Let me open by walking through the details of our strong third quarter results. Net sales for the quarter were $91.6 million, slightly above our expectations and a 1.3% increase versus the prior year quarter. When looking at results on a three year CAGR basis, which we view as indicative of the underlying performance of the business without pandemic related noise, our net sales growth was up double digits. Looking at contribution to growth, volumes were down less than 1% and price mix served as an offset, up nearly 2% versus Q3 2021. Similar to net sales growth, our volume trends were markedly stronger with our three-year CAGR accelerating to roughly 20%. Modest price-mix growth reflected greater increases from decoy and duckhorn versus the prior year period, which more than offset negative-mix headwinds from DTC. I should also note that on a like-for-like basis, price changes were immaterial to our results. Our depletion growth remains strong, increasing by double digits versus the prior year period and meaningfully outperforming shipments in the quarter. With our depletions growing at a similar rate to shipments on a three-year-to-year basis, we view these results as strong evidence of the robust demand for our portfolio of luxury wines. And that bodes well for our long-term outlook. Let's take a moment to discuss our performance by channel. Wholesale to distributor increased by 5.5% versus the prior year quarter. This strength was in part due to a lift from positive price mix as on-premise continued to grow faster than off-premise sales. That said, off-premise did grow nicely versus the prior year quarter, continuing to build upon considerable distribution and market share gains we drove during the pandemic. Additionally, we realized some pull forward in net sales from Q4, which we estimate added a couple million dollars to channel results. In our home state of California, our unique direct to retail channel grew by 7%, which was supported by outsized strength for on-premise. In both wholesale-to-distributor and California direct-to-retail, we observed fairly consistent double-digit growth on a three-year CAGR. As mentioned on our last earnings call, our high-margin DTC channel growth continues to be somewhat restrained by Costa Brown supply constraints. However, this supply constraint is waning, and we see a path toward full recovery by late fiscal 2023. At the same time, we continue to take steps to further diversify our sourcing to support the demand for our ultra-luxury exclusive offering. The channel is down 12.4% compared to the prior year quarter. However, DTC improved over our second quarter performance, bolstered by strength in our tasting rooms and luxury wine clubs, which continue to add great value, allowing us to interact with and introduce new consumers to our high-quality luxury wine. As visitation at our tasting rooms increased versus the prior year period, average spend per visitor increased as well. Additionally, our wine club net sales were up mid-teens versus the prior year period. Gross profit was $44 million a decrease of $3 million or 6.3% versus the prior year quarter. In the third quarter, we wrote down inventory worth approximately $3.9 million related to our premium seltzer. Our premium seltzer was a small element of the new product portfolio we have brought to market in the past two years. While we are pleased with its trial, we are aligning our resources in the future on other priorities that have performed strongly and have a greater potential for sustained growth in the future, such as Decoy Limited and Postmark Winery Brands. Excluding this write-down, as well as our standard adjustment for purchase accounting, adjusted gross profit was $48.1 million, an increase of $800,000, or 1.8%. Adjusted gross profit margin was 52.5%, up approximately 26 basis points. This rate of improvement was the result of favorable brand mix partially offset by unfavorable channel mix relative to the prior year period. Total selling, general, and administrative expenses came in better than expected for the quarter, down 8.1 million, or 25.9%, to $23.1 million. The decrease was primarily attributable to IPO related expenses that were present in the prior year period when we went public. Net income was $15.6 million and diluted EPS was $0.14 per share compared to net income of $9 million and diluted EPS of $0.08 per share in the prior year quarter. adjusted net income was 19.2 million and adjusted eps was 17 cents per diluted share compared to adjusted net income of 17.9 million and adjusted eps of 17 cents per diluted share in the third quarter of 2021 to make a comparison on an apples to apples basis If we burden the third quarter of fiscal 2021 results with a full quarter of public company costs and use the current diluted share count, fiscal 2021 third quarter adjusted EPS would have been 15 cents per diluted share. This comparison yields an adjusted EPS growth of 11.5%. These positive normalized results reflect the continued strength of our top line and stable gross profit margins, partially offset by an increase in selling expenses, supporting sales activities, and the continued resurgence of business travel versus the prior year period. Adjusted EBITDA for the quarter was $32.9 million, essentially flat year over year. This represents 35.9% of net sales compared to 36.4% of net sales in the prior year period. However, if we look at this on a normalized basis and burden third quarter fiscal 2021 results with a full quarter of public company costs, adjusted EBITDA reflects modest growth and approximately 60 basis points of margin expansion. At the end of the quarter, we had cash of $8.7 million and net debt of $231 million with a leverage ratio of 1.9 times. Turning to our updated fiscal year outlook, in light of strong year-to-date performance and our confidence in executing irrespective of the macro events occurring, we are raising and narrowing each of our net sales, adjusted EBITDA, and EPS guidance ranges. We now expect net sales of $369 to $373 million, representing 10% to 11% growth year over year, adjusted EBITDA of $125 to $128 million, or 7% to 9% growth year over year. an adjusted EPS of 59 to 62 cents per share, which assumes a 25% effective tax rate, and 114.5 to 116.5 million diluted shares with respect to planned regular capital expenditures, which do not include strategic opportunities for vineyard purchases, production. With that, I will turn the call back over to Alex for his closing comments.

Thank you, Lori. As we celebrate a full year of being a public company, we are proud to report another quarter of strong financial results and outperforming our high-quality, highly respected portfolio brands, differentiated one-stop luxury wine shop sales approach, scaled omni-channel platform, sustainable, business model and strong execution delivered by an exceptional leadership team put us in an advantageous position to build upon the momentum we have shown year to date and end the fiscal year on a high note. We are confident that we will take stakeholders over the long term.

With that, Shawn.

Thank you. If you would like to ask a question, please press star followed by one.

Please press star followed by two. If you would like to ask a question, please press star followed by one.

As a reminder, please remember to pick up your handset before asking your question. We will pause here briefly, ask questions. Our first question. Good afternoon, everyone.

If you can please discuss the health of the consumer. It seems that you're . But how confident are you in the sustainability of this trend as you build your assumptions for the fourth quarter guidance? keep progressing through the quarter are you seeing any signs of concerns with your consumer any potential trade down in bottles buying less frequently shifting channels to home again from on-premise it might be premature to say that but i just want to double check and then you mentioned many many many positives in terms of how including number of accounts and then the a lot to leaving the account market share can you share a bit of that that info with us if you can say that the trend accelerated as you as you progress the fiscal thank you Andrea so first I think you asked about consumers and so we haven't really consumers

demands for our products. We've just seen continued growth. And when we think about consumers and our products, we really feel that they're somewhat insulated from various inflationary dynamics.

And so we haven't with regard to consumer demand for our products. And we feel will continue. Helpful. Yes.

Yeah, so and then you're asking about trends that we saw in the quarter, I believe. So we remember for us to overcome the growth of the prior year.

So I think of 41% volume growth in the prior year.

in Q3 and this quarter we saw really strong on-premise growth which exceeded our expectations actually and then we also saw off-premise trends really continue strong that we had realized in Q3 of 21 which was we've seen continued

growth in both on-premise and off-premise. And then finally, I'll remind you that in Q3, we did pull about $2 million worth of planned shipments from Q4 into Q3.

that's helpful on on the commentary of how much you pulled forward but still you're you're like underlying you're still accelerating uh in the fourth quarter which is which is good to hear uh the follow-up question that i was was a bit related to that in terms of like how much market share you're getting uh in terms of the accounts or productivity, TDPs, as you pointed out. Is there any data you can share in terms of how much you gain share, let's say, in the Q3?

So we have continued to grow by adding accounts. Accounts growth has been our major driver as opposed to velocity, although we are growing strongly on all cases. accounts sold as well as PODs. We don't have information to publish on a quarterly basis with regard to accounts sold, but we have continued to exceed our historical levels. Andrea, I can tell you that with regard to on-premise, we have exceeded our pre-pandemic council level and we continue to build that particular segment.

That's great. Thank you and congrats again, Laurie and the team, Alex and Sean.

Thank you, Andrea. Thank you.

Thank you. Our next question comes from the line of Lauren Lieberman with Barclays.

please go back to, you know, realigning resources in the marketplace, a way to be qualificated and postmarked. But if you could characterize how you view your integration pipeline, is it fair to think of it as being those resources get realigned?

or if there's any change in how you're thinking about introduction to the marketplace versus what might have been contemplated a year ago.

Yeah, that's a great question. Um, No real change in how we're looking at innovation. The premium wine seltzer was slightly an outlier there and an exciting category to innovate into. But as you noted, we have a new postmark series. We have Decoy Limited. We've done a lot of work in sparkling wine, especially innovation. It takes about two years to kind of get it fully folded into innovation. the market. We have a pipeline. It's part of our DNA, so we continue with that. So I'd say we're not going to be limiting our innovation approach, but probably moving slightly back to more traditional luxury bottled wine innovative strategies.

Okay. We had talked previously about last quarter about potential to accelerate certain planned pricing acts deemed it necessary. So I wanted to get your latest thinking just to what extent you view that as a feasible level to lean further on if necessary.

Pricing is really a very methodical approach for us. We put a lot of thought into it. And any change in pricing is communicated really well in advance with regard to our trade partners to make sure it's accepted and integrated well.

We have found of late that our trade partners are much more receptive with regard to price increases. And as they see, the consumers are being much more receptive. So it's more positively accepted. So we have accelerated some price increases, as we talked a little bit about last quarter. And we don't see any material impact to pricing changes in the current quarter or probably fiscal year 22. But we always prioritize growth. And we look at pricing. And we make holistic decisions. What's our overarching goals? So we look at those two things when we make our pricing decisions.

Great. Appreciate all the perspective. And I'll hand it off from there. Thank you. I'm Brian Spillane. Please go ahead. Good afternoon, everyone. This week. Questions.

I guess the first one, I think you mentioned that depletions were up double-digit in the quarter. I just wanted to make sure I heard that in the prepared remarks.

Double-digit depletion growth. which outpaced our relatively flat case shipment.

And we saw accelerated growth in both on-premise and as well as double-digit depletion growth in off-premise on a three-year CAGR basis.

Okay. And is that trend, you know, just directionally, is it accelerating? Is it? you know, kind of held, the growth rate held constitutes what's, you know, whether accelerating, improving, just any sense of just directionally where that's, you know, how to put that in contact.

I don't think we can comment specifically as to acceleration. I think that you should look at double-digit very healthy for a brand. And I think that the trend on top of that trend amongst affluent consumers is really solid and going to continue to support that. So I think you should look at it as general of the overall wine market.

Okay. And then just as we're thinking about supply chain and, you know, and glass over the last year and even more recently.

So just can you give us a sense of, A, you know, just how you feel about or how you stand in terms of glass, and then maybe if you could just comment on sort of the bottlenecks still night.

I'll split. If some costs, if there's some. There was some underlying cost thoughts there, but as it remains to bottlenecks, we have a really good strategy to make sure that we're not getting tight on bottling supplies is probably your most critical. Sometimes it continues to pay dividends. Bottles would be the largest piece. of the packaging bottle piece and we have some very very good relationships with some bottlenecks on our needs for our types of glass for our products okay and then just last one for me the acquisition that you made recently so can you just talk

You know, kind of as we look forward, you know, in terms of how you're thinking about acquisitions and how we should be thinking about acquisitions, is it the – if you could talk a little bit about just, you know, kind of what the acquisition market, you know, looks like now, especially with interest rates. rates rising and, you know, a lot of the sort of some of the variables that have underpinned valuations for the last, you know, I would say of the, you know, kind of the M&A landscape maybe loosening up or tighten things up. Just trying to get an understanding of rates are moving so fast, right? Valuations are changing. and seeing the equity markets, just how is that affecting the M&A landscape? Sure.

Hey, it's Sean. I think the first thing to do is probably just divide in our minds the two pieces that might be called M&A. There's what we did down in San Luis Obispo and earlier in the year done through vineyard acquisition in Napa Valley. Those are standalone vineyards, or I would loop production assets into that as well. In this case, it's vineyards. Optimize our grape supply and ensure that we have the appropriate diversification for the production assets to ensure that we have the optimal mix and the right amount of slack in our in-house production versus custom crush. So the model there continues to be to be thoughtful and disciplined, but look for those opportunistic assets that will give us the opportunity to use our capital well, to increase diversification, ensure supply to keep and in the right places.

So I'd

put that in one bucket, we will continue to employ that strategy, which I think has served us very well, most notably in Alex's answer to your supply chain question, I think, of grapes and production assets. On the other side, we have the more traditional M&A, as you'd think of that. And I think that the environment, you know, really is a, there is a parallel nicely to sort of what we see in premiumization more broadly. Given that we've talked about our interest in M&A, which is additive to our organic growth on the luxury market, we would anticipate that those assets would be performing well and therefore Therefore, we would not see necessarily a huge swing downward or upward in value kind of where interest rates are and where more broadly the economic cycle is because we would be looking at growth assets that would be consistent with how we see ourselves.

Okay, so interest rates rising, not really having an impact on valuation. That's probably fair.

I think that's where we sit today. And, Brian, just to weigh in on that a little bit, too, I think another underlying thought you were sharing there is we do still believe there are quality assets that are going to come to market as a trend over the next several years.

Okay, great.

Thank you.

Thank you. Our next question comes from the line of Rob Ottenstein with Evercore. Please go ahead.

Great. Thank you very much, and congratulations on the continued terrific performance. The, you know, $18 to $20 or so wine segment and, you know, kind of where decoy competes and, Any thoughts about, you know, trends there, competitive intensity, is it picking up? And, you know, maybe very specifically to that segment. Good.

You know we're deeply entrenched in that segment right there, and we own a huge chunk of it, so we're very confident that we're going to continue to compete well there. If you're kind of looking, asking, do we think there's going to be more competition looking outwards, maybe, but we're very comfortable with the plans in that segment that we have and the offerings and how we're going to market with it. So if it continues to be competitive, competitive, so be it. On top of that, though, is I do believe as we look forward that that overall, what we continue to see and our intel tells us is that that will be an exciting place to be. And the premiumization amongst trusted brands and reliably priced products is still going to stay in effect. So we're also not going to shy away from the belief that kind of overall process will remain a viable part of our short-term, near-term, and long-term strategy. So, no, we don't have any concerns about the competitive net.

You kind of led into my next question. Any color in terms of how Decoy Limited is doing, which is your trade-up innovation?

Very well. Very, very happy with the performance with our plans for future growth in that. So we're excited about how that one has really folded into our family of brands.

And is that going to be, I mean, can you give us any sort of, you know, how to look at the opportunity just so we can try to, you know, try to model this?

Probably on the Stick to some of your data sources. I think that's going to give away too many trade secrets. I'll start handing you all those case numbers.

And it's really additive nature that we

we've seen. And so while that may not specifically speak to the question you asked, I think that it is important to note that we continue to see to the overall portfolio specifically to the Decoy Winery brand.

You know, during the roadshow, you gave us some statistics on wine club membership. I don't remember exactly what that number was. But can you talk about how that has evolved through the pandemic and where it is now? Did you lose a lot of members? Are they coming back? Do you have more now? Just trying to get a sense what that membership looks like.

Yeah, so we don't really report on the various channels, if you will. I'll tell you that...

Our wine clubs continue to grow.

We had some concerns that there wouldn't be growth with accretion without people visiting the tasting room, but we've seen the wine clubs grow nicely. In fact, that's one of the bright spots for Q3, our wine club growth for Q3 for the DTC channel.

Yep, go ahead. I'm sorry. So just to be clear, is your membership in terms of number of fans higher today than it was in 2019?

Yeah, I'm sorry. I don't have that information, and we don't really report on that. I can tell you that our club shipment sales dollars, are up from where they were this time last year. I'm not sure pre-pandemic, but the wine clubs are extremely healthy and continue to thrive.

And I think the other point that probably feeds into that is that our tasting rooms, now that we're open with no limitation on visitation, they continue to see before That is a very important funnel to not only a wine club membership but also to brand evangelists more broadly.

I think the important piece that we're talking about is what's going to happen if inflationary pressures happen. I think this is all speaks highly of the health of premiumization in luxury wine, the experience, these little nuggets we've been sharing. I think we need to distill it down on that trade-up premiumization that most of our customers have will remain strong for the near term.

Yeah, no, that's certainly, I mean, you read half of where I was coming from. Absolutely. The other part that I'm trying to, you know, get a sense on is, you know, how much have they recovered? I mean, like if you looked at the same tasting room, you know, now over the last three months pre-pandemic, Is the traffic, you know, the same, higher, you know, less, just trying to get a sense of where we are?

Change in traffic is, you know, relatively close to capacity. There are capacity limits for the experiences we offer, and people are making appointments, coming in, filling up our – it's seasonal.

It's seasonal during the day and obviously during the season, but generally speaking, we're running close to capacity with our tasting rooms.

And people are buying the wines, and as you know, we skew to the higher dollar price wines in the tasting room. So both seem to be working well. Thank you.

Thank you.

Our next question comes from the line of Kevin Grundy with Jefferies. Please go ahead.

Great. Thanks. Good afternoon, everyone. And I come back to the guidance. Lori, I apologize if I miss this. So, you know, we talked about strong double-digit depletion trends, the consumers holding up well, particularly the high-end consumer, premiumization trends intact. All of that being said, the guidance still does imply an acceleration looking at the comp because on on a sales basis i know the volume a little bit different but on a sales basis the comp gets more difficult so the guidance implies an acceleration on a two-year stack or two-year average basis in the fourth quarter and i just uh want to understand is there something specific there is there some sort of pull forward is there some customer specific no i think um generally the

Fourth quarter is one of our smaller quarters in terms of shipping revenue for the overall fiscal year. So we do have a little bit of an anomaly in Q4 this year that last year we had some noise around the estate, Costa Brown, shipping in Q4 this year, which has gone up.

Okay. All right. All right. And then in terms of magnitude, is that something that you can break out or no?

No, I'm sorry. I don't have that for you right now.

Okay. Just like in kind of right side.

And then for the team, just the distribution opportunity outside of, the on-premise channel, so in your wholesale business. And you've talked about where ACV sits relative to some of the major scale luxury, the timing around your ability to close that gap.

I think you're always trying to close the gap, Kevin. I think that's just what a long-term business does because it will be your quarter shift. I think you need to think of that. That is a longer-term strategy, especially because your competitors are going to try to increase the size of the gap. Think about us as focused on it.

It's hard to hit our customers wherever they're buying our wine, so it's meant to close that gap. But think about it as part of an overall longer-term strategy.

Alex, just in terms of handicapping, so if ACV is in the food channels in the mid-70s for decoy, can you get to the low 90s in two years, three years? What's the current plan?

Kevin, I was going to say, what a nice survey you've done. Time improvement on an ACV gap closure.

And it's worth noting that we additive elements, for example, TAPE quite limited, which is, you know, really an opportunity with a much lower, obviously, ACD given where we are starting from and it's relative new. It's a nice opportunity with white space.

Understood. One more cleanup because I know the call has gone on a little bit long. Just with respect to the inventory reserve in Seltzer, which was not a big bet for you guys at all, so with the inventory, is it sort of fair to say that there's an interest in the RTD space, at least for now, particularly given the really strong health of the core of the portfolio? Yeah, I think that's the right way to look at it. Okay. Okay. That's it for me. Very good, and congrats again on the quarter. Thanks, Kevin.

Thank you. There are no additional questions waiting at this time.

I would like to pass the conference back to Alex Ryan for any closing remarks.

Thank you, everyone, and I want to thank you again for joining us today to review our third quarter. I look forward to speaking with you in late September when we are back.

That concludes the Duckhorn Portfolio's third quarter 2022 earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.