The Duckhorn Portfolio, Inc.

Good afternoon and thank you for attending today's Duckhorn Portfolio Incorporated Q4 and full year 2022 earnings conference call. My name is Jason and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I'd now like to pass the conference over to our host, Sean Sullivan with Duckhorn.

Good afternoon and welcome to the Duckhorn Portfolio's fourth quarter and fiscal year 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. By now, everyone should have access to the earnings release for the year ended July 31st, 2022, It went out at approximately 4.15 p.m. Eastern Time. The press release, as well as supplemental slides, are 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 U.S. food consumption data cited on today's call will refer to dollar consumption for the 52-week period ended July 31st, 2022, and growth versus the same period in the prior year, unless otherwise noted. With that, I will turn the call over to Alex.

Thank you, Sean, and good afternoon, everyone. We really appreciate you joining us today to discuss our strong fourth quarter financial results and guidance for continued growth in our next fiscal year. Following my opening remarks, I will ask Lori to walk us through our fourth quarter financial results, as well as discuss our fiscal year 23 outlook. Then we will open the call for questions. Before I address a few fourth quarter performance highlights, allow me to frame the current wine industry dynamics and our advantage positioning. To set the stage, the luxury price point segment, which we define as $15 per bottle and above, has been and continues to be the fastest growing segment within wine. For the 52-week period as of July 31st, the luxury segment grew a healthy 3.5% compared with a negative 4.5% for total wine according to IRI data. Now, within the luxury segment, the Duckhorn portfolio has continued to be a driving force behind the segment's growth. We were the fastest growing supplier of the top 15 luxury wine suppliers on both the dollar and volume growth basis. with growth in the low teens for both metrics. And when comparing ourselves to our scaled peers who participate within the growing luxury wine segment, our dollar growth was approximately six times greater. This context is key to understanding our fiscal fourth quarter performance and guidance for fiscal year 23. Turning to some of our Q4 highlights, first, we ended the year with great momentum on both the top and bottom line. Second, we posted 10% organic net sales growth, reflecting solid volume growth, once again led by our Duckhorn Vineyards and Decoy Winery brands, as well as sound execution across all channels. When looking at three-year compound annual growth rates, our net sales were up 18%, a strong acceleration versus Q3 results, while volume remained consistent for the quarter and in line with depletions. We continue to look at three-year CAGRs because we believe this perspective is the most indicative of the underlying health of the business in the long term and minimizes short-term noise associated with pandemic dynamics. Third, on and off premise, as well as all major sales metrics, Cases, accounts sold, and points of distribution continue to drive our outperformance of the industry average. Total company three-year trends remain strong, up double digits. And fourth, looking at profitability, we grew fiscal Q4 adjusted EBITDA by over 21% versus the prior year period highlighted by meaningful gross margin expansion. Let's look at the strong on- and off-premise channel dynamics. On-premise remains a primary driver of our year-over-year growth rate, and we continue to take share on slimmed-down wine lists as restaurateurs seek out a consistent supply of luxury wines with strong brand equity. They have confidence these wines will sell through and at a healthy margin. While our three-year on-premise trends did moderate a bit when compared against third-quarter results, the growth in the fourth quarter remained very healthy, even even lapping strong prior year comparisons. All three key sales metrics, cases, accounts sold, and points of distribution were up high single digits. And constructively, much like the broader restaurant industry where June through July trends realized some growth moderation before reaccelerating in August, we've also seen a solid sequential pickup in consumption patterns to start the fiscal year, suggesting underlying consumer appetite for dining out and enjoying a luxury wine experience continues at a healthy rate. As our higher margin luxury wines are predominantly sold on-premise in the wholesale channel, we expect this to serve as a continued tailwind for gross margins, partially offsetting certain headwinds we foresee heading into fiscal year 23. Turning to the off-premise channel, which I will remind you represents the majority of our wholesale business, we also showed solid growth against the double-digit prior year comparison. On a three-year CAGR basis, we delivered accelerating growth in cases, points of distribution, and velocities. An account sold saw consistent double-digit growth. With respect to account type, our performance was well-balanced between national and independent accounts. a testament to our strategic and continuing investment in our sales team, which is a central pillar of our success and our ability to take share. In addition, we see the effectiveness of our one-stop luxury wine shop model and consumer affinity for our high-quality luxury wines playing an important part of the off-premise channel growth. I'd now like to spend a few minutes revisiting and expanding upon the drivers that underpin our considerable distribution white space opportunity and how this gives us confidence in our ability to generate high single-digit organic net sales growth over the longer term. Starting with a broad lens, there are approximately 500,000 licensed accounts in the United States of which we believe approximately half are appropriate for our high-quality luxury wines. of the roughly 250,000 addressable on- and off-premise accounts, our wines appeared in approximately 53,000, or 21%, of our addressable market last year, which was up from approximately 47,000, or 19%, in fiscal year 21. Today, I am proud to announce that we now stand at approximately 59,000 accounts that feature our wines, raising our penetration rate to 24%, as of the end of our fiscal year 2022. This is notable for two reasons. First, it shows that we have been able to successfully grow our accounts by double digits over the past two years. And second, it clearly highlights the considerable runway we still have ahead of us for many years to come. Looking to the future, we have thoroughly mapped out our future wholesale distribution growth opportunity by label, channel, and geography. and believe we have a viable path to achieve an additional five percentage points of penetration by the end of fiscal year 2025. Importantly, the implied distribution growth over this time period should fully underwrite our high single-digit organic net sales growth outlook and still leave significant white space to support additional growth in our future years. Underpinning our penetration outlook, our assumptions are as follows. One, our wholesale account university will grow at a low to mid-single-digit CAGR through fiscal year 25. Two, we continue to expect our growth in new accounts to serve as the primary driver for future penetration increases. Three, the opportunity for account growth is broad-based and varies by label, channel, and geography. But the majority of our expected account growth will stem from our duckworn vineyards and decoy labels, as well as the off-premise channel, much like we have experienced historically. Four, as it relates to velocity per outlet, which considered both placements per account and velocity per individual offering within each account, for the purposes of this analysis, we are assuming minimal gains going forward, even though this metric has grown at a high single-digit rate over the past three years. And five, for purposes of this TAM analysis only, we have assumed no additional new products in fiscal year 23 and beyond. However, as you know, innovation is a key part of our long-term growth strategy. Based on these assumptions, which we believe to be very reasonable given ongoing premiumization tailwinds and our long track record of well outperforming the fastest growing segment of wine, luxury, We are confident in our ability to execute against the considerable wholesale distribution white space opportunity we have in front of us and how it should fully support our high single-digit organic net sales outlook over the long term. As an incremental lever for growth, we will continue to thoughtfully introduce new innovation into the market. We have a strong lineup of new products in fiscal year 23 including our previously discussed Costa Brown Burgundy release, which sold out within a 48-hour period, one of the fastest sellouts of a Costa Brown release in our history, and will be delivered to members in the second fiscal quarter. This serves as a perfect example of how we are delighting our customers in new ways and diversifying our supply of grapes for this luxury brand. Stepping back more broadly, we are proud of our innovation at every price point in luxury, from strong introductions of Decoy Limited to the overwhelming response we've had with Costa Brown. Speaking of our prestigious Decoy Limited Blue Label, which stands upon the broad shoulders of our Decoy brand, we plan to introduce Decoy Limited Merlot, Decoy Limited Brut Rose Sparkling Wine, and Decoy Sparkling Wine in a festive Magnum size. This will nearly double the number of decoy limited wines, increasing an already considerable distribution runway and allowing us to better address new drinking occasions and encourage greater trade-up to higher price point wine. In summary, I'm very pleased with our fourth quarter and full year results. I'm confident in our continued ability to grow market share, and I am as excited as ever for what the future has in store for us given our significantly scaled luxury platform, highly diversified supply chain and production capabilities, unparalleled brand strength, uncanny ability to innovate and delight our customers, experienced leadership team, growth mindset which is purely focused on the fastest growing wine segment, luxury, and our ongoing commitment to invest in our people and their ability to aggressively pursue the considerable distributional white space we have in front of us, I remain highly confident that the best is yet to come. That said, while our core consumer, which I will remind you has demographics even more favorable than the average luxury wine buyer, has proven resilient to date, much uncertainty remains on the near-term macro. We have prudently taken measured approaches to how we view the world over the next 12 months and will remain nimble. much like we've in the past in the event actions are required to address any material changes to the environment. With that, I'll now turn it over to Lori to discuss our fourth quarter performance in fiscal year 2023 outlook.