The Duckhorn Portfolio, Inc.

Good morning and thank you for attending today's Duckhorn Portfolio Q3 2023 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 and 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 would now like to pass the conference over to our host, Sean Sullivan.

Good afternoon and welcome to the Duckhorn Portfolio's third quarter 2023 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 fiscal quarter ended April 30th, 2023, that went out at approximately 4.05 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, I would like to remind you that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, includes 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 total U.S. food scanner data cited on today's call will refer to dollar or unit consumption for the 12-week period ended April 30, 2023, 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. Thank you for joining us today to discuss our solid third quarter financial performance. Following my opening remarks, Lori will walk us through our quarterly results and upwardly revised fiscal year 2023 financial outlook. She will then turn the call to Sean, who will discuss an exciting M&A development. At the end of our prepared remarks, we'll open the call for questions. I would like to begin today's call by offering a few highlights from the quarter. First, from a top-line perspective, we performed in line with our expectations as wholesale drove high single-digit net sales growth while DTC declined due entirely to previously discussed shifts in the timing of our cost around offerings between fiscal Q3 and Q4. Absent these changes in offering timing, DTC would have been up modestly. Second, our volume grew by 3.5%, generally consistent with our first half performance. Depletion growth moderately trailed shipment growth. We continued to make good progress on our considerable distribution white space opportunity as both accounts sold and the number of labels per account contributed positively in the quarter. Third, our portfolio remained a category growth leader within the $15 per bottle and above luxury subsegment of wine, despite a challenging macroeconomic environment weighing on near-term consumer discretionary spending. Mid-single-digit consumption growth and continued market share gains were once again led by Duckhorn Vineyard and Decoy. Of note, Decoy Limited experienced over 15% dollar growth, showcasing the strength of the overall Decoy brand and its ability to extend into higher price points and address new consumption opportunities. We have always prided ourselves on our Merlot wines, and we could not be happier with the response to our recent Decoy Limited Merlot release. And fourth, in spite of the gross margin headwinds the Costa Brown timing shift posed in the quarter, once again we managed to generate strong adjusted EBITDA growth supported by robust adjusted gross margin expansion and sound expense control. Now let's look at on- and off-premise dynamics. Off-premise performance moderated relative to our second quarter. However, we continued to realize solid contributions from several key metrics, including account sold and number of labels per account, which we attribute to our ongoing investments in our sales force, 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. Third quarter on-premise growth was challenged by somewhat slower dining activity, especially when lapping tough prior year comparisons that benefited from the continued on-premise reopening. However, we still grew our account base, and as we have discussed in previous earnings calls, getting into new accounts is a top priority for us as we seek to further penetrate the considerable wholesale distribution white space opportunity we have identified. Furthermore, labels per account growth was generally consistent with prior quarters, reinforcing our view that restaurateurs continue to consider us a trusted partner within luxury wine. I'll now turn to our high margin direct-to-consumer business, which performed solidly in line with our expectations for the quarter. As previously communicated, our cost around Appalachian Series offering, our highest volume cost around offering, shifted into the fourth quarter, while the more limited, higher tier estate series offering shifted into the third quarter. While this shift negatively impacted our third quarter performance, We look forward to the fourth quarter when our DTC channel performance will realize the benefits from the timing shift of the Appalachian Series. Although the channel was down overall for the third quarter, we continually see healthy trends in our club sales as these exclusive and bespoke offerings consistently please our dedicated wine enthusiasts. Additionally, despite the inclement weather during the quarter, which resulted in closures as well as generally unfavorable conditions, The performance of our tasting rooms was quite encouraging, reflected in net sales growth and higher average dollar spend per customer. Our bookings for the summer are also looking good, and we are excited to continue capitalizing on these positive trends. Last month, we announced that we signed an agreement to acquire a production winery and planted vineyards in Alexander Valley, Sonoma County. The acquisition will bolster our production capacity and provide the company with a fully operational and modern facility with state-of-the-art winemaking equipment appropriate for luxury wines. In addition to the production facility, the property also includes seven acres planted to Cabernet Sauvignon. Sean and Lori will be discussing this in more detail later in the call. Before I turn the call over to Lori, I'd like to update you on our CFO search process. At the end of May, we are pleased to announce that we have hired Jennifer Fall-Young, as our next Executive Vice President and Chief Financial Officer. I cannot be more excited to welcome Jennifer to the Duckhorn portfolio, given her strong financial acumen, deep operational experience, and proven track record of developing and leading successful strategic efforts at iconic consumer products companies like Funko and The Gap. On behalf of the entire Duckhorn family, I would once again like to thank Lori for her leadership, dedication, and immeasurable contributions to the Duckhorn portfolio over her 14-year tenure with the company. We would not be where we are today if not for Lori's steady hand guiding the company through a global recession, pandemic, IPO, and countless other challenges while also instilling a culture of discipline and accountability along the way. Lori leaves Duckhorn portfolio well-positioned for continued success not only as a public company, but also as an established industry leader in luxury wine. We are deeply grateful for everything that she has done and wish her the best in her retirement. I'll now hand it over to Lori to discuss our third quarter performance and updated fiscal year 2023 outlook in greater detail.