The Duckhorn Portfolio, Inc.

good afternoon ladies and gentlemen thank you for joining today's duckhorn portfolio q3 2024 earnings conference call my name is tamia and i will be your 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 would like to ask a question please press star 1 on your telephone keypad i would now to pass the call over to ben of avenia tapper vice president investor relations please proceed

Good afternoon and welcome to the Duckhorn Portfolio's Third Quarter 2024 Earnings Conference Call. Joining me on today's call are Deirdre Mullen, President, Chief Executive Officer and Chairperson, Jennifer Paul-Young, Chief Financial Officer, and Sean Sullivan, Chief Strategy and Legal Officer. In a moment, we will give brief remarks followed by the Q&A. By now, everyone should have access to the earnings release for the third quarter ended April 30, 2024. that went out at approximately 4.05 p.m. Eastern time. The press release and an accompanying presentation 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, 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, earnings presentation, and 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. I also note that the Duckhorn Portfolio's balance sheet as of April 30, 2024, reflects the assets acquired in the Sonoma-Contrera acquisition. However, because the closing occurred on the last day of the quarter, the income statement does not include Sonoma-Contrera results in the third quarter. 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 retail scanner data cited on today's call is according to the CERCANA and will refer to dollar or unit consumption for the 12-week period ended April 28, 2024, and growth versus the same period in the prior year in U.S.-tracked channels, unless otherwise noted. With that, I will turn the call over to Biedra.

Thanks, Ben, and good afternoon, everyone. Thanks for joining us today to discuss our third quarter 2024 financial performance. Following my opening remarks, Jennifer will walk us through our quarterly results and updated 2024 financial guidance. I'm pleased to be here for my first earnings call since accepting the CEO role. I began my work with Duckhorn three years ago as a board member after a 30-year career in beverage alcohol and a long-held passion for the consumer goods sector. When I took on the interim CEO role last September, I expected it to be temporary. Since that time, I've had the opportunity to engage with every aspect of the business, meeting with our brand and commercial teams, visiting the wineries and tasting rooms, and it is clear to me that this is a strong and well-positioned business with ample opportunity for profitable growth and a talented and committed team. When the board asked me again to consider if I would stay long-term, I couldn't resist. I am delighted to be serving in the role and energized by what lies ahead for Ducklawn. I'll turn now to our business and the broader industry. Although the market conditions remain challenging across the wine sector and are impacting our performance in fiscal 2024, I see significant potential for Ducklawn's business. This potential is rooted in the substantial progress we have achieved with respect to key business initiatives, including the close and integration of the Sonoma-Couture acquisition and the comprehensive realignment of our wholesale distribution network, both of which we believe set us up for our next phase of growth. Before sharing an update on my immediate priorities and our near-term initiatives, I'll provide some perspective on industry trends and our third quarter results. The trade environment remains pressured due to soft consumer demand. While we had expected the industry to grow low single digits in Q3, consumer data for luxury wine as measured by Cercana was down 1% in the quarter, a reversal from previous quarters. our business continued to outperform the market in the period, which speaks to the enduring strength of our brand. Importantly, we have accomplished this outperformance while remaining focused on operating efficiency and careful cost management. The combination of ongoing industry headwinds and softer-than-anticipated response to our Costa Brown Appalachian Series offering created top-line pressure in Q3. While net sales came in at $92.5 million, strong gross margins and expense control drove adjusted EBITDA of $37.7 million, a 40.8% margin. We are watching industry trends closely and continue to see a consumer preference for premiumization within wine, where demand in the $15 to $20 category and to an even greater degree, $20 to $25 category, per bottle category continues to meaningfully outperform the wine below $15 per bottle category. I'll now share some additional details on what drove our results in the quarter. I'll start with the wholesale channel, which represents about 85% of our business. Here, purchasing patterns by retailers have had a meaningful impact on the business. As a reminder, last quarter we outlined three primary growth drivers for the second half. First, innovation with new products like our Lowering Calorie, Lowering Alcohol, Decoy, Featherweight, Sauvignon Blanc. Second, greater availability of our high-demand products, including Duckhorn Chardonnay. And third, increased programming, particularly with the relaunch of our By the Glass on-premise programs. While some of these initiatives are gaining traction, current market dynamics are impacting the results. I'll take you through them individually. Starting with innovation. While it's still early, I'm pleased to tell you that our most recent product introductions have been well received. For those of you who have had a chance to try Decoy Featherweight Sauvignon Blanc, I think you'll agree it's a truly great wine that holds up from a quality perspective not only to other low ALK options, but to the rest of our portfolio. Following its early spring release, decoy featherweight is already the eighth largest label across all domestic luxury Sauvignon Blanc brands, according to the most recent four weeks or count of data. Duckhorn portfolio wines now occupy three of the top 10 spots on the domestic luxury Sauvignon Blanc leader chart. Also of note, The reorder rate has exceeded our expectations based on past product launches, which is one of the first signs of traction for a new release. And we're similarly excited about our soon-to-be-launched Decoy Limited Passer Wilderness Cabernet Sauvignon. Both of these initiatives are in the early days, but we are very encouraged by the initial feedback we've received from wholesalers and consumers alike. Looking at our second initiative, Greater availability of key wines, including Duckhorn Chardonnay and Decoy Limited Merlot, results have been mixed. While Duckhorn Chardonnay saw strong double-digit growth in net sales, Decoy Limited Merlot didn't generate the year-over-year, in-quarter growth in shipments we anticipated. Although we are encouraged by the consumer demand, as represented by Cercana, which has been very strong. Finally, our third initiative, increased programming, has been most notably impacted by broader industry trends. Specifically, we've seen slower uptake of our by-the-glass programs. Across the industry, on-premise sales dipped in Q3 according to distributor data. The industry has seen some improvements since the lows of February and March, and our results continue to outperform the market in both on- and off-premise. However, we now expect these programs to constitute a smaller contribution to second half net sales than we previously anticipated. On the direct-to-consumer side, we're continuing to refine our club and visitation model to accommodate shifting consumer behavior. While visitor volume is down across the industry, spend per visitor at our tasting rooms remains strong. In fact, the number one selling label at our Duckhorn Vineyards tasting room is The Discussion, the pinnacle label of the Duckhorn Vineyards winery brand, which sells for nearly twice the price of our vineyard-designate red wine. Tasting room visits represent an important conversion opportunity for our wine clubs, and we're highly focused on this channel with initiatives like multi-tier visitation opportunities, including elevated tasting experiences. As we previously communicated, Costa Brown has underperformed our expectations in its most recent releases, and we continue to see evolving consumer preferences and purchasing behavior. We are diagnosing performance trends and developing an action plan to drive improved results and greater consumer resonance for one of the most beloved and well-respected winery brands in our portfolio. As we approach the end of our fiscal year, our immediate priorities, including the successful integration of Sonoma-Couture and the completion of our wholesale distributor network realignment. We closed the Sonoma-Couture transaction on April 30th, and we're receiving and shipping orders to these lines the following day, thanks to a carefully planned integration and the efforts of our integration teams who effectively manage a complex set of processes to achieve a seamless cutover. We initially forecast approximately $5 million in cost synergies from the acquisition, a number that we now expect to be up to $10 million of cost synergies. Further, Sonoma-Couture continues to be one of the fastest-growing luxury wines across all varietals, outpacing the luxury wine market by more than 700 basis points in the current 12-week Sertana data. The complementary nature of the Chardonnay-led winery brand within our broader portfolio architecture will allow us to capitalize on incremental accounts and labels per account. We see significant opportunity to build upon Sonoma-Couture's strong existing growth. The second key priority is our recently announced distributor network realignment. This is something I've prioritized since I began serving as interim CEO last September, as I believe it's a critical element of any supplier operating at the scale Duck Loan has achieved. These changes, which include a comprehensive strategic evaluation and realignment of our wholesale distribution network across the U.S., will help fuel increased focus and investment in the Duck Loan portfolio of brands from our distributors. The transition to the new network has already begun, and while we anticipate some unevenness in the phasing of shipments and depletions over the next two quarters, we expect these fluctuations to be short-term and far outweighed by the longer-term benefit of improved execution and growth. As we continue to navigate the dynamic environment, we remain focused on sharp execution across the business. We have a world class portfolio of winery brands, a talented team, and an unwavering commitment to operational excellence that has allowed us to consistently outperform the industry. While market softness is impacting our fourth quarter outlook, we do expect organic top line trends in the wholesale channel to improve in the fourth quarter relative to our year to date performance. With that, I'll turn it over to Jennifer to provide more details on the financial results for the quarter and our outlook for the year.