Duckhorn Portfolio Inc (NAPA) 2024 Q1 法說會逐字稿

Good evening, ladies and gentlemen. Thank you for joining today's Duckhorn Portfolio Q1 2024 earnings conference call. My name is Tia, and I will be your moderator for today's call. (Operator Instructions) I would now like to pass the call over to Ben Athena Tepper. Please proceed.

Good afternoon and welcome to the Duckhorn Portfolio's first quarter 2024 earnings conference call. Joining me on today's call are Deirdre Mahlan, our Interim President, Chief Executive Officer and Chairperson; Jennifer Fall Jung, our Chief Financial Officer; and Sean Sullivan, our Chief Strategy and Chief Legal 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 first quarter ended October 31, 2023, that went out at approximately 4:05 PM 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 I 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 retail scanner data cited on today's call is sourced from Circana, which was formerly known as IRI. And we'll refer to dollar consumption for the 12-week period ended October 29, 2023, and growth versus the same period in the prior year in US track channels, unless otherwise noted.

With that, I will turn the call over to Deirdre.

Thank you, Ben, and good afternoon, everyone. Thank you for joining us today to discuss our first quarter 2024 financial performance. Following my opening remarks, Jennifer will walk us through our quarterly results and our fiscal year 2024 financial guidance. We are pleased with our execution on the quarter as we delivered top and bottom line results at the higher end of our expected range.

Net sales were $102.5 million in the quarter, and adjusted EBITDA was $34.7 million for an adjusted EBITDA margin of 33.9%, a 90 basis point improvement over the prior year, driven by gross margin improvement and active management of operating costs.

Due to some signs of softening in consumer sentiment and luxury wine trends, we now expect net sales to come in at the lower end of our previously announced guidance range. Accordingly, we are narrowing the net sales guidance to $420 million to $427 million, which reflects an annual growth rate of 4% to 6%. This reflects our expectations for continued share gains, albeit adjusted for a near term lower industry growth rate.

Despite this reduction in our top line outlook, we expect to maintain our previously-communicated adjusted EBITDA margin as we manage our spending to account for this revised sales outlook. This translates into a range of $150 million to $153 million in adjusted EBITDA for the fiscal year.

It's important to note the climate within which we're delivering this full year growth. According to Circana growth in total wine softened, as did the luxury wine segments defined as $15 and above. In the last 12 weeks, the luxury wine segment was flat and total wine overall declined 1.6%.

While we cannot control the macro environment, which has been mixed the Duckhorn Portfolio brands has continued to demonstrate relative strength in their respective tiers. We are confident in our comprehensive strategy and have a track record of profitable sales growth through a variety of industry clients.

Our initiatives to support our strategy remain leveraging our brand strength, evolving our portfolio, expanding our wholesale network and growing our DTC channel. I'll now share some of the highlights from the quarter, driven by strong execution on our initiatives.

Net sales were down 5.2% at the higher end of our expectation for a first quarter decline of mid to high single digits. This outperformance was partially driven by timing as some shipments anticipated for November came in earlier than expected and shifted into Q1 as we shared on our last earnings call in Q1, we lapped a unique first quarter of fiscal 2023.

Last year's first quarter was marked by strong buys in wholesale as distributors and retailers alike placed unseasonably large orders specifically for our Duckhorn wines. The result was an all-time high for quarterly net sales, driven entirely by volume.

Accounting for this challenging comp, we continue to see our wholesale performance ahead of the broader market, demonstrating our brand strength. It is worth noting here that we have always managed this business for the long term and quarterly variability is normal in this sector. Volume trends are affected by a number of factors in the supply chain as distributors and retailers adjust to demand signals and manage inventory levels accordingly. The full year guidance Jennifer's discussing today is consistent with our objectives to deliver profitable growth over the long term.

On the direct-to-consumer side, net sales declined 10.8% in the quarter, partially driven by a reduction in event revenue due to planned renovations at some of our tasting rooms. There is opportunity for improvement for our DTC business, which is one of our five key growth drivers.

Our Q1 results are emblematic of broader post COVID trends in consumer behavior. Across Napa Valley hotel occupancy rates have dipped, but room revenue has continued to grow as strong demand at the highest end has buoyed average loan growth. We're actively adjusting our DTC approach to respond to changing consumer behavior and tap into the strength at the ultra-high end, and we're seeing some positive results.

For example, although the number of visitors and spend per visitor were soft in the quarter, we've seen a strong response to our elevated tasting experiences where spend per person can be considerably higher than our traditional tasting program.

From a total volume perspective, Q1 declined 3.4% in line with expectations. Shipments to wholesale declined 3% in the quarter, while depletions declined at a slower rate. Wholesaler inventories remained at a healthy level and in line with our expectations. While days on hand ticked higher year over year. This was primarily driven by lower than ideal levels during the peak selling season last year.

Drilling down within our portfolio, we see performance slightly ahead of the industry overall, with some areas of particular strength, including Decoy Limited, which had great success expanding into below the evolution of our portfolio is another important growth driver as we leverage our carefully curated collection of luxury wines across a range of price points and case profile.

While retail sales for the total wine category decelerated in the last 12 weeks, the $15 to $25 segment outperformed. Decoy was soft at this price point during the period as the brand absorbed recent price increases and lapped an unusually strong quarter in the prior year. The impact was mainly in the red varietals as Decoys whites grew ahead of the subsegment in this period. We remain confident in the brand's ability to distinguish itself from direct competition within the tiers.

Our higher priced equally limited, as I mentioned, demonstrated continued strength in the quarter with double digit retail sales growth and we view this as another proof point that consumers remain willing to pay for luxury wines. Overall, our market share remained consistent from a channel perspective, despite a challenging environment, we were pleased to report that our account bases increased in both the on-premise and off-premise channels of the business.

We believe this to be testament to the strength of our brands and the confidence of the retailers to take stock in all along as well as the distributor and sales team efforts in achieving our goals of addressing it's distribution opportunities in the marketplace.

To conclude our portfolio of brands performed well in what has proven to be a challenging market environment. While our execution and the strength of our brands partially insulates us from the broader consumer sentiment we are not immune reflecting this climate. We now expect net sales to come in towards the lower end of our guided range, which we are tightening to $420 million to $427 million or 4% to 6% year-over-year growth. We expect to maintain an adjusted EBITDA margin consistent with our prior communications. As we carefully manage our expenses.

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.

Thank you, Deirdre, and good afternoon, everyone. As Deirdre just described, we're off to a good start to the year and believe we will continue to outperform the market as we leverage our strong portfolio of luxury wine brands.

Beginning with our top line. Net sales were $102.5 million, a decrease of 5.2% compared to the prior year period at the high end of the expectations previously communicated as some shipments expected in November came in earlier than expected, shifting some net sales from Q2 to Q1.

We managed through a modest mix headwind due to shipment timing from higher-priced and greater than expected non Decoy wine shipments in the year-ago period. By channel, the wholesale to distributor channel declined 5.4% in Q1. Absent last year's shipment timing impact, we estimate wholesale net sales growth was flat to slightly down year-over-year.

We remain committed to our wholesale strategy to expand accounts and points of distribution to ensure strong programming is in place to support our brands. Distributor days of inventory on hand remain healthy and in line with our expectations at 65 days.

California wholesale direct trade declined 7.3% compared to the prior year period, driven by the same factors that impacted wholesale to distributors. The Duckhorn due to a surge in buying in Q1 of last year was a nationwide trend and California was no exception. The direct to consumer channel was down 10.8%, we do see signs that our strategy to drive our direct to consumer business through customer engagement and our tasting rooms is working as our per-person spend remains high.

As Deirdre mentioned, we're navigating a changing landscape in multiple facets of the DTC business, but we're confident in the initiatives we have in place, particularly in the elevated tasting experiences.

Moving down the income statement first quarter gross profit was $53.9 million or a gross margin of 52.5%, up approximately 190 basis points year over year, driven by improvements in the wholesale channel related to our efforts to optimize trade spend as well as easing input cost inflation as it relates to cost of goods. The DTC channel, some margin contraction of 60 basis points, primarily driven by mix and timing.

Operating expenses were $30.5 million, an increase of $4.7 million or 18.4% year-over-year. On an adjusted basis, total operating expenses decreased $0.2 million or 1%, driven primarily by careful cost management. This excludes $2.7 million of transaction costs related to our pending acquisition of Sonoma-Cutrer Vineyards.

Net income was $15.5 million or $0.13 per diluted share. Adjusted net income was $17.2 million or $0.15 per diluted share. Adjusted EBITDA was $34.7 million, a decrease of $1 million or 2.7% year-over-year. Adjusted EBITDA margin improved 90 basis points versus the prior year period. The improved margin was driven primarily by lower trade spend, partially offset by lower net sales in the quarter. At the end of the quarter, we had cash of $21.2 million and total debt of $241.3 million, resulting in our leverage ratio of 1.7 times net debt.

I'll now share our updated full year fiscal 2024 outlook, which does not include our recently announced plans to acquire Sonoma-Cutrer. Net sales in the range of $420 million to $427 million, which represents growth of 4% to 6%. Adjusted EBITDA in the range of $150 million to $153 million, also a 4% to 6% growth and the margin at the midpoint of approximately 35.5%, consistent with our previously communicated guidance. For adjusted EPS, we expect a range of $0.67 to $0.69 per diluted share.

I also want to provide some color on what we expect to see in the second quarter. As previously mentioned, a portion of shipments expected for November occurred earlier than anticipated. This in addition to a softer consumer environment, contributed to our revised expectations of low single digit net sales growth in the second quarter.

Overall, we are pleased with our first quarter results. We remain in an advantageous position within our industry. And while there are some uncertainty in consumer sentiment broadly, we remain confident in our ability to take share as we continue to outperform the broader wine industry.

I will now turn it over to Sean for some notes on the M&A front.

Thank you, Jennifer, and good afternoon. Earlier this quarter, we announced a landmark acceleration in our long-term strategic plan. We believe the acquisition of Sonoma-Cutrer Vineyards, which is expected to close in spring 2024, subject to customary closing conditions, will deliver significant shareholder value and provide a keystone in our strong foundation of future growth.

As we have previously shared, disciplined acquisitions of complementary winery brands are an important element of our growth strategy and part of our history. Sonoma-Cutrer is an outstanding addition to our portfolio of wines and central to this strategy for growth as a premier luxury wine portfolio in America.

I would like to take a moment to reinforce a few of the key elements of the agreement to acquire Sonoma-Cutrer Vineyards from Brown-Forman for approximately $400 million. Sonoma-Cutrer is one of the largest and most celebrated luxury Chardonnay brands in the United States, and we are delighted to welcome this acclaimed winery brand into our portfolio.

Preparations for closing on track, and we expect to close in spring of 2024 as we discussed last month. We see meaningful wholesale distribution opportunities for Sonoma-Cutrer. We're excited about the prospect of offering Sonoma-Cutrer to the Duckhorn accounts that don't currently carry them . And also about introducing Sonoma-Cutrer on-premise and off-premise accounts to complementary winds in the Duckhorn Portfolio, including wine such as a Decoy Cabernet Sauvignon and Duckhorn Vineyards.

More low, which will be exciting new varietal offerings for legacy Sonoma-Cutrer accounts in which Duckhorn has not have a presence. We will be in touch over the next few months with a more detailed review of the account penetration and distribution whitespace of Sonoma-Cutrer.

One of the benefits of using our stock as a primary element of consideration for this acquisition is that it affords us flexibility and optionality for future growth, which is specifically important to us in the current high interest rate environment. The structure also allows us to bring experience and strategic guidance of [Brown-Forman] to our company as a long-term focus shareholder and through the two members of our Board who will be affiliated with Brown-Forman.

We view Brown-Forman as a partner invested with us in the successful integration of Sonoma-Cutrer and committed to our shared mission to set the standard American wine. Delivering an accretive deal for our first public company brand acquisition was paramount in our evaluation of Sonoma-Cutrer. We estimate Sonoma-Cutrer, pre-synergy adjusted EBITDA margin profile to be similar to the margin profile of the drug on portfolio, which was approximately 35.9% in fiscal year 2023.

The low single digit adjusted EPS accretion that we project to be realized starting in fiscal year 2025, which is just a few months after the anticipated closing of the deal will be driven by $5 million of already identified SG&A synergy. During our work preparing for integration, we are keenly focused on identifying additional sources of efficiency and synergy.

Separately, we believe there are a number of opportunities for incremental revenue growth beyond the current growth of the brand, including cross-selling opportunities in existing Duckhorn Portfolio accounts and vice versa, as well as expanding Sonoma-Cutrer footprint in the DTC channel through a heightened focus on the wine club and an enhanced experience for guests at the tasting room. Areas where we can draw on our extensive expertise to augment growth.

Additionally, we see significant opportunities to promote Sonoma-Cutrer brand awareness with consumers, which we believe will be a key driver of velocity in sales of these longer. And we also believe there are several incremental medium term opportunities to manage Sonoma-Cutrer's fruit sourcing and production models, optimize our company's mix of estate grown and growth rate and pursue value-enhancing land optimization opportunities. We look forward to keeping in touch with you about the preparations for closing and our plans for the future of Sonoma-Cutrer over the next few months.

With that, I'll turn the call over to Deirdre for her concluding remarks.

Thank you, Sean. I've been closely involved in the evaluation of the Sonoma-Cutrer opportunity first as a member of the Board and now as CEO. And I continue to be excited as I learn more about the brand and the opportunities it brings to the Duckhorn Portfolio.

Two things couldn't have been clearer. First, we are acquiring an incredible asset that is a great fit with our brand architecture and second, the document portfolio has an amazing team in place to make this integration a success. We have a proven track record through the acquisitions of both Calera and kosta browne and have significantly expanded our in-house production capability with the recent acquisition of the geyserville production winery.

As a company, we are focused on continuing to identify thoughtful synergies and the successful integration of Sonoma-Cutrer pinto our portfolio and look forward to the strategic commercial and financial benefits it will provide over the coming years.

With that, I'll close by saying I see ample evidence that give me confidence in the strength and resiliency of our brands. We will continue to leverage our advantaged position within the luxury wine space to drive growth and take share through the remainder of fiscal 2024 and beyond.

We remain committed to delivering sustainable, profitable growth and will always strive to create value over the long term for our shareholders. In keeping with that goal, we are excited to welcome Sonoma-Cutrer into our portfolio, and we look forward to making the acquisition official in spring 2024.

Before I move to questions, I'll provide a brief update on our ongoing CEO search. I'm happy to say that the Board is pleased with the candidates it's been seeing and the process is going as planned, and I look forward to keeping you updated as the process progresses.

With that, Jennifer, Sean and I are available to take your questions.

(Operator Instructions) Lauren Lieberman, Barclays.

Great, thanks. Hi, everybody. So just my numbers to be wrong, but I think with the updated guidance and particularly the 2Q comments, still implies very strong growth in the back half of the year, something like a double digit rate. So I know there's a bit of pull forward this quarter from November, but I don't it just strikes me that it wasn't large enough to account for what seems to be implied much healthier growth in the back half. So I was just hoping for some perspective on that anticipated acceleration? Thanks.

Great. Thanks for the question. I appreciate. This is Jen.

Yeah, so the bank have differentiated from the first half. So what we have going on in the back half of the year is twofold really, there's an innovation. We launched Decoys were low limited in fiscal '23 in the back half. But due to the strong success, we've we quickly got low on inventory and through the first half of this year and on our Decoy or low limited inventory, but we will be back in stock towards the back half of the year.

In addition, from an innovation perspective, we are launching our [low Elk] Decoys southern block, which will be our first launch of that in the back half. And then finally, we will be back in stock in our Duckhorn Chardonnay, which has been performing very well for us.

Okay. All right, thanks. And just in terms of -- have you test marketed that -- just a curious because it's a really interesting category, of course, but the range, frankly, like hits and misses. It's yet -- and my sense is a lot of the wind aren't quite getting there yet in terms of taste profile. So have you had the opportunity to test market this app? Because it I'm curious how much of that is a driver of that second half acceleration?

Hey, Laurence, it's Sean. We're very excited about Decoy feather weight, which will be, as Jennifer mentioned, an offering in the second half of the year. I can assure you our winemaking team, as you know, always is very excited to stand behind everything that bears a Decoy Portfolio name. And so all of our wines, including the further it goes through a rigorous committee tasting process, and we're very excited about what we think consumers will view this line in the second half when it's released.

Lauren, let me just add. This is Deirdre. Let me just add one more thing to that. I think, over time, people learn about our innovation and how best to balance our anticipated consumer demand with supply. I think while Sean is absolutely right, that on we are excited about it, and we think it's a winner from a taste profile point of view. However, we are also on the improvements in terms of what we're planning for it in the back half.

So I would not call it out as a driver of what is going to get us to that growth in the back half because we understand it will take time to build some distribution and we'll have to wait and see if the consumer loves it as much as we think they will. So I wouldn't say that is the driver -- it's a contributor, but it is not the only thing that is delivering, that increase here.

Okay, great. And then so therefore, having the inventory on the Duckhorn chardonnay (multiple speakers) --

They're all contributors and also I think we have a balanced view with respect to the overall performance of the industry in the back half. I mean, I understand that -- and we understand there is a lot of cautiousness right now about the consumer and we share that, which is why we tightened up our guidance. But that said, we do expect there to be growth in the back half forecast.

Does the second half assume an acceleration in category growth or no, this is much more availability of these two key product?

I think it assumes a range of outcomes in terms of what's happening in the category. So for example, if you even look at some kind of data in November, it's better than it has been. And in fact, our brands in the four weeks in November were in growth during that period. But every month, of course, is an individual month and not something that we would take as an indicator of the future. But what we're doing is so if the consumer comes back stronger, we would expect to be at the higher end of that range. And if we continue to see on the trends, we see now will be at the lower end.

Okay, awesome, thank you so much.

Kaumil Gajrawala, Jefferies.

Hey, everybody. Thanks for letting me ask a question on what can you talk a bit more about the category and category softness in the past. We heard a lot about resilience, particularly in the high end piece of the line business and then it looks like in this instance, any incremental distribution gains weren't are able to offset anything happening to the category?

Yeah. So basically, what we saw in our scanner data for 12 weeks it's been flat within the wine industry as a whole. And then on a 52-week basis, it was actually up. So we did see some slowing in the $15 and above category within the past 52 weeks that we did outperform the industry. What you saw a little bit in Q1 is because we were lapping such a strong quarter last year, we didn't outperform the industry so much. But as we now have that behind us, we anticipate we will continue to grow outperform where the industry has been as in the industry itself is it is a trading down or maybe just buying less.

As in the industry itself is it is a trading down or maybe just buying less.

The industry see no signs of the industry trading down. And in fact, in November, the 15 plus performed well. So it declined slightly less than 1%. The industry as a total declined 2% and our brands grew. So I think across the on our portfolio in the industry, there really isn't an indication of trading down. In fact, the success of our Decoy Limited, I think, is a demonstration of that, which grows is growing in strong double digits on distribution gain and on the rate of sales, I think we're getting both on deployment and it's a very strong performer and at a higher price point than our other Decoy local. So we are not seeing a sign of slowdown.

Got it. Great. Thank you.

Peter Galbo, Bank of America.

Hey, good afternoon, thanks for the questions. Jen, if I could just follow up on that on Lauren's question. Obviously, understanding there's some nuance in the product availability, but and any more you can do to help us in the back half of the year, just to understand again that how that ramp might look in your comparison there a bit wacky just given I think some of that debt dynamics from 2Q of '23 as well. So just any more color just as we parse the quarters here on what we might see.

Yeah, hey, Peter, a great question. So as we talked about on our last earnings call in '20 -- I'm sorry, are you getting the usual confusion. So until fiscal '23, when we put the kosta browne offering in Q4, it drew a bigger comp in Q4. Now for this year, we're moving it back primarily into Q3, some of that slip into Q4. So you will see more of an outweigh in Q3 versus Q4 just because of that shift in that offering. So keep that in mind that we've had it one way in and '23. And as we move forward, we're switching it back to where we had it previously.

Got it, okay. That's helpful. Then just in terms of -- I didn't know if you updated this just slick gross margin cadence as well for the rest of the year on maybe particular 2Q. And then if it follows that same idea in the back half, if you're shipping more kosta browne in 3Q than the gross margins are probably better. But just anything you do to help us there?

Yeah, as I said it, our margin profile remains the same for Q1 and Q2. We thought we would see a slight improvement year-over-year, but Q3 and Q4, we would see more margin pressure as we anticipated more trade spend because we were extremely clean on trades, get straight spend in Q3 and Q4 last year. So first half slight improvement and second half margin pressure due to placements.

Got it. Thanks very much.

Andrea Teixeira, JPMorgan.

Thank you. Good afternoon, everyone. I wanted to drill back to you, Deirdre, you mentioned the Decoy red wines, so in your prepared remarks being a bit softer within the 15 to 25. So I was wondering, of course, your limit that you're selling as much as you produce, but just curious if that is specific and you pointed out the pricing, right?

So if we think we look back, do you think you offer did a bit on the pricing or that's what you on you were expecting and in that range, of course, the Decoy why the regulator Decoy more on the lower end of that range. Is that any potential on implication there in terms of like increased marketing or increase. And I would say promotional activity there and in that specific price point.

And then if you can also parse out the on-premise, you did call out a number of accounts both from off-premise and on-premise. So if you can talk about also how much is different between the performance was different for on-premise and off-premise if you have that visibility.

Thank you. Hi, Andrea. Yeah, thanks for the question. On the Decoy white label. So not Decoy Limited, the red wines, we did take price on them last year. And I think it's you it's normal for there to be a period after a price increase as that price starts to come through on the shelf and the consumer digests that price and the retailer digests it in terms of what's happening in terms of feature and display for there to be a period where it's digested and there's some softness in the consumer take off that we haven't learned anything that would suggest that there is any issue or that we see now I think, to use your words gone too far on the pricing.

Of course, we continue to evaluate how the consumer is responding to our brands and we will support our brands at the trade level and with the consumer digitally over time to, of course, reinforce the equity at that price point but we're not seeing anything that would suggest that there was an issue with the positioning of the brand and we expect it to continue.

As I said, I haven't seen all of the detail yet on November because it's fresh because of our total portfolio and to return to growth in November. We haven't had time yet since those came out to really dig into the detail. But again, the industry is still soft. So I'm not declaring victory overall, but we're encouraged by what's happened in the in the November store count of data. And as we get through that, we'll be able to tell you more about it at the end of it after this quarter.

In terms of the on and off premise that we -- were you going to say something else? Sorry, not interrupted.

No, sorry, I was about to remind you for the on-premise and off-premise dynamics within the quarter and any trade down as it might seem --

In terms of the distribution in the on and the off-premise, they are both up. From a consumer point of view the on-premise, I think, has been slightly stronger in the most recent months than the off-premise. And again, I think we're not the only ones in the industry talking about this as the consumer habit has fully returned and gone to their post pandemic behavior.

We are seeing more people out and that has improved for, in particular at the more luxury higher price points. It has improved the performance in the on premise, but I wouldn't say that the on-premise is driving the performance. I just think there was some slightly better performance in the on-premise over the course of the period.

And I might just add that we take a lot of we think that's a real positive thing, right? That balance between growth in both on-premise and off-premise. That's the competence of retailers and that's that diversification of where folks find our wines that we think's important in supporting our omnichannel strategy. So we like those results a lot.

Absolutely.

Thank you so much. I'll pass it on.

Thank you.

Thank you. (Operator Instructions) There are no additional questions left at this time. I will hand it back to the management team for closing remarks.

Sorry. Thanks again, everyone, for joining us today for our first quarter performance and our guidance for the fiscal year. I look forward to speaking to you again in March when we report our second quarter results, and we wish you all happy holidays and a prosperous healthy new year. Cheers.

That concludes today's conference call. Thank you. You may now disconnect your lines.