Q3 2021 Duckhorn Portfolio Inc Earnings Call
[music].
Greetings and welcome to the top home portfolios and third quarter 'twenty 'twenty 1 earnings conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation. As a reminder, this conference is being recorded I would now.
And I'd like to turn the conference over to your host Sean Sullivan Executive Vice President and Chief administrative officer and General Counsel.
Good afternoon, and welcome to the debt corn portfolio's third quarter 'twenty 'twenty, 1 and earnings conference call. Joining me on today's call are Alex Ryan <unk>, President and CEO, and chairman and Laurie, but doing our chief financial officer in a moment.
We will hear brief remarks from both followed by Q&A.
By now everyone should have access to the earnings release for the period ended April 30 years 'twenty 'twenty..1 that went out this afternoon at approximately 415 eastern time. The press release is accessible on the company's website and I are dot dot corn dotcom and shortly after that.
Conclusion of today's call or 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 Dr. Corn to 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 as a result of 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 they are included in our earnings release, a full reconciliation of non-GAAP financial measures to the most comparable GAAP measure.
Yeah.
With that I will turn the call over to Alex.
Thank you Sean and good afternoon, we really appreciate you joining us today I'm very excited to kick off our first earnings call as a public company. After our successful IPO launch in March.
On behalf of our talented employees, our leadership team and our board of directors and I would like to welcome all our new and prospective investors I've spent my entire 30 year professional career pursuing my love for winemaking and this illustrious company and I can promise you that we'll continue to work hard to grow it and a profitable.
Sustainable and responsible manner for all of our stakeholders over the long term as we've always done following my opening remarks, I will turn things over to Laurie, but Duane who will discuss our Q3 financial results in greater detail before we open the call for questions.
I'd like to begin by offering a few highlights from our third quarter performance to emphasize and reinforce the strength of our business and to serve as the lead in to the 5 core pillars of our long term growth strategy that I'll elaborate more on and a few minutes.
Our Q3 net sales were very strong we grew our top line by over 31% on top of 9% growth from the prior year period, and and looking at volumes, we delivered 41% growth versus 23% growth in the prior year nearly as impressive as our sales growth. Our depletions grew generally at a similar rate.
Highlighting what's strong consumer demand, we're seeing for our high quality luxury wines are diversified scalable omni channel platform. Once again was a source of strength in the quarter with positive sales growth contribution from all channels as consumer mobility increases we re.
Realized considerable momentum and our on premise business roughly 3 X the growth rate seen in off premise. This was led by nearly 50% growth and our wholesale to distributor channel, which in all fairness did compare to a prior year period. When distributors showed some initial hesitation and making purchases as depend on.
Begin nonetheless, the results well exceeded our expectations.
Off premise was impressive and its own right as the resiliency of its sales far exceeded our expectations, our unique California direct retail mall delivered over 20% net sales growth and saw a consistent.
And 2 year stack versus Q2, and reinforcing our belief that consumption habits acquired during the pandemic will remain somewhat sticky Huawei on our high margin DTC business realized a nice sequential acceleration in net sales even in the face of continued capacity restrictions and our tasting rooms that could.
Impeded our ability to grow club memberships.
Led by decoy and Duck, 1 we saw robust evidence of our winery brands, taking share as consumers and trade enjoyed our well regarded brands.
These strong results and our first quarter as a public company are merely a continuation of how we have consistently executed over our 45 year corporate history since our founding and 1976 by Dan and Margaret duct worn as a family business, we have prided ourselves on driving sustainable and profitable growth while also.
And making consistently excellent luxury ones. We've done this by combining a diversified and scalable omni channel platform with a highly flexible sourcing and production model and a high growth portfolio of iconic luxury winery brands.
We are now the premier scaled producer of luxury wines and North America with our portfolio exclusively focused on the fastest growing segment in the 53 billion dollar U S wind market.
Which is luxury wine and sold at $15 per bottle and up and luxury wines represents 10% to 15% and of the total market, which is fragmented and affords us considerable opportunities to continue achieving industry, leading growth, we have driven and 18% CAGR and net sales over the past 5 years, but to sustained on.
And momentum and continue to grow market share. The first element of our long term growth strategy, we tap into the strength of our platform. We carefully developed a curated yet comprehensive portfolio of high quality 1 to cover the bulls luxury spectrum across a wide range of price points and varieties each of our.
Wines comes with its own distinct attributes and story and we believe we have a rare ability to appeal to a broad and diverse demographic of consumers with a luxury wine for every taste and every occasion.
This breadth and depth of our portfolio allows for us to offer our retail and distribution partners a 1 stop luxury wine shop that we believe differentiates us from our competition and will allow us to continue to take share from the fragmented tail of the luxury wine industry over time, it's not just about what we saw.
Sell though it's also equally as important and how we sell it and have sold it for the past 45 years through our large and growing sales force, we've developed long standing relationships with our distributor and trade partners and have built a diversified scaled omni channel platform that provides us with multiple complementary paths to reach consumers.
These channels include wholesale to distribution and sales to our distributors, who in turn so to on and off premise accounts across the country and internationally.
California, direct retail and unique self distribution Avenue to market in California that offer significantly stronger margins than traditional wholesale and gives us increased control connectivity and visibility on demand in the state of California.
And finally direct to consumer our highest margin channel, which capture sales in our world renowned tasting rooms exclusive wine club offering offerings and E Commerce sales.
The second component to our long term growth strategy is to leverage our marketing and brand strength, we go to market as a 1 stop luxury wine shop, including well over 100 wines that spanned many regions and varietals, we have trusted brands that both the wine connoisseur and recreational consumer can enjoy with our iconic waterfowl theme.
<unk> offering a sense of familiarity and certainty of high quality luxury experience.
And as a result, our retail and distributor partners take confidence in our made by Dr. Corn branding.
This has historically afforded them attractive margins.
And strong throughput, which we expect will continue into the future once we penetrate and account with 1 of our wines our intentions are to expand our presence with other brands and varietals, while we have multiple on ramp to our portfolio. We view decoy as our gateway Duck and primary brand lever for continued distribution growth.
Both in terms of new doors, and further penetration with existing given its wide appeal to consumers looking for exceptional wines and more accessible prices.
To ensure that we can sustain our industry leading growth at industry, leading margins, we must continue to evolve our portfolio. Our founders were pioneers of their time choosing to produce merlot and the Napa Valley, which was a bold and doing choice as a result, the desire to innovate and the willingness to be bold is part of our DNA and.
And it is the third pillar to our growth outlook. It is foundational to our continued success and we will never rest on our past accomplishments always driving to bring new experiences and high quality luxury wines to our growing consumer base.
Yeah.
Although innovation permeates our entire portfolio a prime example of our ability to innovate has been with our decoy brand, having originally started as a red blend produce with grapes and the Napa Valley, we repositioned and expanded the brand and 2010 as a more attainable luxury wine, while maintaining its exceptional quality and.
And taste.
This strategic shift has transformed decoy into our flagship power brand and a market leader within luxury wine, where we now offer a number of varietals and source grapes from appellations, all across California, providing greater sourcing flexibility and ensuring we procure only the highest quality of grapes.
While we are pleased with the strength that <unk> already demonstrated we believe that there continues to be several compelling opportunities to elevate the brand and increase its dominance within the luxury market through brand extensions and entry into new categories with the most recent notable example example being debt of hard Seltzer.
While still early and its rollout the January launch of our decoy hard Seltzer has been highly encouraging with positive feedback from both our distributor and retail partners, having earned the right to transcend any 1 variety or category. We have carefully crafted a premium priced wine based set of sensors that are differentiated.
From mainstream on spirits space soldiers, we believe our hard seltzer will not only have broad appeal to the current decoy wine drinker, but it will also afford us the opportunity to participate and new additional drinking occasions.
The fourth pillar of our long term growth strategy is to invest and our DTC business not only is the channel highly accretive to our overall margin profile, but it also serves as a marketing engine, providing an important opportunity for us to engage with consumers create duckworth and evangelists and drive adoption across all.
Channels as well as our broader portfolio. Despite continued challenges on capacity restrictions depressed consumer travel and visitation and challenging social distancing protocols. The DTC business has performed consistently well delivering an 8% and net revenue growth and Q3.
This is especially impressive growth given that a considerable amount of cost of brown ones normally destined for the wholesale were sold through DTC channel last year at the peak of Covid <unk> impact on U S restaurant wine sales, thanks to our creative efforts and a difficult operating environment. This fiscal year on.
Marketing and DTC teams have launched several new offerings, including curbside pickup corporate virtual tastings and additional courtyard outdoor seating to maintain and deepen customer relationships and deliver growth.
Moving forward, we will seek to build upon our recent successes and we continue to invest and this is very important channel. Just recently, we opened our eighth high touch tasting room from the migration winery brand in the Carneros region, a premier wind destination and the Napa Valley.
As the country continues to reopen and given our view that there is considerable pent up demand for social engagement and and in person luxury experience, we view ourselves as well situated to capitalize on this increased mobility.
Because of the highly fragmented nature of the luxury wine producer landscape, we view strategic M&A as the fifth and final component to our long term growth strategy.
While we do not see M&A as necessary to our growth, we do see M&A as another lever at our disposal to accelerate growth expand our margins and bolster our luxury wine portfolio. We believe that there is a strong pipeline of winery brands vineyards and Standalone production assets that would become available and the next few years.
And we are well positioned as a buyer of choice, our 45 year history, and well known leadership team gives us credibility with potential sellers and an early look at many assets coming to market.
That said our experienced team is disciplined and we maintain a high thresholds when we look at potential acquisitions, and we look at the target brand strength and the luxury wine segment, we look into our ability to accelerate the brand's growth as part of the Doctor on portfolio. We look at the expected positive trade and consumer reaction to the acquisition.
And we also look at the unique attributes of the target such as access to premium grapes, a diversification of supplier increased production resiliency and.
We look for that asset to have and accretive long term financial profile as part of our portfolio. We're laser focused on price and value and are not interested in M&A that does not align with our commitment to grow our margins were.
We are very proud to have acquired and successfully integrated 2 winery brands and the past 4 years, Costa Brown and color on each possess a strong engaged consumer following and their acquisition and allows us to further diversify our luxury offerings and broaden our production footprint as we look to the future. We are focused on finding the right assets at the right price.
And the fact that we view M&A as additive, but not necessary underlies our approach that we believe will lead to result accretive to growth and margin over the long term.
Underlying our past successes and expectations for continued profitable growth our ESG practices, we have always prided ourselves on being stewards of the land champions of our employees and communities and which we work and live and committed to the practices.
And our risk management that are central to good governance, the tenants of ESG are rooted deeply and our 45 year history.
And the areas in which we focus on such as our diversified sourcing model and also specific characteristics of our stakeholders are completely aligned with our business and growth strategy.
Focus areas. It's important to know also aligns with the preferences and worldview of the customers that buy our luxury 1 and importantly includes the growing millennial consumer community as well make no mistake. We don't do this for popularity sake, we do it out on a necessity and because it's the right thing to do we are very proud of.
Our ESG initiatives and we view it as being core to our mission a key contributor to our growth and a competitive advantage for us in the market.
So as we began our life as a public company I'm very excited about our future growth and our advantaged position in the industry. Our strategy is to continue to do what we've been doing because for nearly half a century, we have proven that it works we plan to continue to lead with the power of our decoy and Duckboard brands.
Again, if we expand our distribution complement growth with strategic acquisitions lean on our high margin DTC channel and seek out efficiency gains and reinvest in our platform with a mentality of driving long term value creation, we strongly believe that because of our scaled highly resilient business model and our.
Our proven track record of sustained growth and a variety of macroeconomic climates not to mention our strong brand portfolio and fantastic leadership team set stuck on up well for sustainable profitable long term growth.
Now I will turn it over to Laurie, but doing to go through the quarters financial results in greater detail.
Thanks, Alex and good afternoon, everyone.
It's great to be speaking with you on our first earnings call as a public company and I am delighted to share with you our strong results for our third quarter.
Net sales for the quarter were 94 million and increased from the prior year at 31, 6% the increase and net sales is primarily attributable to 41% volume growth, which compares to 23% volume growth and the prior year. However, this was partially offset.
By and negative 9.4 mix contribution as our leading decoy and Doug Horne brands outpaced the rest of the portfolio and wholesale to distributor sales growth exceeded the growth of our unique California direct to retail and DTC channels on a like for like basis.
Pricing changes were immaterial to our results.
Versus our 31% net sales growth depletions in the quarter were generally in line coming and a few percentage points below net sales growth with regional and performance being nearly similar across the east and west Excluding California.
All channels contributed positively to our top line with wholesale to distributor proving to be the driving force at just over 48% growth as a result of a much faster than anticipated recovery and on premise and and encouraging resiliency and off Prem.
And as a society reopens from business. In addition, we realized continued growth and both points of distribution and to a lesser extent velocity.
Gross profit was $46.9 million and increase of $10.6 million or 29, 1% versus the prior year period.
Adjusted gross profit for the quarter, which accounts for purchase accounting adjustments related to prior acquisitions was $47.2 million and increase of $8.7 million or 22, 6% versus the prior year period.
The vast majority of the realized margin compression was driven by continued shifts in channel and brand mix as noted by our outsized wholesale to distributor growth and as decoy and death line continue to grow at a faster rate than our other winery brands.
Total selling general and administrative expenses were notably higher versus the prior year up 18 million or 137% to 31.1 million How's.
However, I'd call out that most of the increase was related to our recent IPO in the form of $8.6 million and equity based compensation to.
$2.3 million and non capitalized transaction expenses and additional increased public company costs, such as D&O insurance and professional fees.
Our effective tax rate was 38, 4%, which was higher than the 26, 5% effective rate and the comparative prior year period due to equity based compensation expense and connection with our IPO.
Excluding the impact of equity compensation, our blended effective tax rate was 25, 9% for the quarter.
Net income was $9 million and diluted earnings per share was 8 cents adjusted net income and earnings per share were $17.9 million and 17 cents per share.
And increase of 15 and 13% respectively.
Versus the prior year period results as a result of higher sales volume, partially offset by channel and brand mix and increased SG&A.
Adjusted EBITDA for the quarter was $32.9 million or 36, 4% of net sales.
Versus $31.2 million or 45, 5% in the prior year period.
The margin decrease was primarily attributable to increased public company costs, and the current quarter and reduced SG&A expenses and the prior year quarter.
Which was at the beginning of the pandemic.
Overall SG&A charges were normalized for Covid related expenses and public company costs are in line with historical margins.
At the end of the quarter, we had cash and cash equivalents of $5 million and net debt of $260 million with a leverage ratio of 2.3 times.
Looking ahead, we feel confident and our ability to profitably sustain our industry, leading sales growth over the long term.
While our rate of growth is not likely to remain at levels realized in Q3, and our strong depletions in the quarter and addition to distributor inventory days on hand, still well below normalized levels suggest a continuation of healthy consumer demand.
From a balance sheet perspective, given strong fundamentals consistent operating cash flow and minimal near term capital needs while comfortable at current levels. We expect our leverage to continue to gradually move lower over time absent any disciplined and and.
And we may undertake.
In summary.
The business is performing very well we're excited by the opportunities ahead of us and we remain committed to executing our long term value creation strategies.
With that I will turn the call back to Alex for closing comments.
Our track record of consistent execution against whatever backdrop remarkable brand strength clear ability to innovate and grow through successful acquisitions. In addition to our scaled highly diversified platform and exceptional leadership team are foundational to our future success.
And we're deeply committed to sustainable profitable long term growth and we're confident that we will continue to deliver for our shareholders.
As we move forward, our strong and growing cash flow positions us well to unlock shareholder value.
While our priority will be to reinvest in the business to support sustained future growth at industry, leading margins. We will also seek to reduce our leverage and maintain financial flexibility to pursue strategic M&A and if the opportunity presents itself, we remain stewards of capital and we will always strive to optimize shareholder value.
With that Lori and I will be available for your questions. Thank you.
At this time I would like to remind everyone in order to ask a question Crestar then the number 1 on your telephone keypad again and that is star then the number 1 on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
We have our first question coming from the line of Kevin Grundy with Jefferies. Your line is open.
Great. Thanks, good afternoon, and and congratulations to you and your team on the on a strong quarter.
I wanted to start on the strength of the wholesale business outside California, and I think it would be helpful to spend some time there.
As it was really the key driver of upside and the quarter versus expectations, you, both mentioned and strength and both the on and the off premise can you unpack the factors a bit more for us in terms of where where you really seeing the the strength and the quarter and what were the key drivers of upside versus your own.
On internal models, and and and versus the Street and how this is informing your view here.
From what we can expect for growth of the business and in the near to intermediate term, maybe just comment on what youre seeing and the business here and and.
And may and early June.
Great sure, Kevin and thank you and thanks for joining us today.
So we did exceed our internal expectations for Q3, with our decor and upfront and brands driving much of the exceptional growth in the wholesale to distributor channel as we mentioned.
Our other winery brands exceeded our expectations as well as.
On premises coming back stronger than we had originally anticipated.
Additionally, our DTC channel exceeded expectations as our visitor centers saw traffic increases on.
Although they continued to.
The restricted due to capacity limitations.
So.
With.
And <unk> to your question I have and how we see this for the future.
So we're still navigating through times domestically and globally and in the quarter, we made some investments and marketing our new product innovations and we're excited to see the on premise open and consumers getting back to normal and we can say that we feel really good about our growth and our and.
Your line business overall.
Overall.
Thanks, Lori just just a brief follow up on and I'll pass it on because I know this question is from others.
Is there anything you can help us with the growth number. It was was really strong if I'm not mistaken. It was it was over 40% and the wholesale distribution business outside of California.
And what sort of the expectation here and and in the near term and maybe I'm not sure. If you can do anything to help us there between growth rates and the on and off premise understanding of the comparisons and the for the on premise are going to be pretty easy here and there.
The coming months. So anything you can provide there I think would be helpful for us. Thanks.
Oh sure Yeah. So our Q3 and growth was led by off premise growth and points of distribution as well as velocity.
We did see significant growth on the on premise depletions in Q3 with our on premise depletions.
The pre pandemic levels and growing at a rate 3 times the growth rate of our off premise depletions.
And as on premise rebuilds, we are gaining wine listing on placements and continue to see opportunity.
And on premise remains far from pre.
Pre COVID-19 levels.
So we do feel that we will experience.
And.
So we don't feel that we will experience the same rate of growth.
In Q4 as Q3.
Remember that Q3 is comping against a very unique quarter with the onset of the U S impact of the pandemic and related business and consumer concern.
That being said we are very excited about Q3 growth rate and we feel really good about our future growth and our underlying performance.
Oh.
Yeah.
Yes.
Thank you we have our next question coming from the line of Kyle meal, Quechua Lala with credit Suisse. Your line is open.
Hey, everybody, congratulations and welcome to the to the public markets.
I guess.
The first question is on.
<unk> volume growth in the <unk> can you maybe just talk about the impact of that kind of growth on your supply chain flow.
And I think you mentioned that inventories at distributors still are quite low so on.
Europe.
Quite notably going into the recovery so how on.
Maybe on the prepared but in terms of what are you what is your capability to deliver as we kind of enter this.
This recovery model, which as you had mentioned is happening a little bit faster and plan.
A comment on how we go to Alex.
We feel very confident with our supply position. Your observations are obviously very correct.
Our diversified production plan and our and our fixation on managing inventory very very carefully.
We're not we don't think we are and are positioned to have any type of shortcomings at all.
And as this as this recovery continues to move forward. So we're confident our ability to supply the market.
And and and I didn't quite add Tom on that.
So our internal inventory levels are within our target ranges.
And inventory levels for our distributors are on average below our target levels hallow over there not really significantly low and we are working with our distributors and they've agreed to revise order plans to reflect a longer lead time on receipt of goods.
And there where that stock out of stock situations arent good for any of us and and we're all committed to make sure that doesn't happen.
Yes.
Okay, great. So definitely sounds like distributor inventories are low and not because you can't supply them, but because of their ordering.
How much they've been ordered that would be a better way to look at it yes. So so we have noticed some from and.
Impact on distributor levels due to some some freight and availability of trucks and we've discussed it at least they're very aware of it and there we don't really see any significant concerns there.
Okay, Great and then if I may ask you released the topic of <unk>.
The moment for all companies on around on and around inflation.
From the time kind of when you were going public to know.
Things and really looking just a bit different can you maybe just talk about your input cost environment, how that may have changed how you plan to deal with it.
Yes sure.
So our business really isn't susceptible to traditional inflationary risk like you may find with many food or beverage companies.
Let me just explain on that a little bit. So we have full visibility into our cost of goods for bottled wine, which is to be sold over the next couple of fiscal years and we also have really good visibility into our near term bottlings. So the current inflationary pressures and will not really impact on.
Gross profit margin and immediately and the near term.
And.
In addition to that come on we.
Packaging and really is the only material item that will have potential near term.
Rates as as we are bringing in our current.
Materials.
So packaging materials costs range from 2010% to 20% of our total cost of goods and.
And we have kept them we've contract with the for these materials and kept our and inflationary rate at 3% annually and like I said that the winds are going and selling over the next 2 years or so or argued bottled.
Yeah.
Thank you we have our next question coming from the line of Andrea Teixeira with Jpmorgan. Your line is open.
Oh, Thank you good afternoon, and though and I wanted to echo the congrats on on the strong results out of the gate.
So I wanted to just follow up on your comments about the distribution increase and velocity Lori before and also.
On the margin commentary so if we if we see and you said you had a huge increase on the on the sugar and a side of your business right and and once we normalize.
And more of the direct to consumer and and continue to build on that and then and mix normalizes and we actually see margins become better and the fourth quarter and and and I had.
Yeah.
So.
Thank you.
Andrea for your questions and again welcome for joining us today.
So as we predicted with regard to your question on points of distribution and velocity.
Our points of distribution were the primary driver of sales growth and the quarter and that's based on that.
And that is in line with our expectation and then to a lesser degree our growth was around velocity.
And remind me of your second question. Please.
Yeah. So on the margin commentary that you gave us. So you said obviously you have contracted for the next 2 years, but now that the mix and then you'll have a headwind on on the mix side and and basically across the Brown is probably 1 of the reasons why it keeps you can kind of like give us like.
It's not guidance, but basically give us on a journey from here, we will see a you'll make summarizing and not the ones who fail go a lot. So you had that 9% headwind on the average pricing and so going forward is that 9% headwind going to persist on get better and then potentially.
Improve your margin.
Sure Okay. Thank you.
The gross.
Profit margin pressure is in line with our expectations. Andrea However, our growth exceeded our growth estimates. So as we mentioned the vast majority of the margin.
Margin compression was driven by mix and both in terms of channel and as noted by our outside direct to distributor growth and then also by brand as our decoy and Doug Horne, our brands continue to outpace that.
And the growth of our other winery brands the growth is exciting for us and we're very happy to see it hurts a little bit different margin profile.
Thank you.
Okay and in order to ask a question simply press Star then the number 1 on your telephone keypad. Please also note to limit your questions to 1 question and 1 follow up only thank you.
Next question coming from the line of Peter Galbo with Bank of America. Your line is open.
Hey, good afternoon, Alex and Laurie Thank you for taking the questions.
Alex in your prepared remarks, you know a couple of times you mentioned just on from this has come back much faster than you anticipated and then I guess just.
Could you dimensionalize that for us a little bit you know are you seeing activity level that you expected in October and you just they were pulled forward day.
And just kind of help us.
Think through how you would clamp on internally versus what you're actually seeing on the ground.
And then you know with it with some of the other commentary around kind of on premise outside of California versus in California, If you could kind of delineate that for us.
I think that I.
And I think what.
And again it Peter it's a good question you know I don't think anyone had a really strong crystal ball into how the world was going to kind of come out of shell shock and reenter.
Most of the United States has been probably a little faster than we thought coming back getting out and moving around restrictions are all over the board, but generally loosening.
And.
So, we're probably a little faster and we thought and are quite encouraging as it relates to California, California has been slow to open up right. So that's kind of another 1 another big market that's going to open up here pretty quick we think by the middle of July So I mean middle of June So we feel that it's going to kind of follow.
The general positive trend.
People mobilizing and throughout the country and we're encouraged by that as well.
No. Thank you that's helpful and and maybe just on the M&A commentary that you gave as well.
You know, we're kind of private valuations are sitting today, what you're seeing if the pipeline is still relatively full and you know kind of how you're how you're thinking through that over the next 6 to 12 months. Thanks very much guys.
Sure.
This is a this is sean and good afternoon.
We continue to thoughtfully consider all M&A opportunities on the horizon, we are excited about it and the long term.
And we discussed it is important to remember we see it as Alex mentioned is additive but not necessary.
For our continued growth.
Evaluations vary widely and U S.
Specced into disaggregated market with players and different sizes capabilities and and categories of focus and wine.
And the luxury winery brand segment valuations remain relatively strong.
And although they really are few wineries and scale trading hands, making the discernment of a broader trend a little more difficult given our discipline and determining how best to grow the business, we evaluate potential transactions with the view to the long term accretive nature of the deals we're looking at and accordingly valuation as a key litmus tests, but its just 1.
Many factors that we look at.
Thank you we have our next question coming from the line of Wendy Nicholson with Citi. Your line is open.
Hi, guys.
And congrats on the great corner.
From my first question on the software business I think initially you know your expectations were very new did but it sounds like.
And the product is off to a great start so can you talk about kind of.
Sure.
And whatever out of stocks or rent or your ability to service the demand meet the demand and kind of any plans to expand distribution and based on how well it's doing out of the gate just give us sort of the state of the union on where where the filter businesses.
Sure Hi, Hi, Wendy welcome.
So yeah. So you know its seltzer is just.
Been launched within the last 3 months, it's a really extremely small piece of our business and.
And we won't be reporting on specific products and the future, but regarding shelter and Jennie O jet in general I can tell you that we have been looking at our initial orders and our Depletions and our Reorders and we see really strong depletions and the 3 months following the launch.
And we're really encouraged by seen reorders across a number of accounts and so we really see some positive and we're receiving Wendy and addition positive feedback from both our distributors and our retail partners. So we continue to be encouraged and excited by by this new product innovation and ours.
Got it and and just in terms on them.
Out of stocks at this point no issues I mean, you're still able to meet the demand.
Yes.
That's correct Yeah, we haven't we haven't had any out of stock with regard to our smelters at all great Alright.
And then.
Perfect and my last question is just I would say no.
He said the tasting rooms are opening up and gradually but can you kind of dimensionalize that and would you say kind of relative to capacity I assume I assume you're still having you know relatively small numbers of people and to the tasting rooms. When do you think you'll be at full capacity and be able to have been sort of act and feel the way they did pre COVID-19.
Oh, Great question Wendy throughout the pandemic, we've been treated similar to restaurants, and then not so similar to restaurants. So we've been operating at 50%. We just moved up to about 70, some odd percent.
And with outdoor seating and the you know it's been it's been all over the board. So we're not back from where we want to be we're not back to kind of that 2019 levels.
We think theres, a chance they'll get back middle of this summer.
And we think that.
Domestic travel just by the nature of what we're hearing about human beings human nature people local domestic people are going to be doing a lot of traveling we will see about international travel that's a little unclear right now so to answer your quickly we think by about the middle of summer unless something else weird happens and the public health Arena will kind of get back to what we have.
Call normal.
Okay.
Okay.
Thank you we have our next question coming from the line of new quality with RBC capital markets. Your line is open.
Thank you good morning, good afternoon, everyone and congrats on a strong quarter out of the gate.
I guess the question from me is just from consumer dynamics I mean, we've heard obviously, there's a lot of trading up that it occurred during COVID-19.
The entire beverage alcohol industry and I'm wondering you know what you noticed so far as consumers are starting to get a little bit more mobile are you seeing consumers that maybe trade up trade down or do you you know how sticky are you seeing the trade up as being.
And Nick how are you.
Good question, we're seeing.
We're slowly kind of getting our best visibility into that as to what people are doing and our tasting rooms.
With a lesser degree and what we see kind of a wholesale but we think people are.
And I don't want to say celebratory mood I think that people want to continue their wind journey and we think that we have a great platform to offer anything they want along the luxury.
Wind journey. So our indications right now are people are staying with high level winds and interested in trading up and experimenting so we're feeling pretty good about.
That is not going to be a dive to the bottom that luxury is still going to stay really popular.
Boy I'm, obviously, it's a lot cheaper at home than what you'd be paying for glass or a bottle at a restaurant and so.
You know I call. This COVID-19 elasticity are you seeing any of that or are you seeing any price shock with consumers and and a more on the restaurant side.
It has not shifted as much out of the home as you would have thought given the mobility has really I think beat and most of our expectations.
Hey, Nick Sorry, I think we got a technological glitch I think I only picked up about half of that last question I apologize can you repeat oh, yeah, sorry about that so I'm just wondering when it comes to the at home versus away from home dynamics, obviously, it's much cheaper to buy a bottle of doctor and I'd be quite at home to consume versus.
[noise] out and having the same brand and our restaurants. So I'm just wondering if youre seeing any elasticity any price shock.
And those on premise venues that you sell your portfolio.
Yes, that's a good question as of today I can report, we're not really seeing that we're feeling that the people's need to celebrate might be overriding any any concerns are there. So no evidence of sticker shock.
Got it okay, Thanks, and I'll pass it on.
Thank you we have our next question coming from the line of Lauren Lieberman with Barclays. Your line is open.
Great. Thanks.
And I think a lot has been and covered but I.
I guess, 1.1 last follow on would be just thinking about it.
On the DTC business and the headwinds from Costa from that you guys have very clearly articulated but as we think.
Forward to tasting.
Tasting rooms reopening it.
And at full capacity.
And how should we think about balancing that with what you already know you know in terms of that Theyre, just going to be Costa brand constraints and how much of an offset might that be to.
And sort of more call it explosive recovery type growth.
And the DTC channel when you get those tasting rooms going again.
Okay.
I don't think.
Laurence good to hear from and how are you guys and I don't think we're going to see a lot of challenges.
And we're trained to make sure that our tasting room customers have access to what they want and yes, we will get from time to time certain production challenges was certain DTC wines, but they are not going to be.
Material and kind of what we offer for our customers.
We will get through quickly this little blip with some cost of Brown and I don't think that's going to be a long term issue.
And for Us and so I see that I see once people come back full tilt to the tasting rooms, which I believe they will well have a full range of products at all the flavor profile levels and price levels and luxury that they want to they want to select from.
Okay, what's interesting, though right now is that when you look on your the tasting room websites you can't make a reservation and the limited it looks like the limited capacity is selling out.
That is generally a good way to characterize it yes.
Okay, So and I may have missed it but what type.
And if any visibility do you have.
And to being able to open it more complete to capacity.
We think we think from what we understand and the California regulations, that's going to be around June 15th with.
The state of California, and never know so, let's say, we're thinking mid summer.
Alright, great. Thank you so much.
Thank you.
Thank you and there are no further questions at this time I will now turn the call back over to the presenters for closing remarks.
Okay.
Alright. Thank you all for joining us it's been an exciting day, it's been an exciting presentation.
And.
And in closing is 1 and say that we appreciate you taking the time to be with US we've come such a long way since 1976 and with so much more to accomplish our mission and Duckworth.
<unk> served wherever fine wines are poured enjoyed throughout North America and the world with every bond and we sell we're offering and experience and a source of connection with each other few companies and proven capable bridging the 2 but we have a lengthy track record of having done so and we fully intend on continuing to build upon our past successes.
By leveraging our brand strength and skilled luxury platform the benefit of our loyal customers and long term stakeholders. Thank you very much again and we'll speak with you in early October for our Q4 call.
Good afternoon.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Yes.
[music].
Okay.
Okay.
Yes.
[music].
Yeah.
And.
And.
[music].
And then.
[music].
Yes.
Yes.
And.
[music].