Q2 2022 Duckhorn Portfolio Inc Earnings Call
Okay.
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Thank you for joining the DUC corn portfolio H Q2 2022 earnings conference call. Please remain holding again, please remain holding.
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Greetings and welcome to the Duck corn portfolio second quarter 2022 earnings conference call. At this time, all participants are in English and only mode. After the speaker's presentation. There will be a question and answer session. As a reminder, this conference call is being recorded.
Wed now like to turn the conference over to your host Sean Sullivan Executive Vice President Chief administrative officer and General Counsel.
Good afternoon, and welcome to the Duck corn portfolios second quarter 2022 earnings conference call joining.
Joining me on today's call are Alex Ryan, our President CEO , and chairman and Lori Benoit, our Chief Financial Officer.
In a moment, we will give brief remarks, followed by Q&A.
Everyone should have access to the earnings release for the period ended January 31, 2020 to the second quarter of our fiscal year 2022 went out at approximately 415 P M Eastern time.
The press release is accessible on our website at IR Dot dot corn dotcom and shortly after the conclusion of today's call or webcast will be archived for the next 30 days.
Before we begin let.
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 dock corns 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 that the company undertakes no obligation to update or revise these forward looking statements in the future.
We will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release, a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
In addition, please note that all IRI consumption data cited on todays call well refer to dollar consumption for the 12 week period ended January 23rd 2022 and growth versus the same period in the prior year, unless otherwise noted and with that I'll turn the call.
Alex.
Thank you Sean and good afternoon. We appreciate all of you joining us here today Duckworth portfolio continues to set the standard for American fine wine I'm proud of the beautiful luxury wines, we make and today I'm excited to share with you another great quarter of outstanding financial results, both on the net sales and adjusted.
EBITDA lines later in the call. We will also be discussing our upwardly revised outlook.
I will start with an overview of our second quarter results.
It's unpredictable environment I'm very appreciative of our teams' unrelenting ability to adapt and outperformed the high growth luxury wine market.
In spite of all microns short term disruption disruption to the economy, we were able to deliver continued strong performance in on premise or off premise business showed great resiliency and actually accelerated on top of solid positive growth observed earlier in the year.
Introduction of new luxury wines and the strategic investments we've made in our sales force over the course of the pandemic have afforded us and a measurable benefit.
Continued profitable share gains across all channels, specifically I would like to highlight five notable data points from the quarter.
We generated 18% net sales growth on an organic basis and our adjusted EBITDA also grew by approximately 12% when comparing against the prior year quarter burdened by public company costs. This performance underscores our ability to sustainably deliver on both the top and bottom line for stakeholders.
Second our topline strength was driven by 24, 8% volume growth and our Depletions were broadly in line with the shipments highlighting the fact that consumer demand for our high quality luxury wines remains robust.
In fact, according to IRI the DUC loan portfolio was the fastest growing wine supplier among the top 15, one suppliers in the U S.
We were growing dollars by high teens and over and over three and a half times the rate of our closest competitor within the top 15.
Third our Duckworth vineyards in decoy brands continue to lead our portfolio of high growth luxury wines combined our two leading winery brands grew dollar and volume consumption by high teen percentages on average approximately three times faster than the broader $15 per bottle.
Wine market.
Fourth our decoy winery brand the gateway, Doug has proven itself to be a sustained powerhouse.
He was the number two winery brand was in the over $15 per bottle U S wine segment dollar consumption.
But it was also the fastest growing winery brand within the top 15 U S brands across all price points and yet we believe we still have considerable addressable white space relative to our scaled peers.
Finally.
On premise was once again a growth driver for our wholesale to distributor channel. However, our off premise channel continues to build a top the high level.
Of growth, we achieved during the COVID-19 restrictions as well much like our broader results off premise also showed continue.
<unk> strength with double digit growth in Depletions bolstered by strong results in shipments accounts sold in points of distribution.
Now, let's focus on some of our channel dynamics. When we last spoke in early December Covid latest variant omicron was spreading rapidly across the country and creating considerable uncertainty about how it would influence consumption patterns in the supply chain.
The data from this past quarter.
It shows that in our primary markets. The variant did little to dissuade consumers from dining out the on premise channel has continued its recovery. While we were seeing further share gains for our ones on narrow down wine list with distribution growth coming from both new and existing accounts. In addition to the outsized growth seen on premise as it.
News to move back towards pre Covid levels, our off premise business performed exceptionally well in the quarter.
Compared against the first quarter of this fiscal year results accelerated nicely with off premise depletions up by double digits from the prior year quarter supported by strength in key sales performance performance metrics, such as accounts sold and points of distribution.
This is another example of how we are not simply holding our share of at home consumption, but we're continuing to grow it.
We believe we are well positioned to continue to be the preferred choice of retailers seeking a partner capable of providing both the convenience of a one stop luxury one shop as well as the quality and brand strength of our portfolio of fine luxury one although we are seeing broad based strength across our portfolio, our duckworth opinions and decoy brands continued to.
Serve as the most significant drivers of our growth and luxury wines share gains in aggregate when compared to luxury portfolios of our peers. We are amongst the highest contributors to dollar growth within the over $15 per bottle price point for U S ones with both brands up double digits.
As the number two winery brand in luxury wine dollar consumption.
Decoy drove the lion's share of this growth at the same time.
<unk> distribution opportunity for the future is considerable because we believed equally has a lower a C V relevant relative to its key scaled peers and accordingly, we believe we can narrow this distribution gap over the coming years for three reasons.
First decoys rise to luxury prominence as a result of its compelling offering of exceptional quality at an accessible price combination that appeals to a broad array of consumers.
Second our data analytics have found that the decoy consumer over indexes as more affluent educated and younger than the average for luxury wines. These favorable demographics bode well for the brand and our continued effort to drive trade up into new price points as we've seen with the highly successful equally limited.
Blue label third as a result of these demographics, which are equally attractive to on premise and off premise retailers. We believe our partners will be further incentivized to offer a decoy Andy quite limited ones additional space on the win list in the shelf.
And because decoy serves as the gateway duck for the rest of our portfolio. We are also optimistic that future decoy distribution growth will lead to distribution growth for the other one of your brands in the portfolio as well.
I would also like to take a moment to address what we were seeing in the current inflationary environment.
A function of our scale.
As well as our diversified sourcing and production capabilities, we were afforded relatively good visibility into our cost of goods and they've been somewhat insulated from recent cost pressure cost pressures observed across the supply chain.
Relatedly keep in mind that our largest cogs.
Input is grapes the cost of woods rises and falls based on the unique dynamics of the great market for each varietals and location as you know we have a thoughtful pricing strategy for ones that are designed to enhance the long term growth of the business. We do not expect to deviate from this long term strategy, although the timing of some of those increases.
Has been and May continue to be hastened by the broader environment.
Our goal is keeping our healthy margin profile in line with our cost structure over time keeping.
Keeping in mind, our goals for competitive brand positioning and the maintenance of margins, we make change we make changes when prudent.
Be clear that our laser focus on growth will always take priority as we look at these pricing questions.
In summary, I'm very encouraged by our second quarter and first half results.
Well <unk> continues to outperform our expectations and serves as the driving force behind our robust growth. We also see broad based strength across the luxury portfolio and in all channels and it's because of this broad strength as well as our advantage position within the high growth luxury wine market that I'm confident.
And our ability to achieve results discussed today is discussed in today's upwardly revised full year guidance. This growth will be supported by our agile and experienced leadership team that continues to grow and strengthen our business to that end as you may have seen in a separate release. This afternoon, we were pleased to announce that Gail.
Roger will be joining the executive team as executive Vice President Chief marketing and DTC officer in the next few weeks.
He has over 20 years of experience in the luxury wine industry and brings a deep understanding of luxury wine marketing and the DTC business.
Most recently served as senior Vice President International sales marketing and business development at Jackson family ones. We.
We were thrilled that gain will be joining our team and look forward to working with her and very benefiting from her notable experience and D. T C.
On behalf of the board and the executive team I'd also like to thank Carol Rieber for her outstanding work as Duckworth portfolios Chief marketing officer for her 11 year tenure strengthen our brand equity and vastly grew our DTC presence, we own numerous successes to Carol.
We are in a stronger position as she leaves the CMO role and we are grateful for continued help during this transition.
With that in mind, I would like to turn it over to Laurie to discuss our second quarter performance and updated fiscal year 2022 outlook.
You, Alex and good afternoon, everyone. Let me open by walking through the details of our strong second quarter results.
Net sales for the quarter were $98 7 million.
18% increase versus the prior year quarter.
This high level of growth was broad.
Yelled at strong double digit growth in shipments.
Similar positive movements in accounts sold.
For distribution.
Volume growth was up 24, 8% and was partially offset by negative six 8% price mix contribution, which resulted primarily from the timing shift for select DTC volume out of the second quarter and into the first quarter.
And from our leading Duckworth.
And equally winery brands once again outpacing the other winery brands.
Distributor sales growth also exceeded the growth of our unique California direct to retail channel and our DTC channel.
And on a like for like basis pricing changes were immaterial to our results.
As Alex noted earlier.
<unk> remained strong nearly in line with our 24, 8% shipment growth for the quarter and modestly accelerating on a two year stacked basis.
Turning to our performance by channel.
Wholesale to distributor growth exceeded all other channels up over 30% versus the prior year quarter. This strength was as a result of the continued return of our on premise business, coupled with accelerated off premise growth.
We also continue to reap ongoing benefits from the distribution gains realized throughout the pandemic, which we see in our exceptional quarterly net sales growth on a two year stack basis.
The California direct retail channel also grew and greatly benefited from revitalization of on premise sales, increasing 19% and remaining above 25% growth on a two year stack basis.
Primarily due to our ability to improve our cluster brown fall offering shipment timing.
DTC channel growth was down 24% versus the second quarter last year.
May recall, we had discussed a forward shift the last time, we spoke in December .
Second quarter, DTC channel reflected strong interaction with our consumers and our tasting rooms and through our luxury wine clubs.
Our Napa Valley tasting rooms were particularly strong and legend tasting room cells that are nearly doubled Q2 2021.
Similarly, our wine club net sales were up 8% due to strong retention of existing members and heightened seasonal visitation, bringing us new members.
Gross profit was $49 5 million, an increase of $7 7 million or 18, 5% versus the prior year quarter.
Adjusted gross profit was $49 7 million, an increase of $7 1 million or 16, 5%.
Gross profit margin was 51% up approximately 20 basis points.
This margin expansion was driven by favorable sales mix shift and brand and more than offset any unfavorable channel mix.
Total general and administrative expenses were lower than our expectations for this quarter up $6 3 million or 36, 3% to $23 8 million.
The increase was partially attributable to higher general and administrative costs.
And equity compensation that were present in the prior year quarter.
When we were a private company.
The remaining increase in operating expense was driven by fees related to capital markets transactions greater workforce related cost and elevated selling expenses, primarily to support sales activities such as travel to meet our customers.
Our effective tax rate was 26%.
It was slightly below the 26, 2% effective tax rate for the prior year quarter.
Net income was $17 9 million and diluted EPS was <unk> 16 per share, which compares against net income of 22 million.
EPS at <unk> 22 cents per share in the prior year quarter.
Adjusted net income was $19 5 million and adjusted EPS was <unk> 17 cents per diluted share, which compares favorably against the second quarter of the prior year. When adjusted net income was $16 8 million and adjusted EPS was <unk> 17 per diluted share.
Positive results reflect the continued strength of our top line, partially offset by an increase in selling general and administrative costs, including public company costs.
On an apples to apples basis, if we burden second quarter of fiscal 2021 results with public company costs and use current diluted share count.
Fiscal 2021 second quarter, adjusted EPS would've been 14 cents per diluted share.
This comparison yields an adjusted EPS growth of over 20%.
Adjusted EBITDA for the quarter increased six 6% to $34 3 million, which represents 34, 7% of net sales.
This is compared against Q2 2021.
<unk> EBITDA of $32 2 million, which represents 38, 5% of net sales.
Mike I noted earlier it is important to remember that results for our recent second quarter include approximately $1 4 million and public company costs that did not exist in the prior year quarter. When we were a private company.
We look at this on a comparative basis and burden in fiscal 2021 second quarter results with a similar level of public company costs.
Adjusted EBITDA.
In the most recently completed quarter would reflect a growth rate of nearly 12%.
At the end of the quarter, we had cash of $4 8 million and net debt of 253.4 million with a leverage ratio of two times.
I would like to take a moment now to discuss our outlook for the rest of fiscal 2022.
As Alex discussed our first half performance demonstrated continued strong performance and sales execution.
We are also mindful that COVID-19, NGL political upheaval present meaningful uncertainties as we forecast our business.
We expect strong brand performance to continue through the second half although growth rates will moderate as we cycle the recovery of on premise in the back half of last year.
That said in light of our strong first half we have confidence in the strength of our brands and we are raising our fiscal 2022 guidance versus the outlook. We first provided you on our October call.
We now expect.
Net sales of 364 to 369 million or eight to nine 5% organic growth.
Reflecting a fairly equal that marginally greater dollar contribution from Q3 versus Q4.
Adjusted EBITDA of $121 million to $125 million or three to six 5% growth.
Adjusted EPS of <unk> 55 to 58 cents per share, which assumes 25% effective tax rate and 114.5 to 116.5 million diluted shares outstanding.
And no change to our prior guidance with respect to planned regular capital expenditures, excluding strategic opportunities for vineyard purchases production assets or M&A.
As the industry and broader economy do their best to navigate through a period of considerable inflation. We continue to believe that we are in an advantaged position because of our highly flexible sourcing and production model.
Our differentiated go to market strategy.
Our strong brand equity that we have fostered for our high quality luxury wines for over 45 years due to this strategic positioning.
Evaluate price regularly and have the ability to shift the timing of pricing and promotional actions based on inflationary or deflationary periods.
In response to this sustained inflationary interval, we are accelerating the timing.
Of certain planned price increases.
However, we do not expect price changes to have a material impact on our fiscal year 2022 results and we will remain vigilant.
And reassessing, our pricing strategy in the future.
But this current environment continue and we further accelerate planned price increases we will communicate these changes to our partners and continue to work closely with distributors and retailers. While these changes are implemented.
As Alex stated clearly growth is paramount.
Future timing adjustments will be thoughtful and with an eye to maintaining our top line momentum.
With that I will turn the call back over to Alex for his closing comments.
Thank you Laurie.
As I look at the company today, having reported on the first half of this fiscal year I'm confident that the duct portfolio remains well positioned to build upon our considerable distribution and market share momentum as we move forward. The past six months of success as a continuation of our storied 45 year old history of delivering.
Sought after luxury wines and profitable growth well in excess of the industry average irrespective of what conditions exist around us we were always focused on our guiding principles and strategic focus that have sustained us for 45 years and presents substantial runway for continued profitable growth.
I would like to close my comments by reiterating our five pillars of our sustained long term growth.
First.
Operating our skilled Omnichannel platform in addition to our diversified sourcing and production capabilities.
Second.
Leveraging our marketing and brand strength, especially our one stop luxury one shop sales approach.
Third driving innovation, and bringing new experiences and high quality luxury wines to a growing consumer base.
Fourth investing behind DTC is the marketing engine of the company that provides an important opportunity for us to engage with consumers create duckworth evangelists and drive adoption across all channels and brands.
And fifth.
Thoughtfully pursuing strategic assets to optimize grape sourcing and production and high quality luxury winery brands through M&A. We view this last pillar as a supplement to both our long term organic growth and an.
And industry, leading margin profile.
With that Sean Laury, and I are available for your questions.
To ask a question press Star one please limit yourself to one question and a follow up as a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking your question. We will pause here briefly ask questions are registered.
The first question comes from Mcmil Carter <unk> with credit Suisse. Please proceed.
Hi, guys good.
Afternoon, I guess for you guys.
On the growth can you maybe dissect a little bit in terms of maybe how much came from distribution.
Versus maybe something that might look like more of a like same store sales type of equivalent.
Yes.
Well. Thank you for the question really good question.
Hey, so are our growth for the quarter came predominantly from points of distribution. Similarly to how it has come in the past so.
We had a growth of 21% and accounts sold and 21%.
As well so.
So that's that's where we see the growth coming from of course led by our <unk> brand, which as Alex mentioned is our gateway that.
Yep got it.
And maybe just taking a step back and thinking a bit further on the opportunity for distribution obviously.
You've had a very successful.
Run of late can't go on Forever can you maybe just talk about how far along you are and how much runway do you think is left.
Yes sure.
Thank you that's a really great question too so we see considerable opportunity for us out there so both against our.
Our white label as well as our new Blue limited label for 40 decoy. So if you look.
If you were having to look at the IRI data for the last 52 week period ending in January .
You'd see that decoys ACD sits in the mid seventies.
Versus mid Eighty's to low ninety's of some of the major.
Scaled luxury peers, so that really gives us great confidence in the strength of that brand and the long runway that we have out there for continued growth.
For for not only <unk>, but also for D quite limited and that are the distribution for <unk> limited is about half of that of what we have for our white label. So we have considerable.
<unk> space out there to grow that as well.
Okay, great. Thank you.
Thank you.
Thank you. The next question comes from Lauren Lieberman with Barclays. Please proceed.
Yes.
Great. Thanks, so much.
I want to talk a little bit about about profitability.
Inflation maybe.
I think the first half gross margin.
Quite a bit lower.
Okay.
You know about inflationary pressure and I think I tried to kill it.
Similar to expedite some of that pricing.
Pricing actions so.
What are the major areas for your own fleet.
<unk>.
Knowing the grades that we have.
So with one two and that goes.
And you have a great deal.
The question is how can you Morgan on for Paul.
Yes.
Yes. Thank you Lauren good afternoon, and thanks for the question. So you you were cutting out a bit there for me, but I think I was understanding. Your question you were asking about what kind of inflation, we're seeing and then.
Is that correct.
That's right that's right because knowing that great.
A big part right and you have visibility.
And as I looked at a higher than anticipated. Thanks.
Yep Yep Yep so.
So as we've discussed our great pricing is the biggest cost of our cost of goods and we have great visibility into the.
The cost of the grapes in several several years out or grapes or more strictly.
Fluctuate if you will based on really.
Yeah.
The growing season, the agriculture are related to the great cost. So so we know what those are we arent seeing increases in pricing. We are seeing somewhat from last year and just in that last year's great prices were suppressed due to the growing season with smoke.
So so we're seeing slight increases for harvest year, 'twenty, one, but that's really coming back to normal costing for grapes.
So we do see some pressures that originally we had thought were transitory.
Been in in some of our labor costs, we have some.
Hum.
Hum COO.
Loss of glass, but as Youll recall, lorne or contracts are relatively long term for our the majority of our inputs and so we have caps on the amount that those items can increase so we aren't seeing significant increases.
Increases in our inputs for our cost of goods you know more around some.
Some are afraid, but that too is limited as the majority of our contracts are negotiated as delivered.
Okay, but to be clear it let's go or not.
To decide.
Price increases.
Oh sure Yeah, so as as we've talked in the past also with regard to pricing, we take a very holistic and methodical approach to our pricing we work to maximize.
The return if you will from our trade spend and our discounting, but we also look at at our planned.
Frequently so we have we have programs that are out there that are in place and we also have upcoming programs that we can work to pull different levers. So just based on some of the inflationary issues.
Issues that we've seen the pressures and or our understanding of realization I think with with the rest of them.
Of the country that if inflation is here to stay for a while we have accelerated some of our changes on our pricing so with regard to some of the programming and some of those those type of spend so we have.
Accelerated pricing and we do that in combination with our partners, our distributors and retailers so that they.
Are well aware of what the changes are and so we work with them to make sure that everybody understands and but we did lose things for it.
Okay, great. Thanks, so much.
Thank you Lauren and next question comes from Kevin Grundy with Jefferies. Please go ahead.
Hello.
Well I'm going to turn back on.
Yeah.
Kevin you can go ahead with your question.
Can you guys hear me okay.
Now we can.
Okay perfect.
Thanks, Thanks for the question.
Congrats on the strong result, just picking up on the sales guidance and the decision to raise that clear.
Clearly strong first half of the year first quarter was strong second quarter as well, maybe just comment a bit on how you see the balance of the year other than the fact that the first half of the year was clearly better.
The back half now you're going to be facing more difficult year over year comparisons, what's really changed if anything with respect to the balance of the year as you see it relative to the initial guidance.
And then Alex within that within that if you wouldn't mind just touch on any concerns that you may have with respect to the strength of the consumer given inflationary pressures more broadly to Lauren's point, not really seen a lot of pricing in wine.
So to speak of including it in your portfolio, maybe that's an opportunity maybe it's not but just comment broadly on sort of any risks you may see.
The consumer given what they're under broadly from a inflationary pressure perspective. Thanks.
Yeah, Hi, Kevin.
Nice to talk to you today and thanks for the question. So yes, so where we are raising our guidance in the back for this fiscal year. We're extremely excited about the strength of our brands.
Thinking about the back half.
Traditionally our back half.
Has a little bit slower growth than the first half of the year without the benefit of the seasonality of some of the holidays and that type of thing going on but when we look at the back half.
We feel that our growth will come in equally.
The third and fourth quarter.
With some marginally greater.
Increased contribution in the third quarter and so we have a little bit of impact from our Q3 versus what we experienced last year and I think if you remember in.
Our Q2, some of our shipments were deferred or held up a bit if you will by our distributors who were holding the shipments for early part of Q3 to include some new product innovations that we're shipping in the early part of Q3. So this.
This year Q3 is comping up against that which we don't have that pull forward into Q3 and also we do have a little bit of impact from our cost of Brown, our spring list offering so our K b remains to be supply constrained and that is impacting our.
Q3 as well.
And then Alex do you want to Yeah, Hey, Kevin how are you doing.
Hey.
You know our brands are quite strong right now and clearly they're being led by Dr. Cornton decoy you think you can see that.
And in the you know the consumers are reaching for wines. That's a good thing going into the back half of the inflationary pressures on the consumer side.
I'd be remiss, if I didn't say I'm concerned with it but but we think that our trade is getting behind our brands because they are pulling through they are turning we think the distributors continue to see is us is a very efficient way of getting a lot of luxury wines into the marketplace.
That would be the offset to some inflationary pressures and then finally, you know take a geopolitical or inflation.
You know when when typically when consumers get a little nervous they go to trusted brands and I think we're 45 years of doing a really good job, we would fit into that category. So yes, we watch it carefully and we've tried to address our price increases in our programs to make sure. We are taking care of our consumers. So we are concerned with the inflationary environment, but again.
We are increasing guidance and we feel that we've got the programs and the strategies in place to.
Whether through that not knowing what's going to end up but let's assume it's going to continue to be somewhat of an inflationary unknown environment. We think we have the brands and the relationships in place to make sure. Our our goals are hit in our in our wines continued to sell so we're confident.
That's helpful. Just one quick follow up Alex maybe just one sort of overall view on.
Trends in the U S wine industry, we kind of went through that bumpy period, and then on premise of course, they'll get hit in December and January with Omicron all of the total beverage alcohol did as well as we look at the Nielsen data it still looks a little bit soft for the wind industry some of that comp related maybe some of it not.
So maybe just your thoughts on overall trends within the U S wine industry understanding that that premium continues to hold up better than other parts, but just just broadly I think your thoughts there would be helpful. And then I'll pass it on thanks.
Got it.
Great question I think you helped me answer. Thank you I appreciate that it makes it easier on me.
<unk>.
I'm not going to comment on total wine because theres. So many sub segments in there and we compete in only one segment and that segment is doing really really well ultra.
Altra premium wine $15 plus has been and remains strong and I think that that's due to people deciding that the story and the the wind the wine environment is exciting for them to continue to grow and so we're bullish in that area. We were staying focused on that area.
The next step is.
I think we're firmly planted there so as others try to get into that area. We have a we have a leg up because we have been only focusing in that area. So I.
I wouldn't go as you look to Napa I wouldn't spend a lot of time looking at the overall wine category because I believe that the ultra premium section is growing and will continue to grow and that's where we're focusing.
That's where the action is so.
And then in the data and the data bears that out you've seen as much as I have so we're excited to be there we're going to focus continue focusing on it.
Okay very good thank you Bob good luck.
Thank you.
Thank you Kevin. The next question comes from Peter and Cal Bow with Bank of America. Please go ahead.
Hey, guys. Good afternoon, thanks for taking the questions.
Laurie I just wanted to ask maybe a clarification on the sales guide kind of following up on Kevin's question.
I understand that Youre lapping kind of big numbers from last year, Although I think in your remarks, you mentioned.
You are lapping tough on premise from last year.
I would think.
Into the back half of this year this fiscal year like.
You're still not even all the way back to 2019 levels. So I would think that would still maybe be be a tailwind.
And as I think about just recent scanner through through the quarter also being strong.
Just wondering how to think about those as potential sources of upside actually to even though provide sales guidance.
Yeah, So as we think about.
The back half we really.
We're very confident as I said, so we would have a little bit more growth if it weren't for the supply constraint on our K b shipments so.
We've worked really hard to solve our supply constraint that we talked about with regard to Kb.
Our production is doing a great job of meeting our expectations and we're working to shore up that supply for in the future.
But as we think about it it's really the story for the back half is is Q3 and how that comps against the huge growth and in the prior year I think if you remember we had 40% growth in Q3 last year. So we do feel very confident in our ability to.
To grow off that large growth last year, but.
But we do have this supply constraint in our.
Our K B shipments, which is which is a huge contributor.
Compared to last year in that quarter.
Got it okay.
And I think last quarter, you had mentioned.
You were still expecting kind of gross margin.
Modest gross margin expansion for the year.
Like to obviously this quarter, you had modest modest expansion, but with kind of some of the mix impact.
Just curious with that and with the inflationary outlook you've talked about it is that still the case or is there a relation to that comment.
Yes, so we do expect some slight margin improvement in the back half and not so much in Q3, which is when the the Kb would've would have shipped with with our phenomenal margin with regard to that brand. So we do expect some.
Slight margin improvement, mostly driven by brand mix.
In the in the back half so Q3, not not so much with regard to margin improvement, but that will be.
Pick back up in Q4, and so for our for the back half we expect to see very similar margins to what we've seen in the first half.
Thanks very much.
Thank you Peter the next question comes from Robert Stein with Evercore. Please proceed.
Hey, guys. This is actually Greg on for Robert Great results today, just a quick question on the pipeline you have.
With M&A you guys talked about this year.
A big year for you guys. Maybe I was just wondering if you have any new updates for that as well as what sorts of assets. You guys are you now looking towards and then if you could also just maybe touch on new innovation you have.
And any plans there thank you.
Hey, Derek Sean.
I'll take the first piece of that in Paas Alex.
So yes as I think we do continue to see.
The bearing out of what we talked about with 2020 to being an active year for M&A on the on the brand front.
Our our effort is going to be as we've talked about before focused on luxury winery brands and highly disciplined.
So the increase in activity, we see is broad based and we're focused on a piece of that the.
The valuations they are I think continue to be reasonable they are increasing.
We've seen recent deals.
Have a EBITDA multiples in the mid to high double digits. We think that that is is a reasonable.
And thoughtful place, where we could do a good deal. So I think we have a focus on that and that's where the primary element of M&A is going to be for us.
All the time as we've talked about before we are looking at vineyards and production facilities separate and apart from brands.
We talked about three new vineyard parcels.
We closed on during the last quarter. So I think that the year. As you said is going to be an interesting one we're very well positioned and excited about it but it would just be remiss if I didn't note that our that our organic story is very compelling and in the center of it so our feet to the fire if you will and I think.
Alex you were talking about China.
Npd's new product development, Yeah, Let me just add on to what Sean said and I think it's important that we all continue to take this away as I stated earlier in numerous times, we're going to stay focused and luxury because that's where the real performance and growth and opportunity lies so all wider in M&A opportunities may not measure up to the criteria that we've placed in front of a March.
Profile growth profile.
<unk> points in such a brand positioning imaging all that stuff. So there's a strong pipeline, but it narrows quickly into the things that would fit and you would expect it would fit into Napa. So that's where we're spending most of our time trying to find those jewels, if you will or they can fit into our profile and that would be supportive of our long term goals.
On innovation, we've talked about this a number of times, we have a lot of products that we both introduced and in the pipeline to continue to grow I was just gonna mentioned, sometimes it gets kind of helps to manage lauren's comment.
You know I I'd be nervous if we're if our growth was going to slow down in the future. If it wasn't continuing to create new products and that's just part of our overall goal. So not only have we introduced for example, the blue label the D quite limited and it takes its keep in mind. It takes about two or three years to get our products fully distributed into the overall broad.
U S market. So to you know the gift keeps giving once you come up with a new product, but we have a lot of new and exciting products that we will be strategic releasing in the future overtime due to again to offset the risk on any one particular product and continue our growth engine far into the future. So you can continue to expect here.
Updates on new products coming.
Coming throughout the year, we have an exciting one which we've been teasing you guys on it and I apologize that was just good marketing on our part coming out in the fourth quarter of this year so stay tuned.
Great. Thank you guys if I could just squeeze in one more about the wine Seltzer. If you could maybe just give us a quick update on how that's doing any plans you guys have there you know the tracked channels have been been strong, but any more color you guys get out provide would be great. Thank you.
Yeah Jim.
As quick ones Selter was planned to be in is a small small part of our business or our distributors are working with the trade working with it but again, it's it's it's so small and obviously self to yourself hit a little hidden ones. It's meeting our objectives, but it's not going to be a big part of our business going forward and we really echoed that through.
The throat.
Our launch and our development of that.
It was just again broadening out the decoy name was the primary goal there so not much more to update on that.
Great. Thanks, guys.
Thank you Robert the next question comes from Nik Modi with RBC capital markets. Please proceed.
Hey, good afternoon guys.
Filippo <unk> for Nick.
So I wanted to go back to the on premise channel.
We've seen.
All mccarney impacts a significant acceleration in restaurant reservation and mobility trends.
In the second half of February and early March I guess first of all you've seen a similar sequential improvement as well in your on premise business.
In terms of total reported growth and then second maybe you can you can talk about your share gains in the channel and whether those are continuing what what is driving those.
Yeah. Thank.
Thank you Philippe.
Thanks for the question. So we were we are very excited about the growth we saw in on premise.
In the quarter.
We saw great growth in November December slowed some in January but we're also very excited about the growth we saw in off premise at the same time. So if you'll recall, we had really strong gains that we had realized in off premise.
During COVID-19 and we continue to not only.
Retain those.
Points that we gained at that time, but we're also growing from them. So we're seeing really strong growth of both but.
The growth in Q2 was a lead.
On a percentage per channel increased by on premise for sure.
Got it and sequentially I guess as you exited the quarter did you see also a further acceleration in the business.
Less restriction last mask mandates.
Yes, yes, we have seen rich.
<unk> returned to the on premise growth.
And so and.
And we continue to as I think we we discussed a little bit in the past we are continuing to gain price.
Our listings if you will unwind list we're.
We're seeing pared down wine list, but were very excited to see that our wines are on those shorter wine list, which is really helping with the sell through.
Got it thank you guys.
Thank you.
Thank you. The next question comes from Andrea <unk> with J P. Morgan. Please proceed.
Hey, guys. This is drew Levine on for Andrea Thanks for taking the question I wanted to ask about the distributor inventory levels, just given the really strong continuing underlying demand.
Can you maybe talk about.
You know I guess.
To historical levels, if they're sort of in line or if you have some some room to make up on on shipments and if you're planning on sort of shipments to be in line with depletions in the back half of the year.
Yeah. So thank you Joe for the question so traditionally in in.
Q2, we see our our distributor inventory floor inventories increased somewhat so that they make sure. They don't run out during our during the holidays and we saw similar results. So we do we.
We do expect that the distributor floors will re.
REIT level, if you will in Q3, but we don't expect much variance between depletions and shifts in the quarter, we expect them to be fairly similar.
Perfect. Thank you and then I just wanted to go back to the inflation point understanding that you have spot term contracts with your suppliers, but are they asking you to sort of.
Bear the burden with them.
And some of these increases or I know you mentioned labor, but in some freight but is it really just not much.
Underlying inflation in those <unk>.
<unk>.
Yeah. So.
In some cases, there they're being that they're asking us for some partial sharing but we're really not seeing much change. So we we have like I said these long term contracts with caps and so we do sit down and we work with our partners of course like anybody would but we arent I'm predicting increased considerably.
Increases in our cost of our inputs at all.
Perfect. Thank you.
Thank you.
No additional questions waiting at this time, so I'll pass the conference to Alex Ryan for additional remarks.
I want to thank you again for joining us today to review our second quarter in summary, we remain confident in our ability to continue to profitably outperform the high growth luxury wine segment and are excited to meaningfully raise our fiscal year 2022 guidance. Following a very strong first half performance.
Months.
Forward to speaking with you again in early June when we report our fiscal year 2022 third quarter results.
Goodbye.
That concludes the corn portfolio second quarter 2022 earnings conference call. Thank you for your participation you may now disconnect your lines.
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Right.
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