Q2 2024 The Duckhorn Portfolio Inc Earnings Call
Good evening.
Cole: Good evening, ladies and gentlemen. Thank you for joining today's Duckhorn Portfolio Q2 2024 Earnings Conference Call. My name is Cole, and I'll be the moderator for today's call.
Ladies and gentlemen, thank you for joining today's corn portfolio Q2, 2024 earnings Conference call. My name is cole and I'll be the moderator for todays call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end if you'd like to ask a question. Please press star one on your telephone keypad.
Cole: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I'd now like to turn the call over to our host, Ben Avenia Tapper, Vice President of Investor Relations. Please proceed.
I would now like to turn the call over to our host Ben Vignette Tapper, Vice President Investor Relations. Please proceed.
Good afternoon, and welcome to the <unk> corn portfolio's second quarter 2024 earnings Conference call. Joining me on today's call are Deirdre Marlin interim President Chief Executive Officer, and Chairperson, Jennifer Fall Jung Chief Financial Officer, and Sean Sullivan, Chief strategy and legal officer in a moment.
Ben Avenia: Good afternoon, and welcome to the Duckhorn Portfolio's second quarter 2024 earnings conference call. Joining me on today's call are Deirdre Mahlan, Interim President, Chief Executive Officer, and Chairperson, Jennifer Fall Young, Chief Financial Officer, and Sean Sullivan, Chief Strategy and Legal Officer. In a moment, we will give brief remarks, followed by a Q&A. By now, everyone should have access to the earnings release for the second quarter ended January 31st, 2024, that went out at approximately 4.05 p.m. Eastern Time. The press release and an accompanying presentation are accessible on the company's website at ir.duckhorn.com. And shortly after the conclusion of today's call, a webcast will be archived for the next 30 days.
We will give a brief remarks, followed by Q&A by now everyone should have access to the earnings release for the second quarter ended January 31, 2024 that went out at approximately 405 P. M. Eastern time, the press release and an accompanying presentation are accessible on the company's website at IR dot dot corn dot com and shortly after that.
Conclusion of today's call or webcast will be archived for the next 30 days.
Ben Avenia: Before we begin, I would like to remind you that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, includes risks and uncertainties. If you refer to Duckhorn's earnings release, earnings presentation, and the company's most recent SEC filings, you will see a discussion of factors that could cause the company's actual results to differ materially from these forward-looking statements. Please remember, the company undertakes no obligation to update or revise these forward-looking statements in the future. We will make a number of references to non-GAAP financial measures.
Before we begin I would like to remind you that today's discussion contains forward looking statements based on the environment as we currently see it and as such includes risks and uncertainties. If you refer to <unk> earnings release earnings presentation, and the company's most recent SEC filings you will see a discussion of factors that could cause the company's actual results to differ materially from these.
Forward looking statements. Please remember the company undertakes no obligation to update or revise these forward looking statements in the future. 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.
Ben Avenia: We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. In addition, please note that all retail scanner data cited on today's call is according to and will refer to dollar or unit consumption for the 12-week period ended January 28, 2024 and growth versus the same period in the prior year in U.S. direct channels unless otherwise noted. With that, I'll turn the call over to Deirdre.
The measures to the most comparable GAAP measures. In addition, please note that all retail scanner data set it on today's call is according to the <unk> and we will refer to dollar or unit consumption for the 12 week period ended January 28, 2024 and growth versus the same period in the prior year in U S track channels, unless otherwise noted with that I'll turn the call over to Deirdre.
Thanks, Ben and good afternoon, everyone.
Deirdre A. Mahlan: Thanks, Ben, and good afternoon, everyone. Thank you for joining us today to discuss our second quarter 2024 financial performance. Following my opening remarks, Jennifer will walk us through our quarterly results and updated fiscal year 2024 financial guide. Amid challenging market conditions, our net sales fell short of our expectations. However, Duckhorn Wines consistently outperformed the broader $15 and above luxury wine market as reported by Circana. While we expect to continue to take share and outpace the luxury market, we believe the softness across the industry will persist in the coming quarter. The industry growth rate for luxury wine over the past 12 weeks has been flat to 1%, which we expect to continue.
Thank you for joining us today to discuss our second quarter 2024 financial performance.
Following my opening remarks, Jenifer will walk us through our quarterly results and updated fiscal year 2024 financial guidance.
Amid challenging market conditions, our net sales fell short of our expectations.
However, duck, one wines consistently outperform the broader $15 and above luxury wine market as reported by Takeda.
While we expect to continue to take share and outpace the luxury market. We believe the softness across the industry will persist in the coming quarters.
The industry growth rate for luxury wine over the past 12 weeks has been flat to 1%.
Which we expect to continue.
Deirdre A. Mahlan: And that is what we assume in our updated guidance for fiscal 2024, with the largest segment of the Duckhorn Portfolio volume in the $15 to $25 price range that continues to outperform the broader market, plus the strength of our brand equity and incremental initiatives in the second half. We believe we are well-positioned to accept. Despite these broader market headwinds, we delivered strong profitability in the second quarter and continued to take share as we focused on those factors within our control. Importantly, we grew Adjusted EBITDA by approximately 10% to $42.7 million, an Adjusted EBITDA margin of $41.5 million, which is a 400 basis point improvement over the prior year period, driven by robust gross margins and strong operating cost management. Not only does this speak to the Duckhorn Portfolio's strength as a luxury wine operator, but it is also evidence of our ability to manage our business effectively and profitably across multiple demand environments, highlighting our ability to outpace the broader market. We outperformed total wine by more than 300 basis points and the luxury wine market by nearly 200 basis points over the quarter, according to Circana data.
And that is what we assume in our updated guidance for fiscal 2024.
With the largest segment of the DUC count portfolio volume in the 15% to 25 dollar priced here that continues to outperform the broader market plus the strength of our brand equity and incremental initiatives in the second half.
We believe we are well positioned to exceed industry growth.
Despite these broader market headwinds, we delivered strong profitability in the second quarter and continued to take share as we focused on those factors within our control.
Importantly, we grew adjusted EBITDA by approximately 10% to $42 $7 million and adjusted EBITDA margin of 41, 5%, which is a 400 basis point improvement over the prior year period.
Driven by robust gross margins and strong operating cost management.
Not only does this speak to the duck loan portfolio strength is a luxury wine operator. It is also evidence of our ability to manage our business effectively and profitably across multiple demand environment.
To highlight our ability to outpace the broader market.
We outperformed total wind by more than 300 basis points and the luxury wine market by nearly 200 basis points over the quarter. According to some kind of data.
Deirdre A. Mahlan: However, while we continue to take share, distributor and retailer inventory adjustments did impact our top line results as we saw evidence of both tiers taking a cautious view of market growth and more assertively managing inventory. The industry outlook for the second half of our fiscal year remains cautious. Incorporating our Second Quarter Results and the challenging market conditions, we are revising the midpoint of our full year guidance such that the implied second half growth rate is in the low to mid single-digit range, which reflects a softer near-term outlook for the industry. However, offset by Duckhorn's proven ability to outperform the Luxury Wine Market. Our conviction about the second half comes from multiple factors, which I'll discuss here.
However.
While we continue to take share distributor and retailer inventory adjustments did impact our top line results as we saw evidence of both tiers, taking a cautious view of market growth and more surgically managing inventory.
The industry outlook for the second half of our fiscal year remains cautious.
Incorporating our second quarter results and the challenging market conditions, we are revising the mid point of our full year guidance such that the implied second half growth rate is in the low to mid single digit range, which reflects a softer near term outlook for the industry offset <unk> proven ability to outperform the luxury wine market.
Yeah.
Our conviction in the second half comes from multiple factors, which I'll discuss here, but I also encourage you to refer to a new earnings presentation, which includes a slide detailing the building blocks of our second half expectations.
Deirdre A. Mahlan: But I also encourage you to refer to our new earnings presentation, which includes a slide detailing the building blocks of our second half expectations. As previously described, our outlook assumes the luxury wine market continues to perform as it has in the recent 12-week period, which has been in the flat to 1% range. We view our proven ability to exceed that industry growth rate as our baseline for the second half. On top of that baseline of steady state growth, we see additional second half upside of approximately 200 to 300 basis points from three distinct initiatives. In order of magnitude, these three items are.
Yeah.
As previously described our outlook assumes the luxury wine market continues to perform as it has in the recent 12 week period.
It's been in the flat to 1% range.
We view, our proven ability to exceed that industry growth rate as our baseline for the second half on top of that baseline of steady state growth. We see additional second half upside of approximately 200 to 300 basis points from three distinct initiatives.
In order of magnitude. These three items are fair.
Deirdre A. Mahlan: First, innovation, which encompasses decoy featherweight, our new lower in calorie, lower in alcohol Sauvignon Blanc, as well as the introduction of an Appalachian-specific decoy-limited Pesaroblas Cabernet Sauvignon Blanc, plus the continuation of strong growth in Decoy Ltd. Second, improve product availability in some of our most popular wines, including Duckhorn Chardonnay and Decoy Limited Merlot. And third, incremental programming with our distributors and retail partners, including reintroducing by-the-glass programs, among other things. These initiatives are expected to add additional upside to growth in the second half, contributing to a revised full-year outlook for net sales between $395 million and $411 million. I'll now turn to the results from the quarter. In the wholesale channel, distributor and retailer inventories declined in dollar terms as they reduced forward-looking forecasts to account for softer market conditions.
First innovation.
Which encompasses D quite featherweight, our new lowering calorie lower in alcohol 71 block as well as the introduction of an Appalachian specific D quite limited peso robust Cabernet 71.
Plus the continuation of strong growth in decoy limited offerings.
Second <unk>.
Improved product availability and some of our most popular wines, including duck on Chardonnay, and decoy limited Murillo.
And third incremental programming with our distributors and retail partners, including.
Including reintroducing by the glass program among other opportunities.
These initiatives are expected to add additional upside to growth in the second half contributing to our revised full year outlook for net sales between $395 million and $411 million.
I'll now turn to the results from the quarter.
In the wholesale channel, we saw distributor and retailer inventories decline in dollar terms as they reduce forward looking forecast to account for softer market conditions.
Deirdre A. Mahlan: Despite these challenges and the resulting impact on net sales, the Duckhorn brands continue to grow within the channel with consistent end consumer demand, as supported by trailing circana data. This underpins our confidence in a return to more normalized alignment between shipments and depletions over the longer term, as we look past the near-term industry. On the direct-to-consumer side, visitation at our tasting rooms is showing positive signs, but our club membership remains below the pandemic. As we've previously discussed, we see meaningful opportunity for our DTC business, which is one of our four organic growth areas. DTC, important in its own right as a sales and marketing channel, has a valuable halo effect on the whole film.
Despite these challenges and the resulting impact on net sales.
The duck on brands continued to grow within the channel with consistent and consumer demand as supported by trailing sort kind of data.
This underpins our confidence in a return to more normalized alignment between shipments and depletions over the longer term.
As we look past the near term industry softness.
On the direct to consumer side visitation at our tasting rooms is showing positive signs.
But our club membership remains below pandemic highs.
As we've previously discussed we see meaningful opportunity for our DTC business.
Which is one of our four organic growth pillars.
DTC important in its own right as a sales and marketing channel has a valuable halo effect on the wholesale business.
Deirdre A. Mahlan: We continue to focus on reaching consumers in the way that resonates most effectively. This includes the creation of ultra-high-end experiences as we leverage the opportunity to build lasting relationships with our most valuable customers. Moving down within our portfolio, I want to take time to recognize Decoy, a brand we created more than three decades ago. It has consistently grown through bridal extensions and innovation. Today, Decoy continues to delight consumers, generating strong growth in excess of its price tier and sustaining a position as one of the most popular luxury wines available, both from a sales and brand awareness perspective.
We continue to focus on reaching consumers in the way that resonates. Most effectively. This includes the curation of ultra high end experiences as we leverage the opportunity to build lasting relationships with our most valuable customers.
Drilling down within our portfolio I want to take time to recognize decoy a brand we created more than three decades ago.
It has consistently grown through bridal extensions and innovation.
Today decoy continues to delight consumers generating strong growth in excess of its price tier and sustaining our position as one of the most popular luxury wines available both from a sales and brand awareness perspective.
Perhaps nothing speaks to the strength of the broader decoy brand more than our success with D. Quite limited launched in 2020 at a higher price point limited continues to deliver strong double digit growth in store kind of data.
Deirdre A. Mahlan: Perhaps nothing speaks to the strength of the broader Decoy brand more than our success with Decoy Limited. Launched in 2020 at a higher price point, Decoy Limited continues to deliver strong double-digit growth in Circona data. Finally, from a channel perspective, we continue to see growth in the number of accounts, both on-premise and off-premise, that carry our wine. This increase in accounts is a key part of our wholesale growth strategy and further proof of the strength of the Duckhorn portfolio as a whole, as well as individual brands within it. I also note that the acquisition of Sonoma Cotrer unlocks a unique opportunity to introduce Duckhorn Portfolio wines to Sonoma Cotrer vineyard owners, and vice versa. Based on our early analysis, we see a significant opportunity to cross-sell our brands post-closure. The opportunity to increase the number of labels per account is considerable and something we're incredibly excited about as we look toward the close of this activity.
Finally from a channel perspective, we continue to see growth in the number of accounts, both on premise and off premise that carry our wine.
This increase in accounts is a key part of our wholesale growth strategy and further proof of the strength of the duck one portfolio as a whole.
As well as individual brands within it.
I also note that the acquisition of Sonoma Cutrer unlocks a unique opportunity to introduce stuck one portfolio lines to Sonoma Cutrer vineyard accounts and vice versa.
Based on our early analysis, we see significant opportunity to cross sell our brands post closing.
The opportunity to increase the number of labels per account is considerable and something we're incredibly excited about as we look toward the close of this acquisition.
Additionally, as part of our integration planning, we have initiated a comprehensive review of our wholesaler alignment strategy to ensure that the route to market for our combined portfolio is efficient and optimized for growth.
Deirdre A. Mahlan: Additionally, as part of our integration planning, we have initiated a comprehensive review of our wholesaler alignment strategy to ensure that the route to market for our combined portfolio is efficient and optimized for growth. As regards our acquisition of Sonoma Coterier, I'll note that we remain on track to close this spring. We are acquiring an incredible asset that is a great fit within our portfolio brand architecture, as evidenced by the opportunity to capitalize on incremental accounts and labels per account, as I just described. When we first announced our plans, we described approximately $5 million of cost synergies, primarily in op-eds.
Continuing with our acquisition of Sonoma Cutrer Air I'll note that we remain on track to close this spring.
We are acquiring an incredible asset that is a great fit within our portfolio brand architecture.
Evidenced by the opportunity to capitalize on incremental accounts and labels per account as I just described.
When we first announced our plans we described approximately $5 million of cost synergies primarily in Opex.
Jennifer Fall Jung: With additional time and visibility in the intervening several months, we now believe that number to be the minimum in cost, as we find additional opportunities to extract costs from the combined entities' operating expenses. We're making excellent progress and look forward to updating you when we close later this year. I'll conclude by saying, while we have more work to do, we're pleased with the hard work and execution of our team in a challenging environment. The strength of the CIRCANA data speaks to our robust brand equity and supports our confidence in our ability to weather near-term demand fluctuations while continuing to drive sustained long-term profitable growth. With that, I'll turn 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.
With additional time and visibility in the intervening several months, we now believe that number to be the minimum and cost savings as we find additional opportunities to extract costs from the combined entities operating expenses.
We're making excellent progress and look forward to updating you when we close later this spring.
I'll conclude by saying, while we have more work to do we're pleased with the hard work and execution of our team in a challenging environment.
The strength of this or kind of data speaks to a robust brand equity and supports our confidence in our ability to weather near term demand fluctuations, while continuing to drive sustained long term profitable growth.
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 <expletive> and good afternoon, everyone. We continue to effectively navigate a dynamic demand environment. Despite the near term softness in net sales, we delivered profitability well above expectations on strong gross margins and active operating expense management.
Jennifer Fall Jung: We continue to effectively navigate a dynamic demand environment. Despite the near-term softness in net sales, we delivered profitability well above expectations on strong gross margins and active operating expense management. I'll now provide the results for the quarter. All comparisons are to the second quarter of fiscal 2023, unless otherwise stated.
I'll now provide the results from the quarter all comparisons are to the second quarter of fiscal 2023, unless otherwise stated.
Beginning with the top line net sales were $103 million, a decrease of <unk>, 4% as a distributor and retail inventory reset extended beyond our initial expectations.
Jennifer Fall Jung: Beginning with the top line, net sales were $103 million, a decrease of 0.4% as the distributor and retail inventory reset extended beyond our initial expectations by Channel, Wholesale to Distributor, Net Sales, or Flatten QT. As previously discussed, net new accounts and labels per account were offset by tighter inventory controls across the supply chain. Despite these factors with our distributor and retail partners, we continue to deliver on our strategic objectives to leverage the brand and expand our wholesale accounts, both of which represent key drivers of our net sales growth. Distributor Inventory Days on Hand were broadly in line with our expectations of 65 days. California wholesale direct-to-trade declined 2.6 percent, driven by the same factors that impacted wholesale-to-distributor net sales.
Yeah.
By channel wholesale distributor net sales were flat in Q2.
As previously discussed net new accounts and labeled for account were offset by tighter inventory controls across the supply chain.
Despite these factors with our distributor and retail partners, we continue to deliver on our strategic objectives to leverage the brand and expand our wholesale accounts both of which represent key drivers of our net sales growth.
Distributor inventory days on hand was broadly in line with our expectations of 65 days.
California wholesale direct to trade declined two 6% driven by the same factors that impacted wholesale distributor net sales.
The direct to consumer channel was down four 3% roughly in line with our expectations. During what is typically a lighter quarter for the D to C business.
Jennifer Fall Jung: The direct-to-consumer channel was down 4.3 percent, roughly in line with our expectations during what is typically a lighter quarter for the D2C business. As we previously noted, we continue to adjust our DVC business to position it for success amidst a period of post-pandemic transition. Moving down the P&L, second quarter gross profit was 58.3 million, a gross margin of 56.6 percent, up approximately 330 basis points year-over-year as we optimize our trade spin in line with the lower depletion volumes in the quarter. In keeping with our expectations for improved second half growth, we have adjusted spend to be more in line with our historical levels. SG&A was $29.2 million, a decrease of 1% year over year.
As we previously noted we continue to adjust our D to C business to position it for success in this period of post pandemic transition.
Moving down the P&L second quarter gross profit was $58 3 million a gross margin of 56, 6% up approximately 330 basis points year over year as we optimize our trade spend in line with a lower depletion volumes in the quarter.
And keeping with our expectations for improved second half growth, we have trade spend to be more in line with our historical levels.
SG&A was $29 2 million, a decrease of 1% year over year.
Jennifer Fall Jung: On an adjusted basis, total SG&A declined 0.7 million, or 3%, to $21.9 million, driven by strong cost management throughout the quarter. This represents 50 basis points of leverage despite flat net sales. Note that adjusted operating expenses exclude $1.8 million of transaction costs primarily related to our pending acquisition of Sonoma Couture Vineyard. Net income was $15.9 million, or $0.14 per diluted share. Adjusted net income was $20.7 million, or $0.18 per diluted share.
On an adjusted basis total SG&A declined <unk> 7 million or 3% to $21 9 million driven by strong cost management throughout the quarter.
This represents 50 basis points of leverage despite flat net sales.
Note that adjusted operating expenses exclude $1 8 million of transaction costs, primarily related to our pending acquisition of Sonoma Cutrer vineyards.
Net income was $15 9 million or 14th cents per diluted share adjusted.
Adjusted net income was $20 7 million or 18 cents per diluted share.
Adjusted EBITDA was $42 7 million, an increase of $3 9 million or 10, 1% year over year.
Jennifer Fall Jung: Adjusted EBITDA was $42.7 million, an increase of $3.9 million or 10.1% year-over-year. Adjusted EBITDA margin improved 400 basis points versus the prior year period to 41.5%, driven by gross margin improvement and strong cost control. At the end of the quarter, we had cash of $13.1 million and total debt of $283.8 million, resulting in our leverage ratio of 1.9 times net debt due to the seasonality of grow
Adjusted EBITDA margin improved 400 basis points versus the prior year period to 41, 5% driven by gross margin improvement and strong cost controls.
At the end of the quarter, we had cash of $13 1 million and total debt of $283 8 million, resulting in our leverage ratio of one nine times net debt due to the seasonality of grower payments.
Yeah.
I'll now share our updated full year fiscal 2024 outlook, which reflects our second quarter results as well as our current expectations for second half growth.
Jennifer Fall Jung: I'll now share our updated full year fiscal 2024 outlook, which reflects our second quarter results, as well as our current expectations for second half growth. These expectations are influenced by near-term softness across the industry, but offset by both our proven ability to outperform luxury wine and incremental growth driven by multiple initiatives rolling out in the second half of the year. As a reminder, our guidance does not include our pending acquisition of Sonoma Cotrera.
These expectations are influenced by near term softness across the industry, but offset by both our proven ability to outperform luxury wine and incremental growth driven by multiple initiatives rolling out in the second half of the year.
As a reminder, our guidance does not include our pending acquisition of Sonoma Cutrer.
For the full fiscal year 2024, we now expect.
Jennifer Fall Jung: For the full fiscal year 2024, we now expect net sales in the range of $395 million to $411 million, which represents growth of approximately minus 2% to positive 2%, which implies low to mid-single-digit growth for the second half of 2024, as Deirdre discussed. For adjusted EBITDA, we expect a range of $145 million to $150 million, or flat to 4% growth. This represents an adjusted EBITDA margin of 36.6% at the midpoint, up 80 basis points from our previous guidance as we continue to focus on execution and cost management. For adjusted EPS, we expect a range of $0.63 to $0.65 per diluted share.
Net sales in the range of 395 million to $411 million, which represents growth of approximately minus 2% to positive, 2%, which implies low to mid single digit growth for the second half of 2024 as <unk> discussed.
For adjusted EBITDA, We expect a range of 145 million to $150 million or flat to 4% growth.
This represents an adjusted EBITDA margin of 36, 6% at the midpoint up 80 basis points from our previous guidance as we continue to focus on execution and cost management.
For adjusted EPS, We expect a range of 63.
To <unk> 65 per diluted share.
I also want to provide some color on what we expect from a seasonality perspective, due primarily to the timing of our coastal Brown Appalachian series offering the largest annual release from our coastal Brown winery brand.
Jennifer Fall Jung: I also want to provide some color on what we expect from a seasonality perspective due primarily to the timing of our Coastal Brown Appalachian Series offering, the largest annual release from our Coastal Brown winery brand. As we've described previously, this release will be shipped in the third quarter rather than the fourth quarter, as was the case in fiscal 2023.
You can also find this detail in our accompanying presentation.
As we've described previously this release will be shipped in the third quarter, rather than the fourth quarter as was the case in fiscal 2023.
Jennifer Fall Jung: As a result, we expect significant variance between the third and fourth quarter net sales growth rates versus the respective prior year quarters. More specifically, we expect a second half debt sales split of approximately 53% in the third quarter and 47% in the fourth quarter. On the gross margin front, two factors will impact gross margin in the second half of fiscal 2024, both of which are driven by an improvement in product availability for some of our most popular products. First, we're restarting our Wine by the Glass program, which drives sales both directly and indirectly through enhanced brand awareness, albeit at a lower margin. The second factor is increased trade spend relative to last year and the first half of the year. We continue to expect second-half trade spend to return to historical levels and align with our growth expectations. As a result, we expect the fiscal 2024 third and fourth quarter gross margins to be below the high point achieved in the second quarter.
As a result, we expect significant variance between the third and fourth quarter net sales growth rates versus the respective prior year quarter.
More specifically, we expect our second half net sales split of approximately 53% in the third quarter and 47% in the fourth quarter.
On the gross margin front, two factors will impact gross margin in the second half of fiscal 2024, both of which are driven by an improvement in product availability for some of our most popular products.
First we're restarting our wine by the glass program, which drive sales both directly and indirectly through enhanced brand awareness, albeit at a lower margin.
The second factor is increased trade spend relative to last year in the first half of the year.
We continue to expect second half trade spend to return to historical levels and align with our growth expectations.
As a result, we expect the fiscal 2020 for third and fourth quarter gross margin to be below the high point achieved in the second quarter.
Our second quarter net sales were lower than anticipated. We are pleased with our ability to toggle the business to ensure we continue to deliver margin expansion.
Deirdre A. Mahlan: While second quarter net sales were lower than anticipated, we are pleased with our ability to pivot the business to ensure we continue to deliver margin. Importantly, we expect the inventory adjustments caused by a shifting post-pandemic outlook will be smaller in the second half and anticipate they will be largely complete this fiscal year. As a leading luxury wine company with one of the strongest brands in the industry, we are confident in our ability to continue to take share and deliver sustained, profitable, long-term growth. Thank you. I will now hand it back to Deirdre.
Importantly, we expect the inventory adjustment caused by a shifting post pandemic outlook will be smaller in the second half and anticipate they will be largely complete this fiscal year.
As a leading luxury wine company with one of the strongest brands in the industry. We are confident in our ability to continue to take share and deliver sustained profitable long term growth.
Thank you I will now hand, it back to Diedre.
Deirdre A. Mahlan: Thanks, Jennifer. I'm coming up on my six-month mark as interim CEO of the Duckhorn Portfolio. And despite the challenging industry dynamics, I'm pleased with the progress the organization is making to deliver on our future growth plans, including the completion of the Sonoma Cotrera acquisition and second-half innovation launches. We remain committed to delivering sustained profitable growth and will always strive to create value in the long term for our shareholders. Our long-term growth drivers remain confirmed.
Thanks, Jennifer.
I'm coming up on my six month, Mark as interim CEO with a DUC corn portfolio and despite the challenging industry dynamics I'm pleased with the progress the organization is making to deliver on our future growth plans, including completion of the Sonoma Cutrer acquisition and second half innovation launches.
We remain committed to delivering sustained profitable growth and we will always strive to create value in the long term for our shareholders.
Our long term growth drivers remain consistent.
Deirdre A. Mahlan: Leveraging our brand strength. Evolving Our Portfolio. Expanding Our Wholesale Network, and Growing Our DTC. These drivers will support our growth through the current demand environment and beyond. Before I move to questions, I'll provide a brief update on our CEOs. The search committee has made great progress and has narrowed down the initial pool of candidates to several that the board is very pleased with.
Leveraging our brand strength evolving our portfolio <unk>.
Expanding our wholesale network and growing our DTC channel.
These drivers will support our growth to the current demand environment and beyond.
Before I move to questions I'll provide a brief update on our CEO search.
The search committee has made great progress and has narrowed down the initial pool of candidates to several that the board is very pleased with and I look forward to updating you as we continue with the process.
Deirdre A. Mahlan: And I'll look forward to updating you as we continue with the process. With that, Jennifer, Sean, and I are available to take your questions. If you'd like to queue for a question, please press star followed by one on your telephone keypad. Or, if for any reason, you'd like to remove your question, please press star followed by two.
With that Jennifer Sean and I are available to take your questions.
If you'd like to queue for a question. Please press star followed by one on your telephone keypad.
If for any reason you'd like to remove your question. Please press star followed by <unk>.
Nick Modi: Again, to join the queue for a question, please press star one. We'll pause here briefly as questions are registered. Our first question is from Nick Modi with RBC. Your line is now open. Hi, thank you. Good afternoon, everyone.
Ken to join the queue for a question. Please press star one we'll pause here briefly ask questions are registered.
Our first question is from Nik Modi with RBC. Your line is now open.
Hi, Thank you good afternoon, everyone.
Deirdre A. Mahlan: So just two quick questions. Deirdre, I was hoping you could comment on just the overall consumption backdrop. Certainly, the change in guidance was a function of inventory dynamics. But I was wondering if you could just comment at the consumer level in terms of, from your perspective, what you see happening. And then the second question was just you mentioned something about wholesale optimization, and so I was hoping you could just provide a little bit more and maybe what you think about the California business then if you're rethinking your go-to market in that state. Thank you. Okay, thanks.
So just two quick questions.
Was hoping you can comment on just the overall consumption backdrop certainly the the change in guidance was a function of inventory dynamics, but I was wondering if you can just comment on the consumer level.
From your perspective, what you see happening and then the second question was just you mentioned something about wholesale optimization and so on.
I was hoping you could just provide a little bit more clarity on maybe what you think about the California business then.
If you're rethinking your go to market in that state.
Okay. Thanks first I'll give you my view on the consumer although I would say as I'm sure you hear for many this is quite a difficult time.
Deirdre A. Mahlan: First, I'll give you my view on the consumer, although I would say, as I'm sure you hear from many, this is quite a difficult time to forecast consumption. Clearly, you know, we're fortunate to be operating in price tiers in the wine sector that are actually in growth and have remained in growth through much of what has been kind of a volatile post-pandemic period. I think, you know, the reason for our guidance and what's reflected here is that we expect kind of a continued variable response from the consumer in terms of their behaviors, both on and off premise. And there's a, you know, a dynamic happening that we're seeing that there seems to be more activity on the premise, in particular versus what was happening at the pandemic levels during the pandemic. And that's affecting both our DTC and our kind of chain business in the off premise. You know, the zero to one range that we quote, that has been stable for a period. Some periods it's a little down; some periods it's a little up.
To forecast consumption.
Clearly you know we're fortunate to be operating in price tiers in the wind sector that actually are in growth and have remained in growth through much of what has been kind of a volatile post pandemic period.
I think the reason for our guidance and what's reflected here is that we expect kind of a continued.
Variable response in the from the consumer in terms of their.
Their behaviors, both in the on and off premise and there's a dynamic happening that we're seeing that there seems to be more activity in the on premise.
And in particular versus what was happening in the pandemic levels and the pandemic.
At time, and Thats affecting both our DTC.
And our kind of chain business in the off premise.
B the zero to one our range that we quote that has been stable really for a period. Some periods. It's a little down some periods, it's a little off but if you look across you know.
Deirdre A. Mahlan: But if you look across, you know, consecutive 12 week periods, which take out some of the bumps, you know, that's pretty much where it's been. Stable is probably not even the right word, but it hasn't deviated too much from that range. So I think as we come through this next six months, it'll be important to see where everyone is expecting interest rates to come down and some abatement in inflation, what consumer behavior looks like. I do think it's important to note that we're not seeing much trading down out of this price tier among our core consumers. People may be moving from, you know, some of the 20s into the 16 or 17, but we're not seeing evidence of people going from above 15 down to $10. I mean, that is not a trend that we're seeing, and you can see that, actually, in the Circana data.
<unk> 12 week periods, which take out some of the bumps.
That's pretty much that's been.
Stable is probably even not the right word, but it hasn't deviated too much from that range. So I think as we come through.
This next six months it'll be important to see where everyone is expecting interest rates to come down in some abatement in inflation.
What the consumer behavior looks like I do think it's important to note that we're not seeing trading down much out of this priced here in our core consumers you know people may be moving from some of the twenties into the 16 or 17, but we're not seeing evidence of people going from above 15.
Down to $10 I mean that is not a trend that we're seeing and you can see that actually in this kind of data.
So if we look forward, we're really you know barring any trigger that would show that there is a shift we're just expecting that to continue for the rest of the fiscal year in any event as we see it play out.
Deirdre A. Mahlan: So if we look forward, we're really, you know, barring any trigger that would show that there's a shift. We're just expecting that to continue for the rest of the fiscal year, in any event, as we see it play out. With respect to your second question on distributors, yeah, I mean, Duckhorn has been growing and is now, you know, significantly at, you know, a scale business, has a couple of big scale brands if you consider the acquisition, the pending acquisition of Sonoma Cotrerre. So we thought this was the right moment for us to take a step back and look at our wholesaler relationships, you know, how we're aligned You know, as you can imagine, the Duckhorn Portfolio is represented in some states, and Sonoma Cotrerre is represented by a different wholesaler in the same state. So we had some alignment we needed to do anyway, and we decided to take a step back and do a full and comprehensive review with our wholesalers about how we think about the business going forward. And everything's on the table.
With respect to your second question on the distributor.
Yeah, I mean, I think Oh duck corn has been growing and is now significantly at a scale business has a has a couple of big scale brands.
If you consider the acquisition and the pending acquisition of Sonoma Cutrer. So we thought this was the right moment for us to take a step back and look at our wholesale relationships. How we're aligned as you can imagine.
The.
Chuck one portfolio was represented in some states and Sonoma Cutrer represented by a different wholesaler in the same state. So we had some alignment we needed to do anyway, and we decided to take a step back and do a full and comprehensive review with our wholesalers on thinking about the business going forward and everything's on the table I mean, we're looking at all of our business. We're of course happy with.
Deirdre A. Mahlan: I mean, we're looking at all of our businesses, which we're, of course, happy with, and we've talked about California before, but, you know, we will always kind of keep evaluating all of the potential opportunities as we think about them. Great. Thank you. I'll pass it on.
And we've talked about California, before but we will always kind of keep.
Evaluating all of the potential opportunities as we think about that.
Yeah.
Great. Thank you I'll pass it on.
Thanks, Nick.
Our next question is from Kamil <unk> with Jefferies.
Nick Modi: ........
Kaumil S. Gajrawala: Our next question is from Kaumil Gajrawala with Jeffries. Your line is now open. Thanks, everybody. This is a little bit of a follow-up on Nick's question. I think we want to just try to really dig into, you know, what caused the wholesalers to decide that they had a much more negative view of the back half, which obviously led to the inventory corrections. Like, what are they observing or seeing to give them that sense?
Your line is now open.
Thanks, everybody.
Little bit of a follow up on Nick's question, Mike I think we wanted to just try to really dig into what caused the wholesalers to the side.
They have a much more negative view on the on the back half, which obviously led to the inventory correction just like what are they observing are seeing to give them that to give them that sense and then maybe the second pieces.
Deirdre A. Mahlan: And then maybe the second piece is, for quite some time, you've been a distribution story. And I'm curious, as we think about your guidance, you know, how much incremental distribution as a contributor to sales growth is embedded in that. Okay, so let me start with the first question.
For quite some time <unk> been a distribution story.
I'm curious as we think about your guidance, how much incremental distribution as a contributor to that.
Growth is embedded in that.
Okay. So let me start with the first question.
Deirdre A. Mahlan: I can talk to you about what our wholesalers and distributors have conveyed to us as we kind of came through the second quarter and kind of saw the weakness in their orders, even though we were still seeing growth in our business. And what I've been hearing, and you know, our first guidance at the end of the first quarter expected this situation to abate. We thought, you know, and clearly, obviously, from our first quarter guidance, that the situation would improve, and it did not. In fact, it got a bit softer.
Yes.
I can talk to you about what our wholesalers and distributors have conveyed to us as we've kind of came through the second quarter and kind of can see the weakness in their orders, even though we were still seeing growth in our business and what I've been hearing and you know our first our guidance at the end of the first quarter expected that.
Tuition to abate, we thought you know and clearly obviously from our first quarter guidance that that situation would improve and it did not.
In fact, we cut a bit softer and our wholesalers are kind of saying the same thing to us which is that you know when you come through 2023.
Deirdre A. Mahlan: And our wholesalers are kind of saying the same thing to us, which is that, you know, when you come through 2023, there will be softness in terms of the retail trade. What they saw as retailer de-stocking, retailers taking smaller deals in terms of the cases that they were buying and being more reticent about buying inventory. So they were clearly managing their inventory, you know, as the price increases stopped in grocery, and they had to worry about their own working capital, increasing interest rates, etc. What our wholesalers have told us is that they expected that to improve in the second half of 2023, and it didn't. So then when you got into the second half and, you know, through our second quarter, they weren't seeing improvement in terms of retailer behavior.
There has been softness in terms of the retail trade what they saw as retailer destocking retailers, taking smaller deals in terms of the cases that they were buying and being more reticent about.
Taking about buying inventory so they were clearly managing their inventory as the price increase has stopped in grocery and they had to worry about their own working capital increasing interest rates et cetera.
You know what.
Our wholesalers have told US is they expected that to improve in the second half of 2023.
And it didn't.
So then when you got into the second half and through our second quarter. They werent seeing improvement in terms of retailer behavior. So they then started taking a more conservative view themselves.
Deirdre A. Mahlan: So they then started taking a more conservative view themselves and manage inventory down. And I think the retailers, you know, are seeing what we all know and read about in the press about, you know, the concerns about the consumer on inflation and on food prices, et cetera, and are just looking to make sure that they're managing their inventories effectively, from the people that I've spoken to at Wholesale say, look, they just don't believe this can continue much longer because inventory levels have now gotten to the point where the retailers do need to start to replace stock where there is growth. And that's what gives us some confidence because of course our brands are in growth and we would expect that our business will reflect return to growth as retailers start to restock those products. So... And then the second question. Yeah. Hey, Kamil.
Manage inventory down and I think the retailers are.
Are seeing what we all know and read about in the press about you know the concerns about the consumer on inflation on food prices et cetera.
And we are just.
Just looking to make sure that they're managing their inventories effectively.
From the.
The people that I've spoken to at wholesale say look they just don't believe this can continue much longer because inventory levels have now gotten to the point, where you know that the retailers do need to start to replace stock where there is growth and that's what gives us some confidence because of course, our brands are in growth.
And we would expect that our business will reflect the.
Return.
To growth as retailers start to restock those products.
So.
And then the second question.
Sean Sullivan: Thanks for the question. So from an account perspective, both our on-premise and off-premise grew their accounts over the course of the quarter. And as we look forward to growth, we absolutely still see opportunity and white space within our account base. So it's absolutely still part of our strategy.
Thanks for the question so from an account perspective, both our on premise and off premise.
Through their accounts over the course of the quarter and as we look forward for for growth, we absolutely still see opportunity and white space within them within our account base. So absolutely. So part of our strategy, but that's also coupled with.
Sean Sullivan: But that's also coupled with, you know, our other pillars of our strategy, which are, you know, our D&C business and our customer experience, our organic growth, our portfolio expansion, like we've been demonstrating through Decoy Limited, Featherweight, and now Decoy Paso, as well as our inorganic growth, like acquisitions, which we're demonstrating through Sinemica Trayer. So, definitely, a front and center part of our growth strategy, but we are supporting that with other avenues as well. That's useful information.
Our other pillars of our strategy, which are you know.
Our D to C business and our customer experience.
Our organic growth.
Portfolio expansion like we've been demonstrating through do you quite limited further way and now D quite paso as well as our.
Inorganic growth like acquisitions, which we're demonstrating through Sonoma cutrer, So definitely front and center part of our growth strategy, but we are.
We're supporting that with other avenues as well.
That's useful thank you.
Kaumil S. Gajrawala: Thank you. Our next question is from Lauren Lieberman with Barclays. Your line is now open.
Thank you.
Our next question is from Lauren Lieberman with Barclays. Your line is now open.
Yeah.
Lauren Rae Lieberman: Thanks everyone. I was curious if you could just talk a little bit about the free cash flow in the quarter. It changed pretty significantly. Give me a little bit more color on what's going on with free cash and the outlook for the year. Thanks.
Thanks, Hi, everyone. I was curious if you could just talk a little bit about the free cash flow in the quarter changed pretty significantly as well.
More color on what final, what's the cash and the outlook for the year.
Yeah. Thanks for the question. So we did have a big use of cash in the quarter due to our grower payments and that's all due to seasonality.
Jennifer Fall Jung: Yeah, thanks for the question. So, we did have a big use of cash in the quarter due to our grower payments, and that's all due to seasonality. And so, you know, that is reflected within there. And we typically don't give an outlook on our free cash flow, but it should normally follow the seasonality of our business. We will have the acquisition, which we will use through both internal cash as well as our credit facility to fund that as well. Oh Lauren, you're cutting up a bit. Oh, okay. Let me try again, and if not, I'll do it offline.
And so you know that is reflected within there and we typically don't give an outlook on our free cash flow, but it should normally follow our seasonality of our business, we will have the acquisition.
Which we will use through both internal cash as well as our our credit facility to fund that as well.
Yeah.
Okay.
You recharge definitely.
<unk> definitely.
Oh, Lord Youre cutting off a bit wide.
Oh, Okay, let me try again, and if not I'll do it offline.
I was just saying you gave a lot of color on the call.
Lauren Rae Lieberman: I was just saying you gave a lot of color on the conversations with wholesalers and there with retailers about carrying inventory and so on and knew that end market demand was still okay. And Marta Munoz, a more customary growth rate to the, Yeah, and you're cutting out quite a bit. So I'll pick up where I thought I heard the question, which was, we don't have a crystal ball right now. We wish you did, but our guidance does reflect, at least in the short term, what we've been seeing historically and throughout Q2. And so we've just, since we did see the data come through, tried to make sure that we've baked that into our guidance going forward. Our next question is from Greg Porter with Evercore. Your line is now open.
Patients with wholesalers, and then with retailers about carrying inventory and so on and knew that end market demand kill okay.
Can you having about the market itself slowing.
Consumer behavior being different not in terms of trade down, but just in terms of overall consumption.
Hearing in terms of their view being two steps closer to the consumer on when we get to sort of a.
Or.
More customary growth rate for the industry.
Yeah, and you're cutting out quite a bit so I'll pick up where I thought I heard.
The question, which was you know we don't have a crystal ball right now and we wish you did but our guidance does reflect at least in the short term what we'd been seeing historically and throughout Q2.
And so we've just.
Since we did see the data come through we've tried to make sure that we've baked that into our guidance going forward.
Yeah.
Yeah.
Our next question is from Greg <unk> with Evercore. Your line is now open.
Gregory Porter: Hey guys, thank you for your time. Just a quick question on the underlying trends. Are you seeing some of the weakness in the category from when we try to, I guess, boil it down to where it's actually sourcing from? Are you seeing that the consumer is working down, you know, pantry levels at home from purchases maybe made during COVID over the last few years? Or have you seen that general consumption overall has also come down? It's hard to know that, Greg.
Hey, guys. Thank you for the time just a quick question on the underlying trends.
Are you seeing some of the weakness in the category from.
When we charter I guess boil it down to where its actually sourcing from are you seeing that the consumer is like working down pantry levels at home from purchases may be made during cold weather over the last few years or have you seen that the general.
<unk> overall has also come down.
It's hard to know that Greg it's hard to know exactly what was in the consumer's pantry. We know there was pantry loading.
Deirdre A. Mahlan: It's hard to know exactly what was in the consumer's pantry, but we know there was a pantry load. And so I think as we've come through 2023, the wisdom in the industry across beverage alcohol, in particular spirits and wine, the hypothesis is that, you know, some of the softness has been, you know, destocking of what the consumer has at home, as well as a shift in behavior of occasions where they're going to the on-premise more than the off-premise. And, you know, while that, of course, is still business, So we do see that.
And so I think as we've come through 2023, the wisdom in the industry across beverage alcohol in particular spirits and wine. The hypothesis is that some of the softness has been <unk>.
Destocking of what the consumer has at home as well as a shift in behavior of occasions, where theyre going to the on premise more than the off premise and.
While that of course, there's still business. It does tend to impact volume in terms of the.
The timing of volume and where that volume is coming from so we do see that I don't know of any.
Deirdre A. Mahlan: I don't know of any consistent or known other shift in consumption trends that are impacting business right now in the near term other than, you know, normal consumer behavior responding to inflation and what's happening, you know, in terms of the overall market and the economy. Great, thank you guys. Our next question is from Andrea Teixeira with J.P. Morgan. Your line is now open. Hey, good afternoon. This is Drew Levine. I'm here for Andrea.
Consistent or known other shift in consumption trends.
That are impacting the business in right now in the near term in the near term other than normal consumer behavior responding to inflation and what's happening in terms of the overall market and.
The economy.
Great. Thank you guys.
Okay.
Our next question is from Andrea Teixeira with Jpmorgan. Your line is now open.
Hey, good afternoon. This is truly an anchor Andreas thank you for taking our questions.
Andrea Faria Teixeira: Thank you for taking our question. I'm just hoping to be able to get some more context on the updated guidance. Maybe, can you talk about... You know, how much of the lower guidance is kind of an inventory adjustment relative to overall slower consumption trends? So you could talk about kind of what your depletion trends were, both in the quarter and kind of how you're thinking about depletions versus inventory in the second half. I'll start and then Jennifer can add some more color. We saw in the first half that every year there is a, in the second quarter, depletions exceed shipments. There's a surge leading up to the holiday, and then there's a reversal.
So just hoping to be able to get some more context on.
The updated guidance, maybe can you talk about.
How much of the lower.
Lower guidance is kind of inventory adjustment relative to overall.
Lower consumption trends. So if you could talk to kind of what your depletion.
Trends were both in the quarter and kind of how you're thinking about depletions versus inventory in the second half that would be helpful.
I mean, I'll start and then Jennifer can.
And add some more color.
We saw in the first half every year.
There is a in the second quarter Depletions exceed shipments you know there is a a build leading up to the holiday and then there's a reversal of what we did see in the second quarter was a much deeper reversal of that trend so much.
Deirdre A. Mahlan: What we did see in the second quarter was a much deeper reversal of that trend. In the second quarter, depletions exceeded shipments by more than we anticipated. As we come through the second half, we do expect that normalization to start to rebalance itself, and that is one of the underlying assumptions. But, if that doesn't happen to the degree we expect, we still think we're well within the guidance range because what we are expecting there to be more of a normalization and, again, based upon what I said on one of the earlier questions, what our wholesalers are telling us is that And so we are anticipating that.
In the second quarter Depletions exceeded shipments.
By more than what we anticipated as.
As we come through the second half, we do expect that normalization to start to rebalance itself.
That is one of the underlying assumptions.
If that doesn't happen to degree we expect we still think we're well within the guidance range, because but we are expecting there to be more of a normalization and again based upon what I said on one of the earlier questions is that what our wholesale wholesalers are telling us is that they expect.
An improvement in that overall trend and so we are anticipating that we do think that our guidance if it doesn't if it doesn't.
Deirdre A. Mahlan: We do think that our guidance, if it doesn't reverse entirely as we expected, you know, we're still well within that range. And I think the reason why our range is what it is is because there are some unknowns about the pace of that reversal as well as, you know, some of the specifics of the industry. Yeah, and I'll just add on that. Thanks for that.
First entirely as we expected, we're still well within that range and I think the reason why our range is what it is is because there are some unknowns about the pace of that reversal as well as some of the specifics of the industry growth rates.
Yeah, and I'll, just I'll add on that what we see in our edge.
Deirdre A. Mahlan: You know, what we see in our, inventory within our distributors as well, quarter over quarter, it continued to come down this quarter. So it's, it's, you know, well within where we target them. So there's not a lot of inventory out there.
And the inventory within our distributors as well quarter over quarter. It continued to come down this quarter. So it's well within where we target them. So there's there's not a lot of inventory out there.
Jennifer Fall Jung: And as Jennifer mentioned, in their deck on page 10, there is a second half growth drivers outline that is probably helpful also in piecing together the other elements of your question. Okay, great. Thanks. And then, just if I could have a follow-up, could you talk about the competitive environment?
And as Jennifer mentioned.
In our deck on page 10, there is a second half growth drivers outlined that there is probably helpful. Also in piecing together the other elements of your question.
Okay, great. Thanks, and then just if I can have a follow up.
Can you talk about that.
The competitive environment.
<unk>.
Andrea Faria Teixeira: Clearly, industry growth has slowed, but are you seeing any pickup, I guess, in promotional activity, or are the wholesalers or retailers kind of asking you to increase activity behind the brands to kind of drive some demand? And that's in relation, I guess, as well to the strong gross margin performance over the past several quarters. So any thoughts there would be helpful.
Clearly our industry growth has slowed but are you seeing.
Any pick up I guess in promotional activity or the wholesalers or retailers kind of asking you for.
To increase.
Activity.
On the brands to kind of drive some demand.
And that's in relation I guess as well to the strong gross margin performance over the past several quarters. So any thoughts there would be helpful.
Yeah, I think where you see more of the promotional activity is really in the value segment, so below $15 versus where we're currently planning.
Jennifer Fall Jung: Yeah, I think where you see more promotional activity is really in the value segment, so below $15 versus where we're currently playing. And then from working with our distributors, we always have our standard promotions with them. We're not hearing or receiving requests for additional promotions.
And then from working with our distributors, we always have our standard.
Standard promotions with them.
Not hearing or are receiving requests for additional promotions and what you saw in the quarter was actually we maintained where we are and where we do play within that promotional cadence and and we're also very mindful not to start.
Jennifer Fall Jung: And what you saw in the quarter was that we maintained where we do play within that promotional cadence. And we're also very mindful not to, you know, start, For lack of a better word, buying market share through increased promotions because that's a hard model to sustain. So we're on track with our strategy. Thanks so much. Go to Beadaholique.com for all of your beading supplies needs!
For lack of a better word buying market share through increased promotions.
That's a hard model system to sustain so we're on track with our strategy.
Thanks, so much.
Okay.
Our next question is from Andrew <unk> with BMO. Your line is now open.
Andrew Strelzik: Our next question is from Andrew Strelzik with BMO. Your line is now open. Hey, good afternoon.
Hey, good afternoon, thanks for taking the questions.
Andrew Strelzik: Thanks for taking the questions. My first one is on the margin side. And I was hoping you could elaborate on some of the key margin drivers in the quarter, in particular the operating cost management that you referenced, and how durable is your confidence that you can hold on to those canes for the rest of this year? Maybe if you could comment on whether you think kind of the 2Q SG&A levels are a good run rate or how you expect that to trend through the rest of the year. Great. Thanks for the question. I'll start with margin.
My first one is on the margin side and I was hoping you could.
Elaborate on some of the key margin drivers in the quarter in particular on the operating cost management that you referenced and.
How durable are your confidence that you can.
Can hold onto those gains after the rest of this year, maybe if you could comment on whether you think kind of the <unk> SG&A levels are a good run rate or how do you expect that to trend through the rest of the year.
Great. Thanks for the question I'll start with margin. So we do believe that our Q2 margin was a high mark in the quarter based on where the sales landed in our trade spend landed as well as there was a bit of mix underneath the covers from our different labels, which help also support the margin as we spoke about on the call there will be pressure in.
Jennifer Fall Jung: So, we do believe that our Q2 margin was a high mark in the quarter based on where the sales landed and our trade spin landed, as well as there being a bit of mix underneath the covers from our different labels, which helped support the margin. As we spoke about on the call, there will be pressure on the back half on margin based on, we believe, our trade spin will normalize and align up directly with our sales, which, as you can tell, are, as we mentioned, in the low to mid-single-digit growth rate for the back half. So, that's what we expect on the margin line. From a cost perspective, coming into the year, we knew the industry was under a lot of pressure, and we've been managing our costs very tightly throughout the year, and we will continue to do that in the back half. And you see that reflected in our adjusted EBITDA guidance above the midpoint of where our net sales guidance is. And really, on the SG&A side or the operational side, where we're cutting back is really on non-essential items. We are not taking any costs out of the organization, which is supporting our growth.
In the.
The back half on margin based on we believe our trade spend will normalize and and our lineup directly with our sales, which as you can tell are and as we mentioned are in the low to mid single digit growth rate for the back half. So that's what we expect on the margin line from a cost perspective coming into the year, you know theres been a lot of new.
The industry was receiving a lot of pressure and we've been managing our costs very tightly throughout the year and we will continue to do that in the back half and you see that reflected in our adjusted EBITDA guidance above the midpoint of where our net sales guidance is and really on the SG&A side or the upside.
Where we're cutting back is really on.
Non essential items, we are not taking any cost out of the organization, which are supporting our growth is really just being extremely prudent.
Jennifer Fall Jung: It's really just being extremely prudent, whether it be back office headcount or travel, entertainment, all that kind of stuff that we're just being very dogmatic about. Okay, that's helpful. And a second question, if I could, is on the acquisition. And I don't know how much you can really speak to this, but to the extent that you are expressing more optimism on the synergy side, what's kind of underpinning that? And then, you know, is there any sense that the consumer environment and inventory could change the cadence to which you think you'll be able to kind of leverage Sonoma Cotrera and the broader portfolio relative to how you had initially expected?
Whether it be you know.
Back office head count or travel entertainment all of that kind of stuff that we're just being very dogmatic about.
Okay.
Okay. That's helpful.
Second question, if I could is on the <unk>.
Acquisition.
And I don't know how much you can always speak to this but to the extent that you are expressing more optimism on the synergy side whats kind of underpinning that and then is.
Is there any sense that the consumer environment and inventory management.
<unk> changed the cadence to which you think you'll be able to kind of leverage Sonoma cutrer and the broader portfolio relative to how you had initially expected. Thanks.
Jennifer Fall Jung: Thanks. Yeah, thanks for the question. On the synergies, you know, when we announced the acquisition, that was our first draft going through based on the information we had.
Yeah. Thanks for the question on the synergies, we when we announced the acquisition that was our first draft going through based on the information. We have we've now had a few months to get a lot better information by partnering with Brown Forman and that's where we've been able to go a lot deeper in terms of where we think we can grab some <unk>.
Jennifer Fall Jung: We've now had a few months to get a lot better information by partnering with Brown Forman, and that's where we've been able to go a lot deeper in terms of where we think we can grab some synergies. And we'll have a lot more to share on specifically what those look like on future calls. And then from a consumer perspective, no, we don't. You know, that's a great brand, and we feel very confident about the acquisition, about how it's going to play within our portfolio. Yeah. And, hey, it's Sean.
And we will have a lot more to share on specifically what those look like in future calls and then from a consumer perspective, no we don't.
That's a great brand when we feel very confident about the acquisition about how it's going to play within our portfolio.
Hey, it's Sean I would just add to Jennifer's point. It is just the continuation of more work, we're doing and being positive and feeling good about what we're finding as we continue to prepare for integration.
Sean Sullivan: I would just, to Jennifer's point, it is just the continuation of more work we're doing and being positive and feeling good about what we're finding as we continue to prepare for integration later this spring. And as Jennifer noted, with respect to the strength of the brand, you know, the Circana data, for example, is out there and shows it continuing to do very well. And we think we're going to be able to add further value once it's a part of our portfolio. Great, thank you very much. Thank you. Our next question is from Peter Galbo with Bank of America. Your line is now open. Hey guys, good afternoon. Thanks for taking the question. I guess maybe just one, can you expand or unpack a little bit more on the start of the, I think you call it, the Wine by the Glass program? How far into that are you now, kind of the early learnings you have, and I think you did mention... Margin Drag, to kind of help us understand that.
Later, this spring and as Jennifer noted with respect to the strength of the brand.
So Canada data for example was out there and shows shows us continuing to do very well and we think we're going to be able to add further value.
It's a part of our portfolio.
Great. Thank you very much.
Yes.
Our next question is from Peter Galbo with Bank of America. Your line is now open.
Hey, guys good afternoon.
For taking the question.
I guess, maybe just one can you expand or unpack a little bit more about the restart on the I think you called it the widebody class program just.
How far into that are you know kind of the early learnings you have and I think you did mentioned it was going to be a bit of a margin drag just kind of help us understand that a little bit more thanks very much.
Peter Thomas Galbo: Thanks. Great, thanks for the question, Peter. Yeah, so we had some inventory shortages, and that's why we had to pull back on the Wine by the Glass program, specifically within the Duckhorn Chardonnay and a few others. And we've talked a little bit about getting back into stock on those in the back half. So that's really what caused us to kind of lose some of that momentum.
Yeah, great. Thanks for the question Peter Yeah. So we were we had some inventory shortages and that's why we had to pull back in the wine by the glass program, specifically within the deck cord Chardonnay and a few others.
And we've talked about it a little bit about.
Getting back into stock on those in the back half so that's really what.
It caused us to kind of lose some of that momentum starting it back up we really do feel even though it is a bit of a drain on margin. It's a great way to expose people to all of our brands.
Jennifer Fall Jung: Starting it back up, we really do feel, even though it is a bit of a drain on margin, it's a great way to expose people to all of our brands and get us some brand awareness. So it's part of the program, and we feel it's worth that investment because it pays off in dividends as we continue to get more people into our portfolio of brands. Thanks. We have no additional questions at this time, so I'll pass the call back to the management team for any closing remarks. Okay, thanks again, everyone, for joining us today for our second quarter performance and our guidance for fiscal year 24. I'll look forward to speaking with you again in June when we report our third quarter results. Cheers. That concludes today's conference call. Thank you all for your participation. You may now disconnect your line.
And get some brand awareness. So it's part of the program and we feel it's worth that investment because it pays off in dividends as we continue to get more people into our portfolio of brands.
Okay.
Okay.
We have no additional questions at this time, so I'll pass the call back to the management team for any closing remarks.
Okay.
Yes.
Okay. Thanks again, everyone for joining us today for our second quarter performance and our guidance for fiscal year 'twenty four I look forward to speaking with you again in June when we report our third quarter results cheers. Thanks, everyone.
Yeah.
Yeah.
Okay.
That concludes today's conference call. Thank you all for your participation you may now disconnect your line.