Q3 2024 The Duckhorn Portfolio Inc Earnings Call
Good afternoon, ladies and gentlemen, thank you for joining today's stuck corn portfolio Q3, 2024 earnings Conference call. My name is to me and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
He would like to ask a question. Please press star one on your telephone keypad I would now to pass the call over to Ben.
Vignette Tapper, Vice President Investor Relations. Please proceed.
Good afternoon, and welcome to the Dr. Kwan Portfolio's third quarter of 2024 earnings Conference call.
Ben Avenia: Good afternoon, and welcome to the Duckhorn Portfolio's third quarter 2024 earnings conference call. Joining me on today's call are Deirdre Mahlan, President, Chief Executive Officer, and Chairperson, Jennifer Paul Young, Chief Financial Officer, and Sean Sullivan, Chief Strategy and Legal Officer.
Joining me on today's call are Deirdre, Marlin, President and Chief Executive Officer, and Chair person, Jennifer Fall Jung Chief Financial Officer, and Sean Sullivan, Chief strategy and legal officer in a moment, we will give a brief remarks, followed by the Q&A by now everyone should have access to the earnings release for the third quarter ended April 32024.
Ben Avenia: In a moment, we will give brief remarks, followed by the Q&A. By now, everyone should have access to the earnings release for the third quarter ended April 30, 2024, which went out at approximately 4.05 p.m. Eastern Time. The press release and an accompanying presentation are accessible on the company's website at ir.duckhorn.com, and shortly after the conclusion of today's call, a webcast will be archived for the next 30 days. Before we begin, I would like to remind you that today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, they include risks and uncertainties.
That went out at approximately 405 P M eastern time.
Speaker Change: This release and an accompanying presentation are accessible on the company's website at IR dot that corn dot com and shortly after the conclusion of today's call and webcast will be archived for the next 30 days.
Ben Avenia: If you refer to Duckhorn's earnings release, earnings presentation, and the company's most recent SEC filings, you will see a discussion of factors that could cause the company's actual results to differ materially from these forward-looking statements. Please remember, the company undertakes no obligation to update or revise these forward-looking statements in the future. I also note that the Duckhorn Portfolio's balance sheet as of April 30, 2024, reflects the assets acquired in the Sonoma Cotrera acquisition.
Speaker Change: 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.
Speaker Change: Materially from these forward looking statements. Please remember the company undertakes no obligation to update or revise these forward looking statements in the future.
I also note that the DUC corn portfolio as balance sheet as of April 32024 reflects the assets acquired in the Sonoma Cutrer acquisition. However, because of the closing occurred on the last day of the quarter. The income statement does not include Sonoma Cutrer, our results in the third quarter.
Ben Avenia: However, because the closing occurred on the last day of the quarter, the income statement does not include Sonoma Cotrera results for the third quarter. We will make a number of references to non-GAAP financial measures. We believe that these measures provide investors with useful perspective on the underlying growth trends of the business and have included in our earnings release a full reconciliation of non-GAAP financial measures to the most comparable GAAP measures. In addition, please note that all retail scanner data cited on today's call is according to CERCANA and will refer to dollar or unit consumption for the 12-week period ended April 28, 2024, and growth versus the same period in the prior year in U With that, I will turn the call over to Deirdre. Thanks, Ben.
Speaker Change: 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.
Speaker Change: We 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 set it on today's call is according to this or kind of what we refer to dollar or unit consumption for the 12 week period ended April 28, 2024 and growth versus the same period.
In the prior year in U S track channels, unless otherwise noted with that I will turn the call over to Deirdre.
Deirdre A. Mahlan: Thanks, Ben, and good afternoon, everyone. Thanks for joining us today to discuss our third quarter 2024 financial performance. Following my opening remarks, Jennifer will walk us through our quarterly results and updated 2024 financial guidance. I'm pleased to be here for my first earnings call since accepting the CEO role. I began my work with Duckhorn three years ago as a board member after a 30-year career in beverage alcohol and a long-held passion for the consumer goods sector. When I took on the interim CEO role last September, I expected it to be temporary.
Deirdre A. Mahlan: Thanks, Ben and good afternoon, everyone.
Deirdre A. Mahlan: Thanks for joining us today to discuss our third quarter 2024 financial performance.
Deirdre A. Mahlan: Following my opening remarks, Jenifer will walk us through our quarterly results and updated 2024 financial guidance.
Jenifer: I am pleased to be here for my first earnings call since accepting the CEO role.
I began my work with <unk> three years ago as a board member after a 30 year career in beverage alcohol and our long held passion for the consumer goods sector.
interim CEO: When I took on the interim CEO role last September I expected it to be temporary.
Deirdre A. Mahlan: Since that time, I've had the opportunity to engage with every aspect of the business, meeting with our brand and commercial teams, visiting the wineries and tasting rooms. And it is clear to me that this is a strong and well-positioned business with ample opportunity for profitable growth and a talented and committed team. When the board asked me again to consider if I would stay long-term, I couldn't refuse.
interim CEO: Since that time I've had the opportunity to engage with every aspect of the business meeting with our brand and commercial teams visiting the wineries and tasting room.
interim CEO: And it is clear to me that this is a strong and well positioned business with ample opportunity for profitable growth and a talented and committed team.
When the board asked me again to consider if I would stay long term.
interim CEO: Present.
I am delighted to be serving in the role and energized by what lies ahead for <unk>.
Deirdre A. Mahlan: I am delighted to be serving in this role and energized by what lies ahead for Duckhorn. I'll turn now to our business and the broader industry. Although market conditions remain challenging across the wine sector and are impacting our performance in fiscal 2024, I see significant potential for Duckhorn's business. This potential is rooted in the substantial progress we have achieved with respect to key business initiatives, including the close and integration of the Sonoma Cotrera Acquisition and the comprehensive realignment of our wholesale distribution network, both of which we believe set us up for our next phase of growth.
interim CEO: I'll turn now to our business and the broader industry.
Speaker Change: Although the market conditions remained challenging across the wind sector and are impacting our performance in fiscal 2024, I see significant potential at that point.
Speaker Change: This potential is rooted in the substantial progress we have achieved with respect to key business initiatives, including the closing and integration of the genomic a Trier acquisition.
Speaker Change: And the comprehensive realignment of our wholesale distribution network, both of which we believe set us up for our next phase of growth.
Speaker Change: Before sharing an update on my immediate priorities and our near term initiatives.
Deirdre A. Mahlan: Before sharing an update on my immediate priorities and our near-term initiatives, I'll provide some perspective on industry trends and our third quarter results. The trade environment remains challenging due to soft consumer demand, while we had expected the industry to grow in low single digits in Q3. Consumer data for luxury wine, as measured by Cercana, was down 1% in the quarter.
Speaker Change: I'll provide some perspective on industry trends and our third quarter results.
Speaker Change: The trade environment remains pressured.
Speaker Change: Due to soft consumer demand.
Speaker Change: While we had expected the industry to grow low single digits in Q3.
Speaker Change: Consumer data for luxury wine as measured by <unk> was down 1% in the quarter.
Deirdre A. Mahlan: Although a reversal from previous quarters, our business continued to outperform the market in the period, which speaks to the enduring strength of our brand. Importantly, we have accomplished this outperformance while remaining focused on operating efficiency and careful cost management. The combination of ongoing industry headwinds and a softer-than-anticipated response to our Costa-Browne Appalachian Series offer created top-line pressure in 2-3. While net sales came in at $92.5 million, strong gross margins and expense control drove adjusted EBITDA of $37.7 million, a 40.8% margin.
Speaker Change: A reversal from previous quarters.
Speaker Change: Our business continued to outperform the market in the period, which speaks to the enduring strength of our brands.
Speaker Change: Importantly, we have accomplished this outperformance while remaining focused on operating efficiency and careful cost management.
Speaker Change: The combination of ongoing industry headwinds and softer than anticipated response to our Costa Brown Appalachian series offering.
The top line pressure in Q3.
Speaker Change: While net sales came in at $92 5 million strong gross margins and expense control drove adjusted EBITDA of $37 7 million or 48% margin.
Deirdre A. Mahlan: We are watching industry trends closely and continue to see a consumer preference for premiumization within wine, where demand in the $15 to $20 category, and to an even greater degree, the $20 to $25 per bottle category, continues to meaningfully outperform the wine below $15 per bottle category. I'll now share some additional details on what drove our results in the court.
Speaker Change: We are watching industry trends closely and continue to see a consumer preference for premium position within wine where demand in the 15% to $20 category and to an even greater degree 20 to $25 per bottle category continues to meaningfully outperform the wind below 15.
Speaker Change: Per bottle category.
Speaker Change: I'll now share some additional detail on what drove our results in the quarter.
Speaker Change: I'll start with the wholesale channel, which represents about 85% of our business.
Deirdre A. Mahlan: I'll start with the Wholesale Channel, which represents about 85% of our business. Here, purchasing patterns by retailers have had a meaningful impact on the business. As a reminder, last quarter, we outlined three primary growth drivers for the second half.
Speaker Change: Here purchasing patterns by retailers have had a meaningful impact on the business.
Deirdre A. Mahlan: Innovation with new products like a lower in calories, lower in alcohol, decoy featherweight Sauvignon Blanc. Second, greater availability of our high-demand products, including Duckhorn Chardonnay. And third, increased programming, particularly with the relaunch of our Buy the Glass on-premise program. While some of these initiatives are gaining traction, current market dynamics are impacting the results. I'll take you through them individually.
Speaker Change: As a reminder, last quarter, we outlined three primary growth drivers for the second half.
Speaker Change: First innovation with new products like a lower in calories lowering alcohol decoys further weight 70 on block.
Speaker Change: Second greater availability of our high demand products, including <unk> Chardonnay.
Speaker Change: And third increased programming, particularly with the relaunch of our by the glass on premise programs.
Speaker Change: While some of these initiatives are gaining traction current market dynamics are impacting the results.
I will take you through them individually.
Speaker Change: Starting with innovation.
Deirdre A. Mahlan: Starting with innovation. While it's still early, I'm pleased to tell you that our most recent product introductions have been well received. For those of you who have had a chance to try Decoy's Featherweight Sauvignon Blanc, I think you'll agree it's a truly great wine that holds up from a quality perspective, not only to other low-alcohol options but to the rest of our portfolio. Following its early spring release, Decoy Featherweight is already the eighth largest label across all domestic luxury Sauvignon Blanc brands according to the most recent four-week Cer Duckhorn Portfolio wines now occupy three of the top ten spots on the domestic luxury Sauvignon Blanc leader chart.
Speaker Change: While it's still early I am pleased to tell you that our most recent product introductions have been well received for those of you who have had a chance to try decoys further weight 70 on block I think you'll agree its a truly great wine that holds up from a quality perspective, not only to other low alka option, but to the rest of our portfolio.
Speaker Change: Following this early spring release quite the other way is already the eighth largest label across all domestic luxury 71 block brands. According to the most recent four weeks are kind of data.
<unk> portfolio of wines now occupy three of the top 10 spots on the domestic luxury 71, Blonk leader chart.
Deirdre A. Mahlan: Also of note, the reorder rate has exceeded our expectations based on past product, which is one of the first signs of traction for a new release. And we're similarly excited about our soon-to-be-launched Decoy Limited Paso Robles Cabernet Sauvignon. Both of these initiatives are in the early days, but we are very encouraged by the initial feedback we've received from wholesalers and consumers alike. Looking at our second initiative, greater availability of key wines, including Duckhorn Chardonnay and Decoy Limited Merlot, results have been mixed, while Duckhorn Chardonnay saw strong double-digit growth and net sales. Decoy Limited Merlot didn't generate the year-over-year, in-quarter growth in shipments we anticipated.
Speaker Change: Also of note the reorder rate has exceeded our expectations based on past product launches, which is one of the first signs of traction for a new release.
Speaker Change: And we are similarly excited about are assumed to be launch decoy limited Paso Robles Cabernet Sauvignon.
Speaker Change: Both of these initiatives are in the early days, but we are very encouraged by the initial feedback we've received from wholesalers and consumers alike.
Speaker Change: Looking at our second initiative greater availability of key wine, including Duck on Chardonnay, and decoy limited my low results had been next.
Speaker Change: Well duck on Chardonnay, two our strong double digit growth in net sales.
Speaker Change: Decoy limited Merlot didn't generate the year over year in quarter growth in shipments we anticipate.
Deirdre A. Mahlan: Although we are encouraged by the consumer demand, as represented by Cercana, which has been very strong. Finally, our third initiative, Increased Programming, has been most notably impacted by broader industry trends. Specifically, we've seen slower uptake of our By the Glass program. Across the industry, on-premise sales dipped in Q3, according to distributor data.
Speaker Change: Although we are encouraged by the consumer demand as represented by <unk>, which has been very strong.
Speaker Change: Finally, our third initiatives increased programming has been most notably impacted by broader industry trends spit.
Speaker Change: Specifically, we've seen slower uptake of our by the glass programs.
Speaker Change: Across the industry on premise sales dipped in Q3, according to distributor data.
Speaker Change: The industry has seen some improvements since the lows in February and March and our results continue to outperform the market both on and off on it.
Deirdre A. Mahlan: The industry has seen some improvements since the lows of February and March, and our results continue to outperform the market both on and off. However, we now expect these programs to constitute a smaller contribution to second half net sales than we previously anticipated. On the direct-to-consumer side, we're continuing to refine our club and visitation model to accommodate shifting consumer behavior. While visitor volume is down, plus the inter- Spend per visitor at our tasting rooms remains strong. In fact, the number-one selling label at our Duckhorn Vineyards Tasting Room is The Discussion, the pinnacle label of the Duckhorn Vineyards winery brand, which sells for nearly twice the price of our vineyard-designate red wine.
Speaker Change: However, we now expect these programs to constitute a smaller contribution to second half net sales than we previously anticipated.
Speaker Change: On the direct to consumer side, we're continuing to refine our club and visitation model to accommodate shifting consumer behavior.
Speaker Change: While visitor volume is down across the industry spend per visitor at our tasting rooms remains strong in fact, the number one selling label at our ductile and vineyard tasting room is that discussion.
<unk> label of the DUC worn vineyards winery brand, which sells for nearly twice the price of our vineyard designate red wine.
Speaker Change: Tasting room visits represent an important conversion opportunity for our wine clubs and we're highly focused on this channel with initiatives like multi Peter visitation opportunities, including elevated tasting experiences.
Deirdre A. Mahlan: Tasting Moon Visits represent an important conversion opportunity for our wine clubs, and we're highly focused on this channel, with initiatives like multi-tier visitation opportunities including an elevated tasting experience. As we previously communicated, Costa Browne has underperformed our expectations in its most recent release, and we continue to see evolving consumer preferences and purchasing behavior. We are diagnosing performance trends and developing an action plan to drive improved results and greater consumer resonance for one of the most beloved and well-respected winery brands in our portfolio. As we approach the end of our fiscal year, our immediate priorities include the successful integration of Sonoma Cotrera and the completion of our Wholesale Distributor Network Realignment. We close the Sonoma Cotrera transaction on April 30.
As we previously communicated Costa Brown has underperformed our expectations in its most recent releases.
Speaker Change: And we continue to see evolving consumer preferences and purchasing behavior.
Speaker Change: We're diagnosing performance trends and developing an action plan to drive improved results and greater consumer residents for one of the most beloved and well respected winery brands in our portfolio.
Speaker Change: As we approached the end of our fiscal year, our immediate priorities, including the successful integration of genomic <unk> and the completion of our wholesale distributor network realignment.
Speaker Change: We closed the Sonoma Cutrer transaction on April 30th.
Deirdre A. Mahlan: And we were receiving and shipping orders for these lines the following day, thanks to a carefully planned integration and the efforts of our integration teams who effectively managed a complex set of processes to achieve a seamless cutover. We initially forecast approximately $5 million in cost synergies from the acquisition, a number that we now expect to be up to $10 million in cost synergies. Further, Sonoma Coterra continues to be one of the fastest-growing luxury wines across all varietals, outpacing the luxury wine market by more than 700 basis points in the current 12-week Cercana data. The complementary nature of the Chardonnay-led winery brand within our broader portfolio architecture will allow us to capitalize on incremental accounts and labels per account. We see a significant opportunity to build upon Sonoma Cotera's strong existence.
Speaker Change: And we're receiving and shipping orders for these wines. The following day, thanks to a carefully planned integration and the efforts of our integration teams, who effectively manage a complex set of processes to achieve a seamless cutover.
Speaker Change: We initially forecast approximately $5 million in cost synergies from the acquisition a number that we now expect to be up to $10 billion of cost synergies.
Speaker Change: Further genomic code share continues to be one of the fastest growing luxury wines across all varietals outpacing the luxury wine market by more than 700 basis points in the current 12 weeks or kind of data.
Speaker Change: The complementary nature of the Chardonnay led winery brand within our broader portfolio architecture will allow us to capitalize on incremental accounts and labels per account.
Speaker Change: We see significant opportunity to build upon Sonoma contrast, strong existing growth.
Speaker Change: The second key priority.
Deirdre A. Mahlan: The second key priority is our recently announced distributor network realignment. This is something I've prioritized since I began serving as Interim CEO last September, as I believe it's a critical element of any supplier operating at the scale Duckhorn has. These changes, which include a comprehensive strategic evaluation and realignment of our wholesale distribution network across the U.S., will help fuel increased focus and investment in the Duckhorn Portfolio of Brands from our distributors. The transition to the new network has already begun.
Our recently announced distributor network realignment.
Speaker Change: This is something I have prioritized since I began serving as interim CEO last September as I believe it's a critical element of any supplier operating at the scale ductile and has achieved.
These changes which include a comprehensive strategic evaluation and realignment of our wholesale distribution network across the U S.
Speaker Change: We will help fuel increased focus and investment in the DUC portfolio of brands from our distributors.
Speaker Change: The transition to the new network has already begun.
Deirdre A. Mahlan: And while we anticipate some unevenness in the phasing of shipments and depletions over the next two quarters, we expect these fluctuations to be short-term and far outweighed by the longer-term benefit of improved execution and growth. As we continue to navigate this dynamic environment, we remain focused on sharp execution across the business. We have a world-class portfolio of winery brands, a talented team, and an unwavering commitment to operational excellence that has allowed us to consistently outperform the industry.
Speaker Change: And while we anticipate some unevenness in the phasing of shipments and Depletions over the next two quarters. We expect these fluctuations to be short term and far outweighed by the longer term benefit of improved execution and growth.
Speaker Change: As we continue to navigate the dynamic environment, we remain focused on sharp execution across the business.
Speaker Change: We have a world class portfolio of winery brand, a talented team and an unwavering commitment to operational excellence that has allowed us to consistently outperform the industry.
Speaker Change: While market softness is impacting our fourth quarter outlook, we do expect organic top line trends in the wholesale channel to improve in the fourth quarter relative to our year to date performance.
Deirdre A. Mahlan: While market softness is impacting our fourth quarter outlook, we do expect organic top-line trends in the wholesale channel to improve in the fourth quarter relative to our year-to-date performance. With that, I'll turn it over to Jennifer to provide more details on the financial results for the quarter and our outlook.
Speaker Change: 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.
Jennifer Fall Jung: Thank you, Deidre, and good afternoon, everyone. Q3 saw us deliver another quarter of strong profitability despite the pressure on top-line results. Strong Gross Margins and Active Operating Expense Management enabled us to deliver robust adjusted EBITDA margins in the quarter. As I walk through the P&L, please note that all comparisons are to the third quarter of fiscal 2023 unless otherwise stated.
Jennifer: Thank you <unk> and good afternoon, everyone Q.
Jennifer: Q3 saw us deliver another quarter of strong profitability. Despite the pressure on top line results strong gross margins and active operating expense management enabled us to deliver robust adjusted EBITDA margins in the quarter.
Jennifer: As I walk through the P&L. Please note that all comparisons are to the third quarter of fiscal 2023, unless otherwise stated.
Jennifer: Beginning with our topline net sales were $92 5 million an increase of one 4%, which is in line with our pre announced range.
Jennifer Fall Jung: Beginning with our top line, net sales were $92.5 million, an increase of 1.4%, which is in line with our preannounced range. By channel, wholesale to distributor net sales declined 11% as the weaker demand environment was partially offset by growth in new accounts and labels per account. As Deirdre described, we expect our distributor network realignment will generate greater focus, new investments, and long-term commitments from our distributors. Furthermore, over 50% of our net sales are derived from states in which we have a wholesale distributor alignment. We believe that enhanced alignment with our distributors in these states will drive growth in the wholesale channel and minimize some of the variability inherent in the three-tier alcohol distribution model.
Speaker Change: By channel wholesale to distributor net sales declined 11% as the weaker demand environment was partially offset by growth in new accounts and labels per account.
Speaker Change: As Peter described we expect our distributor network realignment will generate greater focus new investment and long term commitments from our distributors.
Speaker Change: Over 50% of our net sales are derived from states in which we have a wholesale distributor alignment.
Speaker Change: We believe that the enhanced alignment with our distributors in these states will drive growth in the wholesale channel and minimize some of the variability inherent in a three tier alcohol distribution model.
Jennifer Fall Jung: We ended the quarter with distributor inventory days on hand above our expectations of 65 days as weaker market conditions led to a more constrained demand forecast. While this current inventory level is contemplated in our updated guidance, we do expect average days on hand to come down, aided in part by our distributor realignment. California wholesale direct-to-trade declined 7.3%, driven by the same factors impacting the out-of-state wholesale channel.
Speaker Change: We ended the quarter with distributor inventory days on hand above our expectations at 65 days as weaker market conditions have led to a more constrained demand forecast.
Speaker Change: While this current inventory level is contemplated in our updated guidance. We do expect average days on hand to come down aided in part by our distributor realignment.
Speaker Change: California wholesale direct to trade declined seven 3% driven by the same factors impacting the out of state wholesale channel.
Speaker Change: The direct to consumer channel increased 71, 4%, reflecting the shift of our largest coastal Brent offering into Q3 of this year from Q4 last fiscal year.
Jennifer Fall Jung: The direct-to-consumer channel increased 71.4 percent, reflecting the shift of our largest Costa Brown offering into Q3 of this year from Q4 last fiscal year. There will be a commensurate reduction in our direct-to-consumer revenue in Q4, which is reflected in our updated guidance. Moving down the P&L, gross margin was 55.6%, up approximately 20 basis points year over year, driven in part by our channel mix between wholesale and direct-to-consumer, as well as lower trade spin in promotional activity, reflecting lower than expected depletion volumes in the quarter.
Speaker Change: There will be a commensurate reduction in our direct to consumer revenue in Q4, which is reflected in our updated guidance.
Speaker Change: Moving down the P&L gross margin was 55, 6% up approximately 20 basis points year over year, driven in part by our channel mix between wholesale and direct to consumer as well as lower trade spend and the promotional activity, reflecting lower than expected depletion volumes in the quarter.
Speaker Change: Adjusted SG&A, which excludes approximately $4 8 million in transaction and integration expenses associated with the acquisition of <unk>.
Jennifer Fall Jung: Adjusted SG&A, which excludes approximately $4.8 million in transaction and integration expenses associated with the acquisition of Sonoma Trair, increased by $0.5 million to $21 million as we continue to carefully manage operating expenses, including variable compensation and discretionary spend in line with net sales growth. Net income was $13.3 million, or $0.12 per diluted share. Adjusted net income was $16.3 million, or $0.14 per diluted share. Adjusted EBITDA was $37.7 million, an increase of $1.9 million, or 5.3% year-over-year.
Speaker Change: <unk> increased by <unk> 5 million to $21 million as we continued to carefully manage operating expenses, including variable compensation and discretionary spend in line with net sales growth.
Speaker Change: Net income was $13 3 million or 12 cents per diluted share adjusted net income was $16 3 million or 14.
Speaker Change: Per diluted share.
Speaker Change: Adjusted EBITDA was $37 7 million, an increase of $1 9 million or five 3% year over year.
Speaker Change: Adjusted EBITDA margin improved 150 basis points versus the prior year period to 48.
Jennifer Fall Jung: Adjusted EBITDA margin improved 150 basis points versus the prior year period to 40.8. At the end of the quarter, we had cash of $15.7 million and total debt of $315.3 million with a leverage ratio of 2.1 times net debt. This is slightly above historical levels, reflecting debt from the Sinema-Couture acquisition prior to any EBITDA contribution.
Speaker Change: At the end of the quarter, we had cash of $15 7 million and total debt of $315 3 million with a leverage ratio of two one times net debt.
Speaker Change: This is slightly above historical levels, reflecting debt from the Sonoma Cutrer acquisition prior to any EBITDA contribution.
Jennifer Fall Jung: I'll turn now to our outlook for the remainder of the year. We are revising full year fiscal 2024 guidance to reflect the current market environment and our third quarter results. One note, having closed the acquisition on April 30th, our guidance is now inclusive of Sonoma Couture Vineyards. To provide additional clarity, we've included a slide in our earnings presentation that describes the factors contributing to our full-year net sales guidance. For fiscal 2024, we now expect full-year net sales in the range of $398 million to $408 million, which represents a growth rate of approximately minus one to positive one.
Speaker Change: I'll turn now to our outlook for the remainder of the year. We are revising full year fiscal 2024 guidance to reflect the current market environment and our third quarter results.
Speaker Change: One note having closed the acquisition on April 30, our guidance is now inclusive of Sonoma cutrer venues.
Speaker Change: To provide additional clarity we have included a slide in our earnings presentation that describes the factors contributing to a full year net sales guidance for.
Speaker Change: For fiscal 2024, we now expect.
Speaker Change: Full year net sales in the range of $398 million to 408 million, which represents a growth rate of approximately minus 1% to positive one.
Jennifer Fall Jung: This reflects a fourth quarter net sales growth at the midpoint of approximately 5%. This guidance range includes approximately 16 million of anticipated net sales from Sonoma Coterier in the fourth quarter. For adjusted EBITDA, we expect a range of $146 million to $150 million, or 1 to 4% growth. This represents an adjusted EBITDA margin of 36.7% at the midpoint, in line with our previous guidance as we continue to focus on execution and cost management.
Speaker Change: This reflects a fourth quarter net sales growth at the midpoint of approximately 5%.
Speaker Change: This guidance range includes approximately $16 million of anticipated net sales from Sonoma could share in the fourth quarter.
Speaker Change: For adjusted EBITDA, We expect a range of 146 million to $150 million or 1% to 4% growth.
Speaker Change: This represents an adjusted EBITDA margin of 36, 7% at the midpoint in line with our previous guidance as we continue to focus on execution and cost management.
Yeah.
Jennifer Fall Jung: For interest expense, we expect approximately $18 million, and for our tax rate, we expect between 27% and 29%. For adjusted EPS, we expect a range of $0.56 to $0.58 per diluted share on an average share count of 123.5 million shares, which reflects approximately 31.5 million shares issued in the connection with the acquisition of Sonoma Tray.
For interest expense, we expect approximately $18 million and for our tax rate, we expect between 27% and 29%.
Speaker Change: For adjusted EPS, We expect a range of 56 to 58 cents per diluted share on an average share count of $123 5 million shares which reflects approximately 31 5 million shares issued in the connection with the acquisition of <unk>.
Speaker Change: I'll close by reiterating Tejas comment.
Jennifer Fall Jung: I'll close by reiterating Deirdre's comments. We believe we can accelerate growth despite the headwinds currently facing the industry. Our third-quarter results highlight our commitment to driving strong profitability. Our brands continue to outpace the industry in circana data, and 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. Despite the current market conditions, I believe we're at
Speaker Change: We believe we can accelerate growth despite the headwinds currently facing the industry.
Speaker Change: Our third quarter results highlight our commitment to driving strong profitability our.
Speaker Change: Our brands continue to outpace the industry and <unk> data and we are confident in our ability to continue to take share and deliver sustained profitable long term growth.
Speaker Change: Thank you I will now hand, it back to Peter.
Deirdre A. Mahlan: Despite the current market conditions, I believe we're at an important inflection point for the company. As we've discussed, we have a strong portfolio, made even stronger by the addition of Sonoma Cotrera. We have a robust wholesale network, now strengthened and deepened by our realigned distributor network. I am confident we can continue to grow ahead of the market to deliver sustained profitable growth, and I look forward to updating you on our progress. With that said, Jennifer, Sean, and I are available to take your questions.
Peter: Despite the current market conditions I believe we're at an important inflection point for the company.
Speaker Change: As we've discussed we have a strong portfolio.
Peter: With even stronger by the addition of Sonoma Cutrer.
Peter: We have a robust wholesale network now strengthened and deepened by our realigned distributor networks.
Peter: And I am confident we can continue to grow ahead of the market to deliver sustained profitable growth.
Speaker Change: And I look forward to updating you on our progress.
Speaker Change: With that Jennifer Sean and I are available to take your questions.
Speaker Change: We will now begin the question and answer session. If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason at all you would like to move that question. Please press star followed by two.
Operator: We will now begin the question-and-answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason at all you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a quick reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. The first question comes from Kaumil Gajrawala, and with Jeffreys. You may proceed.
Speaker Change: Again to ask a question please press star one.
Speaker Change: A quick reminder, if youre using a speakerphone. Please remember to pick up your handset before asking your question.
Speaker Change: The first question comes from Kamil Guardrail with Jefferies. You May proceed.
Speaker Change: Hey, guys.
Kaumil S. Gajrawala: Hey guys, um.., couple of things. First, maybe just when we're thinking about the industry, can you just talk about what you think is behind the slowdown? I'm sure you've seen some cycles over the years. And is this consumer-driven? Is there something else going on?
Speaker Change: Couple of things.
Kaumil S. Gajrawala: Just any details.
Kaumil S. Gajrawala: Just maybe just when we're thinking about the industry can you talk about what you can just behind the slowdown.
Speaker Change: We've seen some cycles over the years.
Speaker Change: Consumer loans or something else going on there is just any details would be useful.
Speaker Change: Yeah.
Deirdre A. Mahlan: Yeah, so as we're, and hi, how are you? Nice to hear from you. Sorry about that.
Speaker Change: And hi, how are you nice to hear from you sorry about that.
Deirdre A. Mahlan: We, you know. Yeah, it's hard to know what's happening in the consumer lens, but you know, it's really what we're hearing is there is a little bit of a slowdown on the on-prem. We're hearing that from our distributors as well, and we're seeing it in the data. But I think, you know, it just kind of goes back to we're seeing strength in our category as we continue to outperform. So, you know, you're not seeing that as much in the luxury wine segment as you are in the total segment.
Speaker Change: Yeah, it's hard to know what's happening in the consumer lens, but it's really what we're hearing is there is a little bit of a slowdown on the on prem or hearing that from our distributors as well and we're seeing it in the data.
Speaker Change: But I think it just kind of goes back to we're seeing strength in our category as we continue to outperform so youre not seeing that as much in the luxury wine segment as you are in the total segment.
Deirdre A. Mahlan: Yeah, Kamil, I'll just add a little bit to that. And I, you know, you may hear this from others across the BevAlc industry. I mean, clearly there are two things happening that have been, that were happening all through calendar or through most of calendar 23 and have kind of continued into this year, although the impact seems to be lessening. And that is two things.
Tim: Yes, Tim I'll, just add a little bit to that you may hear this from all of those across the industry. I mean, clearly there is two things happening that have been that were happening all through calendar or through most of calendar 'twenty three and have kind of continued into this year, although the <unk>.
Deirdre A. Mahlan: One is kind of a normalization, as some people call it, or a level of inventory adjustment through all tiers, including the consumer, as people adjust their behaviors post-COVID. So I think at the wholesale and retail level, you know, maybe starting at retail, the retailers saw rising interest rates and some softening consumer demand, started to change their purchasing patterns, started to change their own outlook, and probably saw it in the ring in their stores, and then started slowing down purchasing and changing their behavior.
Tim: <unk> seems to be lessening.
Tim: And that is two things one is kind of a normalization as some people corridor at a level of inventory adjustment through all tiers, including the consumer.
Tim: As people adjusted their behavior is post COVID-19, so I think at the wholesale and retail level, maybe starting at retail the retailers saw rising interest rates and some softening consumer demand started to change their purchasing pattern started to change their own outlook and probably start in the ring in their stores.
Tim: And then started slowing down purchasing and change in their behavior and then I think the industry felt it certainly through the end of last year that through the wholesale channel they perhaps thought that as that forecast softened.
Deirdre A. Mahlan: And then I think the industry felt that certainly through the end of last year, that through the wholesale channel, they perhaps thought that, you know, as that forecast softened, you know, the calculated Although it's clear that the consumer behavior post-pandemic has been changing, and that's what we're all busy adjusting to is, you know, how to ensure that we're meeting the consumer where they are and engaging with them effectively for our brand.
Speaker Change: Calculated days on hand go up.
Speaker Change: And then that adjustment stock the normalization starts happening through that cycle. I think there is some softening and you can see it because that's the kind of data backs that up there is some softening in the consumer take off.
Speaker Change: It's not marked its just been kind of slowing and.
Speaker Change: I think what reason we're pleased is that we of course at our price points and the tiers that we operate on there is more it's more robust in terms of staying power. Although as we noted in our recent August the remarks, you just heard we did get some.
Speaker Change: Third quarter, and our third quarter the market turned down a bit I don't think that is indicative of anything it has gotten a little bit better in the month since.
Speaker Change: So I do think that we have a what I would call a softening consumer demand combined with.
Speaker Change: Just some adjustment that needed to happen to the market.
Speaker Change: So we're.
Speaker Change: We're not saying, there's no consumer impact, but the bulk of I think what you've been seeing through the year more of that is I think the normalization of what was happening within the tiers.
Speaker Change: Then a market change in the consumer although it's clear that the consumer behavior post pandemic has been changing and that's what we're all busy adjusting to.
Speaker Change: How to ensure that we're meeting the consumer where they are and engaging with them effectively for brand growth.
Speaker Change: Okay got it.
Kaumil S. Gajrawala: Okay, got it, and if I could just try, you know, not to put words in your mouth, but just to make sure I understand is that it doesn't sound like it feels like to you that we're maybe, you know, in the early cycle, and the consumer continues to get worse. In fact, maybe, it's stabilized. Is that about where you were going with some of what you were saying? Yeah, I'm not,
Speaker Change: Just training.
Speaker Change: Virginia Mill could just to make sure I understand it doesn't.
Speaker Change: Like it feels like that where maybe early cycle on the consumer continues to get worse and Josh maybe each each stabilized.
Speaker Change: Well you are willing to.
Speaker Change: <unk>.
Deirdre A. Mahlan: I don't have a crystal ball, so of course, I want to be careful not to indicate that. But we are encouraged by the last couple of months and what we're seeing from an overall depletion point of view. It's a bit more predictable, so I'm encouraged by that. Of course, the macro environment, and you watch this much closer, closer than we do, every data point is a piece of data or more than one piece of data, and they often contradict each other, so the consumer feels that as well, but I'm not seeing it worsening, so I think that is a fair assessment.
Speaker Change: I don't have a crystal ball so of course I want to be careful not to indicate that we are encouraged by the last couple of months, what we're seeing from an overall depletion point of view, it's a bit more predictable.
And so I'm encouraged by that of course, the macro environment and you know you watch this adds closer closer than we do everyday does it piece of data or more than one piece of data and then they often contradict each other.
Speaker Change: So the consumer feels that as well, but I'm not seeing it worsening. So I think that is a fair.
Speaker Change: Assessment of our views.
Kaumil S. Gajrawala: I do look at it pretty closely, and I also don't know, so I guess that's why I ask. Yeah, well, you're in good company then. When I think about your guidance, does that assume that you just get inventories to where you would like them to be when we start next year? Absolutely, yes. Okay, great. Thank you.
Speaker Change: I do look at it pretty closely and I also.
Speaker Change: No.
Speaker Change: Thank you.
Speaker Change: Yeah well.
Speaker Change: Thank you and good company. Thank you Bob.
Speaker Change: Yes.
When I think about your guidance does that assume that you just gave you get inventories to where you would like them to be when we start next year.
Bob: Absolutely yes.
Okay, great. Thank you.
Bob: Thank you.
Bob: Sure.
Lauren Rae Lieberman: Thank you. The next question comes from Lauren Lieberman with Barclays. Please proceed.
Speaker Change #100: Thank you. The next question comes from Lauren Lieberman with Barclays. You May proceed.
Lauren Rae Lieberman: Great. Thanks.
Lauren Rae Lieberman: So just wanted to talk a little bit cost of brown.
Speaker Change #102: I know you'd flagged it.
Lauren Rae Lieberman: softer uptake on this year's offering as part of the reason for this quarter's dynamics. And I was just, and then you suggested you're starting to, you're digging in to try to understand it a little bit better. I was wondering if you'd give us maybe a preview. Does it feel like it's a high-end consumer issue and more of an almost cyclical dynamic, or are you seeing things that are concerning you from a brand relevance standpoint? And I guess also I thought that you guys had pretty high visibility into demand, into the uptake on Costa Brown, from my understanding. So I'm just curious about that degree of surprise. Thanks.
Speaker Change #103: Softer uptake on this year's offering as part of the reason for this quarter dynamics and I was just and then you suggested you're starting to you know youre digging in to try to understand it a little bit better I was wondering if you could give us maybe a preview you know does it feel like it's a high end consumer issue and more on that.
Speaker Change #104: Almost like a cyclical dynamic or are you seeing things that are concerning you from a brand relevance standpoint.
Speaker Change #105: And I guess also I saw that you guys had pretty high visibility into demand like the uptake on our Costa brand was my understanding. So I'm. Just curious also about that degree of surprise.
Deirdre A. Mahlan: Thanks for that, Lauren. I think this goes back to the comments that I made in response to Kamal's question a couple of minutes ago. I'll start there, which is that the behavior of consumers has shifted. And I think much of the consumer industry that is engaged one way or another in clubs is kind of navigating what is a changing consumer behavior in terms of So, the first thing I'll say is, you know, we have done outreach to our consumer base in Costa Brown, whom, you know, we have relationships with through the club.
Speaker Change #106: Yeah. Thanks, Thanks for that Lauren.
I think this goes back to the comments that I made in come all in response to <unk> question, a couple of minutes ago I'll start there, which is that the behavior of consumers has shifted and I think.
Speaker Change #107: All are much of the consumer industry that is engaged one way or another in clubs is kind of navigating what is it changing consumer behavior in terms of how the consumers' purchase.
Speaker Change #107: So.
Speaker Change #107: The first thing I'll say is we have done outreach to our consumer base and cost of Brown, who we have relationships with through the club.
Deirdre A. Mahlan: And we do not see any degradation in brand equity or how people feel about the brand, quite the opposite. I think we still feel very strong affinity with the brand, so that's what we're seeing in response. So, that was, of course, encouraging, and I think what we are seeing and the feedback that we're getting, and we can see is the same as what I mentioned before. The consumer is now shifting their behavior.
Speaker Change #108: And we do not see any.
Speaker Change #108: Degradation in the brand equity or how people feel about the brand quite the opposite I think.
Speaker Change #108: We are feeling still very strong affinity with the brand or that's what we're seeing in response.
Speaker Change #109: So that was of course, encouraging and I think what we are seeing and what the feedback that we're getting and we can see is the same as what I mentioned before the consumers now shifting their behavior. So during the pandemic when people were at home a lot. They were accumulating quite a lot of wind. If you go and if we go and look at what was happening in terms of people joining clubs.
Deirdre A. Mahlan: So, during the pandemic, when people were at home a lot, they were accumulating quite a lot of wine. If you go in, and we look at what was happening in terms of people joining clubs and retention levels, those were the highest levels that we had seen in some time.
Speaker Change #110: And retention levels those were the highest levels that we had seen in some time and they have fallen slightly off of that but there is no material degradation in terms of what's happening, but we are finding that people did.
Deirdre A. Mahlan: And they have fallen slightly off of that, but there is no material degradation in terms of what's happening, but we are finding that people are purchasing perhaps less. Maybe they're not purchasing at every release. And when we ask them, they say, well, you know, I have enough wine, or it's expensive, and I'm thinking about it. So, I think our goal, as everyone's goal is, as you think about how to convert and retain consumers, is to make sure that we meet the consumer where they are, have the right offers at the right price points at the right times of year. We do believe we've got very positive feedback on the wine itself, so we don't think that's an issue.
Speaker Change #111: People are purchasing perhaps less maybe they're not buying at every release and when we ask some they say well you know I <unk>.
Speaker Change #112: Have an offline or it's expensive and I'm thinking about it. So I think our goal is as everyone's goal is as you're thinking about how to convert and retain consumers is to make sure that we meet the consumer where they are have the right offers at the right price points at the right times of year, we do.
Speaker Change #112: We believe we've got very positive feedback on the wind itself. So we don't think that's an issue I just think it's something about or working through our.
Deirdre A. Mahlan: I just think it's something about working through our details, how we are identifying, converting, and retaining the people on the list and then ensuring that we have the right offers so that their purchasing is at the level that we, you know, would hope that it would be. So, those details are what we're working through. And so, as we come through the year and, you know, in September when we come back, I'll be able to share more about the specific next steps that we may take with respect to identifying what's necessary to drive growth back.
Speaker Change #112: How we are identifying and converting and retaining the people on the list and then ensuring that we have the right offer so that they are purchasing is that.
Speaker Change #112: At the level that we are winning.
Speaker Change #112: Would hope that it would be.
Speaker Change #112: So.
Speaker Change #113: It is those details of what we're working through and so as we come through the year and you know in September when we come back I'll be able to share more about the specific next steps.
Speaker Change #113: And that we may take with respect to.
Speaker Change #113: Identifying what's necessary to drive the growth back into the brand.
Speaker Change #113: Okay.
Speaker Change #113: Paul.
Lauren Rae Lieberman: Okay, that's so helpful. If I can ask another implied question, the one implied by "I love this slide you guys put up, the guidance details, slide 12, I guess." And for the implied guidance for 4Q on net sales, organic net sales, excluding the cost of brown shift, it's a very wide range. And so, I get the industry's uncertain, but maybe Jennifer, if you could just help articulate what's at the high end of the range, what's at the low end? What are the sort of underpinning assumptions that we can think through that dictate where things may shake out in that range?
Speaker Change #114: If I can ask another.
Paul: The implied I love. This slide you guys put up the like guidance detail Slide 12, I guess.
Paul: And to the implied guidance for Q on net sales organic net sales, excluding the cost of brown chest.
Speaker Change #116: Very wide range.
And so the industry is uncertain, but maybe Jennifer if you could just help articulate.
Speaker Change #116: That's at the high end of the range was at the low end what are sort of the underpinning assumptions that.
Speaker Change #116: That we can think through that dictate where things may shake out in that range.
Jennifer Fall Jung: Yeah, thanks, great question. So there are a couple things going on underneath the covers. Obviously, we've talked a lot about the volatility in the industry, so that does, you know, put a little bit of length on the overall range, but then also keep in mind that we have just started to integrate our distributor network, and so we're still working out growth goals with them, and we still have some work to do, although we actually have received orders already from our newly aligned distributors, which is great information or great news for us It's really in the wholesale channel.
Jennifer Fall Jung: Yes. Thanks, Great question. So there's a couple of things going on underneath the covers obviously, we've talked a lot about the volatility with the industry. So that that does put a little bit of.
Jennifer Fall Jung: Links on the overall range, but then also keep in mind that we have just started to integrate our <unk>.
Speaker Change #118: Distributor network and so.
We're still working out gross both of them and we still have some work to do although we actually have received orders already from our newly aligned distributors are just great information are great news for us.
Speaker Change #118: So those are the two things that are really kind of driving a little bit of variability underneath the covers.
Speaker Change #119: Really in the wholesale channel, yes, I think only thing I would add to that is.
Jennifer Fall Jung: Yeah, the only thing I would add to that is it's true about depletions, but also about the timing of those orders, as Jennifer pointed out, as we're ramping up, is less predictable. So we wanted to ensure that we kind of covered all the ground as those changes have been happening.
Speaker Change #119: No about depletions, but also about the timing of those orders as Jennifer pointed out as we're ramping up is less predictable. So we wanted to ensure that we kind of covered all the ground as those changes are being made.
Lauren Rae Lieberman: Okay, that's great. And I think you guys spoke about this during the prepared remarks, but just to make sure I caught it. As you exit the fiscal year, do you think, like, where you stand with this distributor network integration, like, you'll be set and ready to go, or do you think there's still some volatility early next fiscal year, as things kind of settle out and there's, you know, perhaps excess wine around, you know, just, you know, as you make this transition?
Speaker Change #120: Okay, that's great and I think you guys spoke to this during the prepared remarks, but just to make sure I caught it.
Speaker Change #120: As you exit the fiscal year.
Speaker Change #121: Think like where you stand with this distributor network integration like Youll be set and ready to go or do you think there is still some volatility.
Speaker Change #122: Early next fiscal.
Speaker Change #123: It seems kind of settle out and there is perhaps excess wine around just as you make this transition.
Deirdre A. Mahlan: I think what we said was the look there is some you know the world as you know doesn't move neatly into quarters so there is go there may be some shifting and as we just pointed out for the fourth quarter and the reason why that range is so big is that there may there may be some that falls into q1 so as we come through and certainly as we come through the year we'll give you an update but I think by the time we get into 2q 2q q2 I would expect that it will all have washed through Okay, thank.
Speaker Change #123: Yeah, I think what we said was.
Speaker Change #123: There is some.
Speaker Change #124: The World as you know doesn't move neatly into quarters.
Speaker Change #125: So there is there may be some shifting in that as we just pointed out for the fourth quarter and the reason why that range is so big that there may there may be some that falls into Q1, so as we come through and certainly as we come through the year. We will give you an update but I think by the time, we get into two two <unk> Q2.
Speaker Change #126: I would expect that it will all have washed through.
Speaker Change #127: Okay. Thank you so much.
Lauren Rae Lieberman: Okay, thank you so much.
Speaker Change #127: Thank you. The following question comes from Peter Galbo with Bank of America. You May proceed.
Peter Thomas Galbo: Thank you. The following question comes from Peter Galbo with Bank of America. Please proceed.
Speaker Change #127: Yeah.
Peter Thomas Galbo: Hey, good afternoon.
Peter Thomas Galbo: Hi, Peter.
Peter Thomas Galbo: Okay.
Peter Thomas Galbo: Thanks for the question. I guess, Jennifer, maybe just a housekeeping job on the first.
Peter Thomas Galbo: Thanks for the question I guess, Jennifer maybe just a housekeeping on the first.
Peter Thomas Galbo: The $16 million in Sonoma Cotrera in the fourth quarter, I think that was maybe a run rate a bit below what would have been the expected plan on a go forward based on when the timing of the deal was announced. But what I don't want to do is take that number and extrapolate it if there's a lot of seasonality in that business. So maybe you could just help us understand the seasonality of Sonoma County Cotrera from a revenue standpoint. Yeah, when we did the three quarters ending January 30th, I think we had about 70 million.
Peter Thomas Galbo: The $16 million.
Peter Thomas Galbo: <unk> in the fourth quarter I think that was maybe run rating a bit below kind of what would've been the expected plan on a go forward based on kind of what the timing of the deal was announced but.
Speaker Change #129: I don't want to do is take that number and a trap related if theres a lot of seasonality in that business. So maybe you could just help us.
Speaker Change #130: That is the seasonality and Sonoma Cutrer air from a revenue standpoint, just different from your kind of your overall business.
Speaker Change #131: Yeah, when we the three quarters ending January 30, I think we added about $70 million of revenue from Sonoma Cutrer.
Jennifer Fall Jung: Yeah, when we did the three quarters ending January 30th, I think we had about 70 million in revenue from Sonoma Coterre. This is an approximate number; there is some seasonality to it, as we know holiday season is as you load in for holiday, one of the biggest quarters, but you know this I wouldn't extrapolate anything from a full-year plan.
Speaker Change #131: This is an approximate number there is some seasonality to it as we know.
Speaker Change #132: Holiday is as you're alluding for holiday one of the biggest quarters, but.
Speaker Change #133: I wouldn't extrapolate anything from a full year perspective.
No.
Speaker Change #134: I would also note just don't forget there are some distributor changes occurring for that brand as well. So so we want to be cognizant of that and the ups and downs that are just a matter of timing that could occur.
Speaker Change #135: Got it I wouldn't read.
Peter Thomas Galbo: I wouldn't read the proceedings. That's why we use the tilde. We don't mean for it to be a precise number that you should extrapolate. Okay, helpful.
That's why we use the tilda, we don't mean for it to be a precise number that you should extrapolate from.
Speaker Change #135: Okay.
Peter Thomas Galbo: And then maybe just like, to the extent that you guys have been delivering a lot of, um, a lot of gross margin upside in these quarters, um.., you know, and the volume weakness has kind of like flowed in. Like, just consider it. Is there a need to, I don't know, invest some of that gross margin upside back into price from a promotional level or even more into marketing spend?
Helpful and then maybe just like.
Speaker Change #136: To the extent that you guys have been delivering a lot of.
Speaker Change #136: A lot of gross margin upside.
Speaker Change #137: These quarters.
Speaker Change #137: Hmm.
Speaker Change #138: And the volume weakness is kind of like float in just considered is there a need to I don't know invest some of that gross margin upside back into back into price from a promotional level or even more in the marketing spend.
Peter Thomas Galbo: Just, it would seem that there was an opportunity given the gross margin over delivery to do more to accelerate the recovery from volume. You know, it's a great question. It's one of the reasons we're.
Speaker Change #138: It would seem that there is an opportunity given the gross margin over delivery maybe to do more to accelerate the recovery from a volume perspective.
Speaker Change #138: Yeah.
Jennifer Fall Jung: You know, it's a great question. It's one of the reasons we're really excited about our alignment with our distributors. You know, we will have our distributors much more focused on our business and reinvesting in our business as we move forward. So we will be reinvesting in the business in a very thoughtful way across all of our brands, and we're really excited about that. And then a little bit of what you saw in the gross margin, just to clarify, in Q3 is when we moved the Cost of Around Appellation from Q4 to Q3, and Cost of Around does have a high margin from last year into Q3. This year, we did see the margin favorability due to mix in Q3, and then you'll see a little bit of pressure in Q4 as that Cost of Around offering is not in Q4 anymore. So that that is a piece of it as well.
Speaker Change #139: It's a great question. It's one of the reasons, we're really excited about our alignment with our distributors. We will have our distributor is much more focused on our business and reinvesting in our business as we move forward. So we will be reinvesting into the business.
Speaker Change #139: In a very thoughtful way across all of our brands and so we're really excited about that.
Speaker Change #139: And then a little bit what you saw in the gross margin just to clarify in Q3 is when we move the cost around Appalachian from Q4 and customer and does have a high margin of last year into Q3. This year, we did see the margin favorability due to mix in Q3, and then youll see a little bit of pressure in Q4 is that cost around offering is not in Q4 anymore. So that is.
Speaker Change #139: A piece of it as well.
Speaker Change #140: Got it thanks very much.
Speaker Change #141: Thank you.
Thank you.
Andrea Faria Teixeira: The following question comes from Andrea Teixeira with J.P. Morgan. Please proceed.
Speaker Change #141: The following question comes from Andrea Tahira with Jpmorgan you May proceed.
Andrea Faria Teixeira: Thank you, and I'm glad and good to see that the team is forming right now. So, I wanted to just think about consumption, if we can try to extrapolate the noise from the wholesale and the pantry to stocking. What have you been hearing from the trade, and perhaps Axe-Costa-Brown in your tasting rooms could be a good metric to that, to help us, like, reconcile all this noise? And then also, clarification on the wide range of the guide in your slide and the distribution realignment.
Speaker Change #142: Thank you.
Andrea Faria Teixeira: And so that's been good to see that the team is forming right now. So I wanted to just think about consumption. If we can try to extrapolate the noise from the wholesale and the pantry Destocking. What have you are you hearing from.
Speaker Change #144: The trade and perhaps did you see X Costa Brown and your tissue rooms could be a good metric to that to.
Speaker Change #145: So help us reconcile all this noise and then also a clarification on the wide range of the guide in your slide.
Speaker Change #146: And the distribution realignment, how much of that distribution realignment realignment, you think would inform you to that I believe it's like 10 percentage points or would you went from minus 7% to plus two five.
Andrea Faria Teixeira: How much of that distribution realignment do you think would inform you about that? I believe it's like 10 percentage points that you went from minus 7 to plus 2.5 Axe-Costa-Brown, just to understand how much of that would be related to the distribution realignment.
Brian: Our next question, Brian just to understand if how much of that would be related to.
Brian: So the distribution realignment.
Speaker Change #148: Yes, we haven't really quantified that.
Jennifer Fall Jung: Yeah, we haven't really quantified that, you know, it's, it's, I think the way to look at it is where's the midpoint of that range because that will really show how we perform, how we expect Q4 to perform on an organic basis, versus how we have been performing year to date. So it's really in line with where we've been performing and just, you know, the wider range is just for the Yeah, and just like that,
Speaker Change #149: It's I think the way to look at it is where is the midpoint of that range because that will really show. How we performed how we expect Q4 to perform on an organic basis versus how we have been performing year to date. So it's really in line with where <unk> been performing and just.
Speaker Change #149: The wider range is just from the variability, yes, and just to.
Jennifer Fall Jung: And just to add a little bit more color, it's just, I think, a bit under 20% of the volume of the business is impacted by distributor change in some states, is moving, and in some states, there's no movement at all. But the thing is, the range is not so much that there's going to be disruption, but there is some shipment variability because the new wholesalers, of course, need to get their warehouses full of the brands that they're going to be representing. And the timing of that as we do kickoffs, et cetera, is just, you know, it's not so predictable today so we have allowed some range in there in terms of the timing of it.
Speaker Change #149: Add a little bit more color. It's just under it's just I think a bit under 20% of the volume of the business is impacted by distributor change in some states.
Speaker Change #150: The <unk> portfolio is moving and in some states Sonoma Cutrer Air in some states. There is no movement at all but the thing is the range is not so much that there's going to be disruption, but there is some shipment variability because the new wholesalers of course need to get their warehouses full of.
Speaker Change #151: The brands that they're going to be representing and the timing of that is we do kick off et cetera is just it's not so predictable when we today. So that we allowed some range in there in terms of the timing of it there isn't anything in terms of the fundamental underlying piece of the business and then to Jennifer's point there.
Andrea Faria Teixeira: There isn't anything in terms of the fundamental underlying piece of the business. And then, to Jennifer's point, there is still some uncertainty in the overall market. So, of course, even the business that's unaffected by wholesaler changes, we're being thoughtful about, you know, what the variability could be within that. But none of those pieces are very wide.
Speaker Change #151: Still some.
Speaker Change #151: Sure.
Speaker Change #152: Uncertainty in the overall market so of course, even the business that's unaffected by wholesaler changes, we're being thoughtful about what the variability could be within that but none of those pieces are very wide. It's just the number of components that we think in this environment warranted a wider range for one quarter, we recognize that seems quite high.
Speaker Change #152: Wide, but given what's happening in the market it seems like the prudent way to approach it.
Speaker Change #153: And maybe maybe that's.
Deirdre A. Mahlan: And maybe, maybe that's super helpful. Maybe the way to think about how you sounded optimistic about the depletions most recently could give us some sort of idea of depletions in May and how the progression was as you exit the quarter against February and February through May, right? So as you exit the quarter, you sounded more positive, or you're seeing depletions improving from that, from that level.
Speaker Change #154: Very helpful. Maybe the way to think how you sounded optimistic about the Depletions. Most recently, perhaps give us like some sort of.
Speaker Change #155: Depletions remain how.
Speaker Change #156: The progression or as you exit the quarter against the fiber in February through May right. So as you exited the quarter you sounded more positive or youre seeing depletion is improving from that from that level.
Deirdre A. Mahlan: Yeah, I mean, I think it was difficult to string together two months of good depletions before, you know, I think it was way back into early autumn or late summer last year before there were two consecutive months of depletions that we felt were consistent with our expectations for the business. And I would say April and May were two months of good depletions at the kind of, you know, kind of a growth rate that we think is consistent with our ambition for the business.
Speaker Change #157: Yeah, I mean, I think it's been difficult to get to string together two months of good depletions before.
Speaker Change #157: I think its way back into.
Speaker Change #157: Early autumn or late summer last year before there were two consecutive months of Depletions that we felt were consistent with our expectations for the business and I would say April and May.
Speaker Change #157: We're two months of good deletions in the kind of.
Speaker Change #157: Kind of a growth rate that we think is consistent with our ambition for the business. So we feel good about that that said as I said earlier in the call I don't want to declare victory on two months of good Depletions, we are still seeing.
Deirdre A. Mahlan: So we feel good about that. That said, you know, as I said earlier in the call, I don't want to declare victory on two months of good depletions. We are still seeing, you know, what I would still anticipate some of it just by pure mathematics in terms of what the industry is cycling from last year, that we should see some leveling off and slight improvement in the market. And, you know, barring any unexpected, you know, kind of macro or socioeconomic factors, we would expect to see, you know, a leveling and slight improvement in the market in the coming year.
Speaker Change #157: What I would still anticipate some of it just by pure mathematics in terms of what the industry is cycling from last year that we should see some leveling off and slight improvement into the market and barring any.
Speaker Change #157: Expected kind of macro or socioeconomic factors, we would expect to see a leveling and slight improvement in the market.
Speaker Change #157: The coming months.
Speaker Change #158: Okay. Thank you I'll pass it on.
Andrea Faria Teixeira: Okay, thank you. I'll pass it on.
Speaker Change #158: Thank you.
Andrew Strelzik: Thank you. As a quick reminder, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from Andrew Strelzik with BMO. You may proceed.
Speaker Change #159: A quick reminder, if you would like to ask a question. Please press star one on your telephone keypad the.
Speaker Change #160: The next question comes from Andrew <unk> with BMO you May proceed.
Speaker Change #161: Hey, good afternoon, thanks for taking the questions.
Andrew Strelzik: Hey, good afternoon. Thanks for taking the questions. Excuse me, my first one is on the updated synergy assumptions.
Speaker Change #162: Excuse me my first one is on me.
Speaker Change #163: David synergy assumptions.
Speaker Change #164: Where is that upside to incrementally coming from and can you share. How much is included in the fourth quarter versus two.
Speaker Change #164: 25, and if youre, including any revenue synergies at this point.
Speaker Change #165: Great Andrew.
Andrew Strelzik: Where is that incremental upside coming from? And can you share how much is included in the fourth quarter versus 2025? And if you're including any revenue synergies at this point?
Speaker Change #164: So.
Speaker Change #166: The majority of the synergies are coming from.
Speaker Change #167: Compensation and organization leverage being able to leverage our teams here at <unk>, we have the expertise in luxury wine versus the resources that were currently dedicated to the business, but there are there are also some savings associated just getting us all on the same systems really streamlining processes. So the majority of it is though from a compensation.
Speaker Change #166: <unk> perspective.
Speaker Change #166: You will see the synergies come through in 2025 as we noted in the first full year of operations for the first quarter. We are still although the integration plan is complete we are still switching over some things to our network. So there'll be some investments now and that will be offsetting some of those synergies that we really expect to see them.
Speaker Change #166: In 2025, and it'll be not all in one corner it'll be throughout the year.
Speaker Change #166: Yeah.
Speaker Change #166: Okay, Okay, Great and then I guess.
Speaker Change #168: Go ahead.
Speaker Change #169: Oh, sorry, and you did ask about revenue synergies, we have not make those in at this point.
Speaker Change #170: Got it okay.
Speaker Change #171: My other question is just about the cost controls that.
Speaker Change #171: You've been able to execute.
Execute against and I guess, what I'm trying to understand is how much of that.
Speaker Change #171: Kind of as Youre able to hold onto once the topline improves versus trying to more being timing related.
And I guess I'm, just trying to think about.
Speaker Change #171: At what point.
Speaker Change #171: The portion that is more timing related you start to make those reinvestment or you start to make those investments.
Speaker Change #172: Is there any kind of sign post to think about or how you guys will gauge the timing related to that.
Speaker Change #172: Yes.
Speaker Change #173: So we do feel really good about being able to offset our topline.
Speaker Change #174: Tough macro environment with cost controls as well as our improved gross margin and where we have been saving money has really been from a discretionary standpoint and back of house at this point, we want to make sure that we're still investing for profitable growth in the business and we will continue to do that on a go forward basis, we have.
Speaker Change #174: Now 11 are great brands that we need to support so we will continue to invest to support those brands in a profitable way.
Speaker Change #174: Yeah.
Speaker Change #175: Thank you.
Speaker Change #176: There are currently no further questions at this time I will pass it back over to the management team for closing remarks.
Speaker Change #177: Okay. Thanks.
Jennifer Fall Jung: Great. Hey Andrew.
Speaker Change #178: I want to thank everyone again for joining us today to review, our third quarter performance and guidance for fiscal 'twenty four I'll look forward to speaking to you again in September when we report our fourth quarter and full year results.
Jennifer Fall Jung: So, the majority of the synergies are coming from really compensation and organization leverage, being able to leverage our teams here at Duckhorn because we have the expertise in Lux Rewind versus the resources that we're currently dedicated to the business. There are also some savings associated with just getting us all on the same IT systems, really streamlining processes.
Jennifer Fall Jung: You will see these synergies come through in 2025, as we noted in the first full year of operations. For the first quarter, we are still, although the integration plan is complete, still, you know, switching over some things to our network. So, there'll be some investments now that will be offsetting some of those synergies, but we really expect to see them in 2025. And it won't be all in one corner. It'll be throughout the year.
Andrew Strelzik: Okay, okay, great. And then I guess I'll go ahead.
Jennifer Fall Jung: Sorry, and you did ask about revenue synergies. No, we have not made those available at this time.
Andrew Strelzik: Got it. Okay.
Jennifer Fall Jung: And then my other question is just about the cost controls that you've been able to execute against. And I guess what I'm trying to understand is how much of that... able to hold on to once the top line improves versus kind of more being timing related. You know, and I guess I'm trying to think about at what point, the portion that is more timing-related, you start to make those reinvestments, or you start to make those investments. If there are any kind of signposts to think about or how you guys will gauge the timing related to that, thanks. Yeah, so we do feel really good about being able to offset our carbon footprint.
Jennifer Fall Jung: We do feel really good about being able to offset our top line in this tough macro environment with cost controls as well as our improved gross margin. Where we have been saving money has really been from a discretionary standpoint and back of house. At this point, we want to make sure that we're still investing in profitable growth in the business, and we will continue to do that on a go-forward basis. We now have 11 great brands that we need to support, so we will continue to invest in supporting those brands in a profitable way.
Operator: There are currently no further questions at this time. I will pass it back over to the management team for closing remarks. Okay, thanks.
Deirdre A. Mahlan: I want to thank everyone again for joining us today to review our third quarter performance and guidance for fiscal 24. I look forward to speaking to you again in September when we report our fourth quarter and full year results.
Speaker Change #178: Q until then.
Speaker Change #178: Okay.
Speaker Change #179: This concludes the conference call. Thank you for your participation you may now disconnect your line.
Operator: This concludes the conference call. Thank you for your participation. You may now disconnect your line.