Duckhorn Portfolio Inc

NYSE:NAPA

Good afternoon, ladies and gentlemen. Thank you for joining today's Duckhorn Portfolio Q3 2024 Earnings Conference Call. My name is Tamia, and I will be your moderator for today's call.[Operator Instructions] I would now like to pass the call over to Ben Avenia-Tapper, Vice President, Investor Relations. Please proceed.

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 Fall Jung, Chief Financial Officer; and Sean Sullivan, Chief Strategy and Legal Officer.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, 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.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.I also note that the Duckhorn Portfolio's balance sheet as of April 30, 2024, reflects the assets acquired in the Sonoma-Cutrer acquisition. However, because the closing occurred on the last day of the quarter, the income statement does not include Sonoma-Cutrer results in 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 the Circana 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.S. track channels, unless otherwise noted.With that, I will turn the call over to Deirdre.

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 3 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.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 resist. I am delighted to be serving in the role and energized by what lies ahead for Duckhorn.I'll turn now to our business and the broader industry. Although the 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-Cutrer acquisition and the comprehensive realignment of our wholesale distribution network, both of which we believe set us up for our next phase of growth.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 pressured due to soft consumer demand. While we had expected the industry to grow low-single-digits in Q3, consumer data for luxury wine as measured by Circana, was down 1% in the quarter, 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 softer than anticipated response to our Kosta Browne appellation series offering created top line pressure in Q3.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. We are watching industry trends closely and continue to see a consumer preference for premiumization within wine, where demands in the $15 to $20 category, and to an even greater degree, $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 quarter. 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 3 primary growth drivers for the second half.First, innovation with new products like our lower-in-calorie/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 by-the-glass on-premise programs.While some of these initiatives are gaining traction, current market dynamics are impacting the results. I'll take you through them individually. 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 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-alc 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 4-week Circana data.Duckhorn portfolio wines now occupy 3 of the top 10 spots on the domestic luxury Sauvignon Blanc leader chart. 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. 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 a strong double-digit growth in net sales, Decoy Limited Merlot didn't generate the year-over-year in quarter growth in shipments we anticipated. Although we are encouraged by the consumer demand, as represented by Circana, which has been very strong.Finally, our third initiative, increase programming, has been most notably impacted by broader industry trends. Specifically, we've seen slower uptake of our by-the-glass programs. Across the industry, on-premise sales dipped in Q3 according to distributor data. The industry has seen some improvements since the lows of February and March, and our results continue to outperform the market in both on and off-premise. 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 across the industry, spend per visitor at our tasting rooms remains strong. In fact, the #1 selling label at our Duckhorn Vineyards' tasting room is The Discussion, the Pinnacle label of the Duckhorn Vineyard's Winery brand, which sells for nearly twice the price of our vineyard-designated red wine.Tasting room 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 elevated tasting experiences. As we previously communicated, Kosta Browne has underperformed our expectations in its most recent releases, 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, including the successful integration of Sonoma-Cutrer and the completion of our wholesale distributor network realignment. We closed the Sonoma-Cutrer transaction on April 30, 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.We initially forecast approximately $5 million in cost synergies from the acquisition, a number that we now expect to be up to $10 million of cost synergies. Further, Sonoma-Cutrer 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 Circana 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 significant opportunity to build upon Sonoma-Cutrer's strong existing growth.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 achieved. 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, and while we anticipate some unevenness in the phasing of shipments and depletions over the next 2 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 the 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. 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 for the year.

Thank you, Deirdre, 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. 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.Over 50% of our net sales are derived from states in which we have a wholesale distributor alignment. 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 the 3-tiered alcohol distribution model.We ended the quarter with distributor inventory days on hand, above our expectations of 65 days as weaker market conditions have 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. The direct-to-consumer channel increased 71.4%, reflecting the shift of our largest Kosta Browne 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 spend and the promotional activity, reflecting lower-than-expected depletion volumes in the quarter.Adjusted SG&A, which excludes approximately $4.8 million in transaction and integration expenses associated with the acquisition of Sonoma-Cutrer, 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. 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 2.1x net debt. This is slightly above historical levels, reflecting debt from the Sonoma-Cutrer acquisition prior to any EBITDA contribution.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 30, our guidance is now inclusive of Sonoma-Cutrer 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 1% to positive 1%. 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-Cutrer 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.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 connection with the acquisition of Sonoma-Cutrer.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 an important inflection point for the company. As we've discussed, we have a strong portfolio, made even stronger by the addition of Sonoma-Cutrer. We have a robust wholesale network now strengthened and deepened by our realigned distributor network. And 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, Jennifer, Sean and I are available to take your questions.

[Operator Instructions] The first question comes from Kaumil Gajrawala with Jefferies.

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-led? Is there something else going on? Just any details would be useful.

Yes. So, as we're -- and nice to hear from you. We -- yes, 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 slowdown on on-prem. We're hearing that from our distributors as well and we're seeing it in the data. But I think, it just kind of goes back to -- we're seeing strength in our category as we continue to outperform. So, you're not seeing that as much in the luxury wine segment as you are in the total segment.

Yes. Kaumil, I'll just add a little bit to that. And I -- you may hear this from others across the Bev-Alc industry. I mean, clearly, there is 2 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 2 things. 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 adjusted their behaviors post-COVID.So I think at the wholesale and retail levels, 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 stored in the ring in their stores and then started slowing down purchasing and changing their behavior.And then I think the industry felt that certainly through the end of last year that through the wholesale channel, they perhaps thought that as that forecast softened, the calculated days on hand go up and then that adjustment starts -- the normalization starts happening through that cycle. I think there is some softening, and you can see it because the Circana data backs that up. There is some softening in the consumer takeoff.I don't -- it's not marked, it's just been kind of slowing. And I think the reason that 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 -- just the remarks you just heard, we did get some third quarter and our third quarter, the market turned down a bit.I don't think that is indicative of anything. It's gotten a little bit better in the months since. So I do think that we have a, what I would call a softening consumer demand, combined with just some adjustment that needed to happen through the market. So, 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 than a marked 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 is how to ensure that we're meeting the consumer where they are and engaging with them effectively for our brand growth.

Okay. Got it. And if I -- maybe just trying -- not to put words in your mouth, but just to make sure I understand, it doesn't sound like it feels like to you that we're maybe 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're saying?

Yes, I'm not -- 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 watch this as close or closer than we do, every day there's 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 of our views.

I do look at it pretty closely and I also don't know. So, I guess that's why I asked.

Yes. Well, you're in good company.

When I think about -- yes, when I think about your guidance, does that assume that you just get -- you get inventories to where you would like them to be when we start next year?

Absolutely, yes.

The next question comes from Lauren Lieberman with Barclays.

Great. So, just want to talk a little bit about Kosta Browne. I know you'd flagged it as a softer uptake on this year's offering is 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 on the -- almost like a 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 like the uptake on Kosta Browne was my understanding. So, I'm just curious also about that degree of surprise.

Yes, thanks for that, Lauren. I think this goes back to the comments that I made in Kaumil's -- in response to Kaumil's question a couple of minutes ago. I'll start there, which is that the behavior of consumers has shifted. And I think all -- 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 how the consumers purchase.So, the first thing I'll say is, we have done outreach to our consumer base in Kosta Browne whom we have relationships with through the club. And we do not see any degradation in the brand equity or how people feel about the brand, quite the opposite. I think, we are feeling still very strong affinity with the brand, and that's what we're seeing in response.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 consumer is now shifting their behavior. So, during the pandemic when people were at home a lot, they were accumulating quite a lot of wine. If you go and -- if we go and 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. 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 buying at every release.And when we ask them, they say, "Well, I have enough wine 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 the year.We do believe we've got very positive feedback on the wine itself. So we don't think that's an issue. I just think it's something about working through our -- how we are identifying and converting and retaining the people on the list and then ensuring that we have the right offer so that their purchasing is at the level that we would hope that it would be.So it is those details of what we're working through, and so as we come through the year and 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 the growth back into the brand.

Okay, that's so helpful. If I can ask another, the implied -- I love this slide you guys put up the -- like guidance detail, Slide 12, I guess. And for the implied guidance for 4Q on net sales -- organic net sales, excluding the Kosta Browne shift, it's a very wide range. And so I get the industry is uncertain. But maybe, Jennifer, if you could, like just help articulate what's at the high end of the range? What's at the low end? What are sort of the underpinning assumptions that we can think through that dictate where things may shake out in that range?

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 does 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 they -- we actually have received orders already from our newly aligned distributors, which is great information or great news for us. So those are the 2 things that are really kind of driving a little bit of the variability underneath the covers. It's really in the wholesale channel.

Yes, I think the only thing I would add to that is, it is still about depletions, but also about the timing of those orders, as Jennifer pointed out. As we're ramping up, it's less predictable. So we wanted to ensure that we kind of covered all the ground as those changes are being made.

Okay, that's great. And I think you guys spoke to 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 as things kind of settle out and there's perhaps excess wine around just as you make this transition?

Yes. I think what we said was, look, there is some -- the world, as you know, doesn't move neatly into quarters. So there is through, 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 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 Q2, I would expect that it will all have washed through.

The following question comes from Peter Galbo with Bank of America.

I guess, Jennifer, maybe just a housekeeping on the first. The $16 million of Sonoma-Cutrer in the fourth quarter, I think that was maybe run rating a bit below kind of what would have been the expected plan on a go forward, based on kind of 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 with that. Is the seasonality in Sonoma-Cutrer from a revenue standpoint, just different from your -- kind of your overall business?

Yes. When we -- the 3 quarters ending January 30, I think we had about $70 million of revenue from Sonoma-Cutrer. This is an approximate number. There is some seasonality to it, as we know, holiday is, as you [ load in ] for holiday, one of the biggest quarters. But this -- I wouldn't extrapolate anything from a full-year perspective.

Peter, I would also note, just don't forget there are some distributor changes occurring for that brand as well. So we want to be cognizant of that, and the ups and downs that are just a matter of timing that could occur.

Got it.

I wouldn't read procedurally through the -- that's why we use the tilde. We don't mean for it to be a precise number that you should extrapolate from.

Okay. Helpful. And then, maybe just, like, to the extent that you guys have been delivering a lot of gross margin upside on these quarters and the volume weakness has kind of like flowed in, like, you just considered 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? Just it would seem that there's an opportunity given the gross margin over delivery, maybe to do more to accelerate the recovery from a volume perspective?

Yes, it's a great question. That's one of the reasons we're really excited about our alignment with our distributors. 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 into the business in a very thoughtful way across all of our brands. And so, we're really excited about that. And then a little bit on what you saw in the gross margin, just to clarify, in Q3 is when we move the cost around Appalachian from Q4 and [ cost around ] 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 you'll see a little bit of pressure in Q4 as that cost around offering is not in Q4 anymore. So that is a piece of it as well.

The following question comes from Andrea Teixeira with JP Morgan.

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 destocking, what have you been hearing from the trade and perhaps DTC ex-Kosta Browne and [Indiscernible] could be a good metric to that to help us, like, reconcile all this noise?And then also a clarification on the wide range of the guide in your slide, and the distribution realignment, how much of that distribution realignment do you think would inform you to that? I believe it's like 10 percentage points that you went from minus 7% to plus 2.5%, ex-Kosta Browne. just to understand if how much of that would be related to the distribution realignment?

Yes. We haven't really quantified that. 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 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 -- the wider range is just for the variability.

Yes. And just to 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, the Duckhorn portfolio is moving and in some states Sonoma-Cutrer, in some states, there's no movement at all. But the thing is, the range is not so much that, oh, 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 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 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 what the variability could be within that.But none of those pieces are very wide. It's just a number of components that we think in this environment, warranted a wider range. For one quarter, we recognize that seems quite wide. But given what's happening in the market, it seems like the prudent way to approach it.

And maybe I'll -- that's super helpful. Maybe the way to think how you sounded optimistic about the depletions most recently, perhaps give us like some sort of idea of depletions in May and how the progression were as you exit the quarter against the February through May, right? So as you exit the quarter, you sounded more positive or you're seeing depletions improving from that level.

Yes. I mean, I think it's been difficult to get to string together 2 months of good depletions before, I think it's way back into early autumn or late summer last year before there were 2 consecutive months of depletions that we felt were consistent with our expectations for the business. And I would say April and May were 2 months of good depletions and the kind of 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 2 months of good depletions. We are still seeing what -- and 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 unexpected kind of macro or socioeconomic factors, we would expect to see a leveling and slight improvement in the market in the coming months.

[Operator Instructions] The next question comes from Andrew Strelzik with BMO.

My first one is on the updated synergy assumptions. Where is that upside incrementally 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?

Great. Hey, Andrew. So, majority of the synergies are coming from really compensation and organization leverage, being able to leverage our teams here at Duckhorn being, we have the expertise in luxury wine and versus the resources that were currently dedicated to the business. But there are also some savings associated just getting us all on the same IT systems, really streamlining processes.So the majority of it is, though, from a compensation perspective. 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, 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, but we really expect to see them in 2025. And it will be not all in one quarter. it will be throughout the year.

Okay. Okay. Great. And then I guess, my -- go ahead.

Sorry. And you did ask about revenue synergies. No, we have not baked those in at this point.

Got it. Okay. 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 kind of you're able to hold onto once the top line improves versus kind of more being timing related? And I guess I'm trying to think about at what point the portion that is more timing related, you start to make those reinvestment or you start to make those investments. Is there any kind of signpost to think about or how you guys will gauge the timing related to that?

Yes. So, 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 at 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 now 11 great brands that we need to support. So we will continue to invest to support those brands in a profitable way.

Thank you. There are currently no further questions at this time. I will pass it back over to the management team for closing remarks.

Okay, thanks. 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. Cheers, until then.

This concludes the conference call. Thank you for your participation. You may now disconnect your line.