Brown Forman Inc

Good morning. My name is Dorothy, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter fiscal 2019 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Jay Koval, Vice President and Director of Investor Relations. Sir, he may begin.

Thanks, Dorothy, and good morning, everyone. I want to thank you for joining us for Brown Forman's second quarter 2019 earnings call. Joining me today are Paul Varga, our Chairman and Chief Executive Officer, Lawson Whiting, Executive Vice President, Chief Operating Officer, and incoming Chief Executive Officer, and Jane Moreau, Executive Vice President and Chief Financial Officer. This morning's conference call contains forward-looking statements based on our current expectations. Numerous risks and uncertainties may cause actual results to differ materially from those anticipated or projected in these statements. Many of the factors that will determine future results are beyond the company's ability to control or predict, and you should not place undue reliance on any forward-looking statements, and the company undertakes no obligation to update any of these statements, whether due to new information, future events, or otherwise. This morning we issued a press release containing our results for the second quarter of fiscal 2019, in addition to posting presentation materials that Jane will walk through momentarily. Both the release and the presentation can be found on our website under the section titled Investors, Events, and Presentations. In the press release, we have listed a number of the risk factors that you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our Form 10-K, 8-K, and 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures, the reconciliation to the most directly comparable GAAP financial measures, and the reasons management believes they provide useful information to investors regarding the company's financial conditions and results of operations are contained in the press release and investor presentation. One additional housekeeping item, we evaluated changing today's call given the passing of former President George Bush, but decided that the change would be more disruptive to everyone's calendars than keeping our originally scheduled date and time. That being said, we plan on ending our call today at 10.50 a.m. to ensure that all of our participants have adequate time to join the funeral ceremony for our 41st president at 11 a.m. EST. With that, let me turn the call over to Lawson.

Okay, well, thank you, Jay, and good morning, everyone. Today, Jane and I will be talking about the first half of our fiscal year 2019, where Brown Forman continued to deliver solid top-line growth. However, there are a couple of factors, most obviously and notably tariffs, that are causing fluctuations in our quarterly results. But overall, I'd characterize the first half as a continuation of the solid, fundamental growth story that we have seen for much of the past decade. So first, I just want to start out by thanking our fourth 4,800 employees around the world for the solid start to fiscal 19, delivering 5.5% top-line underlying growth on top of last year's strong 7% top-line gain. We're planning for modestly faster underlying sales growth in the back half of the year, doing part to easier prior year comps of 5% growth. More details to follow from Jane, but if not for the tariffs, we would be on track to not just deliver another great year of top-line results, but also bottom line, where underlying operating income growth, X tariffs would be on track to be up in sort of the high single digits, consistent with our sort of our most recent historical 10-year numbers, as well as the ambitions that we have going forward. Even so, we believe we've taken the appropriate measures that should position us for mid-single-digit underlying operating income growth for the year, which would result in EPS growth in the range of 11 to 18 percent for fiscal 2019. So these tariffs have certainly presented challenges across many areas of the company, including our production and supply chain operations and, of course, our commercial teams in the affected markets across Europe, Mexico, and Canada, to name a few. We're in a unique position as the market leader in American whiskey, competing against so many non-impacted spirits categories. But over the short term, we're assuming the tariffs remain in place. In our first quarter earnings call, we reduced the midpoint of our underlying operating income growth for the year by roughly three points, or approximately $35 to $40 million net impact due to tariffs. That has not changed. As a reminder, the cost of the tariffs is going to be largely a hit to our gross margin. To date, we have chosen to largely absorb these costs so that we could maintain the solid commercial and consumer momentum through the critical O&D period. As we communicated previously, we are and we will continue to evaluate pricing on a market-by-market, customer-by-customer basis. In other words, our approach is what I would describe as surgical, and we will continue to do this as long as the tariffs remain. Despite these short-term headwinds, our long-term goals and our growth ambitions remain unchanged, which is what we'll be talking about next week at the Investor Conference in New York. We'll spend the afternoon discussing our strategy and why we're so bullish on the global growth potential for our premium American whiskey brands and how we intend to lengthen our lead in a rapidly growing category. I'll introduce our strategic framework as well as discuss how we have organized our teams to better focus and execute our strategy. Our Chief Brands Officer will focus on some new thinking on how we build our brands and share more specifics on how we intend to capitalize on the global demand for our premium American whiskey brands. We'll hear from our commercial leaders on where we see the greatest growth opportunities and how we'll seize them. Jane will share how we invest to fuel growth and deliver returns for shareholders. Garvin will also be there to talk about the Brown family and their ongoing commitment to building forever at Brown Foreman. And finally, Paul will be there in his final appearance as CEO to lead some bourbon tastings with the investment community. Easy. So now I'm going to hand the call over to Jane, let her walk you through the first half of the year of results, and then give you some more color on our reconfirmed guidance for fiscal 2019.

Okay. Thanks, Lawson, and good morning, everyone. During my comments today, I will reference the slides we posted to our website this morning. This will help you walk you through the two main areas of focus that I plan on covering in my prepared remarks. These two areas include, first, a review of our first half results, And second, our outlook of fiscal 2019, which reaffirmed this morning. After I complete my prepared remarks, we'll open the call up to Q&A. Okay, so let's begin with slide three, and it highlights our first half results, reflecting solid top and bottom line underlying growth, even after considering the impact that the cost of tariffs began to have on our gross margin in the second quarter. First half underlying net sales grew about 5.5%, as Lawson said a moment ago. Tariff-related inventory buy-ins, largely in Europe, and givebacks associated with these buy-ins created quite a bit of noise in our underlying rate of sales growth for both quarters. On our last quarterly call, we estimated that the tariff-driven retailer and wholesaler inventory buy-ins had contributed roughly two to three points to our 9% underlying net sales growth in the first quarter. We had anticipated that the buying-in effect would reverse by the end of the fiscal year, and indeed it did, as essentially the entire give-back occurred during the second quarter, negatively impacting second quarter sales growth by about two points. In other words, our underlying net sales growth of 30% in the second quarter was equally as unrepresentative of our trends in our business as was the first quarter's 9% growth. The first half growth rate of 5.5% on top of last year's first half growth of 7% equates to an over 6% CAGR as illustrated on slide four. As we look over the balance of the fiscal year, it should be noted that the second half comparisons eased considerably plus 5% underlying net sales growth, implying that we should see modestly higher net sales growth in the back half, given our current business trends, and that'll keep us on track to deliver another year of 6% to 7% growth in underlying net sales. Now, the difference between the underlying operating income growth in the first half versus the second half is even larger. We grew underlying operating income by 4% in the first half of this fiscal year, on top of a very strong 14% underlying growth register in the same period a year ago. The combined impact of lower gross margins due in part to tariff costs, as well as the fact that the AMP investments have been front-loaded this year, pulled down our year-to-date underlying operating income growth to 4%. These factors were partially offset by the continued tight management of SG&A spend. Now, the company remains focused on efficiency programs and reallocation efforts to ensure that we are both leveraging prior investments and positioning our brands for long-term success in the marketplace. Now, moving on to slides five and six, You'll see our reported net sales growth was pulled down by about two points due to foreign exchange and one point due to the adoption of the new revenue recognition standard. Slide seven and eight dig into our results by geography. Let's start with the United States. We delivered 3% growth in underlying net sales during the first half of this year. The second quarter growth accelerated modestly despite a route to consumer change in the market and tough comparisons against last year's first half, where our U.S. business grew 6%, helped by last year's first half's heavy timing of promotional activities. As a result, our two-year average growth in the United States in the first half is in the 4% to 5% range, as shown on slide 9. So acknowledging that there are always short-term fluctuations in three-month takeaway trends, we believe our business in the U.S. is growing in the mid-single digits, and that's supported by the blended Nielsen and NAPCA value takeaway trends during the first half of the year, as well as the 12-month trends. Our emerging markets delivered excellent underlying net sales growth, 10% on top of 15% gains in the first half of last year. our growth in emerging markets remained broad-based, including strong contributions from Mexico, Brazil, Ukraine, China, Sub-Saharan Africa, and India. Similar to the first quarter, it was in our developed international markets that tariffs had the largest impact on our growth rates. This is a tale of two quarters, if you will. The first quarter benefited significantly from retail and wholesaler-driven buy-ins in several developed markets in Europe, and the second quarter experience to give back from those buy-ins. Given our estimates that inventories are now largely in line with historical levels, we believe that the first half underlying net sales growth of 5% is roughly indicative of the trends we have seen in our developed international markets over the last several years. Germany, Australia, and Spain were standout performers, while we also registered solid growth from the UK and France. And then finally, travel retail continued to grow well into the double digits, with underlying net sales growth of 14% on top of last year's first half growth of 11%. This growth was fueled by an increase in travelers, growing demand for the American whiskey portfolio, and new product introductions, such as Jack Daniel's Bottled and Bond. And moving on to slide 10, you can see it highlights our well-balanced delivery of growth by brand, with the Jack Daniel's family of brands underlying net sales up 5%, and our premium bourbons, including Old Forrester and Woodford Reserve, up 24%. We're particularly pleased with the continued U.S. leadership of Woodford Reserve and the super premium bourbon category. I'm very optimistic as we ramp up our investment and focus globally on Woodford, as well as our super premium whiskey portfolio. Further, tequilas, including Herradura and Aljimador, as well as Numix, continue to grow nicely, up 12%. Slides 11 and 12 examine our margins and other rates of growth. What I thought I might do now is spend just a moment talking about gross margin, which, as expected, began to experience the cost of tariffs during the second quarter. Specifically, when we started the fiscal year and in the absence of tariffs, we expected modest declines in gross margins, similar to what we experienced in fiscal 2018. Recall, this anticipated decline was due to higher input costs, including wood and agave, as well as the incremental depreciation expense associated with our multi-year capacity expansion program. You may also recall on our first quarter call in August, we revised our outlook for gross margin declines to over 200 basis points for the full year, reflecting the net impact of tariff-related costs as we sought to invest behind maintaining the consumer momentum in our business. As a reminder, as one of our tariff mitigation items, we shifted a couple months of inventory to Europe, which in conjunction with our normal inventory levels and considering the timing of tariffs when they took effect, protected the majority of our business in Europe through the first five months of fiscal 2019. Thus, During our second quarter, we began to realize the net tariff-related costs as well as the expected increase in input costs. These factors, combined with the impact from the adoption of the revenue recognition standard, reduced our gross margin during the second quarter by 200 basis points, resulting in a 100 basis point decline during the first half. And you can see this all illustrated on slide 12. So now moving on to our operating expenses. Our underlying A&P investment grew 7% in the first half, a few points above sales growth due to the timing of the fund. Underlying SG&A grew 3%, driven in part by costs associated with organization-related changes in the early retirement program the company offered in the first quarter. In the aggregate, our underlying operating income growth through the first half was up 4% and was negatively impacted by roughly two percentage points due to the incremental costs associated with tariffs. A 19% effective tax rate fueled by tax reform helped drive the 8% growth in earnings per share to 93 cents. So now let me move on to my second topic and share with you our reaffirmed outlook for fiscal 2019. that you can see on slide 13. So despite the tariff-driven lumpiness in our first and second quarter results, the underlying net sales growth in the first half keeps us on track to deliver another year of strong top-line growth at Brown Foreman. Our takeaway trends for the brands remain solid and supportive of our growth ambition. Second half results in the U.S. should benefit from the focused promotional support that we had planned for the large holiday selling season. As a reminder, top line comparisons eased by two percentage points in the back half. In total, our outlook remains unchanged from our first quarter call as we expect another year of six to seven percent growth in our underlying net sales in fiscal 2019. Also unchanged from our first quarter guidance, we are assuming that tariffs, as Lawson said a moment ago, remain in effect throughout the remainder of fiscal 2019 in the EU, China, Mexico, Canada, and Turkey. We continue to assess the timing and the amount of additional price increases on a market-by-market basis, but we do not expect that additional increases would offset the cost of the tariffs are the higher cost of goods we had already anticipated for the full fiscal year. As a result, we believe the gross margin pressure will continue during the second half of the fiscal year and cause an over 200 basis point decline for the full year, which is really consistent with what we communicated to you in August. While first half underlying AMP growth came in well ahead of our underlying net sales growth, we anticipate that these two metrics will grow roughly in line on a full-year basis. We expect tight management of SG&A should result in flat spend for the year, creating some modest operating leverage from gross profit to operating income. As a result, we are reaffirming our full-year expectations for 4 to 6 percent underlying operating income growth for fiscal 2019. Our earnings per share outlook is also unchanged, $1.65 to $1.75, and this range represents a growth of 11% to 18% over last year's EPS of $1.48. As a sensitivity, EPS over the balance of the year would be impacted by roughly 4 cents if foreign exchange rates moved 10% in either direction. So in summary, Our company continues to register solid top-line momentum. And as Lawson also said a few moments ago, in the absence of tariffs, we would be on track for another year of high single-digit underlying operating growth and operating income. Despite this short-term challenge, we continue to manage the business as we always have for the long term. We believe we have some of the best premium American whiskey brands and assets in the world, which when combined with our whiskey-making know-how and brand-building skills, position us well to continue creating shareholder value. Our results are well-balanced, help our fast-growing business outside of the United States. Our business in the United States continues to benefit from our portfolio skew toward the fastest-growing categories, including American whiskey and tequila. We believe our portfolio, including our leading premium American whiskey brands, are significantly underpenetrated today relative to their long-term potential, and our teams are working hard at executing our 2025 strategy to capture this growth, which, by the way, You'll hear more about next week at our Investor Day. Equally important, we have invested significant capital in the United States to expand our business to fuel the growing demand we expect from current and future consumers of our brands around the world. This includes a multi-year period of stepped-up CapEx and inventory investment, which has been a significant use of cash over the last several years. We expect to leverage these working capital investments in the coming years to drive additional free cash flow generation and provide opportunities to return cash to shareholders as we always have, thoughtfully, disciplined, and opportunistically, sensitive to the broader environment, including our recent dividend increase of 5.1% and our share repurchase activity in the second quarter. And so with that, wraps up my remarks. Dorothy, we can please open up the call for some questions.

As a reminder, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from the line of Brett Cooper with Consumer Edge Research.

Good morning, and thank you. Two questions for me. I was just hoping you could help us understand, I guess from your perspective, the puts and takes on timing-related items that are a little bit harder for us to see So specifically you call out in the release promotional timing and distributor changeover, just trying to get a sense. I appreciate that the three is against the six a year ago. If you put those together, you're growing roughly in line with the category. And given your portfolio, at least I would expect it to grow a little bit better. And then the second is really on a topic you brought up last call, and that's with respect to the creation of the emerging brands group. The brands that are in that group really get a heightened focus. I suspect Jack Daniels and Woodford in the U.S. make a lot of money for everybody so those don't get left behind. And I was just wondering if you could offer your take if there's a transition period in terms of shifting of responsibilities before you get the impact from those changes in a similar way that the reallocation of Southern Comfort Resources took a bit to show through in results. And then finally, just what comes of the non-focused brands as a result of the shift? Thank you.

Thank you, Brett. Thank you, Brett. So let me start with the United States and see if I can help. There is a lot of noise, as we said, in the numbers. And so if you look at the first half, just to reiterate, our growth in the business was 3% at the top line. There was a couple of things I called out. One, there was a distributor change in one state. It pulled our numbers down about a point. That's behind us. And then there's some other timing activities that happened. I'd like to focus specifically timing being on our really heavy promotional activities that we did across the board last year on Jack Daniels, Gentleman Jack, Honey and Fire. And we chose to push that through the holiday period and later this fiscal year. So when we consider both of those factors, we think our business is running in the U.S. in the 4% to 5% range. And, again, that is consistent with the syndicated data growth. One thing that we don't have that we've had in the past, perhaps I think this is getting to your question, we do have Rye out there. We can talk about that in a little bit more detail. But the innovation lift to our business that we had for so many years with Honey and Fire, which are both, by the way, growing still very nicely in the United States, but they aren't – the new innovation – is not propelling us above the TDS growth at this point. So I don't know if that helps a bit on the puts and takes as it relates to the U.S. business. And you know that when we look at our U.S. business, we also had the easy comps next year. So we were comparing the 3% to a 6% growth in the first half. And then if you look at the second half, and again, that's driven in part by this change in route to consumer and the promotional timing. And then you flip it to the last half, our growth in the last half is 4%. So we're flipping our timing and promotional activities back there and have the change in the distributor state change behind this. So that's the U.S. I don't know if a lot of people have got emerging brands or add anything else to the U.S.

Let me add just one more point on the U.S. sort of timing promotional calendar differences. One of the other results of the shifting of our promotional calendar is that our relative price positioning went up over the last few months. So we were going up a bit, and our competitors are going down, so that differential got spread, and that hurts volumes a bit. We're getting a little bit sharper with that now, and so it's just one more reason why we think the second half of the year you'll see an acceleration. I'd also want to point out, too, that Woodford, which you mentioned in your question, remains very, very strong. It's actually – Now it is the number one incremental growth driver. As Tracton Nielsen, it's the number one growth driver in the entire American whiskey category. So it has become very meaningful to our business and continues to really look good. And the other bourbon brands, really old Forrester, the teal brands, particularly Aradura, are also sort of accelerating our growth rate. So we feel pretty good about the premiumization wave that continues to happen in the U.S. and how it is benefiting some of those brands. One sort of a final point on the U.S. is really I think we have to admit that after a summer of digesting a number of organizational changes, which started with me but trickled down through the organization, that's now behind us. The entire U.S. organization is very focused really on delivering O&D and the rest of the fiscal year, and they're in a good place. Which brings in the topic of the emerging brands team and how that's going. We put it in place, really didn't get. I would say their first meeting wasn't really until August. And so I have a hard time saying that's the reason some of those brands are accelerating right now, but the good news is that they are. So if we look through not only Ardura and Old Forester, which are sort of the anchor brands within that division, but thankfully Glendronic in particular is starting to accelerate its growth rate in the U.S., It took us a little bit longer maybe than what we have liked to get it to sort of get the momentum behind it, but it is happening now, and we feel pretty good about that. Same thing on Slane, where some dedicated resources and focus we think is what it needed, and it's also beginning to accelerate. So we feel pretty good about the direction it's going. It's so new still that it's tough to cite that as the reason that many of these brands are accelerating, but it has to be a contributor. Can we answer?

Thank you.

Your next question comes from the line of Dara Mosenian from Morgan Stanley.

Hi, good morning.

Morning, Dara.

So obviously there's been a lot of concern about macros in Asia and in travel retail. It seemed like your travel retail results were still pretty strong in the quarter. I was just hoping you could give us an update on those areas, so what you're seeing on your own business and travel retail, maybe what you're hearing from an industry perspective, as well as China, any changes sequentially as you move through the quarter, any signs of weakness so far in fiscal Q3, and maybe just general thoughts on the level of macro risk in those areas.

Yeah, you know, I always like to start off with our business just in general, our concentration of our emerging markets group. I think that's what you're focusing on when you say Asia. And really parts of global travel retail are pretty broad for us. It's not the same as perhaps some of our other competitors. It's broad-based. And so if I look at the growth we had in the first half, we're very pleased with it on top of the 15% growth we had last year, so double-digit on top of double-digit. And we're forecasting for the year for that not to change. continue to be very, very strong contributions. So we're not seeing things slowing down, if you will. I will say that China is a very small business for us. We've talked about this before, but I'm excited about some of the things that we're testing and doing there as it relates to the e-commerce business. In fact, we had a wonderful singles day. Perhaps we'll talk about this next next week at our investor conference on 11-11, where our volumes doubled in one day versus the same period a year ago. Just a little touch of stuff. As it relates to the global travel retail business, it remains strong. Yes, travel is still up, as we said. Some of it is driven by us and new introductions there, as we said, innovation, and it's doing well as innovation being bottled and bond. The Scotches, as Lawson was referring to in the U.S., actually are doing very well in our global travel retail business. And as we continue to introduce travelers around the world and they become more familiar with American whiskeys, our American whiskey portfolios continue to do well there. So we haven't, as I look again to the full year, For the travel retail business, I expect it to remain a strong contributor to our growth.

And on the emerging markets question, and, Dara, I know you largely know this, but the markets that are driving that sort of double-digit sales growth around Foreman are different than the markets that drive most of our competitive emerging markets buckets. So Mexico, Poland, really Eastern Europe, which – No one really ever talks about is a sizable business for us and growing at very, very nice rates. Brazil has been a star for years now and continues to grow very nicely and in Russia. So we have a different set of markets than is a little more common in the India-China world. We feel, you know, so one, we think that's a big opportunity and something we will be talking about that next week. But that's an area we see in the future being a decent growth driver for us. But for now, those core markets of Mexico, Poland, Brazil really are driving our emerging markets business.

I want to just build one more point on when we combine our emerging markets and travel retail, they're well over 20% of our business now. And some people take it for granted. I mean, that's a pretty good chunk of our business. And when it's growing double digits, it begins to be very meaningful for Brown Farming. So when we consider other places of the world, I think we cannot lose sight of the nice growth there and the size that these businesses are becoming.

That's helpful. And then just, Jane, one quick clarification. It sounds like STNA may be a little more favorable in your full year guidance based on the release. Is that being offset elsewhere by gross margins maybe being a little worse than expected, or does that just sort of put you in a better place in terms of your EPS range, albeit unchanged, but maybe, you know, looking like you're more favorably placed within that EPS range?

Yeah, I mean, I think, yeah, the Yeah, Dara, thank you. I started off the year, I think we expected SG&A to be flat and modestly, may have changed it modestly with the first quarter, but really it's just tightening and continuing management of our costs and taking a closer look at what our four-year forecast is. So I'm back to where I was at the beginning of the year, really. It keeps us firmly in our range.

Okay, thank you.

Your next question comes from the line of Peter Grom with JP Morgan. Hey, good morning, everyone.

Morning, Peter.

Morning, Peter. So the tone on tariffs seems to kind of have changed since August. And, you know, at the time, it seems as if one of the reasons you decided to absorb the tariffs in August was a result of the positive commentary in the press. So I understand you guys are still planning to absorb the tariffs for now, but is there anything out there that may alter your strategy as you move into the back half of the year? And has there been any positive developments of late? Thanks.

Yeah, I mean, I wish I could say there were positive developments. And I think there's obviously in Mexico, Canada has been, you know, moving in the right direction or it feels that way. China, you know, seems to be a roller coaster a little bit. But in Europe, it's gotten quiet. And for us, Europe is the largest of those buckets for sure. So in terms of tone changing a little bit, I mean, you're probably right in saying that when we were in, I guess it was August call, we were optimistic that the tariffs might get settled a little faster than they seem to be. But we're sticking with it and we do continue to absorb the cost for now as we would say we are investing in the momentum of the brand. So But as we move farther into the fiscal year and into the summertime, we're going to be more motivated to take ñ to recoup at least a portion of these tariff costs, and we're starting those conversations now. So we will see. I don't think our overall position has really changed very much, but we're trying to stay agile as the situation is pretty fluid. the entire tariff discussion remains a very big part of how this fiscal year is unveiling.

It's definitely a balancing act, I think, for us as you consider the reportability of our product to our consumers and then just the relative pricing when you consider the competitive set that's not subject to these tariffs. And then we'll consider in our margins. So it's a balancing act with all of those factors as we look ahead. We have actually taken some pricing in a handful of markets, so make sure that you understand we have taken some. We took it earlier this year.

Great. Thank you.

Your next question comes from the line of Vivian Azar with Cowan.

Hey, good morning. This is Brian Vlazon for Vivian.

Hello, Brian, from Vivian.

So this weekend at the G20 Summit, we saw the U.S., Canada, and Mexico essentially sign NAFTA 2.0. Are there any implications for your Mexican operations or import businesses into either geography?

Yeah. No. There's not any implications. Matter of fact, just so we understand, the signing of the tariff, I think it's actually got a got a period of time before it actually becomes effective. It's got to go through Congress and other things to fully be approved before it comes in place. And that is separate and apart from the still in the aluminum tariff and the retaliatory tariffs that were put on American Whiskey in response. So that's the first step. And then the second step would have to be the rescinding of those tariffs. That part's still impacting our business, the still in the aluminum tariff.

Great. And then separately, so Woodford continues to outperform despite its higher ASP relative to its peers. Can you just comment on the price gap evolution in super premium bourbon and whether these price points are increasingly bifurcated?

Well, I mean, we have been steadily increasing the price on Woodford now, you know, at a very low single digit rates, you know, for quite some time. The, the, There's certainly other brands that are just below us that continue to grow and grow nicely too. And you've probably seen that the, I'll call it the American whiskey business in the United States is accelerating right now. Again, it sort of dipped a little bit over the last six months and then it started coming back and I think it's over 10% now or in that range. So, We feel pretty comfortable that the brand is strong enough that it can continue to take some small price increases and continue to defend its turf as really the number one super premium whiskey out there. It's a great success story for us and one that we're very proud of. Great. Thank you.

Our next question comes from the line of Steve Powers with Deutsche Bank.

Hey, thanks. Good morning to everybody. So I know that directionally some degree of tariff impact was expected in this quarter coming out of last quarter, but it just looks to me like the tariff impacts maybe started to flow through a bit more intensely than expected in the second quarter, both in terms of the reversal of the first quarter advanced sell-in as well as some of the negative impacts to gross margin hitting in the second quarter versus more of a delayed impact toward the second half. So I guess the first question is, is that a fair depiction of that you're feeling more tariff impact a bit earlier than anticipated, and if so, is there an explanation as to why? And then secondly, in that context, realized price mix fell off dramatically in the second quarter from the first quarter at the total company level, which just seems counterintuitive given the tariff impacts ramping up. So maybe could you bridge the sequential falloff in pricing in the quarter and that was just finished, and then perhaps provide some color as to how that price mix line should trend in the back half as you work to offset some of the further tariff impacts.

Thanks. So, Steve, just to talk about the first half, I think you were talking about were the tariffs larger bottom line impacts to us than we expected in the second quarter? They were not.

Correct.

So they were not. So answer to your question that they were not. We said they would start to hit us in the second quarter. In terms of the timing of when they reversed, we really didn't know the exact timing. This is new territory to us. We expected them to reverse by our fiscal year end and they all reversed in the quarter, if you will. So the margin impact of this is really where I was talking about the impact that we weren't expecting. What we expected in the second quarter margin impact was consistent. The timing was not what we expected, but it's behind us now. We just thought it would all be by the end of the year. So does that clarify both those questions?

That does, but I still have a question as to the realized price mix.

Thanks. Yeah, so the realized price – so as I said, we've really – And we said this back in August, and Lawson was just referring to it. We delayed, for the most part, in all of our major markets, any price increases related to tariffs. We took them in a handful of very small countries. And so you're not seeing the pricing in the quarter. I think that's what you were trying to allude to, connecting tariffs with pricing. That's because it didn't happen, because it was very small, anything that we had. Any type of pricing that we would have later on tariffs, related to tariffs, would be later in the year, and we do have a little bit of improvement on that in the back half.

Okay, and I don't mean to dwell on it, but in the first quarter, the 9% underlying growth was in part driven by four points of price mix, if my numbers are correct. Whereas this quarter, essentially all of the underlying sales growth was volumetric. So I'm just trying to bridge that for changing to zero, just quarter to quarter. And is there a mixed impact? Is there timing? Because I just feel like a very abrupt fall off. And I don't see anything in the year-over-year compare that would explain it.

Yeah. It's really driven by the give-back, the mix of the give-back that we had in Europe.

Okay.

Okay. Okay.

Yeah, way to think about it, first quarter would have been inflated by the inventory build, giving you more price mix. And then when it reversed in the second quarter, you would, again, have the effect of the price mix not being there, right? Okay. Just to answer your question, I think that explains most of it.

It does. Okay, that helps. Thanks so much. Appreciate it.

Our next question comes from the line of Judy Hong with Goldman Sachs.

Thank you. Good morning. Good morning, Judy. So first, I just wanted to follow up on the U.S. trends. And I think that there are sort of two separate issues. One is just in terms of the consumer takeaway trends. I know that, you know, you talked about the 4% to 5% being kind of the underlying trends that you see. I guess the last couple of months, it does seem a little bit soft, at least in some of the scan data. So I know, again, there's a lot of short-term fluctuations. So just wondering if you can kind of talk about you know, what's causing some of this slowdown more recently. And then the second issue in the U.S., it seems to be more just the timing of your underlying sales versus kind of what you see in the consumer takeaway data. So when you say in the second half you're expecting an acceleration, is it more that the consumer takeaway trend should now be more representative in your underlying sales just as some of the comparison issues go away? So we should be looking at somewhere in the mid-single digits, or do you also expect consumer takeaway trends to accelerate in the back half, and that gives you a boost in terms of the back half trend for the U.S.?

Well, I think, Judy, that kind of yes and yes. One, I would just, and you sort of alluded to it, but be careful with the shorter-term syndicated data results because they've often diverted from what we're seeing as our real takeaway trends. So that's happened a number of times in the past. But really the two issues, which we mentioned earlier, but really is just the tough comps. I mean, and that math is in the slides that you guys have. But the other part of it really is the promotional calendar timing, which we did wait to the second half of the year. And so, as I talked about a little bit earlier, is the pricing gaps relative to our real good or big competitors got bigger. That was a nick on our volumes, and we've already – We've done some things to get that back in place again, and we feel pretty confident that you'll see a second-half acceleration. That acceleration should show up not only in our company sales numbers, but also in the syndicated data.

So, Judy, I thought I might just add on one point to help on the first part of your question, just to put it into some type of perspective. I saw the statistic yesterday. I was looking at something. And it talks about our activity, our overall promotional activity, our spend, I guess, if you will, being down double digits for the last three months versus the years. So you can see it's fairly significant. It would have a fairly significant impact, and Lawson mentioned this earlier, because other competitors were continuing to do this type of activity during this last three-month period. We did not. We zagged, they zigged, whatever you want to say, went the opposite direction. And so that... big change is probably what you're seeing in the three-month syndicated data. Again, we already had plans to move things and did move things through the OND. That's what our plan was for the year. So we expect to see an acceleration as we go through the balance of the year, and you'll see depletions and our takeaway trends converge back to more of the 4% to 5% range.

Got it. Okay. And then just following up on the tariff impact question. So if I look at the slide where you talked about the gross margin impact from tariff, the 0.3 percent, so that's about 3 million, roughly, in terms of the second quarter. It sounds like the 35 to 40 million impact that you called out last quarter is still intact. So I guess the 30 million plus kind of a number, it's your expectation that that actually does flow in the back half the year. And so the gross margin guidance of down 200 basis points, that seems more second-half weighted still. Is that the way that we should think about the tariff impact?

You got it.

You're absolutely correct. Okay. And then a little bit of a longer-term question on your mix of your emerging markets. So I think you even called out today that some of your, you know, growth that you've seen in markets like Poland and Germany and other markets, it's a little bit different than some of the other competitors that have obviously focused on markets like China and others. So how do you sort of envision the mix of your emerging market opportunity kind of changing over time? Is it more just, you know, you still see a lot of opportunity in markets like Poland and others, that that's really where you're going to continue to focus on? Or would you think about diversifying that mix going forward? And how do we think about the investment level in some of those markets?

Okay, that's a good question. That is something we're doing a lot of studying on right now as to where we see the best opportunities. But it's not that we would you know, not that we don't feel good about Poland and Eastern Europe and some of those markets going forward. They're still particularly, as their consumers shift, a lot of times it's shifting out of vodka into whiskey, and that is a sort of an underlying trend that has boosted those markets, you know, for a number of years, and we're continuing to ride that wave. But you asked about where, you know, where are some of the markets where we're underdeveloped and we see some, you know, better performance going forward. I would cite South America in aggregate as one. Africa in general, we are very, very small. And then India and China both are, you know, are growing markets for us. They're just not really all that big. And so, you know, expectations are going up on both of those markets. It's true you'll have – you know, we will have to reallocate some resources to build awareness and to build, you know, to establish those markets and get them moving faster. And we have every plan, you know, plans to go ahead and do that. But I wouldn't call – we're not – We're not going to go what I call silver bullet down on one market and say that's going to be the growth driver of our sort of future. It's going to be a spread the bet thing. You know, as we continue to look and really the geographic diversification, they're going to be focused. Those markets are really going to stay focused on the Jack Daniels family and continue to push forward. I mean, they're all well-seeded. It's just a matter now of extrapolating it into bigger growth.

Judy, one other thing to keep in mind related to, I know you know this, when you look at the relative position or performance of the companies in the industry and the emerging markets, I mean, sometimes it swings by the degree to which you're in cognac is one aspect of it, particularly when you talk about China. The other one is the degree to which your company has invested heavily in the local businesses. And The story of Brown Performance is so interesting is that ours, for the most part, is a very Jack Daniels and hopefully, ultimately, an American whiskey-led premium price point strategy at this stage for the emerging markets. Some of the biggest differences you'll observe in our performance or penetration or position within these emerging markets versus our competition really goes back to what portfolio you're taking into them and what price points you play. And, of course, that moves around with the passage of time. You know, cognac's in fashion for a while, and then it drops in a country or the emerging market. Local businesses can be strong or weak. And so I just always like to remind people that the various companies do have different strategies and portfolio approaches to these emerging markets.

Got it. That makes sense. Okay, thank you. See you next week. Yeah, see you.

Thank you. We've reached a lot of time for questions. Turn the call back over to Mr. Koval for closing remarks.

Thank you, Dorothy, and thanks to all of you for joining us today for our first half earnings call. Just a quick reminder to those who haven't yet RSVP'd to next week's Investor Day at the Stock Exchange, please let us know by this Friday so you can avoid any issues with security at the exchange, and we look forward to seeing you then. In the meantime, feel free to reach out if you have any additional questions. Take care.

Thank you, ladies and gentlemen. That does conclude today's conference call. You may now disconnect.