Brown Forman Inc

like to thank each of you for joining us today for Brown Foreman's second quarter and first half of fiscal year 2026 earnings call. Joining me today are Lawson Whiting, President and Chief Executive Officer, and Leanne Cunningham, 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. You should not place undue reliance on any forward-looking statements and, except as required by law, 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 and first half of fiscal year 2026, in addition to posting presentation materials that Lawson and Leanne 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 you should consider in conjunction with our forward-looking statements. Other significant risk factors are described in our 2025 Form 10-K and from time to time in our Form 10-Q reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures, a 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 condition and results of operations, are contained in the press release and investor presentation. With that, I'd like to turn the call over to Lawson.

Thank you, Sue, and good morning, everyone. I'm pleased to share our second quarter and first half of fiscal 2026 results with you today. I'll start by sharing a few comments on the operating environment and then provide the key drivers and highlights of our top-line results, including our geographic performance, strategic innovation, and the two unique headwinds Brown-Forman is currently facing. Then I'll turn it over to Leanne, who will share additional insights on other financial highlights, including gross margin and operating expenses, and our full-year fiscal 2026 outlook, which we are now reaffirming. While the operating environment remains challenging and uncertain, it has been relatively consistent with our expectations, and the themes from the second quarter remain largely consistent with those from the first quarter of this fiscal year. We believe cyclical pressures related to ongoing macroeconomic and geopolitical uncertainties continued to negatively impact consumer confidence and reduce discussionary spending in the U.S. and many developed international markets. On the other hand, we continue to see resilient consumers in a number of our emerging international markets where trends are generally much stronger. We expect cyclical headwinds to ease over time while also acknowledging that we're operating in a very dynamic industry and some current headwinds may persist over time. With that in mind, our focus remains sharply on managing the factors that we can influence. Now, moving to our first half fiscal 2026 top line performance. Our first half fiscal 2026 reported net sales declined 4%, with organic net sales flat after adjusting for the A&D impact related to Corbell and Sonoma-Couture, which are no longer in our current portfolio. From a geographic perspective, our organic net sales results were led by the collective strength of the emerging international markets, which provided double-digit growth of 12%, and the travel retail channel, which increased 6%. While this growth was partially offset by a 6% decline in the developed international markets collectively and flat performance in the United States, it's important to note that both performance in developed international markets and the U.S. sequentially improved from our first quarter results. Diving deeper into the emerging international markets, Mexico and Brazil continue to deliver strong double-digit growth. While the economic environment in Mexico remains subdued, with consumers seeking value and trading down, these conditions have benefited our RTD portfolio, which helped fuel 18% organic net sales growth in the first half of fiscal 2026. New Mix, the world's first tequila-based RTD, delivered very strong double-digit growth as the brand continued to lead the category and gain share in Mexico. Our distribution of brands within the William Grant & Sons portfolio also provided incremental organic net sales. We continue to believe this complementary portfolio provides us additional strength to achieve greater development and growth of our portfolio of brands in Mexico, particularly in the on-trade and in the super-premium segment. In Brazil, our strategic approach to building the Jack Daniels family of brands continues to produce strong results, with organic net sales growing more than 20% in the first half of fiscal 26. Jack Daniels Tennessee Apple and Jack Daniels Tennessee Whiskey led the growth and gained share as we continued to expand our geographic reach, increase distribution, and leverage our revenue growth management capabilities. In addition, as we mentioned last quarter, we believe premiumization is an opportunity in Brazil, and we continue to focus on increasing distribution for our super premium whiskey portfolio. The Global Travel Retail Channel delivered organic net sales growth of 6% in the first half of fiscal 2026, with growth in most of the major regions as passenger numbers continued to increase, surpassing pre-pandemic levels. The Travel Retail Channel is not only a growth contributor, but also a critical brand building platform. As we shared during our recent Investor Day, the Global Jack Daniels campaign, That's What Makes Jack Jack, has launched in select international airports to position us to reach consumers on this global stage. Turning to our developed markets, consumer sentiment and confidence both remain pressured in most European economies, creating a difficult operating environment. While the outlook remains challenging, we are maintaining or gaining share of the whiskey category in six of our eight top European markets. In the UK, economic conditions are negatively impacting consumer spending and total distilled spirits trends in both the on and off premise. Organic net sales declined 13% as we lapped tougher comparisons in the year-ago period related to wholesaler and key retailer buying patterns. While off-premise takeaway trends for total distilled spirits, as well as the whiskey category, are in low single-digit decline, the trends have improved slightly, and Jack Daniel's Tennessee Whiskey continues to gain market share. Organic net sales declined 8% in Germany, where similar to the UK, consumers have been impacted by challenging economic conditions. This has led to higher rates of saving, softening of total distilled spirits trends, and an increase in competitive promotional activity. Despite the operating environment, our super premium brands Diplomatico Rum, Gentleman Jack, and Woodford Reserve delivered double-digit growth in the first half of fiscal 2026. The last market I'll focus on today is the United States. Total distilled spirits trends have decelerated but continue to decline at a low single-digit rate as consumers are pressured to make their dollars stretch further. Even in this environment, we continue to close the gap with TDS and organic net sales were flat in the first half of fiscal 2026. These results continue to be ahead of our depletion-based results as well as takeaway trends driven by the powerful combination of our U.S. distributor changes and the launch of Jack Daniels Tennessee BlackBerry. With distributor transitions now complete, we have turned our focus from transition to execution, especially during the important holiday season. Two key objectives for the transitions were increased distributor investment funds and improved margin structure, and I'm pleased to see these two areas contributing positively to organic net sales results. Increased dedication and focus from our distributor partners was another goal of our route to consumer transformation in the U.S. and has driven increased distribution for Jack Daniel's Tennessee Whiskey, as well as Jack Daniel's Tennessee Honey, Fire, and Apple. The launch of Jack Daniel's Tennessee Blackberry continued to exceed expectations as we progressed through the first half of fiscal 2026. As we shared during our investor day in October, Blackberry is getting wonderful feedback and buzz from distributors, retailers, consumers, both new and existing, and the media. This continued excitement drove shipments to exceed depletions, though the difference between the two decreased as we moved through the first half of the fiscal year. We remain encouraged by the strong start in the U.S. and are using the excitement to sustain momentum and drive consumer takeaway. As I mentioned before, BlackBerry is a globally relevant flavor trend across food and beverage categories, and Jack Daniels has a proven track record of leveraging our global footprint and capabilities to extend the impact of new flavor launches. We also began a phased launch of Jack Daniels BlackBerry outside of the U.S. in select international markets, including the U.K., Germany, and France, as well as the global travel retail channel. Similar to the U.S., the initial response from retailers and consumers has been incredibly strong. In the U.K., Tesco, Jack Daniels BlackBerry, was the best new product development launch in the spirits category, with more than half of the consumers that purchased the product being new to the spirits category. The brand also generated a double-digit repeat purchase rate. In Germany, Amazon sold out of the Jack Daniels BlackBerry in the pre-order shop. And in France, the brand is listed in the major retailers with positive media impressions, visibility in the main aisle, and promising initial sell-through in both the off- and on-premise channels. Again, we're pleased with the early stages of the BlackBerry launch and will continue executing our strategic phased launch to support scalable and sustainable geographic expansion for the next few years. Finally, I'll briefly share an update on two headwinds that are somewhat unique to Brown Foreman. Many of you will recall from our previous communications that used barrel sales and the trade dispute between the U.S. and Canada are substantial headwinds for us this fiscal year, and they significantly impacted our first half organic net sales results. Organic net sales for used barrels decreased by more than 60% as the current industry operating environment, particularly for the Scotch and Irish whiskey suppliers, continues to pressure demand and pricing. Canada's organic net sales also declined over 60% as beverage alcohol products produced in the United States continue to be off the shelves in the majority of Canadian provinces. Our much smaller non-U.S. brands, such as Diplomatico and the Glendronic, continued to deliver organic net sales growth, but they were not able to offset the decline of our brands that are produced in the U.S. Overall, the first half of fiscal 2026 has unfolded largely as we anticipated, and we believe we remain positioned to achieve our full-year guidance, driven by a series of key actions we've been taking. These include navigating the current environment with a balanced focus on the short and long term, strengthening our portfolio of brands through strategic innovation, as well as a focus on our premium plus brands and RTDs to address consumer trends. making key route-to-consumer transitions, including the U.S., Japan, and Italy, and streamlining our workforce structure to increase our agility, leverage synergies, and enhance our ways of working, which we believe will enable us to fuel the growth of our brands, our business, and our people at a more rapid pace. I remain fully confident in the potential of Brown Foreman, our brands, and our people, and I'd like to extend my thanks and appreciation to our dedicated team of employees for their resilience and commitment. Before I conclude my comments, I also want to provide an update on our CFO recruitment process. In August, we announced that Leanne had made the decision to retire at the end of the current fiscal year on April 30th. Our recruitment process for her successor is well underway, and as you would expect, we are being very thoughtful in our approach to ensure we select a successor who will best position Brown Foreman for the long term. With that in mind, we anticipate that the process may extend into early next calendar year. In the meantime, I appreciate Leanne's continued leadership and am personally grateful for the opportunity to continue working closely together until her replacement is on board in the next few months. With that, I'll turn the call over to Leanne.

Thank you, Lawson, and good morning, everyone. As Lawson mentioned, I will provide additional insights on other financial highlights, including gross margin and operating expenses, and conclude our prepared remarks with comments on our full-year fiscal 2026 outlook. First, to our gross margin. In the first half of fiscal 2026, our reported gross profit decreased 4%, resulting in a reported gross margin of 59.5%. Our gross profit margin expanded 30 basis points due to a 190 basis points A&D benefit largely related to the conclusion of our relationship with Corbell and the absence of the prior year transition services agreement for Sonoma-Couture. This benefit was partially offset by 110 basis points of higher costs largely due to lower production levels inflation on our input costs and timing of cost fluctuations and fifty basis points of unfavorable price mix due to the strong growth of new mix and lower used barrel sales continuing with our other financial highlights i'll turn to our operating expenses In the first half, organic advertising expense decreased 1%, which is largely aligned with our depletion-based top-line results. We continue to believe our level of investment behind our brands is healthy, with a focus on Jack Daniel's Tennessee Whiskey to support the That's What Makes Jack Jack global campaign, as well as the launch of Jack Daniel's Tennessee Blackberry. As we shared during our Investor Day, the Jack Daniels Global Campaign represents our largest in brand history, with the majority of fiscal 2026 expenses to occur during the key selling months of October, November, and December. Our organic SG&A investment decreased 4% following our strategic workforce restructuring initiative. In total, reported operating income decreased 9% and organic operating income decreased 4% in the first half of fiscal 2026. In addition to the $22 million non-operating post-retirement expense related to our workforce initiatives, these results led to a 13% diluted earnings per share decrease to 83 cents per share. Before moving to our outlook, I'd like to take the opportunity to provide you with a few comments related to our capital allocation philosophy. We approach our capital deployment decisions with the core objective of sustainable long-term value creation. Our capital allocation philosophy balances ongoing investment in the business, including organic investments and acquisitions alongside shareholder returns, such as regular dividends, share repurchases, and special dividends. First, in the first half of fiscal 2026, capital expenditures decreased by $16 million compared to the year-ago period. While we continue to fully invest behind our business, we have completed a number of projects and expansions which reduced our working capital requirements and improved cash generated. We grew cash flows from operations by $163 million to $292 million primarily reflecting disciplined working capital management. Free cash flow, defined as net cash provided by operating activities, less purchase of PP&E as presented in the statement of cash flows, increased by $179 million to $236 million, reflecting strong operating cash flow generation and lower capital expenditure needs. Secondly, on November 19, 2025, our Board of Directors approved a 2% increase in the quarterly cash dividend, marking 42 consecutive years of dividend increases and 82 consecutive years of paying a regular cash dividend. This is a powerful testament to the strength of our balance sheet, the confidence we have in our ability to generate strong cash flow, and to our commitment to returning cash to shareholders. Finally, as you may recall, on October 2, 2025, the Brown-Forman Board of Directors authorized the repurchase of up to $400 million of our outstanding shares of Class A and Class B common stock. As of October 31, 2025, we have repurchased $99 million of our outstanding shares of Class A and Class B common stock. Our enduring commitment to our valued shareholders, coupled with a long-term perspective and the focus on building valuable brands, is the foundation of our capital allocation philosophy and guides our decisions. Now turning to our full-year fiscal 2026 outlook, which, as Lawson shared, we are reaffirming. We continue to navigate a spirit sector facing headwinds and still expect that the behavior of the consumer and the level of trade inventories will not change meaningfully during the 2026 fiscal year. Our guidance also continues to assume that there will be no change to the current tariff impact, direct and indirect, on our products. We strongly believe that we will navigate these short-term challenges through the strength of our portfolio, including strategic innovation, the benefits of our route to consumer transitions, and our evolved workforce structure. Our expectations from a geographic perspective remain the same as well. We still forecast continued growth in our emerging markets and the global travel retail channel and expect the depletion-based trends in the U.S. and developed international markets to remain similar to fiscal 2025 with the exception of Canada. The continued unavailability of American Spirits products in Canada resulted in a significant impact to our top-line performance. While we are hopeful for the return of American products to Canadian store shelves, we continue to assume this headwind will persist for our full fiscal year and is reflected in our full-year guidance. in addition to canada the other cyclical headwind largely specific to brown foreman is the year-over-year change in our used barrel sales used barrel sales have returned to levels that reflect the challenging and uncertain operating environment for the spirits industry We continue to expect used barrel sales to be lower by more than half a fiscal 2025 level. While we continue to execute our long-term pricing strategy and expect to benefit from our revenue growth management activities and strategic innovation, particularly Jack Daniels Tennessee Blackberry, We anticipate product mix headwinds due to the faster growth of our RTD portfolio and agency brands in Japan and Mexico. We still anticipate that shipments will roughly be in line with depletions in fiscal 2026. We anticipate that ordering patterns in the second half of the year will reflect more typical seasonality as our U.S. distributor network moves beyond the phasing impact of the initial transitions and the launch of Jack Daniels Tennessee BlackBerry concludes. For fiscal 2026, based on the currently known factors, we continue to expect a low single-digit decline in organic net sales and reported gross margin expansion, as we believe the benefit from A&D will more than offset the headwinds from negative price mix and higher costs. While input costs will continue to benefit from lower agave costs, we project higher costs compared to the prior year largely driven by the impact of inflation and lower production volumes. In addition, as we shared previously, following the divestiture of Sonoma-Couture, we entered into a transition services agreement which had a negative impact on our overall reported gross margin. The TSA has ended, resulting in a positive impact on a year-over-year basis. and the absence of Corbell is expected to benefit reported gross margin. Our outlook for organic operating expenses reflects continued management of controllable expenses. Our A&P spend will continue to reflect investment behind our brands that is aligned with our depletion-based top-line outlook. We also continue to expect a reduction in SG&A following our strategic workforce restructuring initiative. Based on the above, we are forecasting organic operating income to decline in the low single-digit range. We also continue to expect our effective tax rate to be in the range of approximately 21 to 23%. We are updating our estimated capital expenditures outlook from a range of $125 to $135 million to a range of $110 to $120 million for the full year. While this range is lower than previous years, we have completed a number of projects and expansions and remain committed to our long-held capital allocation philosophy to first invest fully behind our business. And we also continue to focus on reducing our finished goods inventory, which should further reduce our working capital needs and significantly improve cash generated. Again, our performance in the first half of fiscal 2026 is largely in line with our expectations and provides us the confidence to reaffirm our full year 2026 outlook. As we enter the second half of fiscal 2026, we will continue to focus on growing our portfolio of brands, capitalizing on our strategic route to consumer changes, and leveraging our evolved workforce structure. We are committed to thoughtfully and strategically managing through the current volatility and uncertainty while positioning the company to deliver long-term growth. This concludes our prepared remarks. Please open the line for questions.