Good day. And thank you for standing by. Welcome to the Third Quarter and Year-to-Date Fiscal '23 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Ms. Sue Perram, Vice President and Director of Investor Relations. Ms. Perram Please go ahead.

Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown-Forman's third quarter and year-to-date fiscal 2023 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 third quarter and nine months ended January 31, 2023, 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 & 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 Form 10-K and 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 are 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 would like to turn the call over to Lawson.

Thank you, Sue, and hello, everyone. I'm proud of the results that we are sharing with you today, as we delivered strong organic performance for the first nine months of fiscal 2023. Before I go into the details of our most recent results, I wanted to take a moment to step back and acknowledge that it has now been three full years since March of 2020, which for Brown-Forman and the world was the start of the COVID-19 pandemic. Since that time, we’ve experienced significant volatility and uncertainty, while always remaining focused on the long-term health and growth of our portfolio of brands and our people. Consider that during this three-year time period, we added two new super premium brands in Gin Mare and Diplomático and we divested others. We just launched a major global initiative with Jack & Coke. We grew by more than 500 employees as we evolved our route to consumers in five markets, strengthened our integrated marketing communications capabilities and grew our emerging brands' teams among other changes. And importantly, compared to the first nine months of fiscal '20, we grew Jack Daniel's Tennessee Whiskey by 1.5 million cases and Woodford Reserve by 500,000 cases even amid severe supply chain constraints. Through it all, we delivered what our investors have come to expect from Brown-Forman, consistent, reliable, compounding of growth. If you follow Brown-Forman long enough, you know that we often speak not in quarters or years or even decades, we speak in generations. And I truly believe one of our greatest competitive advantages is this long-term perspective. It allows us to demonstrate creativity and resilience in the face of constant change to execute on our strategic priorities and invest boldly behind our brands and our people. This focus has allowed us to deliver short-term results…

Thank you, Lawson, and good morning, everyone. As Lawson reviewed the top line drivers from a portfolio perspective for the first nine months of fiscal 2023, I will provide a few additional details on the top line results as well as other items that drove our business results and our outlook for the fiscal year. First, as Lawson mentioned, for the nine months of fiscal 2023, organic net sales increased 12% compared to the same period last year. The growth was driven by a 9% increase in volumes, particularly for New Mix, Jack Daniel's Tennessee Whiskey and Jack Daniel's RTDs. We also gained 3% from price mix, reflecting higher prices across much of our portfolio, led by Jack Daniel's Tennessee Whiskey. From a geographic perspective, for the first nine months of fiscal 2023, strong results were broad-based with organic net sales growth in each geographic cluster compared to the same period a year ago. Collectively, our emerging international markets continued to deliver very strong double-digit organic net sales growth, increasing 26%. This growth was led by Jack Daniel's Tennessee Whiskey, particularly in Türkiye and Brazil, driven by improved product availability and supply chain disruption eased as well as increased pricing. RTDs also contributed to growth with New Mix and Jack Daniel's RTDs growing strong double digits in Mexico, where we are gaining share in a growing category and increasing price. In addition, Jack Daniel's RTDs were launched in Brazil earlier this year and are off to a very strong start. This impressive growth includes the impact of the year-over-year declines in Russia as we suspended our commercial operations almost exactly one year ago in March of 2022. Prior to this suspension, this market represented approximately 2% of our total reported net sales. Our developed international markets collectively delivered strong organic…

Thank you. [Operator Instructions] Our first question will come from Vivien Azer of Cowen.

So, I wanted to follow up on the commentary around the Jack & Coke strong start internationally. Is it possible to quantify that at all in terms of the contribution to country level growth and/or the impact that it had on the broader Jack franchise? And then, as a follow-up to that, can we talk a little bit about the expected investment spending for the U.S. launch as well? Thank you.

Yes. Vivien, a couple of things. One, as I think you know, the launch was really in Cancun over the last few months. It was not even across the entire country of Mexico. And so, the impact on this fiscal year is negligible, even probably within the country of Mexico would be negligible. So, -- but look, I mean, I think in Leanne's -- some of the comments that she made, it's off to a good start. We're pleased with the distribution. We're pleased with the consumer repurchase rates and everything. So everything is going sort of as planned or even maybe a little bit better than planned, but it's tough to extrapolate or see that impacting fiscal '23. Now, fiscal '24, I mean, we haven't given any guidance yet on that, and we'll probably do that after -- in the next quarter when we start talking a lot more about fiscal '24. But I think it is worth pointing out a little bit about how this is going to work just so that you all understand how the model works. And I'll just use a couple of examples. We can use Mexico as probably a good starting point. The Coca-Cola Company has taken the lead and the business model is actually similar to how they work with their bottlers around the world. But instead of two players, there's three as we are part of that too. So the revenues, the costs, the brand expense, all of that will be reflected on the Coca-Cola Company's P&L, not on Brown-Forman's, we will be selling whiskey -- both whiskey, almost the equivalent concentrate in their terms. And so, that's the revenue impact on us, but you're not going to see the full P&L impact in a country like Mexico. Turning to the U.S. If you look at the U.S., and it's going to be also similar for Germany and Australia, which are two really big RTD markets, we're going to handle the manufacturing and the distribution. And so U.S., Australia, Germany, you will see the revenues, the brand expense, the costs all in our P&L. So, it's difficult when you try to consolidate the two to figure out how is that all total up because it really is going to depend on the balance of sales between all the different markets around the world. But one way or the other, we still feel pretty good about it. And we'll talk more about that, as I say, in the next quarter.

And then from the investment perspective, answer to the second part of your question, this is about, as Lawson mentioned, jointly being funded between Brown-Forman and the Coca-Cola Company and that joint advertising will also have a halo effect over the entire Jack Daniel's family of brands kind of as we think amplifying the trademark.

Our next question will come from Andrea Teixeira of JP Morgan.

This is Drew Levine on for Andrea. Thank you for taking our questions. So I wanted to ask on the gross margins. It doesn't seem like the cost headwinds really abated much at all. Although I think last quarter, there was a pretty sizable headwind due to mitigation efforts to get the product on shelf in addition to inflation, obviously. So, could you talk about where you're seeing continued pressure on that cost line and how you see it evolving over the coming quarters? Because I would think most of those mitigation efforts were in the past, but maybe it doesn't appear. So, any color there would be helpful. Thank you.

Okay. And I'll take that in two parts, both where we are kind of year-to-date and then stepping back from our full year outlook. First, I think it's important that you'll recall our full year guidance, which is consistent in line with our first half of 2023. So, it does imply improvement in the fourth quarter. For us, our normal seasonality of the fourth quarter generally has a positive impact on our gross margin, and we will have a benefit in lapping the foreign exchange impact that we had in the fourth quarter last year. Continue to say we're always fortunate with our premium and super premium portfolio of brands that can handle the pressure that we've been facing over these last quarters. So, as you can see on slide 7, we did contract 170 basis points ending at 58.4%. That price mix positively impacted gross margin by 200 basis points due to price increases across our portfolio, led largely by Jack Daniel's Tennessee Whiskey. Then we have the removal -- a positive impact of the removal of the European Union and UK tariffs on American whiskey, which benefited our gross margin by 170 basis points. Specifically to your point on costs, our cost for the year-to-date was negatively impacted 430 basis points, and it's those two key drivers, which is the impact of inflation, which we are still seeing largely on most of our commodities, so some of that is beginning to ease. I'll speak to that in a moment. And then energy and fuel, as well as for us in our third quarter, we still have November and December in our third quarter. So, we were still experiencing expenses related to -- costs related to supply chain disruptions and getting that product to the shelf, though we do…

Our next question will come from Nadine Sarwat of Bernstein.

I want to stick to that gross margin point. So far, we've been talking about what you're seeing at the moment and going into this last quarter. Could you help us understand any of your expectations for gross margins on the medium term? I appreciate you might not want to give explicit guidance, but to the extent that you could give us the puts and takes about where you think you can be trending, including calling out maybe where agave prices are, that would be very helpful. And then, lastly, on your impairment, just a follow-up on that Finlandia brand. One of the reasons you called out were higher interest rates. I presume that would impact your entire portfolio when going through that exercise. So, could you just give us a little bit more color about your expectations for this brand, in particular, how that's changed and the role you see it play in your portfolio going forward? Thank you.

Okay. I will start on a bit more color on the midterm for cost. You're correct, and we're always excited this time of year to begin thinking about and talking about the next fiscal year, but next quarter is when we'll provide significantly more detail on that. I can say and with the commentary that we have is with our distributor and retailer inventories returning to a more normalized level, a significant portion of the cost that we have incurred related to the expedited shipments of our finished goods into the market, we believe that's going to significantly ease as we move forward. That's probably the best thing that I can say for that today. To your comment on agave. Agave, we continue to be -- we've talked about there is strong demand for the category, but we do see greater supply coming on. We are beyond our peak, but we have kind of stabilized around the 28 to 30 pesos per kilo. And for us specifically, our demand has been very strong. So the balance between our internal and external sourcing is for us kind of one of the headwinds we had faced in this year. But again, we do see that supply coming on, and we'll talk more about that in the next quarter is what we think for the next fiscal year.

And then, on Finlandia, Nadine. So yes, that -- look, a sizable impairment charge is not something that's fun, but I think you all know it's noncash. What happened was -- it's a combination of things. It's the rising interest rates, meant the impairment testing, I mean, that quickly catches on the impairment testing front, and that's what -- that's the major reason that we had to take a second impairment charge on Finlandia. It's also feeling the pressure from higher cost; its input costs are higher. And then obviously, Russia and then not only Russia, but the countries that touch it all around there are all very, very weak. And so, it's just been a tough situation. As you all know, it is a regional brand for us. It's not really even sold in much of the world at this point in time anymore. It's a very -- it is an important brand in certain countries, particularly in Eastern Europe. So, the suspension of the business in Russia was the biggest single factor that made it so difficult, but we're going to continue trying to improve the performance of the brand and continue to fight through what is a very difficult situation.

Our next question will come from Stephen Powers of Deutsche Bank.

I just wanted to go back and maybe round out the gross margin conversation and the cost conversation. I think, Leanne, the commentary you gave around your cost pressures year-to-date and where you see things going was very helpful. But I guess, I'm left with the question of just trying to untie how much of what you've experienced and are experiencing is just a byproduct of general cost pressures kind of industry-wide, which I'm sure is the big part there versus how much of what you've incurred maybe specific to Brown-Forman just based on the way your supply chain is configured and the reality is there or procurement timing, contracting realities. I'm just trying to understand how much may be kind of more unique to you versus the industry. And if there are things that are more unique to you, just as there's any learnings there as you think about the medium to longer term about how you could maybe insulate yourself from some of that quality again, to the extent there is any specific element there.

Well, a few things have happened. And when you think about kind of the impact of inflation and supply chain disruption, generally speaking, two-thirds, one-third with the two-thirds being inflation. For us, I mean, I think we've experienced fairly globally the same from inflation. I mean, our mix of commodities may be a bit different than other people's commodities, whether we're sourcing domestically in the United States or internationally, and our mix may be a bit different from others. For us, I think we continue to have the opportunity where we have talked about for the last few quarters, and we have taking on some costs as it relates to risk mitigation to our supply chain that you have heard us talk about. As we went through supply chain challenges related to glass, we were intentional about diversifying our supplier base that always comes at a bit of a cost. But again, we thought -- we think and continue to think it will position us well for the future. Again, for the one-third related to the supply chain challenges I've already talked to that. I think that we are moving beyond that as we return our inventories to more normal. Again, one thing that might be a bit different from us is just the percent of inventory we have -- of our business as an aged product that might be a little bit different than others, but we can probably dissect that a different day. What was the last part of your question?

No, actually, I was okay on agave. I think there might have been a question earlier on just sort of what you're seeing on agave, if you've got any comments there. But, thank you very much.

Thank you.

Our next question will come from Filippo Falorni of Citibank.

I was wondering if you can talk about the consumer trends that you're seeing across the world, particularly in terms of premiumization, whether you're seeing any slowdown. In your prepared remarks, you sounded still optimistic about the premiumization trends. But on the margin, are you seeing any change in consumer behavior? And, if you can comment on this topic for your key markets, talking about the U.S., Europe and some of your emerging markets? Thank you.

Yes. I'll talk a little bit about -- I mean the consumer demand, I mean, look, it has still remained very, very strong, as you can see just in our top line figures. I think if you -- there's the question around premiumization, which has been happening for 20 years, has been happening in our industry. If we go down to the U.S. market and look about premiumization, it really -- premiumization trends spiked a lot during COVID. They are returning to a little bit more of a normalcy. But if you look at TDS in the United States and you take a look at the breakdown by price point, you'll still see, I'll say, super-premium, ultra-premium growing at a higher rate than a say -- not plain premium, but premium or something down in the standard category. So, the story is still true that consumers are premiumizing their purchases in spirits, and that trend has -- is still strong. But it’s not -- the differential between the two is not as strong as it was, I'll say, a couple of years ago. So, I hope I explained that right. So, you're still seeing the premium trends. It's just the delta between super premium and ultra and then the other price points down-low has come down a little bit. I think a positive take out of all this, though, is our pricing strategy over the last couple of years, so we're through -- essentially through two years of this, of low single-digit, but consistent regular pricing seems to be working pretty well. We think we've got a nice balance between where consumers are willing to take the price increases, where retailers are willing to take the price increases and -- we think it's the smart thing to do over the long term. And so, we're going to continue that trend as much as we can. And so far, we have not seen an elasticity that would really make us, say, you know what, I'm not sure that's the right thing to do. We continue the path forward, and I think we're getting a better balance between volume and pricing, which is something we very much want.

Got it. Anything in particular you're seeing in Europe and emerging markets? Maybe if you can comment on those regions?

I mean, not really. But I would caution, it's difficult to take our trends and extrapolate them to a broad read around the consumers around the world. And that has everything to do with the shipment comparisons that we're dealing with. So, if we're only looking at our brands, the shipment comparison, the timing of glass availability last year and how we compare against this year sort of dominates our trends more so than what we would say is a read across the consumer moving around. So, I know that doesn't really answer your question, but we're just sort of in a unique situation given the volatility that we've seen with glass.

Our next question will come from Kevin Grundy of Jefferies.

I thought it'd be useful, Leanne, we spend a little bit of time on U.S. business, so down 10% year-over-year in the quarter, understanding the dynamics around inventory is difficult year-over-year comp. Just a few questions here. Just comment, if you wouldn't mind, how the U.S. business came in relative to your own expectations, understanding you certainly run the business longer term. I think we can appreciate that. But from a quarterly perspective, how it came in? Leanne, you also made comments about normalization of inventory levels. I'm assuming that that commentary sort of holds for U.S. as well, but if you could just confirm that. And then lastly, just from a consumer demand perspective, maybe just touch on retail takeaway and depletions in the quarter, specifically for the U.S. and then expectations here as we look out in the intermediate term. So that would be helpful. Thanks for all that, guys. I appreciate it.

All right. Kevin, I'll start it, and then Leanne, you can add on if you want to. Look, it is -- the U.S. market is beginning to normalize. I think we've said that a couple of times, but it's normalizing on a higher base for sure compared to where we were a few years ago. But if you look at TDS right now, it's trending back to the mid-single-digit range, which was where it was for many of the years, pre-COVID. So, now we delivered 4% in the first nine months of the year. That was essentially expected. Remember, we were plus 11% through the first half. And so, we knew a slowdown was coming, and it did bear that way out. It essentially came in relatively close to where we thought. And there is another big factor in this Q3 number for the U.S. And that's -- if you go back to last year, just looking at Jack Daniel's Tennessee Whiskey in the third quarter of fiscal '22, we were plus 35. So, that is a huge number to compare against. And that's because that’s -- we're back to the same glass availability topic where the glass became available in the third quarter. We prioritized Jack over the rest of our portfolio as the on-premise was also opening, and it just was a massive quarter. And so, that comparison had a big impact. If you step back and look at Nielsen or NABCA, you can get a much more sort of normalized rate of growth these days. And that would tell us the U.S. market for us is in that 6% range. I think TDS is 5% to 6%, somewhere right around there. And the NABCA numbers are actually even a little bit higher than that. And so, we feel pretty good that maybe if it has returned to normal, but normal is still pretty good for the U.S. market. And certainly, we're seeing stronger rates of growth outside of the United States. So, I think it's also worth pointing out, at least within our own performance, we're doing a little bit better than TDS, which is something -- that's a goal that we always have out there. And to be ahead of both, Nielsen and NABCA -- firstly, it's been a while since we were above it. Once again, a lot of that because of the glass, but it's nice for our teams to know that they're back ahead of TDS.

And then I'll just add two things. If you -- all the way back to when we originally planned this fiscal year, you'll recall that we planned for the beginning of normalization with an outlook, a top line organic outlook at mid-single-digits, which aligns with our long-term algorithm. That included us cycling the largest impact of the pandemic and also the absence of our Russia business. So as we've gone through, again, all of the prioritization and the strong shipments, in our first half, we had a 5-point benefit year-over-year due to that effort. Now that we're beginning to lap that very strong comparison of our rebuilding the inventory against the prior year and our markets around the world are beginning to normalize, we have a benefit of two points. So, I think that's worth noting. And then the other thing I would say is in the prepared remarks, we talked about the U.S. business inventory being back in line and at a normal level. At the enterprise level, we continue to make significant progress. We continue to see a net increase in distributor inventories. At the same time, it's still having the strong consumer demand. But we still believe, as we said last quarter that by the end of this fiscal year, we would kind of be back at from the enterprise perspective, a more pretty much normal historical levels of inventory.

Our next question will come from Brett Cooper of Consumer Edge Research.

A question for you on distribution or route to market. In the U.S., one of your competitors moved to beer distributors in many states. Outside the U.S., we're seeing distillers testing alternative routes to market, whether that be through the Coke bottling network or selling from brewers. And with your business building a relationship with the beer distributors in the U.S., Coke network outside of the U.S., I was wondering if you could speak to or assess your route to market potential for changes, and if there's an opportunity to supplement your current efforts? Thanks.

Well, I'll speak to a little bit at least about the U.S. changes throughout the market. I mean -- we are using Raise [ph] out in California for our launching a Jack & Coke. So that's something that is quite a bit different. But we're still very much in partnership with Breakthru and RNDC for the most -- as our largest two partners in the U.S. And that business, as you can see through the numbers, it remains pretty strong. We also made the change two years ago with Pabst, I think was what it was. That was all about getting with a distributor partner that was able to reach all these points of retailers that are able to sell malt products, which is Jack Daniel's Country Cocktails. And that has been an enormous benefit to that brand. And so I think our -- we are testing different models in the United States. When you leave the U.S., it's very different. That story has all been about us sort of forward integrating and being responsible for our own route to market. And we've -- we say, five markets in the last two years, something like that. So we continue to be pretty agile and try to mix it up and try different changes or different models and different partnerships. And I think overall, that's had a pretty healthy impact on our business, really not even over the last year, but over the last decade or so, it's been a pretty meaningful impact.

Our next question will come from Lauren Lieberman of Barclays.

I wanted to ask a sort of backward-looking question but informing the forward. And just that in hindsight, it maybe seems like you had greater supply chain issues or glass constraints than some of your peers in the industry. And I just say that based on -- as you've talked through reasons for the gap between your performance in TDS previously and that now kind of catching up. So just looking backwards to look forward, are there changes you're making in terms of supply chain relationships with suppliers, et cetera, or the way that you manage inventory in-house thoughts and with distributors, to make sure that you're not in that position again.

Well, we can start with -- in comparison to TDS, again, we've talked many times again around how we were impacted and then how we prioritize our brands of how based of the opportunities that were available at the time. So with the glass supply capacity that we had, we wanted to prioritize Jack Daniel's Tennessee Whiskey with the reopening of the on-premise. Quickly thereafter we prioritized Woodford Reserve to have that brand available. And so as we went through that prioritization, it -- as Lawson has said many times, it's made it very, very hard to compare our results and our takeaway trends compared to TDS. Now, what we have done is, again, you've heard me talk about, we have done a few things on the supply chain side of our business. We have invested in new technologies to give us greater visibility. And we are implementing new processes. I think, Lauren, when we were together, we talked about actually new processes related to forecasting and planning demand. And then, from a cost perspective, we've also incurred some costs to diversify our supply chain, specifically around glass supply. But then we've also brought in new tools and learned new ways of expediting our products to market when and where that's needed.

Yes. I mean, I think we've said this on some prior calls, too, but we were nearly 100% with one partner for glass supply. And when you talk about Jack Daniel's and Woodford, you're looking at a U.S. supplier of glass for the world. And when that one supplier began to really struggle, it impacted us greatly, and we didn't have anywhere else to turn. And so, it has taken -- it's been about a year since we, in earnest, found some other partners. And so, we are diversifying. We're still heavily reliant on that one supplier, but we're trying to diversify a bit. So once again, so we don't get caught in this again. Although I must say, we were with that same supplier for 100 years and not had any problems before that. So, it was very much a COVID-driven crazy volatile world that caused a lot of these problems.

Thank you. This is all the time we have allotted for questions. I will now turn the conference back to Sue Perram for closing remarks.

Well, thank you. And thank you, Lawson and Leanne, and thank you to everyone for joining us today for Brown-Forman's third quarter and year-to-date fiscal 2023 earnings call. If you have any additional questions, please contact us. On this International Women's Day, we hope you will join us in celebrating the women of Brown-Forman and women all around the world. With that, this concludes our call.

This does conclude today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.