Hello, and welcome to Brown-Forman Corporation Third Quarter and Year-to-Date Fiscal 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the Speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Sue Perram, Vice President, Director, Investor Relations. You may begin.

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 Year 2025 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, 2025, 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 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, 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 would like to turn the call over to Lawson.

Thank you, Sue, and good morning, everyone. Thank you for joining us today as we share our third quarter and year-to-date results for fiscal 2025. When we shared our first half fiscal 2025 results in December, I ended my prepared remarks with these words. We're still operating in a highly dynamic environment with many uncertainties, even so with all we know today, we continue to expect our second half to be stronger than the first. I'm proud to say that we executed our plan and delivered sequentially stronger top and bottom line results as we entered the second half of the year. January was the fifth consecutive month of positive 3-month rolling organic net sales trends. This trend returns our year-to-date fiscal 2025 results to growth, bringing organic net sales in line with organic operating income ahead of our full year expectations. The operating environment continues to be incredibly dynamic and many uncertainties remain, particularly on the topic of tariffs. Taking everything into consideration as we know it today and based on our year-to-date performance, we're again reaffirming our full year organic net sales and organic operating income outlook for fiscal 2025. Now let me provide a bit of perspective on our year-to-date fiscal 2025 results. I'll start with the performance of our brands, and then Leanne will share more about our geographic performance, other financial highlights and our 2025 outlook. Our reported net sales decreased 4% in the 9 months of fiscal 2025, while organic net sales grew 2% after adjusting for the divestitures of Finlandia and Sonoma-Cutrer in the prior fiscal year. The negative effect of foreign exchange and the business model change for Jack Daniel's Country Cocktails. From a brand perspective, Woodford Reserve and Jack Daniel's Tennessee Whiskey were the two largest drivers of organic net sales…

Thank you, Lawson, and good morning, everyone. As Lawson mentioned, I will provide additional details on our geographic performance, other financial highlights and our fiscal 2025 outlook. As we have shared with you previously, we anticipated a return to growth for organic net sales and organic operating income in fiscal 2025, driven by gains in international markets and the benefit of normalizing distributor inventory trends on a year-over-year basis. From a geographic perspective, we saw sequential organic net sales improvement with growth in each of our geographic clusters as we began the second half. This was in line with our expectations and resulted in a return to growth in the year-to-date period. Our emerging international markets continue to lead our growth and collectively delivered an 8% organic net sales increase in the year-to-date period. This growth was led by strong double-digit growth in Turkey and Brazil, led by Jack Daniel's Tennessee Whiskey. Our business in these markets continue to benefit from the growth of the premium whiskey category. Brazil is also benefiting from our geographic expansion strategy and the launch of an additional package size for Jack Daniel's Tennessee Whiskey. In Mexico, organic net sales were flat as the challenging economic environment is impacting discretionary spending and consumers are trading down. While our RTDs and Jack Daniel's are outperforming competitors and gaining market share, our tequilas continue to underperform. As Lawson mentioned, New Mexico delivered double-digit organic net sales growth, driven by a steady pricing and promotional strategy, along with increased distribution. In addition, Jack Daniel's RTDs, which include Jack & Coke outperformed the RTD category and fueled value growth. While the current operating environment is difficult, we are committed to the development and growth of our portfolio of brands in Mexico. We are further leveraging our own distribution capabilities…

[Operator Instructions] Our first question comes from the line of Lauren Lieberman with Barclays. Your line is open.

Great. Thanks so much. Good morning. So we took a look back at a bunch of transcripts and conversations from the craft boom of the, I guess, what would be like 2014 to 2018, '19 kind of period. And look back at a lot of the things that the company talked about, looked back at your business performance. And Jack Daniel's continued to grow nicely in the U.S. despite sort of all of this activity in craft. And something we get a lot of questions about outside of the -- how much are people drinking or not, is the likelihood of there being a wave of smaller players hitting the market in the next year or two with all this excess whiskey that seems to be out there. So I just kind of wanted to maybe loss and take a step back and think about how you are or are not preparing for an environment where we come back to having a litany of small brands out there, lots of noise and activities, celebrities throwing their name on whiskey. And how you think about the relative health of the Jack Daniel's and Woodford Reserve brands, frankly, I guess, in Forester, today versus where you were back in kind of 2015 to 2017.

It's a good question, Lauren. So I can't remember what I said last week, let alone 10 years ago, but I will take a stab at it. So look, you're right, there was that wave of smaller I don't love the word craft, but it's generally entrepreneurial-led brands that exploded in that time frame as some bulk suppliers really got much, much bigger in that business. When you go back before that time frame, like pre-2010, there really wasn't -- it was not easy. There was a huge barrier to entry in the American whiskey category because it was dominated by 5 or six companies, including us, and we weren't selling any of our extra whiskey. So that did change things. But fast forward to today in terms of industry supply, and I mean, the number I've been running with in terms of "craft brands", their market share only got to 3% or 4%. It still seems to be in that range. And I have read that there's more closing that are opening right now by quite a bit. And so I don't consider the industry supply issue to be a battle against the craft brands, it's more all the big players. And you know them all. It's all the ones, all the big -- all they're both public and private companies that would be in there. So now we also know or have been told that these are rational players. These are big, for the most part, big companies that have cut back on the supply. I mean they're slowing down. They're either not opening some new plants that were scheduled to be opening or they are slowing down and furloughing some people, all those kind of things. So the industry is doing what it naturally is supposed to do, which is to cut back on some of that supply and getting it back in line. And look, it doesn't take very long to get it back in line when everybody starts doing that. At even site, if we went back two years ago, if you remember, Lauren, I can even remember being at your conference, we were reaffirming our guidance at that time, and we missed it. But back then, we were more scared that we were going to be short, not long. So that situation is dynamic, it changed pretty quickly, and we'll see where we lay out.

And then to your point on Jack Daniel's performance in health, what we would say is the trend as we've been in this fiscal year, they've definitely been improving as sequentially as we've gone through the year from down six in Q1 flat in the first half and now to organic growth of plus 2% in the year-to-date period. We see our positive 3-month rolling organic net sales trends. Some of this, yes, is driven by our Japan investment in our own distribution as well as markets like Turkey where the premium whiskey category continues to grow. And then in the U.S., and I'm sure we'll talk about this more just it continues to accelerate sequentially also in the U.S. And then if there's anything else you want to add also on brand health.

Well, look, I mean, the Jack Daniel's brand -- I mean, look, it's been a very competitive few years, and it's been challenging. We have made a lot of changes to the Jack Daniel's, I'll call it, brand toolbox to really emphasize different things. And so we're focusing a lot heavier on music right now. So activation, say, global music festivals, we do a lot of that kind of thing. We have kind of a neat thing where we host songwriters several times a year down in Lynchburg, Tennessee and they stay on the property. And that has had something to do with or at least we think it has something to do with all the song mentioned that Jack Daniel's has exploded actually in the last couple of years. So that helps and gives you some confidence that we remain relevant with a big chunk of our audience. McLaren, we talked a little bit about this on the call. We're redefining the way we do Jack's Garage Experience, which is the music culture infusion of racing in there and that we bring it all together, and those have been, I think, pretty successful and we're taking -- we're doing new on-premise things. Lean also talked about that a bit. So there's a lot going on. There's a lot changing. And look, the trends, particularly in the U.S., have not turned like we would have wanted by now, but we continue to get really nice growth out of our emerging markets, which is really pulling the company along and pulling the brand along right now.

Next question comes from the line of Nadine Sarwat with Bernstein. Your line is open.

Thank you, Lawson. Leigh Ann, two questions from me. I think in your prepared remarks, you called out the competitive environment for tequila in the U.S. at the moment. in light of some of the price movements we've seen from your competitors, can you talk to your approach on pricing when it comes to your tequila portfolio in the U.S.? And how do you think about that balance of volume versus price when it comes to driving sales growth. And the second question, you called out U.S. spirits market value growth, I think, minus 1 sort of bumping along in the same range versus the last time we spoke. Are you seeing any changes in consumer behavior under meet that headline number that's worth calling out, thinking about it by product, price point or channel, any additional consumer insights would be helpful?

Yes. I mean, look, in terms of -- if we're talking about the U.S. here for a second. Look, the -- if we're using TDS in the U.S. as the proxy for consumer health, it's pretty flattish, flattish to down. Obviously, that's been disappointing. We would have wanted it to sort of bounce back and expected some growth a little bit faster than it's coming through. But that just hasn't happened. So I do think something that it is new at least or at least new to me, but that we have noticed recently is how much the small sizes are driving momentum and share in the U.S. market. And the reason I bring that up is I think that's a nod to what we still claim, and I know where your headed, Nadine, but that -- we still think that this is largely a cyclical versus a structural change. And the reason small sizes are doing well is more because of the cyclical inflation and it's a consumer that's pinched, and I'm sure we're going to talk more about that. But I mean, the consumer headwind there of inflation and food inflation in particular, is still there. Pricing in tequila was the other one. Look, yes, as you said, Tequila has become more challenging in I'll say, in the last year that some of the big brands of a lot of them, including Herradura, El Jomidar into decline, and we're working very, very hard, obviously, to improve that. On the pricing side of things, though, it wasn't let me make sure I say this right. Pricing is down -- okay, pricing in tequila in aggregate is down 1.7%. So some of the -- and it's the big brands that have gotten a little bit more aggressive. Now 1.7 isn't super aggressive. I actually -- we sort of had some concerns, it was going to be worse. And if you look at TDF, pricing, not just tequila but pricing across U.S. spirits, it's only down 0.5 point. So I would argue rational heads seem to still be ahead of -- our competitors are still acting rather rationally. And while Tequila has gotten a little bit more challenging and a little bit more aggressive on price, it's just by a little bit.

And I'll just add on a little bit as it relates to our pricing as it relates to tequila is still a bit ahead of TDS. That's all about moving Herradura into that faster-growing price segment of that $20 to $30 range. We have been working on that price, as you heard us say for some time. Soon, we're going to be relaunching the brand with a new premium package, new communications and with some new innovations around it to support that new price positioning and that faster growing price tier.

Our next question comes from the line of Peter Grom with UBS. Your line is open.

Hey, thanks. Good morning everyone. So I guess I wanted to just get some perspective on distributor inventories just in the context of organic sales growth. Obviously, nice to see a return to growth here in the third quarter. But there still seems to be a nice tailwind driven by the distributor inventory changes. I think it was 300 basis points for the quarter and kind of year-to-date. Leanne, like how should we be thinking about this as we look ahead? Is this just kind of a return to normal and you really wouldn't anticipate any sort of unwind as we think about the fourth quarter for '26. I know you made some comments around the U.S. that would maybe suggest some unwind there. So maybe you can elaborate on that. But -- and then just if you were to kind of look at the 6% organic sales growth and think about the core component or the way you guys used to report it at 3% this quarter, do you kind of anticipate this underlying growth to continue to improve as you look ahead?

Yes. So I'll start with your inventory question. And I think it's really important to go back and get grounded on where we ended fiscal '24. And if you will recall, we ended fiscal '24 with depletions six points ahead of shipments. So as you think about where we are this year, we continue to believe that in general distributors are continuing to target the low end of their normal range of inventory. Retailers have adjusted their inventory over the period of time in response to consumer takeaway trends and the higher inflation rate. If you look at our Schedule B that's in our earnings release, for this time, you'll see that for year-to-date, our shipments are largely in line with our depletions. And actually, our depletions are just ever so slightly ahead of our shipments. So specifically in the U.S., on the last call, we would have said just to ensure a robust holiday selling season, there were some core SKUs for Jack Daniel's, Woodford Reserve and Corbel that we needed to have at the distributor ahead of the holiday selling season. So with the just retailers carrying lower inventory levels, we didn't hit an out-of-stock situation. So the distributors have largely sold through that seasonal inventory build. And what we expect is that when we get to the end of this fiscal year, the shipments and depletions are largely going to be in line. So we're not forecasting any significant changes in the trade inventory levels. And then your other piece was depletion-based results. depletion-based results. So I think where we are is you're going to continue to see -- we're going to continue to operate in a highly dynamic environment. We think the consumer behaviors are going to be stable. We're still going to get a full year benefit of Genmar and Diplomateco. Again, we have our growth in emerging markets. We would have also talked about this entire year that innovation was skewed to the back half of the year. We've now launched our Woodford Double Double Oak, which the shipments have come through. We expect the depletions to follow and it's been a successful launch to date as well as our Jack Daniel's 14-year-old product as well.

Our next question comes from the line of Filippo Falorni with Citi. Your line is open.

Hi, good morning everyone. I wanted to follow up on Peter's question. Just the amount of shipments above depletion. I know there's an inventory impact in the period -- in the year ago period. But how are you thinking like adding into fiscal '26, do you see any risk that there might be like a negative impact or like you feel like you're going to exit the year with a more normalized basis? And then if I can ask a different question on just the thoughts on tariffs. Obviously, there's a lot of hidden uncertainty on the topic, but particularly with the EU, the risk that the introduction of tariffs by the end of the demand, just any perspective on how you're managing the situation from an inventory standpoint? And any thoughts on pricing with response to the tariffs?

So I'll start with inventory, just to conclude then I'll turn it over to Lawson for tariffs. For F '26 of course, we'll be talking about that in our June call. But again, as we think about where our inventory levels are, they continue to be at the low end of their normal range. We expect that shipments and depletions largely are going to come back into line for this fiscal year. So depending on where the year ends, we'll guide more on '26 when we get to June. But right now, everything remains stable in the inventory arena.

Tariffs. I didn't think we'd make it 15 minutes on this call without getting to tariffs first. But look, just to start out with a little bit. This conversation around tariffs. One, it's obviously bigger than Brown-Forman, and it's bigger than our industry and every day seems to unfold a different twist on the story. So there's not that much that we can really say. I can tell our competitors and everyone that we're working with is shooting to try to get reciprocal 0 for 0 tariffs. That is our key ask. Maybe that's obvious. But to try to keep this industry out of these trade wars. So we're going to continue to prepare. We -- unfortunately, we've done this before. We've learned a bit, and we're committed to really try to do the best we can for both our consumers and our stakeholders. And we think we know how to do that. So you asked about the EU and sort of what's happening there and but the EU tariffs, I mean, it's a real possibility, obviously, I mean they automatically roll over on March 31. We don't know where this thing is going. We don't know any more than you all know the 25%, it could be 0, it could 25%, it could be 50%, and we actually don't know yet. But we do know that the EU is trying to engage with our administration, and they have not -- so far, they've not announced any retaliation. So that's where it's -- there's not a whole lot more we can say. This reciprocity issue though, I think, is very, very important, and we're going to continue to push that and our competitors are doing something similar. And -- but if it doesn't happen that way, if it rolls out where they're coming after American whiskey again and we don't have a situation of reciprocity, then the market for spirits once again gets very distorted that is a big disadvantage for us. But we really believe that that's not going to be the case, and we're going to try to continue to believe and hope that American whiskey is not involved in this big dispute. So on what we've done and preparing for this, I mean, it is -- and I said this on the last quarter's call too, it's a tough thing to talk about it. It's very competitively sensitive. And so we're not going to say very much, but know that we do have measures in place, and we're obviously watching this thing about as closely as we simply can.

And then the only thing that I'll add to that is, as you know, this is a highly volatile situation that we can't predict what's going to happen. So just from a financial perspective, as Lawson said, we've been executing on multiple risk mitigation plans for most of this fiscal year. And with the situation as fluid as it is, we can say that any impact on any type of tariff would be included in our F '25 guidance, and we just believe it's prudent to wait until June to share any other thoughts on the potential impact going forward.

Our next question comes from the line of Andrea Teixeira with JPM. Your line is open.

Hey, good morning, this is Drew on for Andrea. So just following up on that thread, Leanne and Lawson the tariffs on Mexico and Canada. I think Canada is removing some products from the LCBO. So can you maybe quantify the impact that you're building in on the fourth quarter? And then separately, maybe you could shed some light on how holiday performed versus your expectations in the U.S.?

Why don't I take the Canada piece and you can talk about the holidays a little bit. So yes, so Canada and Mexico and the EU for that matter, all -- there are different situations there. So I wouldn't try to, you're not mixing them up. But I mean, recognizing Canada particularly is different than the others. So -- they -- yes, yesterday, they removed basically American, not just beverage alcohol, but a lot of American-made products have come off the shelves in Canada, which is tough. I mean, that's worse than a tariff because it's literally taking your sales away completely removing these -- our products on the shelves, we -- that's a very disproportionate response to a 25% tariff. So frustrating, and we're going to continue to try to fight for getting, as I said, just a minute ago, these reciprocal 0 for 0 tariffs is the best thing for our industry as a whole. And we're going to see how that all plays out. Canada is not a massive company for Brown Farm, and it's around 1% of our sales. So we can withstand. And it's disappointing that some of our consumers are going to be able to get our bottles of Jack Daniel's up there because it's a big brand in Canada and popular, but we will see how this this plays out and the rumors continue to float around Canada every day. So Mexico, we're going to have to see what happens with Mexico. They haven't announced anything either as specific of what is going to happen there. And I think we'll have to see when that actually comes out into the public.

Yes. So then to your other part of your question, I would say, in general, the holiday selling season at the enterprise level was as we expected. Not a lot of change in consumer behavior, though, the consumer does continue to be more mindful of their spending. Many shoppers are prioritizing deals and promotion because they continue to be stretched. And this year, kind of what was different for us, and we've already talked about that is last year during kind of the end of the holiday selling season. That's when distributors began to move from the midpoint of their normal range down to the low end of their normal inventory range. But all in all, we continue to see it was a bit more of a promotional operating environment during the holiday season. We personally, we increased our price competitive, but we didn't as any of our suppliers. And I would say the percentage of the volume sold on promotion for us was at the midpoint of our competitive set. So again, as our theme is our results continue to be in line with our expectation in the holiday season kind of unfolded as we expected.

One thing I think it's worth going through again. We've done this now I know the last few quarters is this whole argument of debate, I guess, on structural versus cyclical changes in our industry. And I do want to remind everyone, one of the points, I guess, that that somehow, I think is getting lost a little bit. If you back up in time -- let's actually go back up 20 years. A quick summary, U.S. spirits market ran between a 4 and a 5 for literally decades and that was based on some premium is helping. We had spirits taking share from wine and beer, you have population growth, you had all these things, and it made in for a multi-decade run of really, really healthy growth. COVID come shot up and then we went from kind of summer fall of 2020 for 3 years straight, the spirits market really globally was on fire and had really, really strong growth rates to the point everybody will remember, we couldn't supply at all because the demand was so high. Fast forward to what has happened over the last 18 months in the summer of '23 beginning of the fall of '23, I remember standing on Labor Day weekend, proclaiming that the U.S. market was growing between 5% and 6%, still look healthy, everything felt great. From September '23 to December, literally 4 months, the market went from plus six to 0, and then it ran at a minus 2% for all of 2024. I say all that because I don't believe the big structural things that people talk about all the time, GLP-1s, cannabis in Gen Z, that does not take six or 8 points off the U.S. spirits market in a period of 5 months. I just don't…

Our next question comes from the line of Eric Serotta with Morgan Stanley. Your line is open.

Great. Thanks everyone. Good morning. A couple of cleanup questions. First, in terms of California and the distributor transition there. Are you expecting anything unusual or visible in fourth quarter results from RNDC, I guess, selling down inventories, Sazerac building inventories? Or do they just sort of wash out or net out to something not material in the quarter. Then in terms of your finished goods inventories, I believe you spoke coming out of last fiscal year starting this fiscal year that your finished goods were on the high side and need to be throttling back production a little bit. Just wondering, is that done? Are your finished bids inventories now in place that you'd like? And then lastly, emerging markets, you are putting up some pretty nice org sales growth there. Just wondering how much of that is coming from pricing versus volume? Are you seeing some pretty big inflationary pricing in markets like Turkey or is a lot of this growth coming from volumes.

Okay. Great. Well, I'll start with California. We have all of our teams through R&DC, Brown-Forman and Ray all working to have a seamless transition again, we believe that as we go through kind of the rest of this fiscal year that we will see a seamless transition. And not a negative impact as we go through this transition. Again, we have been with Rays and we've expanded our relationship with them. we continue to be a huge partner with R&DC across the other 23 states. So we're all working together to ensure that seamless transition. From a brown form and finished goods question perspective, we have been working over this fiscal year, as we've talked about with lower production to adjust our finished goods, raw material inventories back down to more historic levels. We've made significant progress in that. I would like to believe we definitely have more to go. You'll see that impact somewhat muted because of our continued execution against our tariff mitigation strategies. So that will become more visible over time. And then in emerging markets, it's dependent on the market because Brazil we have geographic expansion. For Turkiye, again, you talked about with the inflationary market there, we are taking pricing, but then it continues to be a market where the premium whiskey category continues to grow. So we have a mix, and it's just on a country-by-country basis. But I think probably one thing I will add to that is we have said over time and that came out of our Investor Day that Brown-Forman's opportunity in emerging markets was an opportunity that I think we heard from a lot of you all that was said was underappreciated. And this is a moment where we're seeing that growth come through in those markets.

Our next question comes from the line of Bonnie Herzog with Goldman Sachs.

All right. Actually, I was hoping for a little bit more color on your marketing and advertising spend in the quarter, which was scaled back a little bit. And so I just -- and I think about that in the context of the lift you saw in your margins and certainly EPS and near term, but just maybe help us understand the strategy behind your spend levels moving forward, especially in the context of brand building and driving the recovery that you kind of are highlighting?

Okay. I can let Lawson talk about brand building. I'll just talk at the highest level, where we've always said our brand spend is generally in line with our top line growth. The key there is we always say that it assumes no impact from a change in distributor inventories or otherwise, that kind of more in line with our depletion-based top line growth. because we are continuing to invest, particularly in Jack Daniel's Tennessee Whiskey, and we're focused on maintaining and growing their share of voice for that long-term brand equity and in Boston.

Yes. I mean, as Leanne said, we tend to have a brand expense move with our underlying sales growth. That doesn't -- that -- I mean, that's not particularly strong right now across much of the industry. But I think importantly, we're going to continue to invest strongly behind the brand. As you know, we had a pretty big reorg around here -- almost two months ago. Some of that investment will go against incremental brand expense, brand investment, advertising, all that kind of stuff. We are working through that right now. We've -- it's really not a factor in fiscal '25, and we're going to see what it looks like for fiscal '26. I think we'll probably talk about that more on our next conference call, but there will be incremental investments coming to support the brand growth.

Ladies and gentlemen, due to the interest of time, I would now like to turn the call back over to Sue 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 year 2025 earnings call. If you have any additional questions, please contact us. We look forward to participating in the UBS Global Consumer and Retail Conference in New York next week and hope to see many of you. For those of you unable to attend, our fireside chat will be made available as a webcast accessible via the Brown-Forman corporate website under the section titled Investors, Events and Presentations. With that, this concludes today's call.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.