Good day, and thank you for standing by. Welcome to the Brown-Forman Corporation First Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Sue Perram, Vice President, Director of Investor Relations. 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 First Quarter 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 first quarter 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 report 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 conditions 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. I'm glad to be with you to share the highlights and drivers of our first quarter fiscal 2026 top line performance with a focus on our geographic performance, a few unique headwinds to our business and strategic innovation. Then I'll turn it over to Leanne who will share additional insights on other financial highlights, including gross margin and operating expenses before she wraps up with comments on our full year fiscal 2026 outlook, which we are reaffirming. But before I begin, I wanted to take this opportunity to recognize Leanne and her 30-year career at Brown-Forman. As you likely read in our news release earlier this week, Leanne has made the decision to retire on May 1, 2026. She's been a respected colleague for the past 3 decades and a valued partner of mine since she joined the executive leadership team 4 years ago. I've seen the impact she's made not only on our business results and culture, but on the many people at Brown-Forman that she has mentored and developed over the years. Leanne, on behalf of the entire organization, thank you for everything you've done for Brown-Forman. You will be missed. So now on to our results. Overall, I'm pleased with the start to our year. Our first quarter fiscal 2026 reported net sales declined 3%, but organic net sales increased 1% after adjusting for the A&D impact related to Sonoma-Cutrer, Finlandia and Korbel as well as the negative effect of foreign exchange. From a geographic perspective, our organic net sales growth was led by the emerging international markets, which grew 25% in the Travel Retail channel, which increased 7%. This growth was partially offset by a 9% decline in the developed international markets collectively and a 2% decline in the…

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. I will then conclude our prepared remarks with comments on our full year fiscal 2026 outlook. First, to our gross margin. In the first quarter of fiscal 2026, our reported gross profit decreased 2%, resulting in a reported gross margin of 59.8%. Our gross profit margin expanded 40 basis points due to a 240 basis point A&D benefit largely related to the absence of the prior year transition services agreement for Sonoma-Cutrer and Finlandia. This benefit was partially offset by points of higher costs, largely due to the impact of inflation on our input cost and lower production levels, 50 basis points of unfavorable price mix due to the strong growth of New Mix and lower used barrel sales and the 50 basis points of negative effect of foreign exchange, driven primarily by the strengthening of the Mexican peso. Continuing with our other financial highlights, I'll turn to our operating expenses. In the first quarter, organic advertising expense decreased 3% as our long-term philosophy is to align A&P spend with our depletion-based top line trends and we are thoughtfully managing controllable expenses in this dynamic environment. We continue to believe our level of brand investment is healthy, which is evidenced by how we have increased our brand investment at a 4% CAGR over the last 5 years and that the strength of our brands enable us to remain competitive in the current environment. Our organic SG&A investment decreased 7%, which reflected lower compensation-related expenses related to our workforce restructuring initiative we announced in January. Our new structure creates a more streamlined organization, leveraging greater synergies and enhanced ways of working, which we believe will enable…

[Operator Instructions] Our first question comes from the line of Peter Grom of UBS.

Leanne, congratulations. Thank you so much for all the help over the years and best of luck moving forward. I guess I just wanted to follow up quickly just on kind of the distributor inventory impact. Clearly, a nice tailwind to sales in the first quarter. But I just want to understand and clarify kind of how you see that evolving as we move through the balance of the year. I think you mentioned, Leanne, that it would be largely complete by the end of the first half. So I just wanted to clarify that. As we look out to the second quarter, would you anticipate a 400 basis point headwind to organic sales? Or did I mishear that? Or am I misunderstanding that?

Yes. I think for the entire fiscal year, we're expecting shipments and depletions to be in line, and that's including our U.S. where we're not expecting any significant changes in the level of our trade inventories. Now I know we tried -- in our June call, we said that there would be some shipment disruptions as we've made these transitions in the U.S. So it's kind of challenging right now to see through to some of these numbers. But in general, we believe that our distributors are going to continue to target the low end of their inventories. They're in low end the normal range that retailers kind of have what they need. You [ can see ] for the first quarter in Schedule B that our shipments are ahead of depletion. That's really related to the launch of Jack Daniel's Tennessee Blackberry, the launch of the new el Jimador package and then the distributor transitions in the U.S. So you can see on Schedule D that there's a 6% increase in the U.S. in net change of distributor inventories and then also in our emerging international markets, a 10% increase. And that is due to just phasing comparisons over the prior year period for the UAE and rebuilding of some inventory in Paraguay and Uruguay because there was those importation disruptions that we had in fiscal '25. So we believe will be -- so for full year, shipments and depletions in line with each other. Importantly, also at the first half, we should see our results to be in line with our full year guidance from a top line perspective.

Our next question comes from the line of Nadine Sarwat of Bernstein.

Lawson and Leanne. I'd like to focus my question on the U.S. I perfectly appreciate the distributor inventory build and the disruption that causes. So I'd like to look through at the underlying growth rate, which was down 8% weaker than what you had in Q4 and Q1 last year. So 2 questions on that. First, on the quarter, in particular, exiting the quarter, was the trend the same weaker, stronger and the distribution [indiscernible]. Second question is, given the underlying performance, has your view on whether the weak U.S. alcohol trends, are they driven by structural or cyclical? I appreciate this question. It feels like we're beating a dead horse every quarter. But I'm sure you can appreciate, it is a crucial question. Would love to get any updated thoughts that you have on that.

Take the beginning of that.

Yes, do you want to go ahead and start with the second part on [ weak ] cyclical?

Yes, beating the dead horse Nadine, that's a good way of putting it because I don't think our answer is going to be a lot different than what we've said before, but let me take some time to go through this. Obviously, we knew this is coming. And there are some sort of new pieces of information, but this is kind of a long answer, so brace for it. Look, I think this conversation around structural and cyclical, which has really been going on for about 18 months or so now. On the cyclical side of things, I mean, there are certainly headwinds around consumer buying power. And we've talked about this in the past, but inflation and higher interest rates are certainly hurting consumers. Uncertainty around tariffs, I think that was not only in the U.S. that actually was more of a global thing, but certainly, that didn't help. But I do think, and I'll come back to something we've we have talked about before. But if you had to say or pick up, 1 thing that we think is the strongest factor that would say this really is a cyclical thing is back to where we were 2 years ago, basically today. I mean it was the Q1 earnings literally from -- what that have been August of '23. So I remember that quarter because at that time, TDS was still in a plus 5% or 6% range, which it's hard to believe how much that has changed in a 2-year window, but I think the timing of it is what is important. So 5% or 6% up at the end of summer in '23. By Christmas, it was 0, and then we got into calendar '24, and it was essentially negative minus 2%, minus 3% for much…

And then hard to follow. But to your first question, Nadine, back to the U.S. and the exit rate. What we would say is we've got 13, 14 states, including California and transition. Every state has been unique. Collectively, we probably did decelerate as we neared the August 1 transition date, there's noise even in our depletion-based business due to these transitions. We do see in some of these states where there's a gap where takeaway is stronger than depletions. And as we think about where we will be for the remainder of this first half, we would expect depletions to accelerate and shipments to lower, again, coming in line with more of our full year guidance.

Yes. That won't happen pretty quick, I think, as -- we've shipped a bunch of Blackberry in the first quarter and hadn't depleted any. And so the depletions are coming. And we do have -- I think you said, normalized here in a fairly fast fashion.

And our next question comes from the line of Andrea Teixeira of JPMorgan.

Leanne, I'm going to echo all the praises for you and wish you the best. Thank you for having the patience and teaching us more about Brown-Forman. I want to go back to a bit about the segmentation in the Jack Daniel's specifically. Just wondering if you can comment on, Lawson, you did mention that you don't believe any secular trends, but of course, like in the kind of like thinking about premiumization, but you still have a decent volume on that call it, mainstream Jack Daniels. Of course, it's a premium liquid. But I'm thinking of more as we see fragmentation and consumers on the RTDs, of course, you have a very strong RTD offering. But just thinking of long term how to attract the new -- at the age consumers, LDA consumers in how you can change that? And how does that behave most recently within that net number in terms of consumption. Of course, we can see your shipments. But in terms of consumption, how has -- have you exited your Jack Daniel's take the JDTW performance?

Well, look, I think if you're referring to consumer takeaway of Jack relative to whether it's TDS or whiskey or hundred or other ways you can cut it. Look, we've been slowly narrowing the gap, and it does kind of depend how you look at it, but we think we're gaining it, gaining on TDS. TDS, I mean, look, if you want to find a green shoot out there, and this is a small one, you got to look hard to find it. But TDS is getting -- has -- for the last 4 months, 4 or 5 months, has gotten a little bit better. We're talking [ 10 ], so we're not taking jumps. But there are slight improvements in there. But if you look at -- and this is -- I think it's interesting, and I was just looking at this a little bit ago, if you look at Nielsen by price point, so you look at the $20 to $29 price point, that's cutting down pretty closely. So we're going to spend a lot of time breaking up TDS in too many ways. But we're in line with that price point, down between 4% and 5%. TDS is flattered very much by the RTDs these days. I think we all know that. So we're doing okay within that. Within the largest brands in America, we always go to that top 20 list that Nielsen has. Jack Daniel's it's holding its own and they are too sort of right about average, I'll say, within all those. There's now -- I think we said 3 -- only 3 brands in the top 20 largest that are even growing right now, and Woodford is 1 of those. And so we're happy about that. But back to the health of Jack…

Our next question comes from the line of Andrea Pistacchi of Bank of America.

Yes. I wanted to go back to Jack Daniel's Black Blackberry a minute, please, which has been in the trade for a few weeks now. You were sounding quite optimistic in the prepared remarks on the launch. So could you give a bit more color maybe on the response you're getting from the trade and the pace of the rollout? And what's the ambition for Blackberry? Do you think it could get as -- I mean, could it be as successful as other flavor launches like Apple Fire, which reached like 2,000, 300,000, 400,000 cases. And I think you sort of mentioned this also in the prepared remarks about the potential for the brand to travel across geographies. But do you see potential as much for Blackberry to travel as you as we've seen with other flavors.

Yes, I'll start with that, and Lawson can build on. For Blackberry, we are off to a really strong start. And to your point, we have only the second half of July, started to get those shipments out there in preparation for the launch. So there's really not a lot of depletion- based information or consumer takeaway that we can comment on yet, but we can say that there is a significant amount of excitement in the system from our distributors. There's a lot of wonderful feedback and buzz that we're getting from both existing and new consumers, customers, media, as we thought about this strategic innovation and we consider Blackberry. Again, it is a natural flavor. It is found largely around the world. It fits with consumers' pallets. And 1 thing we believe that we're strong here at Brown-Forman and is globalizing these flavors utilizing our existing network as we've done with Honey and we've done with Apple. And if you've seen, we actually had really strong results on Tennessee Apple for this quarter as well. So we do believe this is a brand that we can globalize and then it will resonate well. Outside the U.S., there's not as much competition in flavored based whiskey. So we're excited about what we'll be able to do with that. And again, all of that will layer in over time because we're just now in our very first weeks of shipping in the U.S.

Yes. And just to add to that, I mean, the globalness of it, I think it is, as Leanne said, different than most of our competitors that are in this space, and that's important. We are going to use this as a growth driver over even multi-years. It's not all -- not like we're blasting the world in Q1. So not just Q1, but even this fiscal year, we intend to spread this out with different sizes and different markets and all that kind of stuff. So we feel good at it as a sort of a multiyear growth driver. I'll add an anecdotal piece to it a little bit. One of the challenges in flavored whiskeys is the mixer. Like a lot of brands do shots, but there haven't been that many real natural mixers for a lot of the brands. This one has a great natural mixer in lemonade. So that's my anecdotal, but I will tell you, Blackberry and Lemonade is a great to drink. It's been one of the best tasting flavored whiskey things I've ever tried and it works. And we've needed that to really sustain it as a long-term growth driver, and I think we've got it.

Our next question comes from the line of Filippo Falorni of Citi.

Leanne, congrats and thank you for all the help throughout the years. So maybe a question for you, Leanne, just on the gross margin. You had a 40 basis points of gross margin expansion in the quarter. Is the expectation for the year of still seeing some gross margin expansion on a full year basis? And maybe you can walk us through the components, how to get to the expansion. It seems acquisition and divestiture should be the biggest benefit. And then on the other side, if you can look to the cost side both on the commodity part, but also the used barrel sales negative impact on margins, that would be helpful.

Okay. So first of all, I would say we're off to a really strong start for our fiscal year. Our margins are well positioned with 40 basis points of expansion in the first quarter to 59.8%. We've given you kind of the breakdown for that, so I won't go back through that. From a full year perspective for '26, yes, we're going to continue to benefit from the absence of Finlandia and the Sonoma-Cutrer. The absence of those TSAs as well as the absence of Korbel. We do believe our price mix will largely offset our cost. And then as we said in our prepared remarks, our costs are really driven about the impact of inflation on our input costs and then lower production volumes. We are still benefiting from some lower agave cost, but that's being offset by the 2 things that I just mentioned. As it relates to used barrels, again, we are coming off 3 very strong years of sales, F'25 being our strongest year. So now as we normalize that high- margin business and the absence of that, all of that is built into the guidance that we have provided for the full year.

Our next question comes from the line of Eric Serotta of Morgan Stanley.

Leanne, congratulations. It's been a pleasure working with you and looking forward to toasting down in Lynchburg in October. Question for Lawson. What are you seeing in terms of the competitive and promotional environment, last quarter, you commented I think that surprisingly, everyone had been pretty rational thus far. I know first quarter typically isn't a heavy promo period, but any additional color would be helpful. And then sort of as a consumer I'm seeing more allocated bourbons on the shelf. I'm not talking like the $200 suggested retail price bottles that would sell for a few thousand marked up. I'm talking bottles in the $30 to $60 range that for the past few years, you couldn't find or if you did, they were a couple of hundred dollars. Are you see a -- are you seeing that in terms of your and competitor allocated products, leaving Birthday Bourbon aside. And b, is that having any impact, do you think, on brands like Woodford and Old Forester?

That's a good question. look, I step back for half a second, then I'll directly answer your question. As I think we've said on these calls a number of times, American whiskey and then tequila even the 2 categories that serve or offer the best super-premium, ultra-premium line extensions, particularly as American whiskey largely because of the barrel. There's so many different things that you can do. We consider ourselves be leaders in that space, and we've had a lot of very unique and very successful innovations over time. So you're right. I mean there are --- look, everyone -- not everyone, but I mean people -- the big brands have seen a lot of which we have led have seen what you can do with some of these higher-end line extensions, Double Oaked by far being -- I say that, I think would be our most successful line extension that we've probably ever done. So there's lots of exciting things in that space. Jack Daniel's has its 10-year-old. It's 12-year-old, it's 14-year-old, talk about allocated. I mean, there's -- the demand is many, many times more than we have supply for. And there's a number of them in the Woodford and even Old Forester, you mentioned Birthday Bourbon, but we have others in President's Choice and some other really highly desired line extension. So yes, so I mean, I think you will continue to see those. That's a price point that we obviously love to play in. and we think we'll do quite well with that. Now shorter-term question, you had started to ask have you seen -- I mean there's difference in promotions because there's more brands on the shelf necessarily, but pricing has continued to be [indiscernible] fairly rational. Tequila, as I think everyone has said, seems…

And our next question comes from the line of Kevin Grundy of BNB Paribas.

Leanne, I'd like to extend my congratulations and best wishes to you and retirement, of course, as well question for both of you. This is kind of zooming out more 20,000-foot, but just -- so Lawson, the approach to driving growth in the portfolio now geographically. I appreciate the time you spent talking about some of the success you've had in Brazil and emerging markets. And as we kind of look at or contemplate and the market contemplates your ability to kind of get back to that longer-term algorithm, and I think there's a lot of skepticism as you're well aware, it would be a strategy seemingly much more reliant on emerging markets than it has been in the past. So is there an opportunity to accelerate the pace? How do you think about investment levels from a portfolio approach, particularly when you look at the U.S. and developed markets and you're well aware of what the market is sort of pricing in and the market is of the view this is much more structural in nature than cyclical. So I'd love to get your thoughts on your ability to really lean in on emerging markets and accelerate the pace of growth as that becomes increasingly important and then what does that mean in terms of the achievability of your long-term guidance? So a lot in there, but I'd love your thoughts.

I mean, it's a great question. It is -- we are internally spending a lot of time thinking about that and talking about it. And it is -- what -- if this environment in the established big markets, I don't see it being a declining market. I just don't believe that's the even medium- term outlook. But does it get back to 4 to 5, I mean that's such a hard question to answer. And I don't really have a crystal ball. And I know some folks are coming out loud, saying -- making some predictions on that, but I'm not going to do that. But I do think we've talked a lot about if it's a lower growth environment, how does your portfolio look? Are there differences you want to make there? But within geographies, probably even more so, what would you do? And we are naturally going to allocate more resources into these emerging markets because it's not only Brazil, that is growing. We have plenty in Turkey and UAE, and we have big eyes on Asia, and particularly India, which were relatively small. So that would be a good example of a market that needs incremental resources, and we think there is a meaningful opportunity there. And so I don't want to say that we're reallocating away from like the U.S. because it's still the most profitable, biggest premium, all those types of things. We'd be crazy to try to back away from that opportunity there, which I just still think we've got the portfolio that fits the U.S. consumer really, really well. And so we don't want to back away from that. We want to make sure that we get our fair share of that. So -- but yes, I do think in terms of emerging markets going forward, it's -- from Mexico and all of South America has been where we've been the most successful in the last few years, and we will continue to fuel that, the momentum is still there. And so we're continuing to do that. I mentioned India, it sounds strange to talk about the Middle East, but there is a growing business there that is actually there, and we feel pretty good about that. And then Asia still has all the opportunities that we need to find a way to crack that and that will be a big one. And then Japan, we -- I think you all know, we just put our own sales force in place about a year ago. And so we're getting our -- I mean, we're getting up and going there, and it's a challenging market on a lot of levels, but it's a huge bourbon market. It's a very, very premium market. And now we're much better positioned to be able to get our share of that.

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

Congrats and best of luck, Leanne. I wanted to ask a couple of things. First, shipments, as we've discussed, we're well ahead of depletions in Q1. As a result, this was certainly a benefit to organic sales in the quarter, but could you quantify for us the EBIT impact of that load-in in Q1? And then second, I guess I was hoping for some more color on your price/mix in the quarter. I think it was down around 5%. So could you maybe just touch on the drivers of that? And again, how we should maybe think about price/mix for the rest of the year?

To your first question, if you'll take a look at the bottom of Schedule D, we try to provide that all the way through the P&L. So you can see that information that you're looking for is there. And then from a price/mix perspective, a lot of it is about price/mix -- I'm sorry, as far as like mix as far as the higher growth of New Mix and the lower used barrel sales that we had partially offset by kind of the launch of our Jack Daniel's Tennessee Blackberry.

And I think -- I don't know if I misheard you, Bonnie, but the on or whatever this is, the gross margin slide that we have in the deck, the price/mix impact, at least on gross margin was 0.5%. Not 5%.

This concludes the question-and-answer session. I would now like to turn it back to Sue Perram for closing remarks.

Thank you. And thank you, Lawson and Leanne, and thanks to everyone for joining us today for Brown-Forman's First Quarter Fiscal Year 2026 Earnings Call. If you have any additional questions, please contact us. We look forward to participating in the Barclays Global Consumer Staples Conference next week and hope to see many of you. For those of you unable to attend our fireside chat on Wednesday will be made available as a webcast, accessible via the Brown- Forman corporate website under the section titled Investors, Events and Presentations. To wrap things up, the story of Jack Daniel's begins on a day in September about midway through the 19th century, but no one can agree on exactly what day he was born. One thing we do agree on, though, is that Jack's birthday is certainly something to celebrate and since we don't know the exact date, we choose to celebrate any day in September. So we hope you'll join us in raising a glass, which every day you choose, as we say happy birthday to Jack. With that, this concludes our call.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.