Brown & Brown, Inc. (BRO) Earnings

Management highlights

### Strategic Updates and Core Priorities - The company ended strategic discussions with Pernod Ricard after failing to reach mutually agreeable terms that met long-term shareholder value standards. Management will continue focusing on internal strategic priorities, supported by a strong balance sheet and healthy free cash flow. Capital allocation remains focused on business investment, increasing dividends, strategic opportunities, and returning cash to shareholders. - Brown-Forman completed its exit from the wine and champagne business, exiting the Corbell and Sonoma-Cutrer operations after decades in the segment. ### Route-to-Consumer Transformation - Completed significant organizational and distribution changes: added 11 new distributors across 25 U.S. markets to improve focus, distributor investment, and margin structure; launched full own-distribution in Italy and Japan, with Japan leveraging distribution of the William Grant & Sons portfolio to scale operations and deepen trade partner relationships. Management expects own-distribution to drive growth for super-premium brands and the core Jack Daniel's portfolio. ### Innovation Portfolio Momentum - *Jack Daniel's Tennessee Blackberry*: Launched in the U.S. in August 2025, the product reached ~300,000 9-liter depletions by year end, making it the second largest new product by value in total U.S. distilled spirits per Nielsen. It launched in 6 European markets in fiscal 2026, reaching ~150,000 9-liter depletions, and outperformed expectations across all early launch markets. The product is on a multi-year phased global rollout. - *Other key innovations*: Jack Daniel's Single Barrel Heritage Barrel, a critically acclaimed limited release turned permanent portfolio addition, will drive super-premium growth for the Jack Daniel's franchise. NuMix, the leading Mexican tequila RTD, launched in select U.S. markets and exceeded initial launch expectations, targeting Mexican-American consumers. El Jimador Spritz, a new light, refreshing tequila RTD, launched in the U.S. in spring 2026 after exceeding expectations in Australia, and is off to a solid start. ### Organizational Updates - Jim Peters, a 22-year veteran of Whirlpool with deep experience navigating macro cycles and margin pressure, joined the company as new CFO at the end of March 2026, with a smooth leadership transition completed.

Guidance

- For full fiscal 2027, macroeconomic headwinds and geopolitical uncertainty are expected to continue pressuring discretionary consumer spending in developed markets, keeping total distilled spirits category growth below long-term historical averages. Depletion trends in the U.S. and developed international markets are expected to be similar to fiscal 2026, offset by continued growth in emerging international markets and travel retail. - Organic net sales are expected to be approximately flat for the full year. Product mix headwinds from faster growth of the lower-margin RTD portfolio will offset benefits from long-term pricing strategy, revenue management initiatives, and the continued global rollout of Jack Daniel's Tennessee Blackberry. The drag from declining used barrel sales will be significantly smaller year-over-year, and depletions are expected to exceed shipments as the inventory gap from Blackberry's strong initial launch closes. - Organic operating income is expected to decline 3% to 5% year-over-year. Persistent cost pressures from higher-cost barreled whiskey produced during the early 2020s hyperinflation period will continue to impact results over the next two years, with additional input cost pressure from transportation, glass, and energy. Management has identified offsetting cost savings, and SG&A is expected to decline as it lapps elevated 2026 levels from strategic transaction costs. - Capital expenditures are projected to be $600 million to $700 million, down significantly from prior multi-year investment cycles. The effective tax rate is expected to be between 20% and 22%. - Management continues to assume that American spirit products will remain off shelves across most of Canada for the full fiscal 2027, consistent with the year-ago comparison base.

Segment performance

By geography/channel: Emerging international markets delivered 12% organic net sales growth, contributing strong double-digit growth led by Numix in Mexico, the leading Mexican tequila RTD brand. The travel retail channel delivered 5% organic net sales growth, driven by Jack Daniel's Tennessee Whiskey and new product launches. Developed international markets saw a 3% organic net sales decline: Canada saw a nearly 60% decline due to off-shelf placement of American products, while Germany and the UK saw 7% and 9% organic net sales declines respectively amid macro pressure, though Brown-Forman maintained/gained share in 6 of 8 top European markets. Newly launched own-distribution markets Italy and Japan saw strong growth, with Italy doubling organic net sales driven by Gin Mare and Jack Daniel's. The U.S. saw flat organic net sales, with distribution realignment and innovation offsetting macro headwinds on discretionary spending. Financially, reported full year 2026 net sales declined 1% year-over-year, organic net sales was flat after adjusting for exited wine/champagne businesses and foreign exchange impacts. Reported gross profit increased 2% to a 60.5% gross margin (up 160 bps year-over-year), driven by A&D benefits from exiting non-core businesses, favorable foreign exchange, and lower costs. Organic advertising expense decreased 5% as the company shifted to more targeted marketing, while organic SG&A increased 7% due to strategic transaction costs and higher compensation expenses. Non-cash impairment charges of $45 million for Ginmare and $87 million for Diplomatico were recorded, driven by a softer category outlook. Reported operating income declined 10%, while organic operating income declined 2%. Diluted EPS declined 17% to $1.53, driven by impairment charges and the absence of the prior year Duckhorn investment gain. Operating cash flow grew to $1 billion, and free cash flow increased to $893 million. The company increased its dividend for the 42nd consecutive year, and repurchased $400 million in common stock.

Risks & headwinds

- Macroeconomic uncertainty and consumer discretionary spending pressure continue to negatively impact demand in the U.S. and most developed international markets, particularly Europe. - The ongoing U.S.-Canada trade dispute has resulted in American Brown-Forman products remaining off most Canadian retail shelves, leading to a nearly 60% organic sales decline in Canada for fiscal 2026. - Used barrel sales demand and pricing are at cyclical lows, creating a persistent headwind to net sales and operating income, though most of the year-over-year decline has already occurred. - The company carries significant inventory of barreled whiskey produced during the 2020-2022 hyperinflation period, which will create ongoing cost and gross margin pressure for the next two years as this inventory is sold. - Ginmare and Diplomatico have underperformed initial acquisition expectations, resulting in $132 million in total non-cash impairment charges amid a softer category outlook and challenging macro environment in their key markets. - Execution risks remain during the U.S. distribution network realignment, with temporary disruption and lost on-premise listings occurring during transition in 2026.

Analyst Q&A

• Q: The 2027 CapEx guidance of $600-$700 million is at multi-decade lows relative to sales. Is this a short-term move or reflective of medium-term capital needs? /

  A: The lower CapEx guidance reflects the completion of large multi-year capital investments the company has made over the past several years, which now provide sufficient production capacity for the foreseeable future. This level is representative of the new steady-state ongoing CapEx level, with adjustments made as needed for future portfolio changes. (197 characters)

• Q: What is the organic operating income base for fiscal 2026 that the 2027 3%-5% decline guidance is applied to? Also, is there a cash benefit to higher historical costs flowing through the P&L? /

  A: After backing out the ~$132 million in one-time impairment charges from the fiscal 2026 reported operating income of ~$1 billion, the starting organic base is approximately $1.1 billion. Yes, the higher costs flowing through the P&L are from already paid historical inventory purchases, so lower current input costs generate positive working capital and cash flow benefits going forward. (301 characters)

• Q: What are your new CFO Jim Peters' early observations on the biggest untapped shareholder value opportunities at Brown-Forman, and what may be misunderstood by the market about the company's valuation? /

  A: Brown-Forman has an unrivaled strong portfolio of leading brands, an extremely strong balance sheet, and generates top-tier free cash flow in the spirits industry, which the market may underappreciate. My past experience navigating cyclical consumer demand environments will help accelerate existing margin improvement and share-gain actions, which will drive organic growth and long-term shareholder value creation. (286 characters)

• Q: Can you update us on the U.S. launch of NuMix, how it is performing, its distribution plans, and what makes it stand out in the crowded RTD category? /

  A: NuMix is already an extremely large, well-recognized brand in Mexico, with strong existing brand awareness among Mexican-American consumers in the U.S. It launched in 9 U.S. markets in October 2025, and is already the 8th largest contributor to RTD category growth after less than a year of launch, exceeding expectations. The company plans to gradually expand distribution across the rest of the U.S. over the next year. (282 characters)

• Q: What are the international launch plans for Jack Daniel's Tennessee Blackberry, and how is early performance tracking? /

  A: The product launched in the U.K., Germany, Poland, Chile, and France during the second half of fiscal 2026, with early volumes and consumer/retail response exceeding expectations. It is planned as a two-year global rollout, with expansion across additional markets including Brazil (where management is particularly optimistic due to strong existing Jack Daniel's and fruit flavor performance) during fiscal 2027. BlackBerry has a natural, widely popular pairing with lemonade that gives it an advantage over other flavored whiskey offerings. (354 characters)