BF-B

• Strategic Focus on Innovation: Management emphasized that innovation is the primary growth driver, citing strong momentum from 'New Mix' (RTD portfolio), Jack Daniel's Tennessee Blackberry, and el Jimador Spritz. These innovations helped offset headwinds in core whiskey and tequila categories.
• CEO Succession Planning: CEO Lawson Whiting announced his upcoming retirement after nearly 30 years with the company. The Board is conducting a thorough search for a successor, considering both internal and external candidates, ensuring leadership continuity during the transition.
• U.S. Market Dynamics: Despite a challenging discretionary spending environment, Brown-Forman’s U.S. performance remained ahead of competitors. Organic net sales were flat, aided by distributor transitions completed in August 2025 which created timing distortions in prior year comparisons. Shipments trailed depletions by ~4 points due to these timing factors.
• Brand Specifics:
  • Jack Daniel's Tennessee Whiskey: Provided stability with flat organic sales; pricing increased 1% despite a category decline of 0.6%.
  • Used Barrels: Sales declined significantly (>60%) as demand from Scotch/Irish producers remains below peak levels seen two years ago.
  • Tequila: Full-strength portfolio declined in the low teens, but el Jimador showed improvement in the U.S. mid-price tier ($15-$30), rising from #9 to #4 in Nielsen rankings.
• Operational Discipline: Gross margin expanded 40 basis points to 60.2%. SG&A increased 5% due to organizational simplification costs, while advertising declined 4%. Strong cash flow generation allowed for EUR 300 million debt repayment.

• Full-Year Outlook Reaffirmed: Management reaffirmed fiscal 2027 guidance, stating results are largely in line with expectations.
• Organic Net Sales: Expected to be approximately flat for the full fiscal year.
• Operating Income: Expect organic operating income to decline between 3% and 5%. However, management expressed increased confidence that results will trend toward the more favorable end of this range due to cost offsets and improved execution.
• Capital Expenditures: Expected to remain in the range of $60 million to $70 million, significantly lower than recent years.
• Tax Rate: Effective tax rate expected to be approximately 20%-22%.
• Inventory & Cash Flow: Continued focus on reducing finished goods inventory and improving working capital efficiency to support cash generation.

The transcript does not provide a breakdown of financial performance by specific product segment (e.g., Whiskey, RTD, Tequila) in terms of absolute revenue or percentage contribution. It reports consolidated organic net sales trends: Emerging international markets grew 9%, Developed international markets declined 8%, Travel retail declined 1%, and the U.S. market was essentially flat. Specific brand performances mentioned include Jack Daniel's Tennessee Whiskey (essentially flat), Used Barrel Sales (declined >60% to approx. $30 million), Full-strength Tequila (declined low teens), and New Mix/RTDs (strong double-digit growth).

• Consumer Demand Pressures: Soft consumer demand and selective discretionary spending persist, particularly in developed markets like Germany, France, and the U.K.
• Used Barrel Sales Decline: Significant drop in used barrel sales (from >$100M to ~$30M) continues to impact profitability, though the year-over-year dollar impact is expected to moderate.
• Input Cost Inflation: Higher-cost whiskey inventory produced during periods of high inflation (grain, energy, barrels) is flowing through the system. Additionally, diesel and aluminum costs are rising.
• Regulatory/Trade Restrictions: U.S.-produced spirits remain off shelves in most Canadian provinces, with restrictions assumed to continue for the balance of the fiscal year.
• Supply Chain Disruptions: Past disruptions (e.g., Chile methanol crisis) impacted year-over-year comparisons; ongoing global supply chain variability remains a risk.
• Competitive Landscape: Intense competition in the tequila category, with significant trade-down pressure affecting higher-price-point brands like Herradura.

Q: Analyst asked for disaggregation of underlying U.S. performance, noting the gap between shipments and consumer takeaway trends.

A: Management attributed the noise to distributor transitions in August 2025 and the Tennessee Blackberry launch. Approximately half the gap is due to capturing distributor margins previously lost, and the other half is timing-related from Q1 innovation launches. Underlying trends are slowly improving, having bottomed out around Christmas.

Q: Analyst asked what is driving increased confidence in delivering toward the higher end of the operating profit guidance range.

A: CFO Jim Peters cited stronger-than-expected top-line performance (excluding barrels) and cost offset actions delivering benefits sooner than anticipated. CEO Lawson Whiting added that the used barrel sales decline cannot get much worse, removing a major headwind, and U.S. takeaway trends (TDS) have been steadily improving over the last 6-8 months.

Q: Analyst asked about gross margin trajectory given costly inventory coming online and reflections on the ended Pernod Ricard discussions.

A: Margin expansion in Q1 is likely the high point for the year as expensive barreled whiskey and commodity costs (diesel/aluminum) rise. Regarding Pernod, management stated they are focused on standalone value creation via capital allocation priorities (dividends, M&A when appropriate) rather than pursuing deals that didn't meet shareholder value standards.

Q: Analyst asked about the pricing environment in tequila and broader portfolio, noting pricing seemed to be a headwind.

A: Management clarified that tequila category pricing is down only 1-2% due to trade-down, but el Jimador has gained share significantly in the $15-$30 tier. Pricing in the broader whiskey category remains rational, with Jack Daniel's actually increasing prices 1% while the category fell 0.6%.

Q: Analyst asked about industry excess supply and how Brown-Forman is managing inventory compared to competitors.

A: Management argued the industry is not 9-10 years long in inventory as some reports suggest, citing strong international exports and healthy RTD/flavored whiskey sales. They noted a 30% drop in new barrel fills recently, indicating suppliers are rationally cutting production, and highlighted success with super-premium expressions like Heritage Barrel leveraging available inventory.