Good day, everyone, and thank you for being here. Welcome to the Brown-Forman First Half Fiscal 2025 Earnings Conference Call. I will now hand it over to Ms. Sue Perram, Vice President and 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 Second Quarter and First Half of 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 second quarter and first half of fiscal year 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 are reconciliations 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. Before we transition to our results, we have two very special guests with us. As you may recall, on November 25, we announced a change in our Board of Directors' Chair. Here to speak about this upcoming transition is Campbell Brown, Brown-Forman Chair of the Board, and his successor, Marshall Farrer, Executive Vice President and Chief Strategic Growth Officer and Brown-Forman Board Director. Both are great grandsons of the company's founder. Campbell and Marshall have a few remarks they would like to share. After that, we will review our financial results, and then Lawson, Leanne, and I will be available for Q&A. Campbell, I would now like to turn the call over to you.

Thank you, Sue, and good morning. I'm delighted to join you today as this is just the second time I have spoken on one of these quarterly calls. The first time was the third quarter of fiscal 2021 when it was announced that I would become the next Chair of the Board. Like then, I'm here today to discuss succession planning. As we know, it is not by chance that Brown-Forman has been a family-controlled organization for 154 years. Rather, we understand that the company's independence has been enabled by intentional family connections across generations as well as purposeful and productive relationships between the Brown-Forman executive leadership team and Board of Directors. As you may have seen at the recent meeting of the Brown-Forman Board of Directors, I announced my decision to step down as Chair when my term ends in July 2025. While this decision may have come as a surprise to some, let me assure you that even before assuming the role of Board Chair in 2021, I knew that my time in the position would be thoughtfully measured. My timeline was always well aligned with our Board succession planning process, being true to who I am and what I believe is best for the company I love so dearly. While I am stepping down from my role as Chair, I am thrilled to have the opportunity to stand for reelection in July as a Board member and continue to help steward Brown-Forman's future in that capacity. It has been an honor to serve as Chair of the Board alongside such a talented collection of directors and a dedicated executive leadership team, but most of all, I continue to be impressed by the skill, dedication, and resilience of our employees. Since I became Chair, the role has served to reinforce everything I've known to be true and special about Brown-Forman. I am immensely proud of our committed and united family shareholders, the strength of Brown-Forman's people, culture and brands, and our strong governance foundation and process. Individually, these are attributes any company would envy. Combined, they all but ensure Brown-Forman's continued success and independence as a resilient, family-controlled, publicly traded company guided by our core values and long-term perspective for generations to come. And so it is with great pleasure that I also share that the Board has unanimously approved my successor and my cousin, Marshall B. Farrer, who will assume the role of Chair of the Board following his reelection to the Board at the 2025 Annual Meeting of Stockholders. Marshall will become the 11th Brown family member and third fifth-generation family member to serve in this important capacity. As Chair, Marshall will leverage his unique experience, both from within the company and as a champion of the family governance structure to continue to uphold our family's commitment to the long-term perpetuity of Brown-Forman. He has the global mindset, the industry network, and the strategic acumen to guide our Board of Directors in stewarding Brown-Forman's growth and independence. Marshall is well prepared and ready to take on this role. As a member of the Board and executive leadership team, he has partnered with Lawson Whiting, our CEO, and the Board on its long-term strategy. I have full confidence in Marshall's ability to lead the Board and the family. He will continue to build upon and strengthen the relationships and legacy that have made and will continue to make Brown-Forman an independent world-class spirits company headquartered in Louisville, Kentucky, worthy of your long-term investment. Please join me in congratulating Marshall and wishing him the best in this exciting step in his career and service to Brown-Forman. With that, I'll hand it over to Marshall.

Thank you, Campbell, and hello, everyone. First, I'd like to thank the Board for the confidence it is placing in me as the next Chair of our Board of Directors. I started my career at Brown-Forman in 1998 as a marketing manager in the wine division. I was based in California back then, and over the years have held a variety of roles in a number of regions around the globe, including positions that took me to Sydney, Amsterdam, and London before recently relocating back to our hometown of Louisville, Kentucky. As Campbell mentioned, in addition to the various operational roles I've had over my 26-plus years with Brown-Forman, as well as my nearly 9 years of Board service, I've also enjoyed working with members of my family since 2000 when the fifth generation began evolving and formalizing our governance initiatives. I am very honored to accept this new responsibility as we enter the company's 155th year of operation and I am deeply grateful for the trust placed in me by my fellow Board members and the Brown family. I look forward to building on the strong foundation laid by Campbell, Garvin, and all those who have previously served as chair of this great company. Please note that the Board and I understand our responsibilities to you, our public partners as you look to Brown-Forman to deliver long-term sustainable growth achieved responsibly over decades and generations. I have greatly enjoyed meeting some of you at our more recent investor events, and look forward to meeting those I have not met at future investor meetings and events. With that, I would like to turn the call over to Lawson to take us through the first half of fiscal 2025 results.

These gains were largely offset by volume declines for El Jimador and Herradura. Woodford Reserve continues to grow faster than the U.S. whiskey category and gained value share within the most recent Nielsen and NABCA takeaway results. The brand grew organic net sales 8%, driven by increased volume as well as positive price/mix. Results were driven by the growth of Woodford Reserve Distiller Select, the #1 super premium American whiskey globally, along with strong double-digit growth of our ultra-premium offering, Woodford Reserve Double Oaked. Diplomatico, the #2 super premium plus rum globally, delivered very strong organic net sales growth led by France and Czechia, along with the travel retail channel, Germany, and the United States. As I mentioned, when we acquired Diplomatico in fiscal 2023, the brand has a strong European presence, aligning well with our investment in owned distribution in markets such as France and Germany, which are Diplomatico's top two markets. We've placed Diplomatico into our emerging brands portfolio in both Europe and the United States, its third largest market, to ensure it has the focus and dedicated resources to drive its growth. Old Forester, which has consistently provided strong growth despite a volatile environment, delivered double-digit organic net sales growth as the brand benefited from the growth of the single barrel expressions and recent releases such as King Ranch Edition, which is exclusively sold in Texas. While we're very pleased with the performance of Woodford Reserve, Diplomatico, and Old Forester, our tequila brands, El Jimador and Herradura, continued to face challenges in their two largest markets of the U.S. and Mexico. In the U.S., there have been an increasing number of competitors entering the tequila category, while Mexico's economy has faced a challenging macro environment. Despite this performance, we continue to believe we have the right brands to capitalize on the growth in the tequila category globally over the long term. Tequila Herradura is a 154-year-old brand of superior quality and taste, and we're highlighting its craftsmanship, heritage, and authenticity. This year, we've been celebrating Herradura's heritage as the world's first Reposado across consumer communications as well as hosting promotional events across the U.S. And in Mexico, we've recently launched Herradura Crystal, a Reposado Cristalino that builds upon the region's Cristalino trend. For El Jimador, now that we've repositioned the brand's price solidly into the premium price segment, we have opportunities to grow reach and distribution in the U.S. and we're also optimistic about El Jimador's ability to create and grow in the premium tequila category in the rest of the world. We saw very strong double-digit organic net sales growth in Southeast Asia as well as Brazil and Australia, where El Jimador is the #1 100% Agave tequila according to IWSR 2023. While this growth was not enough to offset the softness in the U.S. and Mexico, we believe El Jimador has a strong future and can be a key introduction to tequila for global consumers as they begin to understand the mixability and versatility of 100% Agave tequila. After several quarters of short-term headwinds, I'm very pleased to say that organic net sales for Jack Daniel's Tennessee Whiskey accelerated significantly as we move through the first half of fiscal '25 with sales now flat for the year-to-date period. We continue to invest behind the brand to engage a new generation of legal drinking age consumers while retaining our core consumers. These include the McLaren Formula One sponsorship, music sponsorships, most recently with Shaboozey, new media campaigns, and the Jack Daniel's and Coca-Cola ready-to-drink product. RTDs continue to be a bright spot within total distilled spirits, showing growth across most markets, with Jack & Coke notably increasing its value share in many markets around the world. We continue to add new markets, including a launch in India in September and new formats and flavors within the United States. The Jack & Coke Cherry limited-time offering performed well with initial shopper data from a national grocer showing that Jack & Coke Cherry added incremental shoppers to the Jack & Coke RTD family. We're also excited to introduce a variety pack featuring Jack & Coke, Jack & Coke Cherry, and Jack & Coke Vanilla in the U.S. The variety pack should be widely available in March 2025 as we lean into summer moments such as Time at the Beach, the Lake, and music festivals. We believe our continued geographic expansion and innovation opportunities will generate interest and attention for Jack Daniel's RTDs as well as the full-strength family of brands. Before turning the call over to Leanne, I wanted to share our latest thoughts on tariffs as I know it is a topic of great interest. As you know, Brown-Forman has been headquartered in the United States for nearly 155 years, and we're proud to be the leading exporter of U.S. spirits products to the world. The growth and expansion of our global portfolio allow us to grow at home, increasing jobs and investment in the U.S. and everywhere we operate. Our industry is unique in that many types of spirits like bourbon, Tennessee whiskey, Irish whiskey, Scotch, and tequila are recognized as distinctive products and must be made in their respective countries. So any time these spirits products are targeted by tariffs, there is the potential to create an uneven playing field. At Brown-Forman, we've had an uneven playing field before given the retaliatory tariffs on American whiskey, and as such, have learned from our prior experience. We've been proactively preparing for a variety of scenarios and have implemented mitigation strategies for our portfolio of brands around the world. At this point, there are many unknowns and potential scenarios. It is very difficult to predict how this will play out. In summary, the first half of fiscal 2025 has unfolded largely in line with our expectations, and we continue to believe that we are positioned to achieve our full-year guidance. 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. While our short-term organic results in the first half were below our historical trends, I continue to believe in our long-term growth potential led by our strategy, our portfolio, our geographic breadth, and of course, our talented people. With that, I'll turn the call over to Leanne, and she'll provide more details on our first half results.

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. From a geographic perspective, as expected, we saw sequential organic net sales improvement in each of our geographic clusters as we move through the first half. Our emerging international markets returned to growth and collectively delivered 6% organic net sales growth in the first half. This growth was fueled by the very strong double-digit growth of Jack Daniel's Tennessee Whiskey, Jack Daniel's Tennessee Honey, and Jack Daniel's Tennessee Apple in Türkiye and Brazil. Our business in Türkiye benefited from the continued growth of the premium whiskey category. In Brazil, the economy has remained resilient, as our results were driven by the growth of the premium plus whiskey category, where we are gaining share, our geographic expansion strategy, and the launch of an additional package size for Jack Daniel's Tennessee Whiskey. Brazil has consistently grown 9-liter depletions for the full-strength Jack Daniel's family of brands at a double-digit rate over the past four years and has joined the U.S., the U.K., and Germany as a 1 million case market, where the trailing 12-month depletions exceeded 1 million 9-liter cases. In Mexico, organic net sales of El Jimador and Herradura declined as the challenging economic environment is impacting discretionary spending and consumers are trading down. Despite the decelerating conditions in Mexico, we continue to outperform and gained market share across the channels, driven by strong takeaway in RTDs and whiskey. In addition, Herradura is driving innovation in tequilas with the launch of Herradura Crystal in Mexico, which builds upon the region's Cristalino trend and addresses the consumers’ need for a versatile tequila across occasions. Organic net sales in the travel retail channel declined 3% in the first half. Growth of Jack Daniel's Tennessee Whiskey and Diplomatico were more than offset by the decline of our super premium American whiskeys as Woodford Reserve compared against very strong double-digit growth and the launch of our exclusive global travel retail offering, Jack Daniel's American Single Malt in the year-ago period. We are continuing to innovate in this channel with the timing phased to the second half of the fiscal year. For our developed international markets, organic net sales collectively were down 3% for the first half as growth in Japan was more than offset by declines in the United Kingdom and South Korea. As we shared last quarter, Japan continued to provide growth following our route-to-consumer change to own distribution on April 1, 2024. While the U.K. returned to growth in the later months of the first half, the market continued to compare against higher volumes in the year-ago period related to purchases ahead of the excise tax increase in August 2023. In South Korea, the premium whiskey category is still experiencing growth, though Jack Daniel's Tennessee Whiskey experienced increased competitive activity while also lapping the prior year launch of Jack Daniel's Tennessee Apple. And in the United States, organic net sales decreased 3%. Double-digit growth from Woodford Reserve, Old Forester, and the Jack Daniel's RTDs led by Jack & Coke were more than offset by declines in Jack Daniel's Tennessee Whiskey and Korbel California Champagne. Lawson highlighted the growth drivers of Woodford Reserve, Old Forester, and the Jack Daniel's RTDs in the U.S. Therefore, I'll move to additional comments on Jack Daniel's Tennessee Whiskey and Korbel as well as on inventory and the consumer environment. As a reminder, in the year-ago period, Jack Daniel's Tennessee Whiskey experienced a shift in ordering patterns as inventory was purchased ahead of price increases. While the brand declined in the first half of this fiscal year, the brand's 3-month organic net sales trend is ahead of the fiscal year-to-date trend ended October 2024. There's also improvement in the 3-month rolling takeaway trends. For Korbel, the declines in the first half were largely timing related as we are focusing our promotional efforts on the seasonally stronger second half. Turning to distributor inventory levels in the U.S. At the end of our first quarter, we shared that distributors were continuing to target the low end of their normal range, which is where they remain. As the important selling month of October, November, and December approach, distributors began preparing for the important holiday selling season, and we noted increased shipments for key brands such as Jack Daniel's Tennessee Whiskey and Woodford Reserve. This was done in a few key markets to ensure supply would meet consumer demand and to mitigate the risk of an out-of-stock situation at the retail level as some retailers are continuing to target the low end of their inventory range. From a takeaway perspective, 3-month rolling value trends for total distilled spirits are down approximately 1% and have remained steady in the first half. The premiumization trend continues with higher-priced tiers growing in value and gaining share. The growth in the $40 and above price tiers is driven largely by the U.S. whiskey and tequila categories. Moving on to the rest of the P&L. In the first half of fiscal 2025, our reported and organic gross profit decreased 8% and 4%, respectively. This resulted in 240 basis points of gross margin contraction, which improved sequentially as we progress through the first half. We continue to benefit from favorable price/mix and the Jack Daniel's Country Cocktail business model change. These were more than offset by higher costs, largely driven by the timing of input cost fluctuations, coupled with high inventory levels, foreign exchange, as well as the impact of the transition services agreements related to the divestitures of Finlandia and Sonoma-Cutrer that we shared during our first quarter earnings call. As a reminder, these agreements had a negative impact on our overall reported gross margin, as the gross margin for these services agreements was significantly below the sales of finished goods. I will note that as of October 31, 2024, the transition services agreement related to Sonoma-Cutrer has concluded. As expected, operating expenses in the first half of fiscal 2025 were lower compared to the year-ago period, largely due to seasonality of both fiscal years. Organic advertising expense decreased 4% as we compared against the phasing of our brand-building investments in the year-ago period. As a reminder, our spend was significantly skewed to the first half of our fiscal year 2024 for Jack Daniel's Tennessee Whiskey, particularly the superpremium expressions, and to support the launch of the Jack Daniel's and Coca-Cola RTD in the United States. Organic SG&A investment decreased 3% for the first half, driven by lower compensation and benefit expenses as we lapped a 9% increase in the year-ago period. In total, reported and organic operating income decreased 7% and 3%, respectively, in the first half of fiscal 2025. These results led to a 3% diluted earnings per share decrease to $0.96 per share. Before moving on to our outlook, I would like to share two additional updates since our last quarter related to Sonoma-Cutrer and our capital allocation philosophy. In the second quarter, we recorded income of $2 million related to our equity share of the Duckhorn Portfolio's earnings as a line item below the operating income line on our P&L based on the equity method one quarter in arrears. On October 6, 2024, it was announced that the Duckhorn Portfolio would be acquired by private equity funds. Under the terms of the agreement, upon completion of the proposed merger, Brown-Forman will receive cash of $350 million in exchange for our 21.4% ownership interest in Duckhorn. The completion of the merger, which is expected to occur in the second half of our fiscal year, is subject to customary closing conditions, including approval by Duckhorn stockholders. We will continue to report our equity share of the Duckhorn Portfolio's earnings one quarter in arrears until the merger is complete. Once our investment is sold, we will recognize the equity method earnings only up to the date of Duckhorn's most recently available financial statements and recognize again on the disposal when the investment is sold, not on a lag. Secondly, Brown-Forman believes deeply in and remains committed to building an enduring business. As a testament to this belief, our long-term perspective and our enduring commitment to our valued shareholders, our Board of Directors recently approved a 4% increase in the quarterly cash dividend, marking 41 consecutive years of dividend increases. Brown-Forman continues to be a proud member of the prestigious S&P 500 Dividend Aristocrats Index and has paid regular quarterly cash dividends for 81 consecutive years. And lastly, turning to our fiscal 2025 outlook. We continue to anticipate 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 inventory trends on a year-over-year basis. This outlook is tempered by the global macroeconomic and geopolitical conditions that are creating volatility and uncertainty in the operating environment. We are not forecasting significant changes in the behavior of the consumer or the level of trade inventory as the impacts from inflation and higher interest rates on the consumer and trade remain. As our first half results aligned with our expectations, we continue to believe that fiscal 2025 will be a year of two halves. We have moved beyond the comparison against strong shipments in a few emerging international markets as well as lapping stronger shipments associated with the execution of our pricing strategy on a year-over-year basis. In the second half, with the majority of the movements in inventories across the distributor, retailer, and consumer supply chain behind us, we believe our results will more closely reflect consumer demand. This expectation, though, is dependent on the behavior of the supply chain, which is not within our control. Also, we will begin to compare against a significant slowdown in total distilled spirits trends as well as trade inventory reductions. And finally, we believe that we will benefit from having a full year of growth from Gin Mare and Diplomatico, which had very strong results in the first half of fiscal 2025. With our pricing strategy in place, we remain confident in the strength of our brands and the breadth of our growth across numerous geographies. Therefore, we continue to expect organic net sales growth in the 2% to 4% range, driven by our emerging and developed international markets. We also continue to believe that we will benefit from price/mix through the evolution of our portfolio, which includes the addition of the two super premium brands, Gin Mare and Diplomatico, and the divestiture of lower-margin brands, Finlandia and Sonoma-Cutrer. Price/mix should also continue to benefit from our revenue growth management activities. In addition, the transition services agreement for Sonoma-Cutrer has ended, and we expect the transition services agreement for Finlandia to come to an end in our second half, which will reduce the A&D headwind. And while costs were higher in the first half of fiscal 2025 compared to the year-ago period, this is largely due to the timing of input cost fluctuations, particularly for our tequila brands. For these brands, we still expect to benefit from lower Agave prices for the full year. Though based on their current performance, it will take longer than expected to work through our higher-cost inventory. We have shared that the benefit from the lower Agave prices would be more than offset by the impact of inflation on our input costs and lower production volumes. With the benefit now being lower, we are forecasting that costs will be higher than planned for fiscal 2025, leading to a slight contraction in our reported gross margin on a year-over-year basis. Our outlook for organic operating expenses continues to reflect investment behind our brands and our people, though we will continue to be highly diligent with our SG&A spend to balance the impact of these shorter-term pressures on our gross margin. Based on the above, we continue to forecast organic operating income growth in the 2% to 4% range. The low and high end of our organic net sales and organic operating income ranges are based on numerous scenarios with the greatest influence from weaker or stronger consumer demand in key markets such as the United States and changes in distributor inventory levels. We are operating in a volatile and quickly evolving environment, and our third quarter is seasonally significant to our full-year results. We will continue to closely monitor performance indicators and provide you with those updates in our third quarter call. We continue to expect our effective tax rate to be in the range of approximately 21% to 23%, guiding closer to the lower end of the range, and we are updating our estimated capital expenditures outlook from a range of $195 million to $205 million to a range of $180 million to $190 million for the full year as the phasing of a few of our projects will now extend into the next fiscal year. In summary, the first half of our fiscal 2025 delivered against our expectations. The first half results reflect the current consumer demand environment, along with a few remaining unusual comparisons against the very strong shipments in the year-ago period. While our short-term organic results in the first half were below our historical trends and our full-year outlook, we believe we will continue to see sequential improvement and growth in the second half. As we look ahead to our full fiscal year, we remain confident in our ability to deliver our near-term goals as we continue to focus on executing our long-term strategy and building Brown-Forman for generations to come. I would like to add my thanks to and deep appreciation for my Brown-Forman colleagues around the world for their resilience and agility as they continue to identify opportunities for our outstanding portfolio brands with a dedicated focus on the long-term growth of the company. This concludes our prepared remarks. Please open the line for questions.

Our first question or comment comes from Lauren Lieberman at Barclays.

I was just curious if you could talk a little bit more about inventory levels. I know Leanne, you touched on it in your prepared remarks. But I think, as always, a key topic of conversation among investors before your call. So if you could just give us an update maybe on absolute inventory levels, particularly in the U.S., I think that you had commented last quarter that they were generally holding steady on an absolute basis. So I was curious if that was still the case? And then how you would sort of characterize distributor and retailer attitude towards the category overall and expectations for growth around the holiday season?

Okay. Great. Thanks, Lauren. Just to reiterate what we said, we continue to believe that the distributors are targeting the low end of their normal range and that retailers have adjusted their inventory levels in response to that lower consumer takeaway trend and the interest rate environment, similar to what we would have said in the first quarter. As you can see on our Schedule B in our first half, our shipments this quarter are tending to be slightly ahead of our depletions, and that's reflecting our normal supply chain now from the supplier to the distributor to the retailer to the consumer. But as we prepare for the important holiday selling season, we have increased some shipments for specific brands such as Jack Daniel's Tennessee Whiskey, Woodford Reserve, and Korbel to ensure that we've got product there to meet consumer demand and protect against any out of stocks. And in the U.S., we're just continuing to work really closely with our partners, and we're not forecasting any significant changes in trade inventory levels. And then I think around the world, it continues to be really similar to where we were at the end of Q1 as well, which is in Europe, where we own the majority of our distribution, our stock levels are normal. We have clear insight into our two largest markets in Latin America, which are Mexico and Brazil. And in Mexico specifically, our RTDs are kind of below normal. I would say whiskeys are kind of in line with the long-term trends and tequilas are a bit above that. And again, that's more about how tequilas are performing in the Mexican market. And Brazil, overall, they're at the low end of there. So we continue to believe our inventories are well positioned with our distributors. But I would say in the U.S., we are being specific on some brands to support the holiday season and to ensure that we've got cases there to meet consumer demand. And then I'm sorry, what was the second part of your question?

Holidays environment.

The holiday environment, Lawson, do you want to speak... talked about that a little bit.

We currently lack sufficient data regarding the holiday season, so we will need to wait and see how it unfolds. Taking a broader view, particularly focusing on the U.S. market, it's important to revisit the trends from the past 18 months. About 15 to 16 months ago, we observed that the U.S. market was performing at a 5% or 6% growth rate, which continued through the first half of 2023, as it did in 2022 and even 2021. However, from Labor Day to Christmas last year, the market experienced a significant downturn that surprised many. We have argued that this decline was driven by economic challenges and inflation, affecting consumers' purchasing power, a sentiment that has persisted across various consumer categories over the past year. Unfortunately, the situation hasn't improved much, leading us to have modest expectations for this Christmas season. The Trailing Data Score (TDS) in the U.S. fell from the 6% range in the summer of 2023 to around 0 by Christmas and has remained negative throughout the year. While there are some positive indicators from the National Alcohol Beverage Control Association (NABCA) data, especially regarding Jack Daniel's Tennessee Whiskey, Nielsen's figures reflect a decline in consumer takeaway, still showing low single-digit drops. We maintain that consumers are under financial pressure, and while we believe that this situation will eventually improve, we remain cautious about what this Christmas season will bring.

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

I was actually hoping for a little bit more color on the divergence in trends between U.S. consumer takeaways and your reported whiskey depletions. I guess I'm trying to reconcile the negative, I don't know, 3% to 4% sales trends we've been seeing in the scanner data for the last few months versus your reported flat depletion growth in the quarter. Maybe you could touch on where you're seeing some strength? Is it non-tracked channels, possibly on-premise? And then love to hear your growth expectation for American whiskey category this fiscal year. And does your guidance assume that Jack Daniel's will take share?

For the U.S., there has been a discrepancy between NABCA and Nielsen. Currently, we're experiencing a decline of about 3%, which aligns with our organic reporting and what we're observing in consumer takeaway. The disconnect isn't significant. There has been an improvement from Q1 to Q2 on an organic basis, but overall we're still seeing a low single-digit decline. The on and off channels are closely aligned, with the on channel being about a point weaker. So, we estimate the U.S. market is running around a 2% decline in the off channel and 3% in the overall on channel. This isn’t much different from six months ago, which is why we don't anticipate a dramatic change around Christmas.

And then, Bonnie, to the second part of your question about what's built into the guidance. For us, it's about a full year benefit from having Gin Mare and Diplomatico in our results, the continued growth of Japan, and then Jack Daniel's Tennessee Whiskey largely outside of the United States.

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

Two for me. While we're on the U.S. first question, can you just elaborate maybe on the performance in October exiting the quarter? Any commentary in November in particular? It sounds like it's more sustained from your comments, but if we could just confirm that. And then second question, you touched on tariffs in your prepared remarks. Obviously, top of mind, whether that's from imports from Mexico for your tequila business, exports to Europe. Can you talk a little bit more about how Brown-Forman is thinking about these potential risks and levers at your disposal should they come into play? You called out proactively preparing and implementing mitigation strategies. Could you elaborate on that?

Thank you, Nadine. I'll start with the U.S. to your question. We did see sequential improvement from Q1 to Q2. Q1 in the U.S., we were at a negative 4%. And at the end of our first half, we are at a negative 3%. So we are seeing sequential improvement in this market, along with several of our other markets. We would say for the U.S., one detail I would share is our market share where we were holding in the first quarter, we're slightly declining market share now, and that's largely based on our tequila performance. And I'll turn it over to Lawson for the tariffs.

Regarding tariffs, I want to clarify a few key points. We have a situation concerning the retaliatory tariffs from Europe on steel and aluminum, which impacted us from 2018 to 2021, particularly affecting exports of American whiskey. As the market leader, that period was quite difficult for us. These tariffs are set to return at the end of March, and there are many variables that could influence the outcome. It might be suspended again, completely removed, or return at 50%, among other possibilities. We are engaging with relevant government stakeholders and advocating for stability in our trade relationships. However, based on our past experiences with tariffs, we have been preparing for various scenarios and implementing strategies to mitigate risks globally. Yet, given the number of uncertainties and potential outcomes, it's challenging to predict what will happen. Recently, the discussion has shifted to Canada and Mexico, where there are talks of a 25% tariff affecting imports. Our industry has been dealing with the threat of tariffs alone for years, and now this matter has expanded to different alcoholic categories. In our spirits business, products like tequila, scotch, Irish whiskey, bourbon, and Tennessee whiskey are classified as distinctive products, meaning they must be produced in their respective regions. As a proud U.S.-based company, we hope the administration understands that any increase in sales or production of these distinctive products outside the U.S. could benefit us and stimulate investment here. We'll have to see how these discussions unfold and whether these are serious negotiating tactics or not. While American whiskey is more significant for us than tequila, both situations are concerning. Unfortunately, we don't have any specific insights on this matter, and the many uncertainties make it hard to determine how it will all develop.

Our next question or comment comes from the line of Robert Ottenstein from Evercore ISI.

Let me go in a little bit of a different direction. Can you talk about Jack Daniel's Tennessee Whiskey in the U.S. and the sort of measures that you're taking to, I don't know if renovate the brand is too strong a word, but kind of restore it back to growth, what your brand health indicators are suggesting? And maybe what we should be modeling or what we should be thinking about for that brand in the U.S. going forward in terms of both volume and pricing?

Yes, that's an important question for us, and it's something the company is very focused on. A few points to consider: before the last 18 months, which includes the COVID years and their aftermath, the brand was performing well with solid growth rates in the U.S. It's only in the past 18 months that things have become significantly more challenging. The issue isn't necessarily about brand health metrics. We are actively working to attract new legal drinking age consumers, targeting those around 30 years old. One initiative we've mentioned is our increasing investment in McLaren Racing. This not only gives us good visibility through the racing events but also allows us to create valuable activations, often incorporating music. We have a project called Jack's Garage, bringing in major artists like Shaboozey for concerts around the races. While this won't provide immediate results, it's a unique initiative that we can claim as our own, and we're investing more in it. The song by Shaboozey has gained immense popularity, being played frequently at football games and on the radio, which reinforces brand relevance among college students and older audiences. We’re capitalizing on such moments, such as his performance at the Lions Bears football game on Thanksgiving. We're diversifying our media strategy and have new campaigns in the works, including Jack & Coke. We're implementing various approaches, and we’re starting to see improvements reflected in our metrics, particularly brand health metrics like penetration—how many people are drinking Jack Daniel’s, how often they see it, how they recall our activities, and their perceptions of the brand. These metrics don't shift overnight, but we’re closely monitoring them, and things are beginning to move positively. Jack Daniel's is a significant global brand and a core part of Brown-Forman. The entire company, with almost all 5,700 employees, is dedicated to turning things around. As I mentioned earlier, we’re starting to see early signs of recovery in the U.S. based on NABCA data, and we believe there’s also some encouraging news outside the United States, reflecting a positive trend.

Our next question or comment comes from the line of Chris Pitcher from Redburn Atlantic.

Could you just dig in a bit more detail into how big a contribution that the return of shipments to Japan was in the period? Because on my calculations, probably used barrel sales plus Japan added about 2 percentage points to growth, and I would imagine on quite high drop-through margins. And then just on the used barrel sales, is that a function of price or volume that's helping that drive through because it was much higher than expected?

Yes. For used barrels specifically, you can observe that in our non-branded and bulk sales, as shown in Schedule B and Schedule C. It's really a mix of supply and demand, and even customer mix can influence it at times. It's quite volatile and driven primarily by supply and demand, and this year it has increased compared to previous years due to these various factors. Regarding Japan, we've never specified what we consider the unique source of growth, but we've highlighted it as a growth driver throughout the year. There was some disruption in fiscal year 2024 as we prepared for the transition, but now that we have the brands and the transition is complete, we are successfully establishing our business, adjusting prices, and capturing margins. We are pleased with the growth that this market and our team have achieved this year.

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

I wanted to revisit the comments about distributor inventory. Looking at your Schedule D, it appears to have significantly impacted organic sales this quarter, particularly in emerging markets. Can you provide more details on what occurred in those regions? Additionally, regarding your full-year guidance of 2% to 4%, what assumptions are you making about distributor inventories in the second half? Should we anticipate a continued positive trend, especially as you face easier comparisons, or how should we approach that specific aspect?

Yes. So what you're seeing in the emerging international market is really a prior year where we were refilling the inventory. So for F '25, it is the absence of the refilling of the inventory in the United Arab Emirates, which we've mentioned before. And then to your question on the role it plays in our guidance, what we've talked about is in our second half, the majority of the movements in inventories across the distributor, retailer, and consumer supply chain are behind us, and we believe that our trends are going to more closely reflect total distilled spirits. We've been intentional to say that we anticipate the benefit of normalizing inventory trends on a year-over-year basis as we began to compare against the softening of total distilled spirits trends in the year-ago and trade inventory reductions in the year-to-go. Again, similar to what we said in our prepared remarks.

Our next question or comment comes from the line of Bill Kirk from Roth.

Related to the tariff discussion, what's your ability to pre-ship into countries? And maybe how does that ability vary by countries where you own your own distribution? And how much of that were you able to do last time European retaliatory tariffs were looming?

I'm going to hold back on that topic and say it's quite sensitive in terms of competition. We have to stay quiet about it for now. We are making some important and challenging decisions, but it's a tough situation regardless of the choices we make. The outcome is likely to remain painful.

Our next question or comment comes from the line of Peter Grom from UBS.

So maybe just two quick housekeeping items. So Leanne, I think you mentioned that you maintained the outlook for both the top and bottom line for the year, but you kind of touched on weaker gross margin expectations versus exiting the first quarter. So would it be fair to assume operating profit growth at the lower end of the range? Or is there an offset elsewhere that maybe I'm not thinking through? And then I guess it sounds like we're still early on kind of the holiday season. But I just would be curious, going back over time, if there's one fewer week between Thanksgiving and kind of Christmas, is there any sort of dynamic in terms of demand or drinking occasions that we need to kind of think through on a year-over-year basis?

Our guidance for both the top and bottom lines is based on a range of scenarios that take into account different levels of consumer demand in key markets like the U.S. We have also estimated various changes in distributor inventories. The scenarios we have outlined cover a wide spectrum. We are currently planning for a slight decrease in gross margin, but we are carefully managing our selling, general, and administrative expenses to address short-term pressures on gross margin. Regarding the holiday season...

Yes. To be honest, I haven't discussed the idea of fewer selling days between Thanksgiving and Christmas with anyone. We haven't even considered it in our internal discussions, so we certainly don't view it as a problem.

Yes. And then as we are continuing to look at performance, it is too early yet to get a look into even the month of November because we are just now in the process of closing out that month. We don't have visibility into those results yet. December, of course, then we don't have either, but we do feel like we will have consumer demand across the entire holiday selling season, and it will net out across all of the holidays that fall inside of November through January.

Thank you. We have one more question. That is from Eric Serotta from Morgan Stanley.

Actually, a couple of questions around the supply side. First, earlier this year or late last fiscal year, you did talk about reducing your production to get your finished goods inventories down. Where do you stand today versus your target? And then the next two parts of the question are kind of about industry supply. We have noticed an increase in supply for some allocated bourbons. I'm not talking about things in the hundreds of dollars at retail, but things in the, call it, high $20s to $40 range. Are you seeing or expecting any impact on your high-end bourbons from the increased industry supply or on Jack? And lastly, on the supply side, MGPI has certainly been having its challenges with its third-party customers. What, if anything, do you think that kind of portends for industry supply as you look forward?

Okay. Well, I can start with the Brown-Forman specific question on inventory levels. I would say, on a year-over-year basis, we've made a significant amount of progress in the reduction of our finished goods inventory across our supply chain. Now we know it needs to be a little bit higher just because we've transitioned more markets into own distribution. But when you take a look at our cash flow from operations, one of the primary drivers is that we have just lower working capital requirements, and that's driven by the progress that we've made through those lower production volumes that we've spoken about.

Yes. Regarding the overall industry supply, it's similar to what I mentioned last quarter. If you had asked this question 18 months ago, I would have indicated that we were short on supply, particularly for a fast-growing brand like Woodford. Now, after a year of slowdowns, we've adjusted our production levels, and I'm confident that the major players in the industry have done the same. This is how the industry has functioned for a century, and a slowdown is expected. The impact on smaller craft and challenger brands is evident; it's currently challenging for independent companies to develop new brands. Retailers have already removed inventory from the system, prioritizing the slower-moving SKUs first, leading to struggles for these brands. Distributors are facing significant difficulties and must concentrate on the most profitable products, which tends to be the bigger brands. There are numerous challenges and disadvantages in this situation, and I believe that they are indeed slowing down. Unlike a company like Brown-Forman, many of them do not have a strong balance sheet. Overall, it is a tough environment, and while it's not necessarily advantageous for us at this moment, the evolving industry conditions seem to favor established brands.

Thank you. Ladies and gentlemen, this concludes the Q&A session for the call. At this time, I would like to turn the conference back over to Ms. Sue Perram, Vice President and Director of Investor Relations for any closing remarks.

Thank you. And thank you, Lawson and Leanne, and thank you to everyone for joining us today for Brown-Forman's Second Quarter and First Half of Fiscal Year 2025 Earnings Call. If you have any additional questions, please contact us. Today is actually National Repeal Day, recognizing the ratification of the 21st amendment for the United States Constitution and the end of prohibition in the United States in 1933. I hope that you will join us in raising a glass this day as well as responsibly celebrating during the holiday season. Cheers and happy holidays. With that, this concludes our call.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.