Good day and thank you for standing by. Welcome to the Brown-Forman Corporation Second Quarter and First Half of Fiscal 2026 Earnings Conference Call. 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, Investor Relations. You may begin.

Thank you, and good morning, everyone. I would like to thank each of you for joining us today for Brown-Forman's Second Quarter and First Half of 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 second quarter and first half of 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 reports filed with the Securities and Exchange Commission. During this call, we will be discussing certain non-GAAP financial measures. These measures, a reconciliation to the most directly comparable GAAP financial measures and the reasons management believes they provide useful information to investors regarding the company's financial condition and results of operations are contained in the press release and investor presentation. With that, I'd like to turn the call over to Lawson.

Thank you, Sue, and good morning, everyone. I'm pleased to share our second quarter and first half of fiscal 2026 results with you today. I'll start by sharing a few comments on the operating environment and then provide the key drivers and highlights of our top line results, including our geographic performance, strategic innovation and the two unique headwinds Brown-Forman is currently facing. Then I'll turn it over to Leanne, who will share additional insights on other financial highlights, including gross margin and operating expenses and our full year fiscal 2026 outlook, which we are now reaffirming. While the operating environment remains challenging and uncertain, it has been relatively consistent with our expectations and the themes from the second quarter remain largely consistent with those from the first quarter of this fiscal year. We believe cyclical pressures related to ongoing macroeconomic and geopolitical uncertainties continued to negatively impact consumer confidence and reduce discretionary spending in the U.S. and many developed international markets. On the other hand, we continue to see resilient consumers in a number of our emerging international markets where trends are generally much stronger. We expect cyclical headwinds to ease over time while also acknowledging that we're operating in a very dynamic industry, and some current headwinds may persist over time. With that in mind, our focus remains sharply on managing the factors that we can influence. Now moving to our first half fiscal 2026 top line performance. Our first half fiscal 2026 reported net sales declined 4% with organic net sales flat after adjusting for the A&D impact related to Korbel and Sonoma-Cutrer, which are no longer in our current portfolio. From a geographic perspective, our organic net sales results were led by the collective strength of the emerging international markets which provided double-digit growth of 12% and the Travel Retail channel which increased 6%. While this growth was partially offset by a 6% decline in the developed international markets collectively and flat performance in the United States, it's important to note that both performance in developed international markets and the U.S. sequentially improved from our first quarter results. Diving deeper into the emerging international markets, Mexico and Brazil continued to deliver strong double-digit growth. While the economic environment in Mexico remains subdued with consumers seeking value and trading down, these conditions have benefited our RTD portfolio which helped fuel 18% organic net sales growth in the first half of fiscal 2026. New Mix, the world's first tequila-based RTD, delivered very strong double-digit growth as the brand continued to lead the category and gain share in Mexico. Our distribution of brands within the William Grant & Sons portfolio also provided incremental organic net sales. We continue to believe this complementary portfolio provides us additional strength to achieve greater development and growth of our portfolio of brands in Mexico, particularly in the on-trade and in the super premium segment. In Brazil, our strategic approach to building the Jack Daniel's family of brands continues to produce strong results with organic net sales growing more than 20% in the first half of fiscal '26. Jack Daniel's Tennessee Apple and Jack Daniel's Tennessee Whiskey led the growth and gained share as we continued to expand our geographic reach, increase distribution and leverage our revenue growth management capabilities. In addition, as we mentioned last quarter, we believe premiumization is an opportunity in Brazil, and we continue to focus on increasing distribution for our super premium whiskey portfolio. The Global Travel Retail channel delivered organic net sales growth of 6% in the first half of fiscal 2026 with growth in most of the major regions as passenger numbers continued to increase surpassing pre-pandemic levels. The Travel Retail channel is not only a growth contributor but also a critical brand building platform. As we shared during our recent Investor Day, the global Jack Daniel's campaign, That's What Makes Jack, JACK, has launched in select international airports to position us to reach consumers on this global stage. Turning to our developed markets. Consumer sentiment and confidence both remain pressured in most European economies, creating a difficult operating environment. While the outlook remains challenging, we are maintaining or gaining share of the whiskey category in 6 of our 8 top European markets. In the U.K., economic conditions are negatively impacting consumer spending and total distilled spirits trends in both the on- and off-premise. Organic net sales declined 13% as we lap tougher comparisons in the year ago period related to wholesaler and key retailer buying patterns. While off-premise takeaway trends for total distilled spirits as well as the whiskey category are in low single-digit decline, the trends have improved slightly, and Jack Daniel's Tennessee Whiskey continues to gain market share. Organic net sales declined 8% in Germany, where similar to the U.K., consumers have been impacted by challenging economic conditions. This has led to higher rates of saving, softening of total distilled spirits trends and an increase in competitive promotional activity. Despite the operating environment, our super premium brands, Diplomático Rum, Gentleman Jack and Woodford Reserve delivered double-digit growth in the first half of fiscal 2026. The last market I'll focus on today is the United States. Total distilled spirits trends have decelerated but continue to decline at a low single-digit rate as consumers are pressured to make their dollars stretch further. Even in this environment, we continue to close the gap with TDS and organic net sales were flat in the first half of fiscal 2026. These results continued to be ahead of our depletion-based results as well as takeaway trends driven by the powerful combination of our U.S. distributor changes and the launch of Jack Daniel's Tennessee Blackberry. With distributor transitions now complete, we have turned our focus from transition to execution, especially during the important holiday season. Two key objectives for the transitions were increased distributor investment funds and improved margin structure, and I'm pleased to see these two areas contributing positively to organic net sales results. Increased dedication and focus from our distributor partners was another goal of our route to consumer transformation in the U.S. and has driven increased distribution for Jack Daniel's Tennessee Whiskey as well as Jack Daniel's Tennessee Honey, Fire and Apple. The launch of Jack Daniel's Tennessee Blackberry continued to exceed expectations as we progressed through the first half of fiscal 2026. As we shared during our Investor Day in October, Blackberry is getting wonderful feedback and buzz from distributors, retailers, consumers, both new and existing, and the media. This continued excitement drove shipments to exceed depletions, though the difference between the two decreased as we moved through the first half of the fiscal year. We remain encouraged by the strong start in the U.S. and are using the excitement to sustain momentum and drive consumer takeaway. As I mentioned before, Blackberry is a globally relevant flavor trend across food and beverage categories, and Jack Daniel's has a proven track record of leveraging our global footprint and capabilities to extend the impact of new flavor launches. We also began a phased launch of Jack Daniel's Blackberry outside of the U.S. in select international markets, including the U.K., Germany and France as well as the Global Travel Retail channel. Similar to the U.S., the initial response from retailers and consumers has been incredibly strong. In the U.K. at Tesco, Jack Daniel's Blackberry was the best new product development launch in the spirits category with more than half of the consumers that purchased the product being new to the spirits category. The brand also generated a double-digit repeat purchase rate. In Germany, Amazon sold out the Jack Daniel's Blackberry in the preorder shop. And in France, the brand is listed in the major retailers with positive media impressions, visibility in the main aisle and promising initial sell-through in both the off- and on-premise channels. Again, we're pleased with the early stages of the Blackberry launch and will continue executing our strategic phased launch to support scalable and sustainable geographic expansion for the next few years. Finally, I'll briefly share an update on two headwinds that are somewhat unique to Brown-Forman. Many of you will recall from our previous communications that used barrel sales and the trade dispute between the U.S. and Canada are substantial headwinds for us this fiscal year, and they significantly impacted our first half organic net sales results. Organic net sales for used barrels decreased by more than 60% as the current industry operating environment, particularly for the Scotch and Irish whiskey suppliers, continues to pressure demand and pricing. Canada's organic net sales also declined over 60% as beverage alcohol products produced in the United States continue to be off the shelves in the majority of Canadian provinces. Our much smaller non-U.S. brands, such as Diplomático and the Glendronach continued to deliver organic net sales growth, but they were not able to offset the decline of our brands that are produced in the U.S. Overall, the first half of fiscal 2026 has unfolded largely as we anticipated, and we believe we remain positioned to achieve our full year guidance, driven by a series of key actions we've been taking. These include navigating the current environment with a balanced focus on the short and long term, strengthening our portfolio of brands through strategic innovation as well as a focus on our premium plus brands and RTDs to address consumer trends, making key route-to-consumer transitions including the U.S., Japan and Italy and streamlining our workforce structure to increase our agility, leverage synergies and enhance our ways of working which we believe will enable us to fuel the growth of our brands, our business and our people at a more rapid pace. I remain fully confident in the potential of Brown-Forman, our brands and our people, and I'd like to extend my thanks and appreciation to our dedicated team of employees for their resilience and commitment. Before I conclude my comments, I also want to provide an update on our CFO recruitment process. In August, we announced that Leanne had made the decision to retire at the end of the current fiscal year on April 30. Our recruitment process for her successor is well underway. And as you would expect, we are being very thoughtful in our approach to ensure we select a successor who will best position Brown-Forman for the long term. With that in mind, we anticipate that the process may extend into early next calendar year. In the meantime, I appreciate Leanne's continued leadership and am personally grateful for the opportunity to continue working closely together until her replacement is on board in the next few months. With that, I'll turn the call over to Leanne.

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 and conclude our prepared remarks with comments on our full year fiscal 2026 outlook. First, to our gross margin. In the first half of fiscal 2026, our reported gross profit decreased 4%, resulting in a reported gross margin of 59.5%. Our gross profit margin expanded 30 basis points due to a 190 basis points A&D benefit largely related to the conclusion of our relationship with Korbel and the absence of the prior year transition services agreement for Sonoma-Cutrer. This benefit was partially offset by 110 basis points of higher costs largely due to lower production levels, inflation on our input costs and timing of cost fluctuations and 50 basis points of unfavorable price/mix due to the strong growth of New Mix and lower used barrel sales. Continuing with our other financial highlights, I'll turn to our operating expenses. In the first half, organic advertising expense decreased 1% which is largely aligned with our depletion-based top line results. We continue to believe our level of investment behind our brands is healthy with a focus on Jack Daniel's Tennessee Whiskey to support the, That's What Makes Jack, JACK, global campaign as well as the launch of Jack Daniel's Tennessee Blackberry. As we shared during our Investor Day, the Jack Daniel's global campaign represents our largest in brand history with the majority of fiscal 2026 expenses to occur during the key selling months of October, November and December. Our organic SG&A investment decreased 4% following our strategic workforce restructuring initiative. In total, reported operating income decreased 9% and organic operating income decreased 4% in the first half of fiscal 2026. In addition to the $22 million non-operating post-retirement expense related to our workforce initiatives, these results led to a 13% diluted earnings per share decrease to $0.83 per share. Before moving to our outlook, I'd like to take the opportunity to provide you with a few comments related to our capital allocation philosophy. We approach our capital deployment decisions with the core objective of sustainable long-term value creation. Our capital allocation philosophy balances ongoing investment in the business, including organic investments and acquisitions alongside shareholder returns such as regular dividends, share repurchases and special dividends. First, in the first half of fiscal 2026, capital expenditures decreased by $16 million compared to the year ago period. While we continue to fully invest behind our business, we have completed a number of projects and expansions which reduced our working capital requirements and improved cash generated. We grew cash flows from operations by $163 million to $292 million, primarily reflecting disciplined working capital management. Free cash flow, defined as net cash provided by operating activities less purchase of PP&E as presented in the statement of cash flows, increased by $179 million to $236 million, reflecting strong operating cash flow generation and lower capital expenditure needs. Secondly, on November 19, 2025, our Board of Directors approved a 2% increase in the quarterly cash dividend, marking 42 consecutive years of dividend increases and 82 consecutive years of paying a regular cash dividend. This is a powerful testament to the strength of our balance sheet, the confidence we have in our ability to generate strong cash flow and to our commitment to returning cash to shareholders. Finally, as you may recall, on October 2, 2025, the Brown-Forman Board of Directors authorized the repurchase of up to $400 million of our outstanding shares of Class A and Class B common stock. As of October 31, 2025, we have repurchased $99 million of our outstanding shares of Class A and Class B common stock. Our enduring commitment to our valued shareholders, coupled with a long-term perspective and the focus on building valuable brands is the foundation of our capital allocation philosophy and guides our decisions. Now turning to our full year fiscal 2026 outlook which, as Lawson shared, we are reaffirming. We continue to navigate a spirits sector facing headwinds and still expect that the behavior of the consumer and the level of trade inventories will not change meaningfully during the 2026 fiscal year. Our guidance also continues to assume that there will be no change to the current tariff impact direct and indirect on our products. We strongly believe that we will navigate these short-term challenges through the strength of our portfolio including strategic innovation, the benefits of our route-to-consumer transitions and our evolved workforce structure. Our expectations from a geographic perspective remain the same as well. We still forecast continued growth in our emerging markets and the Global Travel Retail channel and expect the depletion-based trends in the U.S. and developed international markets to remain similar to fiscal 2025 with the exception of Canada. The continued unavailability of American spirits products in Canada resulted in a significant impact to our top line performance. While we are hopeful for the return of American products to Canadian store shelves, we continue to assume this headwind will persist for our full fiscal year and is reflected in our full year guidance. In addition to Canada, the other cyclical headwind largely specific to Brown-Forman is the year-over-year change in our used barrel sales. Used barrel sales have returned to levels that reflect the challenging and uncertain operating environment for the spirits industry. We continue to expect used barrel sales to be lower by more than half of fiscal 2025 level. While we continue to execute our long-term pricing strategy and expect to benefit from our revenue growth, management activities and strategic innovation, particularly Jack Daniel's Tennessee Blackberry, we anticipate product mix headwinds due to the faster growth of our RTD portfolio and agency brands in Japan and Mexico. We still anticipate that shipments will roughly be in line with depletions in fiscal 2026. We anticipate that ordering patterns in the second half of the year will reflect more typical seasonality as our U.S. distributor network moves beyond the phasing impact of the initial transitions and the launch of Jack Daniel's Tennessee Blackberry concludes. For fiscal 2026, based on the currently known factors, we continue to expect a low single-digit decline in organic net sales, and reported gross margin expansion as we believe the benefit from A&D will more than offset the headwinds from negative price/mix and higher costs. While input costs will continue to benefit from lower agave costs, we project higher costs compared to the prior year, largely driven by the impact of inflation and lower production volumes. In addition, as we shared previously, following the divestiture of Sonoma-Cutrer, we entered into a transition services agreement which had a negative impact on our overall reported gross margin. The TSA has ended, resulting in a positive impact on a year-over-year basis, and the absence of Korbel is expected to benefit reported gross margin. Our outlook for organic operating expenses reflects continued management of controllable expenses. Our A&P spend will continue to reflect investment behind our brands that is aligned with our depletion-based top line outlook. We also continue to expect a reduction in SG&A following our strategic workforce restructuring initiative. Based on the above, we are forecasting organic operating income to decline in the low single-digit range. We also continue to expect our effective tax rate to be in the range of approximately 21% to 23%. We are updating our estimated capital expenditures outlook from a range of $125 million to $135 million to a range of $110 million to $120 million for the full year. While this range is lower than previous years, we have completed a number of projects and expansions and remain committed to our long-held capital allocation philosophy to first invest fully behind our business, and we also continue to focus on reducing our finished goods inventory which should further reduce our working capital needs and significantly improve cash generated. Again, our performance in the first half of fiscal 2026 is largely in line with our expectations and provides us the confidence to reaffirm our full year 2026 outlook. As we enter the second half of fiscal 2026, we will continue to focus on growing our portfolio of brands, capitalizing on our strategic route to consumer changes and leveraging our evolved workforce structure. We are committed to thoughtfully and strategically managing through the current volatility and uncertainty while positioning the company to deliver long-term growth. This concludes our prepared remarks. Please open the line for questions.

And our first question will be from Lauren Lieberman of Barclays.

Just wanted to talk a little bit again about the new distribution partners. Seems like you're starting to see impact but really gearing up now into the holiday season. So maybe we'd just love a little perspective on how you might compare the plans that are in place for this year's holiday season versus last and then also the level of caution that you're seeing from these brand-new distributor partners who are going to be excited, but you've also got the known headwinds and questions around the consumer and the category environment.

Let me provide some context, especially for those who haven't closely followed our progress in the U.S. this year regarding RTC changes. California was the first state to implement changes on May 1. Although the transition took longer than we anticipated, it's now progressing rapidly and has shown a strong recovery in Q2. We mostly have our teams in place, and we consider the transition to be complete. The other 13 markets launched on August 1, which is only three months ago, and while Q2 was intense, we had several new partners come on board, including major transition markets like Texas and New York. Everything seems to be unfolding according to plan. However, we learned that we experienced more disruption with the emerging brands, which took a bit longer to stabilize. As is typical when changing distributors, we lost some menus and drink lists, which required time to address. Overall, we're pleased with both our new and existing partners and their performances. We've significantly narrowed the gap to TDS in the first half of the year and, when excluding RTDs, we are actually above TDS, which is encouraging. Regarding consumer trends, we believe things haven't changed much recently. Our team discussed that this quarter felt somewhat uneventful, but after a period of volatility over the past couple of years, consumer behavior in emerging markets remains robust. Global Travel Retail has also performed well, although we are facing some softness in the U.S. and parts of Europe. Generally speaking, many categories in the consumer packaged goods sector, including food, personal care, and retail, have become more conservative in the last six months, and we are seeing some signs of this as well. For the U.S. market, total distilled spirits takeaways are still declining, which is concerning, but we are closing that gap. Innovations continue to drive the market, notably with products like Jack Daniel's Tennessee Blackberry, which we'll discuss further. The RTD category is currently the only segment gaining market share, and for the first time, we have noticed a decline in premium segments, specifically within the $50 to $100 price range. While I don't want to delve into structural versus cyclical factors too deeply, it's clear that the trade down is linked to cyclical trends, suggesting that consumers are feeling the pinch. Nonetheless, we believe this situation is temporary and will eventually reverse.

And then what I'll build on to that is we've been saying for several quarters, we've been trying to strategically navigate the volatile environment at pace and we're beginning to see the benefits of those strategic initiatives. Like we said in our prepared remarks, Lawson said that innovation is driving growth, and we have our strategic innovation of Blackberry. From a strategic RTC perspective, we've made the changes to our U.S. distributor network as well as own distribution in Japan and Italy, which are contributing. And then from an SG&A perspective, our evolved workforce. I mean, we're really getting to the point where we are seeing benefits from the initiatives that we have been putting in place to drive the results we reported today.

And our next question will be coming from Peter Grom of UBS.

I kind of wanted to follow-up on the last point just on what you're seeing in terms of the consumer and the category, but maybe more real time just around the upcoming holiday season, what you've kind of seen through November and a few days here in December because you mentioned the categories continue to decelerate in loss and you kind of touched on the fact that other CPG companies are talking about a weaker performance over the last 6 months. But I think a lot of those CPG peers, even this week are speaking to an operating environment that actually has gotten a bit more worse, I would say are more challenged over the last 6 weeks or so. So is that similar to what you're seeing? Are you seeing the category get a lot worse quarter-to-date and kind of what you're expecting from a holiday period? And then I guess just underpinning that, right, you noted on the difference between what we're seeing in terms of category trends and your organic results here in the U.S. So should that gap narrow looking forward such that what we see in the data is more aligned with kind of your underlying growth?

The total distilled spirits market has experienced some weakening over the past six months, though not significantly. I don't have insights on the last month as I don't track such short-term trends. However, consumers are likely to seek value while maintaining brand loyalty, and the overall environment appears rational. Analyzing the Nielsen data and pricing figures, we see other major suppliers behaving rationally. While tequila has faced some pressure, it has not been as severe as anticipated given the significant drop in agave prices. Pricing for American whiskey is holding relatively steady, down about half a point, which is manageable. The pricing environment remains rational overall. We are cautiously optimistic about the upcoming holiday season, yet we are also mindful of some difficult macro trends. Our teams are well-prepared, and our new distributors understand the importance of executing this season correctly. From what we hear, we're ready to move forward, so we’ll see how everything unfolds.

And then to your second question on the U.S. where we are showing a plus 3% for the U.S. on our depletion-based top line results compared to kind of takeaway trends of a minus 3%. What really is driving that gap for us is part of it is the launch of Jack Daniel's Tennessee Blackberry. And as we shared in our last call, it's moving through the process of original shipments impacting our organic results to depletions and then to takeaway. Q2 for us was the first full quarter of having full shipments and beginning to move into depletion-based results. And we're seeing it bleed into consumer takeaway. As we get into the next couple of quarters, we should see all of those data points balance out. And then the other piece for the U.S. is that benefit that we are referring to from our U.S. distributor relationship terms and the strategic initiative that we put in place for that.

It's important to note that the improved terms are permanent and will be in effect all year, providing us with some breathing room and contributing to our top line growth. This outcome reflects the success of our initiatives. Additionally, I want to emphasize the significant issue regarding lower used barrel sales, which have decreased by 61% in the first half of the year. This decline represents a substantial part of our business, and our results would have been considerably better without this impact. However, this situation isn't consumer-driven; it's more about a global slowdown in beverage alcohol that is affecting barrel sales.

Yes. To elaborate on that, as mentioned in our prepared remarks, the absence of American-produced spirits products from shelves in nearly all provinces in Canada, combined with the cyclicality of used barrel sales, had a collective negative impact of over 2 points on our top line.

And our next question will be coming from Nadine Sarwat of Bernstein.

I have two questions. Leanne, I want to revisit the U.S. You mentioned takeaway, and based on my calculations, your U.S. net sales growth at an underlying level was up 3%. You indicated that takeaway was down 3%. Can you provide more details on how you expect that 6 percentage point difference to evolve over the next two quarters? For my second question, Lawson mentioned pricing. In this environment of lower volumes for an extended period, how are you approaching your pricing strategy, and what insights are you gaining from your competitors as we look towards 2026, which I know is a significant concern for many?

Okay. Nadine, I'll start with your first question which again kind of going back to the U.S. top line depletion pace results at a plus 3%, takeaway at a minus 3%. It's really how we are seeing the flow-through of innovation with the impact of Jack Daniel's Tennessee Blackberry launch which I just spoke to and also the benefit from the U.S. distributor relationship terms that we're seeing flow through. As we go through the rest of the fiscal year, we expect those to narrow. And then I'll turn it over to Lawson for...

Regarding the pricing environment, we have not altered our approach to pricing. I consistently emphasize the importance of a slow and steady strategy with our teams, and they are following that guidance. The current situation in the U.S. market is challenging, and Brown-Forman's overall pricing across the portfolio is down 0.3%, which is nearly flat. The TDS is slightly worse but still not significantly. The larger companies appear to be maintaining their stability, which makes me feel positive. We will keep an eye on competitor promotional activities and respond as necessary, while also focusing on protecting our pricing, margins, and brand equity. Overall, I believe we have a favorable outlook on the pricing environment, and it definitely could have been much worse.

Our next question will be coming from Robert Ottenstein of Evercore ISI.

Just a couple of follow-ups, please. Lawson, I think you mentioned kind of the $100 plus area where you're seeing most of the trade down. Does that mean that in the $20 to $30 area you're really not seeing any trade down at this point? So that's just question number one. Question number two is, I just love to kind of give your thoughts on why you think the current level of advertising, marketing investment is the right area and how you come up with that answer and whether you think, I guess, presumably that increased investment wouldn't stimulate demand. And that's not just for you, but for the industry as a whole, right? Do you think the whole industry is doing the right advertising, marketing out there to create desire and help? Or are we at just a point with the consumer that the returns on those investments don't make sense both for you and the industry?

Yes. Let me start with pricing. Looking at Nielsen's three-month value numbers by price points, the segment over $100 is down 18%, but it represents a small portion of total volume. Interestingly, the price range from $10 to $30 makes up a significant share of the market—about 60% to 70%—and that segment is down around 4%. This shows a trend of consumers trading down. The over $100 segment has seen a considerable decline, while the lower end, $30 and below, is also down by about 4%. The mid-range prices are down around 6% to 7%. It's clear how the pricing environment is shifting and how consumer behavior is adapting. What was the other question?

And then on A&P, yes, we've had our philosophy that A&P spend is going to align with our depletion-based top line growth. But we are continuing to focus on investing behind our brands and we're focusing on maintaining and growing our share of voice and supporting the long-term brand equity. It is important to remember we're navigating a challenging environment, and we're carefully managing all of our operating expenses. But it's important to recall that over the last 5 years, we have added nearly $100 million to brand expense. We continue to work to find initiatives to free up more dollars to continue to reinvest in our brands and our workforce restructuring initiative was one of those where when we get to the place where we can have the right level of benefit, then we will continue to increase. But again, you go back to our portfolio, it's very tight. A large portion of our portfolio falls under kind of that House of Jack. And so we feel like we get a lot of synergies with the structure of our portfolio of brands.

Yes. Regarding your question about the industry, I'm not entirely sure. It's a challenging time, and we are exploring various advertising strategies to gauge the responses. However, given the current subdued environment, with TDS around 4, it’s difficult to claim we can simply advertise our way out of this situation. There are other significant factors that should provide support. We’ve consistently communicated that our advertising will grow in line with our depletion-based sales, and we intend to maintain that outlook throughout the year.

And our next question will be coming from Drew Levine and he's with JPMorgan.

Lawson, hoping you could talk to how you're viewing performance of the rest of the Jack Daniel's family of brands following the launch of Blackberry. What the interplay is between the brands, how you're viewing cannibalization, if it's coming in line or better than expected? And then also how that's trending international. You mentioned strong response in U.K., Germany and France. How incremental has Blackberry been in those markets? And then if you could talk to additional market launches in 2026.

It's only been three months, so it's challenging to determine the impact on Blackberry or the other flavors. Historically, cannibalization has been minimal. We understand that with each new launch, there might be a slight increase, but we don't have enough data yet to know for sure. Our plan for Blackberry over the next few years includes a launch in the United States and several markets in Europe, but we are not yet global. Our aim is to make this a long-term advantage for the company, rather than just a short-term boost. One major benefit Jack has over its competitors in the flavor space is its global reach. We haven’t covered all sizes, and we are working on extending the launch to create a longer-lasting benefit. We expect that this type of launch positively impacts the entire portfolio of the Jack Daniel's family, leading to increased visibility. We've received positive feedback from both consumers and trade, and overall, we feel that this innovation has been successful.

And then one last detail to your question about the markets. Again, we, as you know, launched in the U.S. in August. This fall, we are launching in the U.K., France, Germany, Poland, Czechia, Turkey and GTR, just so you have that information.

But we didn't go to a place like Brazil or...

Absolutely, yes.

A lot of others...

And our next question will be coming from Chris Pitcher of Rothschild & Co Redburn.

Follow-up on the reduced CapEx outlook. It still looks like it's sort of a growth number ahead of depreciation, but in terms of barrels being purchased and warehouse space being expanded, can we read into that, that you're probably getting to a stage now where you're going to maintain or perhaps even reduce the value of your barreled whiskeys? Obviously, we'll get a bit more color with the 10-Q.

Yes, from a capacity and capital expenditure standpoint, we currently possess the distilling, warehousing, and bottling capacities necessary to meet future demand. This capability contributed to our decision to lower our capital expenditure outlook. Regarding inventory, as we've indicated over the past few quarters, particularly through fiscal 2025 and into fiscal 2026, we are producing at reduced levels resulting from the pandemic-induced volatility and supply chain issues. This situation affects our costs as we work to decrease finished goods inventory levels globally. We've made significant progress in managing this, though we still need to address some strategic tariff mitigation inventories. Additionally, we've increased finished goods inventory to support our new agency brand business. When it comes to barreled whiskey, the trends over the last few quarters reflect a moderation as we adapt to the long-term demand relative to our supply. As we continue to evaluate our performance levels, we have the capability to manage this balance moving forward.

Yes. Let me just add to that a little bit. You'll notice we did create a Schedule E in our earnings release to get everybody's eyes a little more focused on free cash flow because we do see some opportunities going forward with lower levels of CapEx going forward. And as we wind down or work through the inventory that we have, it's a material change and some good news in terms of benefits to the balance sheet and just the free cash flow. So yes, we feel pretty good about the outlook there.

Our next question will be coming from Andrea Pistacchi of Bank of America.

My question is about cost savings. In Q2, your SG&A seems to have decreased by about 1% to 2%. Previously, the run rate was over 6% to 7%. Can you provide insights on the momentum of your cost-saving initiatives, especially as we enter the second half of the year when you will be reflecting on some significant initiatives taken over the past year? This is particularly relevant given the current environment, where visibility is low and the timing for improvement in the top line is uncertain. I would like to know about your capacity to potentially boost savings in this context and whether there were any one-time factors affecting SG&A in the first half of Q2.

Okay. For SG&A, it really is about the year ago period as we were beginning to envision what our new evolved, streamlined, simplified workforce structure would be ahead of that announcement. There were a large number of open roles in the year ago period as well as an adjustment to our full year compensation expectations. So that's why you're seeing that kind of negative one first half in this first half of this year. We'll continue to see some benefits as we go forward in the year to go, but you are correct that it will begin to moderate as we lap that mid-January announcement and really that fourth quarter of last year benefit that we'll be lapping from an SG&A perspective. We continue, as we had previous said in our prepared remarks, we are doing in this environment everything to carefully and tightly manage and control all of our operating expenses and controllable costs where that is available.

And our next question will be coming from Steve Powers of Deutsche Bank.

Lawson, Leanne, in the first half the shipments across your total business came in slightly ahead of depletions as you've highlighted. I guess, is it fair to assume that, that reverses, and that shipments and depletions end up the year essentially in line? Or because of those distributor term favorability items and progressive launches of Blackberry, et cetera, is it otherwise fair to assume that you end up maybe a little bit ahead on shipments versus depletions? Curious on that. And if you could, within that, I don't know how far you can go on this, but any quantification of the size of those distributor term benefits or any details on exactly what you may have been able to kind of carve out in terms of what makes up those benefits would be helpful.

Okay. Well, I will start with your comment on shipments versus depletions. And again, like we said, we expected stronger shipments in our first half because we had to load in the new distributors in the U.S. and we were launching Jack Daniel's Tennessee Blackberry. We said in our last call that we expected that to moderate as we got to the first half and that our first half top line organic sales would be in line with our guidance. Now here we are today a little bit better than that and that is after the more than 2 points impact from Canada and used barrels. But that's really about Jack Daniel's Tennessee Blackberry exceeding our expectations. We do expect that for the full year, the gap between shipments and depletions will narrow. And if you look at the gap between where we were at Q1 and where we are at the first half, it has already narrowed significantly. We expect for it to narrow more, but except to the extent of the continued launch in this year of Jack Daniel's Tennessee Blackberry, so those shipments might be slightly ahead of depletions. One thing that I will say that we have to keep in mind as we go into the year ago period from an organic top line perspective is that New Mix which has been one of our strongest drivers of growth in the second half we'll begin to comp and compare against those very strong double-digit growth percentages that we saw in the year ago period. So we'll just have to keep that in mind as we look in the year-to-go period. And then your other was the benefit from distributor terms. We haven't been specific to that other than to say our expectations are, we'll have greater focus, more dedication, distributor investment on behalf of our brand and kind of better terms. And we are seeing the benefit of those flow-throughs but we haven't been more specific than that.

And our next question will be coming from Filippo Falorni of Citi.

I have two questions. The first is about emerging markets, which are still showing strong double-digit growth year-to-date. However, compared to the year-to-date growth in Q1 of 25%, this suggests a significant slowdown in Q2. Could you explain what caused this deceleration? Additionally, as we consider the second half of the year and face tougher New Mix comparisons, what are your expectations for emerging markets during that period? My second question is regarding gross margins. Can you clarify the factors that will impact those in the second half? You're still benefiting from the Korbel acquisition, and the transition services agreement should mostly be completed. Also, will there be any positive impacts from agave costs in the latter half of the year, and do you still anticipate gross margin expansion for the year?

It's always risky to focus on just one quarter when it comes to emerging markets. We didn't expect these markets to maintain a growth rate above 25%. At the end of the first half, we are pleased to report growth at 12%. There were some timing factors involved. There's a lot of positive news to share, particularly regarding Mexico, where New Mix is thriving due to strong takeaway sales and share growth. Brazil remains a robust market for us, and we see continued growth in our Tennessee Whiskey and Jack Daniel's Apple brands. While we anticipate these growth trends may moderate as the year goes on, New Mix will be a significant contributor to our growth as we enter the second half, which will begin to compare against last year's strong growth rates. Overall, we are satisfied with our emerging market growth thus far, and we expect it will continue driving growth for us for the rest of the year. Regarding our gross margin, we expect continued benefits from the absence of Korbel and the completion of the Sonoma-Cutrer TSA this year. Our long-term pricing strategy supports ongoing positive pricing dynamics, especially from Jack Daniel's Tennessee Blackberry and higher net pricing due to favorable distributor relationships. However, challenges remain with agency brands, ready-to-drink products, and lower sales from used barrels, which we expect to act as headwinds. There will also be ongoing pressure from input costs. While we may benefit from lower agave prices, this will be countered by rising inflation costs on materials and decreased production volumes as we work to reduce our finished good inventory and lower our working capital intensity. Overall, we believe that the benefits from acquisitions and divestitures will outweigh the headwinds from negative pricing and mix. As for commodity prices, they have returned to more historical inflation rates, closely aligned with typical wage and general inflation. Although there are some advantages in agave costs, high demand has slowed our ability to manage expensive bulk tequila and aging inventory. Wood is now fully outsourced, and while we expect benefits from that, it will take time. Grain prices are either stable or slightly declining, while the cost of glass may increase slightly due to higher natural gas prices.

And our next question will be coming from Kevin Grundy of BNP Paribas.

Nice to see at the Investor Day recently. Two-part question for me, if you indulge here. Just first on the near term. So the organic sales, both on the top line, the organic sales guidance implies down low to mid-single digits in the back half of the year. Just wanted to kind of get your sense of where you think you fall out within the range given all the moving parts that we talked about, some narrowing of the gap with ships and depletes with this distributor changes, et cetera. So that would be number one. And then number two, and Lawson, this may bump up against the structural versus cyclical sort of debate, but it's kind of the elephant in the room and worth getting your updated thoughts. What's the level of confidence on the building blocks that Brown-Forman can get back to growth? Very specifically, what macro and micro factors are you looking at? I know you're engaging with your consumers constantly. What are they telling you? What are you getting in consumer surveys, et cetera, is an entirely cyclical dynamic and there's not something more structural going on because as you're very well aware, I mean, there's no shortage of sort of data points out there whether this is cannabis, health and wellness, consumers moving away, et cetera. So anything you can do there to kind of reaffirm, I guess, confidence that the spirits industry is not sort of going to perpetually be in sector decline.

Let me start with the structural cyclical, which I find particularly interesting. To be honest, we spent a considerable amount of time discussing this last quarter, and there isn't much new information available. Regarding the media attention in recent weeks about GLP-1s becoming more significant, the possibility of an oral pill versus an injection raises the question of whether it will increase the number of users. However, that's a future development, not something we can address today. There's a headwind in that regard. The cyclical issue I mentioned earlier concerning trade downs is something to take seriously. Overall, the situation remains similar. It would be an overstatement to say we're witnessing a lot of positive signs right now, especially in the U.S. spirits market as a whole. We've indicated this morning that our performance is improving, which is commendable for our teams. Nonetheless, I truly believe the environment hasn't shifted significantly in the last quarter regarding the structural cyclical argument.

In response to your last question, Kevin, regarding our top line, I want to note that given the ongoing volatility in the marketplace and the current operating environment, we are not in a position to narrow our top line range. We are maintaining a flat projection for the first half. We do expect some moderation and alignment with our guidance, which relates to several points we've discussed today. We've increased our initial inventory for the Jack Daniel's Tennessee Blackberry launch and our new distributors in the U.S., which should start to stabilize in the second half and resemble more typical patterns for the latter part of the year. We will also begin to compare results from New Mix with last year. While we are not ready to make any definitive changes due to the volatility we are experiencing, we are pleased that our half-year results have aligned with our expectations.

And in the interest of time, we're concluding this Q&A session. I would now like to turn the call back to Sue Perram for closing remarks.

Thank you. And thank you to Lawson and Leanne and to everyone for joining us today for Brown-Forman's Second Quarter and First Half of Fiscal Year 2026 Earnings Call. If you have any additional questions, please contact us. With the holiday season upon us, we hope that everyone celebrates the season responsibly and that your spirits are bright. From all of us at Brown-Forman, we wish you the happiest of holidays. With that, that concludes our call.

And this concludes today's program. Thank you for participating. You may now disconnect.