Brown-Forman Corporation ($BFB)

All right. Good morning, everyone, and welcome to the UBS Global Consumer and Retail Conference here in New York City. My name is Peter Grom. I'm the U.S. consumer staples analyst here at UBS, and we are very excited to have joining us this morning from Brown-Forman, Lawson Whiting, President and CEO. Brown-Forman is a global leader in the beverage alcohol industry. And over the last several years, has been one of the more consistent track records across our U.S. consumer staples coverage. However, more recently, we've observed some pretty big shifts in terms of global alcohol consumption, especially here in the U.S. which has impacted the company's top and bottom line trajectory. We have a lot of ground to cover today. But in terms of format, I have a number of questions that I plan to ask Lawson. We will also have time for some audience Q&A. So if you want, I believe you all have instructions in terms of how to submit questions that will show up here on this nice iPad. If there are questions, I'll be sure to ask them on your behalf. Before we start, I'm required to read a legal disclaimer. As a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS as any company on which I express a view on this call today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after this webcast. So with that, why don't we get started? Lawson, thanks so much for joining.

All right. Good morning.

All right. So I know we're going to spend a lot of time on the top line at some point, but I maybe want to start, which has been a pretty big topic of discussion the last week and which is margins, right? So you mentioned last week some of the headwinds that you're going to be facing over the next couple of years. So can you maybe just remind those in the room and those listening what you expect to face? And then, I guess, maybe more bigger picture, right? You kind of look at your gross margin where it is today, maybe where it's going versus where it was 5, 10 years ago, would suggest a pretty big opportunity. So can you maybe just walk us through how we should be thinking about the gross margin, maybe looking beyond the challenges of the next couple of years?

Yes. So a little bit of the history to the gross margin story. So we were a company that ran gross margin in the low 60s for a long time, decades really. And it didn't move a whole lot. And then there was a window of time, not sure when it peaks like 2013, '14, kind of in that zone where it popped up, and it was more like the high 60s. And it was a situation where sort of everything lined up together at the same time. If you remember back then, the Whiskey was taking off, and we were -- we still are the dominant Whiskey player -- American whiskey player in the world. And at the time, just everything was in line where pricing was going up, costs stayed very, very low. We didn't have to invest in all the capacity expansions we did. And essentially, it went up. It didn't stay in that high 60s for more than a year or 2 years. So, I wish honestly it never happened because we're always compared against that window of time when it peaked. So it has come down now it's right around 60% today. So the news of last week, which was -- which shocked, but I mean, shook the market a bit was we just said that we could look out. And one thing about the gross margin in the Whiskey business or cost, I should say, in the Whiskey business is, we laid that stuff down 4 or 5 years ago. So we know what's coming. And good and bad. In years when you know it's about to go back down again, you can actually forecast that out. And we do think that will be the case in a couple of years from now. But we could see a couple of year window where there were going to be headwinds from the cost of the Whiskey that we laid down really in 2021, 2022, which was the peak, if everyone remembers, post-COVID -- or not post-COVID, but in the month after COVID when everything went crazy in the spirits business and our sales were in double-digit growth mode for a couple of years, along with that growth came is a huge spike in cost for everything. And it was everything from natural gas, but the big one was wood. So the cost, there was so much demand and everybody wanted to get into the Whiskey business that the cost to make a barrel shot up. And it had been going up for the years pre-COVID, but it really went up during those couple of years there. So we are now taking the Whiskey that was made in that window of time, and it's -- we call it being dumped. We're dumping that Whiskey now and bottling it and selling it a little bit, but we're feeling the impact of the cost from that window of time. And so we just wanted to get out in front of it when we know it's coming a little bit, but it's also something we know there's an end to. We have taken a massive amount of effort in the last couple of years to change the trajectory of our wood costs, because they really have increased quite a bit over the years. We've now outsourced essentially the barrel making process, which for 75 years, we were really the only one that did it ourselves, but we did that -- we started that back in the '50s when there were no alternatives. There was no one that could make it in the scale that we needed it. And so we invested in -- we had the Cooperage in Louisville. We built a second one down just south of where Jack Daniel's is made, but we just were not cost effective. We weren't cost efficient enough. And so we sold that off a couple of years ago, and we'll get the benefit of that a couple of years from now, but we got to get through these expensive barrels to get to the less expense.

That's helpful. And maybe sticking with the margin discussion. A little over a year ago, you announced some strategic initiatives, changes in leadership, reductions in the workforce, what have you. Obviously, these are never easy things to do, but productivity and cost savings, it seems like a relatively new muscle, if you will, for Brown-Forman. So can you maybe just talk about how you think about productivity, whether you see an opportunity to lean in further, especially in an environment where category demand is clearly not where you would like it to be?

Well, I mean, I think, look, we're pretty comfortable with where we are with in terms of, this was an SG&A reduction. It was time, and it was about reallocating as much as anything. So it was -- we didn't really touch or very little touch the commercial world, the sales functions. It was an overhead reduction. And so it was moving basically costs out of Louisville, out of overhead and then taking the opportunity to be able to reinvest those around the world in spots where we are seeing growth. It's just the growth has been very uneven in the last 2.5 years where, as you said even in your intro remarks, the U.S. has slowed down quite a bit. Developed -- mostly Europe has slowed down quite a bit, too. But to the rest of the world is still actually showing some pretty nice growth rates. And so we're moving things around and doing what you would expect every consumer company really is doing right now, which is trying to reallocate resources to capture the growth where it's coming from.

Makes sense. I mean one more question before maybe pivoting to the demand backdrop, but free cash flow. You've significantly increased your cash flow generation for fiscal '26. Is that sustainable? And I guess, what do you plan to do with the cash?

Well, is it's -- a couple of parts. So our free cash flow, which in the period right after COVID, we were investing so much in capital. We spent literally hundreds of millions of dollars expanding our both Whiskey and Tequila facilities. And in inventory, too, because the demand was so high. The demand has slowed enough that we essentially have both in finished goods and in bulk inventory too much. I mean, so we are bringing that number down, and that's releasing a whole lot of cash flow. We just don't have to delay as much down. And the same thing on the CapEx side of things. We're not going to have to expand our facilities for a number of years. And so we expect that free cash flow will be growing faster even than operating income, say, for the -- really for the foreseeable future. So it's a big positive in our story. What was the second half of the question?

What you -- as you go, what are we going to have?

Yes. I mean, look, the whole capital deployment question, I mean, our standard answer has always been we invest in our brands and our facilities first. We are a family-controlled company. And so we have a strong desire to continue to pay dividends in a healthy way. And so we will continue to pay dividends. That's really -- we'll just see how fast we can continue to grow. And we've -- this term dividend aristocrat, which we've had for 50, 60 years, something like that. We have every intention to continue doing that. So acquisitions was always kind of the last, and we did a couple of big ones in 2022-ish. And so there's not a lot of activity in our space right now, but we'll continue to look around. We essentially have a play in every major category that we want to be in, except Vodka. Vodka is the one, remember, we sold Finlandia a couple of years ago. Vodka is a very difficult category. It's not as -- it's low, generally speaking, particularly when you're in -- outside of the United States, the prices are low in the Vodka category. And so it's just not as appealing and I don't see us really making a significant play there with -- never say never, but it's not a very high priority right now.

Okay. Great. So Lawson, you've been pretty vocal and upfront about the challenges the industry has been facing. And I want to get into more what you're seeing real time here. But I was hoping to kind of get some perspective on what's happened over the last couple of years. And just clearly, there's a cyclical component of this, right? But when you think about some of the structural shifts that are happening, have you been able to unpack or dive into how they're actually impacting consumption? And I guess, have you been able to get smarter around it, right? I think a couple of years ago, it was more directionally, some of these things are clearly having an impact. But have you been able to actually dive into and kind of pinpoint how these changes are impacting consumption?

Yes. One -- so what you're referring to this whole structural cyclical debate and where on the spectrum are we started about 2.5 years ago, and we've talked quite a bit about it over the last couple of years. And it is a little bit of both. And so where we are on the spectrum, it's not -- it's not possible. But I mean, it's very difficult to pinpoint how much cannabis and health changes and GLP-1s and all these other things that are floating around out there, how much is impacting each one of them. And so a lot of it is anecdotal. I do think -- look, GLP-1s, I think has sort of leveled off a little bit. And so we'll see how that impacts going forward. Cannabis is another one that feels like it's leveled off a little bit in terms of its growth and its impact on the beverage alcohol business. It's the cyclical side of it, particularly, I often call it just Gen Z, but it's really people in their 20s for the most part that that's where the per capita consumption has come down. So we know that. And it's these younger folks, but I do really believe that is a lot of the cyclical side of things. And I mean, just think about if you live in New York City, the cost to go out and have and drink cocktails if you're 25 years old, is borderline prohibitive. It's very, very expensive. And so, I think that has been a big part of it. It's not quite as expensive when you leave New York City. There are -- come to Kentucky, it's a little bit cheaper. But young folks have had a hard time coming up with the money to be able to do that. Having said that, spirits is still the place to be within the beverage alcohol category. RTDs are -- I'm sure we're going to talk about that. I mean, they're often lumped in, especially in the data with spirits, because it is -- most of the ones that are really growing right now are spirit-based RTDs, but they're different. And you do -- I think if you're analyzing the category and the growth and where the growth is, you do you need to look at it both ways. You can put them all together or you can pull it out and look at it without it. But certainly, that younger generation is starting with RTDs. And then the idea is and has been proven out is often they will graduate from the RTD into the full-strength spirits category.

Yes. Maybe building on that last point, I mean, there's clearly a lot of moving pieces, as you just alluded to. But can you maybe give us an update on what you're seeing from a U.S. consumer standpoint? Are you seeing any signs of improvement? It's just been interesting because I know there's a lot of noise, but you've seen some categories where there has been more structural concerns or debates, if you will, start to show signs of improvement, right? I know beer has been a little bit better to start the year. So curious what you're seeing today and how you kind of see it evolving from here?

I mean a couple of things. One, I mean, the consumer in general, I mean, you all track this kind of macro stuff. And look, consumer confidence is way down. So those numbers are awful actually across much of America right now. So -- and that has traditionally or historically one of the macro trends that follows spirits is consumer confidence. And so that is not helping anything right now. But if you just look at total distilled spirits takeaway in the U.S., a lot of people got real excited because it did -- I don't know, I don't want to use the term bottomed out, but it did hit a bottom in like November. And then there were a couple of months in a row now where we've had better trends. I saw some stuff that came out yesterday at NABCA that wasn't particularly good. But the Nielsen numbers have gotten better over the last few months. I would caution everyone that I don't spend a lot of time looking at monthly data. That's just too short term for me. But if you want to be an optimist or you want to find a green shoot, that's probably the best one out there. People -- they do ask me when is it going to turn around? And that is, it's a question I sort of never want to answer or try to predict that you just can't. But the trend I would follow closest is that total distilled spirits number in the United States. And if it hangs on for a few more months or a few more quarters, I think we'll all start to breathe a little better and start to feel like this thing is starting to go the other way.

Okay. And maybe not to ask a track data question, but when we look at the track trends, it does look like there has been a little bit more pressure on the pricing front. And I in guess layering into this, right, there's been a lot of focus on affordability, right? Whether -- and I know it's in a lot of categories where maybe the pricing has been a bit more excessive, but you have a lot of consumer staples companies leaning more into price investment, et cetera. So what are you seeing today in terms of pricing and promotion? Is it rational? And I guess if you were to look at your two key categories, Whiskey, Tequila, are the dynamics different?

They are a little different. So pricing is down a little bit. I can tell you that if you use Nielsen, which is the one that I have in my head a bit right now. So over the last, at least the 13-week period, TDS was down 1 point, not 3 or 4 points. And the anecdotal that you hear or that I hear even sometimes from our own teams of XYZ brand is getting more aggressive and you can -- but it's not coming through in the numbers. And what we've been saying now for a while, and I think this is -- it is a little bit different than maybe it was 5 or 10 years ago where the big players in spirits are being pretty rational with their pricing strategies. And I think, look, we've all invested a lot of money in people and revenue growth management strategies, things like that, where we're trying to be more professional with the pricing discipline, I guess, I should say. And I think everyone -- all the big players are trying to hold on to that. So if TDS is down 1, Tequila is down 2, American Whiskey category, which everyone is focused on and they're looking at the inventories and they're saying this price -- this thing has got to come down, is not. So it's down 0.5 point. So Whiskey is actually down less than the market as a whole right now. So as I say, it's rational. We use the term low and slow. I use that even with my own teams a bit to -- we do want to have that discipline to continue to go up a little bit, even recognizing it's a tough market to do it. But our goal is low and slow. We're going to deliver that this year. And I expect we will in the following year, too. So relative to other categories, which you mentioned, it is interesting over now more like a 10-year window. I mean, beer has been very aggressive in pricing now for quite a while. Carbonated soft drinks have been incredibly aggressive now for quite a while. Spirits is not. And I can argue both sides of this a little bit. We should have been taking a little bit more along the way. At the end of the day, today, compared to, say, 10 years ago, spirits is relatively less expensive, say, than serving a beer. So I don't think pricing is the challenge for the industry or is the demand challenge that we're all facing right now.

Makes sense. And I guess do you see that changing at all? And I ask that because, I don't know, it seems like things are constantly evolving, but is there anything that you're seeing today that might have shifted this year? I mean, maybe if I were to ask it differently. If I were to ask you the same question, call it, 6, 12 months ago, would your answer be the same?

For the most part, I mean, I think it has weakened a little bit. I mean 6, 12 months ago, pricing was kind of flat. Now it's down 1%. So Tequila is a -- by the way, I didn't say this, but Tequila is a real factor in that right now. So Tequila had an explosive growth for 6 or 7 years, something like that. And when the whole market came down, they have some of the real big brands, the multimillion case Tequila brands are struggling right now. And so there is a little bit of pricing pressure in that category itself. But I think -- I mean, the other factor within Tequila is costs have come down so much. I mean, agave, which peaked at sort of MXN 30 a year ago, something like that. I'm not even sure when the peak was, call it, a year ago or now you can buy Tequila for like MXN 2 and MXN 3 and MXN 4 on the open market. So you're talking about what percentage is that, 80% reduction in costs in the Tequila world. So I think some of the big players are looking at that saying, we can afford to be a little more aggressive on price because our costs have come down so much.

Okay. And then maybe pivoting back and you touched on this as more of a challenge, but curious how you think about capturing the younger consumer, but more from an opportunity perspective, right? I would love to get your perspective on just kind of how the changes in health and wellness, but also just the different product offerings are impacting how younger consumers are discovering the category. You kind of alluded to this, right? Like are RTDs pushing younger consumers into spirits at a faster rate versus maybe where we were 10, 15 years ago?

Yes. It's fine because I was reading even in the sort of the fall about how Gen Z is just entering the spirits category later, yet that's the opposite of that saying that what they are doing, it appears is they're coming into RTDs as their entry point and I don't know what age, but a few years into that, they sort of graduate into that into regular spirits. And so the drinking less but better, which we've said this for a long time right now, that is still very true. And it's -- less but better, but the market was still growing at 4%, 5% per year. We're still seeing it now and the market is declining at 4% to 5% a year. So I do think there still is a great opportunity in that super premium spirits space. And while some of -- it has even in the news lately, talk about should we have more volume down at the lower price points. We have reshaped our portfolio away from that over the last decade, and I don't have any intention of changing that. I am not one that believes that all of a sudden trading down is going to be a big feature of the U.S. spirits market. If you look at the volume numbers by price point, which another Nielsen charts that you can look at, they're all basically the same. I mean, it is a little bit steeper at the $100 and above is weaker than any other price point right now. The $100 and above is kind of a unique thing. There's just not that much volume there. So -- and there is -- it does get a little -- I'm talking a point or 2 better as you get to lower price points. But I don't -- I think that's more of a short-term feature. It's not one that I could really worry about. The RTDs are different, though. It will be interesting to see how that market evolves. It is famously for many years, been very volatile. It's very tough to play in RTDs as a supplier because the brand loyalty is nothing. I mean, it changes so fast. We -- for those who are a little bit older, we used on California coolers. I'm talking 30 years ago or 35 years ago, something like that. It was 10 million, 11 million, 12 million cases and 2 years later, it was 0. And you look at now what's happened in the last few years, the malt-based ones, the White Claws and the Trulys and those brands, they went up and then they went down so fast and High Noon is feeling a little bit of that pressure now. So there's very little loyalty and the consumers, which tend to be a little bit younger, switch brands quickly. And so how you play that is tough. Now we're a little different with Jack & Coke, I would actually say is very different because that's been around for so long. But we have a brand called New Mix, which probably most of you have never heard of. It is -- I think it's 12 million or 13 million cases in Mexico. It is massive, and it is growing at a huge clip. It's an El Jimador RTD that we're now introducing in the U.S., and it's off to one of the best starts we've ever had on a new -- really a new product launch for the United States market. And it's focused on Mexican Americans and California and sort of the Southwest in that area. But it's off to a great start.

Awesome. Maybe pivoting to some category trends. Would love your perspective on how you think about U.S. Whiskey growth looking out over the next 3 to 5 years. Clearly, it's been a key driver of broader TDS growth for a while. But we always get this question on when the cycle, if you will, may end. So I would love your view on the industry looking ahead? And then within that, you kind of alluded to the supply-demand dynamic that it gets widely discussed. So just give us an update on that and how you see that ultimately playing out?

So the Whiskey, a little really quick history of sort of American Whiskey. It declined from 1970 until 2010-ish, those were 40 years of decline. Jack Daniel's was the one brand that buck -- not the one. There were a handful, but I mean, it was by far the most successful over that 40-year period, both in the U.S. and internationally. Then everything started to get really hot in 2010. I mentioned that earlier, we were sort of the big player at that point. And then there became these call them craft brands, not a term I love, because we've got some really good craft brands ourselves. But there was that boom. And these numbers are not going to be exact, and it's really hard to get data on this stuff, but it sort of peaked 3 or 4 years ago at around 4,000 different distilleries across the United States. Once again, these are not exact, but there was about 3,000 at the beginning of 2025, 1/3 of those went bankrupt last year. So you are having a massive swing. Now we're down to 2,000. So half of them have gone away already, and it is a real struggle. And I get it's not -- well, it's a struggle at a lot of levels, a consumer, but it's also a struggle to get through the U.S. distribution system and the retail system that, when beverage alcohol slows down, they don't want -- obviously, they don't want brands sitting on the shelf, and they're just not turning. And so that is a big dynamic that's changing both from a retail and shelf space and all that kind of thing to these brands that there were so -- everybody knows someone who created a Whiskey brand, especially if you live in Kentucky, they're everywhere. But they're going out of business faster than anything right now. So that element is going away. So I'll say less competitive because they never got to be that big, but that is a dynamic that's at play in all this in it. The -- but there are still -- I mean, Woodford Reserve, which is one of the largest brands in the U.S. system with a lot of international potential for us. It's still right. It's depends on which data source. It's growing very slowly right now. It's not growing at the rate it was. But if you look at the top 20 largest brands in the United States right now, not one of them is growing. There's not one brand in the top 20 that is growing. So it's a challenge across the whole sector. Back to -- so for the Whiskey category itself, you -- we're talking about the inventory that everyone, including us went long or got too much inventory, and we're all -- everybody has slowed down. And I've been making this case for a while. The big players are now back dominating the categories again. This is the Diageo's, and the Brown-Forman, and Sazerac, and those companies. And they're all very rational. They're all very sensitive on returns. And you've -- without calling everyone out, you've seen some of them closed, publicly saying we're closing for a year. And we've had several of those big facilities that are already well into that year. And so I do think the inventories are going to balance out a lot faster than some others think. And it's very sensitive to whatever the demand forecast is. But inventories are coming down. We have not shut down. We didn't get that long, thankfully, especially at Jack. But we have slowed down a bit. And that's part of the cost challenge that we and honestly, everyone else is going to feel too. Slowing volumes is going to spit out higher costs for you almost no matter what you do. So -- but it's still going to be a great category. I don't -- it's still one of the -- even as it slows down or even as spirit slows down, Whiskey, American Whiskey is still one of the better categories to be in from a demand perspective.

Great. And then maybe a similar question, moving to Tequila. Obviously, the category has seen exceptional growth for a period of time, but you alluded to some of the pricing dynamics. We've seen trends slow a little bit. So how are you thinking about the category looking ahead? And how do you see the competitive dynamics there playing out?

It is similar to American Whiskey in a lot of ways in that, the category got hot, a whole lot of new brands came in. Now the market slows down, new brands are starting to really fall off and some of the big ones are starting to fall off. And the other thing that's happened in Tequila, which is kind of famous for its celebrity-backed brands, that is getting tired. I really do believe that. We have talked and thought and analyzed this to death over the last 10 years as to should we go there because Herradura in particular, but El Jimador and Herradura both or some of the oldest and most established and well-known high-quality Tequilas out there and to try to either give a piece of it away to a celebrity just has never felt right for our brands. And so we haven't done it, but boy, there were days when we were watching some of these things that were growing at 100% a year kind of clips, and we're not. And it was a challenging thing to watch. But I think at the end of the day, we made the right call. There is a big shakeout happening in the Tequila category in general right now. And we're just going to have to see how this thing plays out. But I could see it following sort of the American Whiskey. There's -- American Whiskey is kind of ahead of it a little bit. So you've already had a lot of brands shake out. But I think it's about keeping your head down. It's still a really attractive category. It's still the demographic growth that goes with it, the appeal to sort of the younger generation as opposed to some other categories like a Scotch or something like that. There's a lot of things about Tequila that I think are really going to -- that will stay positive and continue to make it one of the better categories to be in for the next foreseeable future.

That makes sense. So maybe rounding out the U.S. discussion, and I know you kind of alluded to, you don't really like to give forecast on when things get better. But how does all of this inform your view on kind of the path forward? Do you see any signs of improvement over the next 6 to 12 months? And I guess, maybe more importantly, can the industry get back to the historical levels of growth that we've seen?

I mean, I don't see any reason why it cannot. I do think -- I don't want to say health is trendy, but American consumers are famous for sort of going after health trends and then they kind of give up on it pretty relatively fast. And so we'll have to see how that plays out a little bit. I do think it's a headwind now, but we'll see how long that lasts. I already talked about the cannabis and GLP-1s and all those kind of things. A lot of those -- this is where I don't really want to predict when is GLP-1 is going to peak and come down. I'm not an expert in that space. I have no idea. So -- but it feels like consumers are going to tire of some of these things and they don't like the side effects or whatever it is and then sort of things return to normal. So it is -- I do think the cyclical side of things that, that almost certainly will return to normal, and we just need to get a little bit of a stronger consumer and some consumer confidence back and get back to the days of kind of low to mid-single-digit growth. We're talking all about we spent a lot of time on the U.S. I mean outside of the United States, you're still getting really good growth above those rates now. So when does the U.S. sort of return to form?

So great segue into my next question. So a lot of focus on the U.S., but let's talk about international. And I guess I wanted -- two questions. First, on the developed markets outside the U.S. And I know Canada has its own unique challenges as it relates to your own portfolio. But curious what you're seeing in these markets, both as it relates to the health of the consumer, but also are you seeing any of these structural shifts as well?

It's a little different. I mean Canada is -- I'm not going to talk about Canada because every time I open my mouth about Canada, I get hate mail. But when you look across, say, Europe is probably a better example. Its TDS trends are similar to where the U.S. are right now. But a lot of those markets have been -- they haven't -- the U.S. market was growing much faster than Europe was in the 2010s, let's just say. And so Europe hasn't fallen as far, but it likely is probably not going to come back as high for reasons I've never fully understood. Beer is actually a healthier category in Europe than spirits is and the opposite in the United States. So we will see. There's still -- there are things about Russia and Ukraine and others that are hurting sort of Eastern Europe right now. So that will -- that ultimately should fix itself. But particularly that puts a lot of pressure on Germany and has put pressure on some of those -- the other markets that are sort of closer to the east side of things. The U.K. is -- the challenge there is taxes. They continue to drive up taxes on alcohol, and that is not helping things a little bit. But markets like France have been really good for us over the years, Southern Europe in general. When we made the acquisitions of Diplomatico and Gin Mare, those are brands that are really small in the United States for the most part, but they are really big in Southern Europe. And that -- one of the strategic reasons to make those acquisitions was our portfolio -- when you leave the United States, our portfolio is really led by Jack Daniel's. And we see a huge opportunity. It's one of the -- that is -- if there's an untold story or where do I see the real growth over the next decade or 2, it's going to be the ability to develop the rest of the portfolio in places like Europe where we are so -- we might be 80% or 90% Jack Daniel's in some countries. We now have enough scale with Diplomatico and Gin Mare to create a separate sales team in a lot of these countries. And then they're big enough so they could -- then Woodford follows in there or Herradura follows in there. And so it's a proper sales team now that doesn't have to share its time with Jack Daniel's. It's something we've learned over time. It is very hard to develop a brand from almost scratch or from very small when the same salespeople are doing Jack Daniel's that are doing Gin Mare, that's a hard decision for them. It makes a lot easier to make your bone of selling Jack Daniel's than it is Gin Mare. So we think we've made some good strategic moves there, and we'll see some better growth there.

Awesome. So maybe pivoting the emerging markets, it's been a bright spot for the company. So can you frame the opportunity, both the near-term trajectory longer term? Are there any particular markets that you're excited about in terms of being a driver of growth? And I guess related, are there markets where you're not in today, where you'd like to have more exposure?

Yes. So for those that have followed us the last couple of years, through all the sort of challenges that the U.S. market and some of the other developed markets have had, our emerging market growth has been fantastic, and it continues to be, and it's been the driver of our growth this year. So -- the strongest one or the best one for us around the world is Brazil. That's been true now for a number of years, and it's mostly Jack Daniel's led. The flavors, and this is one -- Jack Daniel's flavors are a little bit unique and then there are certain markets around the world where they fly and Brazil is one of them. So Apple, which has been moderately successful in the U.S. It's not caught up to honey and we'll see where BlackBerry ends up, but it is huge down in Brazil, as just one example. So Brazil is a really strong market for us. Mexico is another really strong market for us. Mexico is growing to be the second largest market in the world from a top line perspective for Brown-Forman. So it's very big and very important. And look, New Mix is driving a lot of that growth. But still, it's a healthy market for us. Jack Daniel's is in a good place. Where are we not? Where is the opportunities, I guess, going forward? We are this big in Asia. We've got to crack that. We have been working on it, and we're thinking strong and hard about what kind of resources it's going to take to be able to grow in a place like India. Everybody wants to grow in India these days. The market is growing so fast. It's such a big population, such a huge Whiskey market. And what's changed or what's new is the development of the price points that are most of the Whiskey there is very, very low. But they have developed a taste for Scotch and American Whiskey and Irish Whiskey actually. And those markets are doing really, really well. So Asia is small. We just made a big change in Japan, where we hired 100-and-some-odd people and assumed our own distribution there. That's kind of an odd move maybe for some, but Japan is actually a huge American Whiskey market for one. It's very premium. That you don't have to deal with the $2 bottles in Japan. They play at the super premium level. And so we're just getting started really there, but that's another level. China has been a tough one for everyone for a long time, we're very small there. I'm less enthusiastic right now about probably putting a lot of resources against that. But Middle East is probably worth talking about a little bit, too, because nobody -- now granted, everything that's happening there over the last few weeks is changing this dynamic. We'll see how that plays out. But previously, boy, we're pretty big, a lot bigger than probably most people would think that you would be in the Middle East and over towards India in that direction, but all successful markets that I think we can continue to grow.

Okay. That's really helpful, Lawson. With the few minutes that we have left here, why don't we pivot back to the U.S.? And I think, just more on the route to market change and the distributor changes that you made. Maybe just to level set, can you just remind everyone listening in the room, what the changes were, what led to that decision? And then as you look back, how has that change gone relative to your expectations? Where have there been surprises, both good and bad?

Yes. So I don't know how close you all are to the U.S. distribution system. It's gone through a lot in the last couple of years. It's as tough as it has been on suppliers and our -- look, generally speaking, we're still holding on to 30% operating margins. We can withstand pressure, still generate plenty of free cash flow to do everything that we want to do and be successful. It's really tough on that wholesale tier, which is single digit at best margins. And so they've been weakened quite a bit by this volume slowdown. But look, we have to look around for ourselves and say, we need strong, well-capitalized partners that can continue to grow with us. The other big thing that we wanted was dedication and focus. So in a world where you literally -- there are some distributors out there, you won't believe this, but I mean, especially like in California, where salespeople could have 5,000 brands in their book. You don't believe there's 5,000 brands in the U.S. I mean, there are. And when somebody is trying to sell that, even if it's not 5,000, but say it's 500 for an average sales guy, they're not focusing on you really. They'll focus on whoever is going to pay them the best. And it's just -- it's a very -- we were in a difficult spot. We were often the largest -- Jack Daniel's will often be the largest brand in these big 500 brand portfolios for a sales guy, but they still have so many other suppliers that they're dealing with that we really wanted to focus from them. And so that was our biggest goal as we went around there. We changed out a lot of markets in the United States. And RNDC is struggling quite a bit right now. They used to be our biggest partner, and they're selling off markets every day. It seems like a different one seems to pop up. So we needed stronger partners, and we jumped on to sort of the raise not bandwagon, but they have gotten much, much bigger. They're trying a different strategy. They want to be total beverage alcohol. They're obviously a very big beer distributor, but very big with Coke and Dr. Pepper and a number of others. And so they're great partners. They're having to learn what it's like to sell spirits. So they -- mostly that's an on-premise comment where they're used to moving lots of boxes through off-premise channels, and you got to figure out how to do high-end restaurants. And so there's been a few bumps along the way there. We've had to hire or they've had to hire so many people that's just getting these new people up to speed, getting their capabilities up to speed. They have to learn their accounts. They have to make relationships. You still -- this is still a relationship business in a lot of particularly on-premise accounts. And so they've had to figure that part out. We work now with a company called Johnson Brothers, and we have a whole bunch of states kind of in the middle of the country, including Texas, that is going quite well. So it varies. It's -- it has not helped, quite honestly, this fiscal year as much, but I think we've sort of solved a lot of the problems now, and we have better margins because of it. And so hopefully, next year is a year when it all sort of clicks and start to really turn the U.S. performance around.

Great. Well, maybe just to end, -- as you think about the company's ambitions over the long term, which is frankly is how you run the business successfully over the generations, what do you think is the biggest challenge as you look out over the next 5 to 10 years? And then I guess there's a lot of discussion on the near-term dynamics, the top line growth. But what do you think is the most underappreciated aspect of the Brown-Forman story that you think is being missed in the context of the current narrative?

Well, I mean, look, I feel -- if you just compare our brands to anybody else in the industry, I feel pretty good. In fact, I feel really good. I mean, we have some of the best, most vibrant spirits brands in the world. And so I feel confident that we can figure that piece out and we can continue to grow. And I think on the what is least known, I alluded to it a little bit a minute ago, it's growing those brands outside of the United States. While we still have -- I mean, only 45% of our sales are in the U.S., 55% is international already. So I mean, we do have big exposure to the international markets. But I'll take a brand like Woodford. I had to make a single bet on where the value growth is going to come out of Brown-Forman over the next decade, it's going to be Woodford's global expansion. I want to see what we did to Jack Daniel's 25 years ago, we can do with Woodford now. And I do think that can be a really good story, and it's something we're going to focus hard on. And as I said, the brands like Diplomatico and Gin Mare can support other brands in our portfolio that we can then take across the world. And we now control our distribution. That's another thing we didn't really get into. But we -- 15 years ago, we didn't really control our own distribution anywhere. And we now control it in the vast majority of the big markets in the world. And having that under our own control is very, very helpful and choosing your own destiny and controlling your destiny.

Makes a ton of sense. Well, we're out of time. So Lawson, on behalf of UBS, those in the room, those listening online, thank you for taking the time to be with us today. Super helpful as always. And we wish you nothing but the best of luck moving forward.

Great. Thank you. Thank you all.