Brown-Forman Corporation (BFB) Earnings Call Transcript & Summary

Now that everyone has had the opportunity to vote, the polls are closed and the inspectors will tally the vote. So here are the preliminary results. Each of the 11 director nominees has received at least 92% of the Class A votes cast. Therefore, each nominee is duly elected to be a director of the corporation. For the advisory vote approving the compensation of the company's NEOs, over 85% of the Class A shares present and entitled to vote voted for the proposal. Therefore, the say-on-pay proposal has passed. And for the ratification of Ernst & Young as the company's independent accounting firm for fiscal 2027, over 99% of the Class A shares present and entitled to vote voted for the proposal. Therefore, the selection of E&Y as our fiscal 2027 auditor has been ratified. Following this meeting, we will issue a press release and file an 8-K with the final voting results. And Marshall, this concludes the formal portion of the meeting.

Great. Well, thank you, Mike, and thank you all for the confidence that you continue to place in the Board of Directors. And since there is no other business to come before the meeting, I declare the formal portion of the 2026 Annual Meeting of Stockholders adjourned. Okay. We have a very new venue, not one that's new to us. This is perhaps Brown-Forman's single most important brand-building partner worldwide as we have a long-standing partnership with Churchill Downs and the Kentucky Derby. As I stand here, I can see some enormous Woodford Reserve branding. It's classy and beautiful. And if you look far out that way, you will see the Old Forester Water Tower at the Brown-Forman campus. So I think we're quite fortunate to be able to hold our meeting here. It's a privilege to stand before you in my first full year as Chairman of the Board. And when I stepped on the stage last year, I felt honored, humbled and very aware of the responsibility that comes with this role. Over the last year, that responsibility has taken a deeper meaning, not just as Chairman, but as someone who has spent nearly my entire life connected to this company. Brown-Forman has shaped my family, my career and my sense of purpose. Serving in this role has only strengthened my appreciation for what this company represents to our employees, our shareholders, our Board and our family. This year has challenged us in meaningful ways. It has also reminded me something fundamental. Brown-Forman's history has never been shaped by absolute certainty. It has been shaped by the decisions that we have made when certainty didn't exist. Every generation has faced moments when the future wasn't perfectly clear, moments that require judgment, discipline and the willingness to look beyond the immediate horizon. As I reflected on this past year, I found myself returning to one of those moments. Nearly 70 years ago, our family made one of the most consequential decisions in Brown-Forman's history, the acquisition of Jack Daniel's. Looking back today, it feels inevitable. Jack Daniel's is so deeply woven into the fabric of Brown-Forman that it's hard to even imagine one without the other. But at the time, it was anything but inevitable. It was debated, it was doubted and it carried real risk. And growing up, I heard the stories about the decision from members of my family and the questions were real. Was this the right move? Could we steward an iconic Tennessee Whiskey brand while honoring our own Kentucky roots? Were we straying too far from who we were. But they were living through uncertainty. And today, we celebrate that outcome. For the Brown family, it was truly a bet the farm moment. And yet that generation, led by my grandfather, Garvin Brown and his brother Lyons Brown, saw possibility where others saw risk. Their courage marked the beginning of one of the most important chapters in our company's history, and it changed Brown-Forman forever. Every generation has had its defining moments. For the third generation, it was Jack Daniel's. For the fourth, it was entering emerging markets and creating Woodford Reserve, another bold investment that has become one of the world's greatest brands of any type. Every generation has also faced moments that tested confidence. History sews those moments into neat stories. But living through them never feels quite so simple. Now those decisions belong to us. That is what stewardship has always meant at Brown-Forman. Each generation inherits something extraordinary and our responsibility is to strengthen it for those who come next. Over the past year, I've learned more than ever about what stewardship requires. I've spent nearly 3 decades in commercial and operational roles across Brown-Forman, but serving as Chairman has given me a very different vantage point. It has reinforced our responsibility is not simply to respond to today's challenges, but to prepare Brown-Forman for the years ahead. That means asking difficult questions, listening carefully, and making the best decisions we can with the information that we have. I'm still learning that, and I take that responsibility seriously. That perspective feels especially important now. Our industry continues to evolve. Consumer preferences are shifting. Economic conditions remain unpredictable and the pace of disruption is accelerating. None of this is new to Brown-Forman. Every generation has faced its own version of uncertainty, but this has been a difficult road and a period for people who care deeply about this company. I've heard the questions and concerns. I've heard the desire to see Brown-Forman regain momentum and those conversations matter. What has remained remarkably consistent throughout our history is how the company responds. We stay grounded in who we are. We focus on what we can control. We protect the strength of our brands. We invest in our people, and we make decisions with a long-term view. Those principles have carried us through every chapter of our history, and they will carry us through this one. That long-term perspective shaped one of the most significant conversations we had this year. It is no secret that we explored a potential combination with Pernod Ricard. Decisions of that magnitude deserve serious consideration. And as stewards, our responsibility is to evaluate every opportunity that could strengthen Brown-Forman over the long term. Ultimately, we concluded it was not the right path for good reasons. And while that opportunity wasn't meant to be, the process reinforced something important. The crown jewel is Brown-Forman, our brands, our people, our culture and certainly our values. We came out of that process with an even greater clarity about who we are and what we are building. None of this happens without our people. To our employees around the world, thank you. This year has brought significant change and change is never easy. Yet every day, you continue to show up and move this business forward. While others have speculated about our future, you stay focused on building it. I also want to thank my fellow members of the Board of Directors. Board service rarely happens in the spotlight, but I've seen firsthand the care and the dedication and the thoughtfulness this Board brings to every conversation and every decision. And among them, I would like to acknowledge our 3 family directors, Campbell, Eliza and Austin, whose perspective and commitment continue to strengthen Brown-Forman and the legacy that we all share. As I close, I've been thinking about this year's annual report in our own words. And what I appreciate about it is that every generation has the opportunity to help write Brown-Forman's next chapter. None of us writes the entire story. We inherit a remarkable legacy. We add our own chapter and then we pass it forward. 70 years ago, one generation chose courage over certainty. Now it's our turn. And what gives me confidence is that we're facing this moment together. Employees around the world, shareholders who care deeply about this company's future, a Board committed to thoughtful stewardship and a leadership team focused on building for the long term. We won't always see every issue the same way. In a company with our history, that has always been true. But what has mattered and what has carried us through every era is the trust that we place in each other. Trust in our intentions, trust in our shared purpose and trust that we are building something meant to last. Brown-Forman has endured for more than 155 years because each generation has stepped forward when the moment required it. They didn't wait for absolute certainty. They acted with courage, discipline and a long-term view. And I believe this generation will do the same. The next chapter of Brown-Forman's story is still being written. And I look forward to what we will write together next. Before I conclude, I want to acknowledge something that has been on many of our minds. Last week, Lawson announced his decision to retire as President and Chief Executive Officer once his successor has been appointed. So on behalf of the Board of Directors, thank you for nearly 3 decades of leadership, partnership and commitment. Under your leadership, this company has grown even stronger globally with exceptional brands, broader international reach and a talented team prepared for the future. In many ways, this transition reflects the very stewardship we've been talking about today, preparing Brown-Forman not only for today, but for those who will lead it next. And as we look ahead, one thing remains constant. Brown-Forman's strength has never come from any one individual. It comes from the collective, our people, our brands, our culture and our shared commitment to steward this company for generations to come. Lawson, it has been a privilege to serve alongside you. And to all of you, thank you for the trust that you've placed in the Board of Directors. And now it is my honor to introduce our President and Chief Executive Officer, Lawson Whiting.

All right. Good morning, everyone. Wow, we really do have standing room only in the back. This is quite the group. Look, I was thinking about how to open up today and really thinking more about what is Brown-Forman and what's the DNA that really makes this company work. We're a company of storytellers and brand builders, and we're really good at it. And we've been really good at it for a long time. We build brands with rich histories, with stories, with people that make these brands come alive. We're not a company that has done a lot of brand building using celebrities and what I consider almost fake brand builders. We do it authentically with heritage, and we do it the right way. We do it the Brown-Forman way. And as I say, I truly believe in that as a strategy for this company, and we're going to continue building brands that way. But there's another part of this company, of the DNA of this company, we're tough and we're resilient. Sometimes you think of the Southern company that's very nice and generous with each other. There's a lot more toughness going on, and we've had to be a little bit tougher in the last couple of years as conditions have gotten so much stronger -- so much weaker. They've been more challenging. So we're in a pivotal moment in this company's history right now. It is a difficult environment. We're dealing with a lot of significant cost pressures and now a leadership transition. So as Marshall mentioned, and you all know, we announced my intention to retire once we do find a successor. This was very much a personal decision of mine, but made with -- at the time when I really have the utmost confidence in our people and our brands and all the changes we made within our brands, within our Board of Directors. It all comes together right now in a place where I'm confident we've got the right people in place and this company will thrive into the future. So -- but until we do find a successor, I'm in the seat. We will see how long that takes, but know that I'm still focused on running the business, and we'll continue to do that. Look, as I'm running the business today, it's key actually to understand the environment that we're in these days, and it is a tough one. As you can see some of these quick sort of news clippings here, the U.S. has gone through quite a bit of turmoil in the last 12, 18 months. We made a lot of distributor changes. About half of the country we made -- half of our business we made changes to. And I think we did it well. We were the first ones out in a lot of cases as we walked away from RNDC and found other partners. That was a big deal. There's a lot of suppliers right now that are also making changes. Thankfully, we did it first. There are significant layoffs happening across the industry right now, in particular with Diageo these days. Everybody is making changes. Everybody is altering their business model. And we'll see how it comes out at the end of the day. But we know Americans are drinking less these days, not a ton, not a lot, but per capita consumption, particularly of what we call Gen Z, is down a bit, and that has made it challenging. But -- and there are other factors in there, and we're going to talk through some of these today. Canada continues to be a problem as we don't have our product on the shelves up there, at least none of our American-made products. So it has been challenging, but the company has been resilient, and I'm going to show you here in a second, we actually performed okay. So let's take a look real quick at fiscal '26. This is a very much simplified P&L. This is the organic change, this income statement. You can see there net sales were flat in fiscal '26 and operating income down 2%. We had given a year earlier guidance. We always give guidance in, sort of, the June time frame to the world as to what to expect. We essentially delivered what we said. We -- if you just pick the midpoint of those guidance points, it was going to be minus 2% and minus 2%. Well, we ended up delivering 0 and minus 2%. So not great. These are not long -- we aspire to have much better results than that. But at the end of the day, with the environment that we're in, it was decent performance. Let's take a look at how we did or how we did it. So innovation became a bigger deal last year. And I find this one interesting. Blackberry, you saw in the film that we started out with was obviously the home run and grabbed the headlines. But the brand to the right of that, Jack Daniel's Heritage Barrel, that's a $70 bottle of whiskey. It's in the single barrel collection. That Heritage Barrel caught on with the collectors and the real aficionados in the bourbon business, and we sold everything we could make. I say all that because it's interesting, a brand like Jack Daniel's can do a Blackberry, which does target sort of the younger consumers that Gen Z, although it's getting broader than that at this point, but it's certainly a popular flavored whiskey. The same brand can do a $70 bottle and sell out everything it can make. Jack Daniel's has very broad shoulders. It can do a lot. It has to do a lot. It's still by far, the majority of our company. And so -- but I want you to know and believe that it has broad shoulders and can do both, and we will continue to do that into the future. King of Kentucky was an interesting one that we introduced just a few years ago at a very, very high price points, and we continue to sell out everything we can make there. And then New Mix, which has also been a very, very popular product, which I'll talk about in a few minutes. It's the quietest, largest brand that Brown-Forman has. The RTC changes I talked about a little there, but you should -- the amount of change that's happening in that third tier, the 3-tier system with our distributors is immense. It's causing disruption all over the markets. But as I said, we got ahead of it a bit, and I feel pretty good where we are. And then the cost pressures. We manage our costs. We are -- given that the majority of our sales are in the American whiskey category, that quite honestly is a disadvantage right now because the acute cost increases that are happening are because of costs that we put in the barrel 5 years ago, and we are suffering through some of those high costs now, but we're fighting through it and doing what we can. So put all that stuff together, how did we do relative to our competitors? And I find this to be an interesting chart. So this is Campari, Remy, Pernod and Diageo. A couple of things you can see, not one company is growing the bottom line right now, no one. Sometimes close and I look at us, that 0 and minus 2%, that's what I showed you on a couple of slides ago. But look at Campari, who really has been the most successful company in over the last couple of years in our industry, because of the Aperol Spritz. They've done very, very well with that. But even they're struggling to grow the bottom line. Remy has struggled for years now, but Pernod and Diageo, Diageo is doing, relatively speaking, pretty well. I would consider Diageo and Brown-Forman at the top of the industry, not by a lot. We're not leaving everybody in the dust. This is squeaking out growth rates wherever you can. But in general, I think that we're doing okay. And these growth rates, as I said, are not what we're striving for, for the long term, but is what we're able to get out of the market today. So relative performance, it matters. It does matter, especially in a declining market. Market share matters. Market share matters a lot when industries are going through these cyclical downturns. But we're doing pretty well there, too. We are gaining share in the United States. We're gaining share in many of our developed markets in Europe, which are the ones that are struggling the most right now. But it is the way that we judge a lot of our markets. I know it's the way the Board judges me in a lot of ways. Market share matters. Something else really matters, too, a strong balance sheet and strong rates of free cash flow. And we've done well here. And I do want to take a minute and explain this slide here because I want to make sure everybody understands what we mean by strong record free cash flow. So you see the green line, that's cash flow from operations. So that's simply, if you go to our annual report, you got an income statement, you have a balance sheet and then a statement of free cash flows. And within the statement of free cash flows, you have operating cash flow. That's basically taking the old business, adding it up, working capital needs, so inventory and receivables, you add it all up together, what kind of cash flow does your business generate. You can see in fiscal '26, we hit $1 billion. It's the first time in the company's history we generated $1 billion in free cash flow. And then look at the line below, the blue line is what we call free cash flow. The difference between the 2 is generally is capital expenditures. So it's the investments we make in our plants expanding capacity, which we expanded significantly at Jack Daniel's, at Woodford, at our Tequila, basically everything over the prior 3 years, we were expanding capacity. So you can see the gap between the 2, between '22 and '25, got a little bit bigger because we were investing heavily. We were spending over a couple of hundred million dollars a year to expand these facilities. That is finished for the most part now. And so rates of free cash flow are now sort of getting released to get us to the $1 billion in operating cash flow and almost $900 million in free cash flow. So for those that -- the media has picked up, and I know there's been stories around and people have talked like the dividend is in trouble and they're going to have to cut it and things like that. It's not true. Don't believe that story. We will -- I expect into the future, look, we're going to be closer to what happened in 2026 than what happened in the prior 3 years before that. We are intensely focused on these metrics, and we will continue to drive free cash flow. That really is what drives the value of stocks ultimately, and we feel pretty well positioned to be able to do that. Last year, by the way, we delivered $827 million back to shareholders, sort of half of it through the regular dividend and the other half through share repurchases. But that also speaks to the strength of our balance sheet and the strength of our free cash flow. So let's take a look forward into fiscal '27. There are headwinds and there are tailwinds. And it seems like, especially internally, we're focused on the headwinds of quite a bit these days. But there are tailwinds, too. There are things that are going really well. So I want to take a second to talk through some headwinds like shifting consumer demand, how challenging that has been and our costs. But then in -- our tailwinds are things like the innovation pipeline that we have and the tremendous momentum we have, particularly in our emerging markets around the world. So starting with this here. This is a true headwind. This is the United States total distilled spirits. So it's total spirits demand over time. And you see this is a 20-year chart. And for so many years, you can tell it was sort of in that 4% to 6% range. And that was important. That was very consistent growth over a long period of time. Both volume and pricing in there, but steady business for most of my career. And then you see the COVID spike. And then you've seen this pretty sharp drop in demand and change in consumer behavior, which gets us down to sort of a minus 2% in 2025. And one of the things about this chart is the minus 2% is being propped up by RTDs. Spirit-based RTDs are actually the most -- the fastest-growing sector within spirits these days. If you take that out, the numbers are actually even worse. So consumer demand is a challenge. That is somewhat out of our control, but we continue to put the company, and we believe in the right place. We want to continue investing in our brands. This will change. The direction of that number will change, and we hope to come out of it even stronger. So costs. That is a real headwind for us, too, this year. Now to try to explain that a little bit. So the whiskey that is being bottled today, generally speaking, was made back in like 2021, 2022. If you remember, we make it and then you put it in a barrel and you age it for 4, 5, 6 years, depending on the brand. So this -- if you remember 2021 and '22, inflation was flying. It was really -- it was a huge challenge. You can see barrels were up 17% in that sort of time frame, the cost to make a barrel. Natural gas up over $200. Corn was up over 90% in that time window. And then just generally inflation, wage inflation and everything else really spiked up. And so all those costs got put into the barrel and now they're coming out. And that -- when you add it all up, that does make for a pretty big headwind for us. We'll eventually turn out of this, but it does take time. And it's really driven by what demand will be and how fast volumes grow. But it is, as I say, is a big headwind. Now tailwinds. We talked about -- we've been talking about Blackberry quite a bit. Talk for just a second on how we roll out these new innovations, particularly on the scale of Jack Daniel's. The smaller ones don't necessarily -- you don't have to do this. But we launched Blackberry last -- kind of this time last year in the United States. Generally with one size, there were others depending on where you are, but we drove that for quite a while. You gain distribution, you gain momentum, you gain consumer awareness. And then we start to sprinkle the rest of the world with the product. We generally take a couple of years to launch big new products. So you get the U.S. to start with one size and then you begin to add other sizes to it. We launched in Western Europe, parts of Western Europe a few months back, and we will continue to launch that around the world over the next year. So it's worked really well. Jack Daniel's flavors tend to work very, very well. There's huge demand for them. That is where the consumer is going, and we're going to meet them with products that they really love. But RTDs generally -- they have changed the face of the U.S. spirits market in particular, and not only the U.S., it really is global, but the demand for flavor and convenience is a macro trend that is here to stay. I think we all believe that. And so we're coming up with other products to meet that consumer. We've had Jack & Coke or Jack & Cola for decades. We've had Jack Daniel's Country Cocktails for decades. But here's some new ones. So Tennessee Blackberry, Blackberry and Lemonade. We very quickly kicked -- got this out, and it is just launching sort of right now, which we think and have confidence that will be big. El Jimador, this is a new one. So it's a spritz product. It's light and refreshing, which is really where the majority of the market is going. And we hope we can turn that into something really big. And then New Mix, I'm going to talk about that in a second. But certainly, New Mix has been an enormous success in Mexico for the most part. And we just started bringing it into the U.S. over the last few months. And we believe the Mexican consumers who very much understand and know this product because it is so big in Mexico, we think they'll be attracted to it. And hopefully, we can make that into a bigger brand. Tailwinds. Besides innovation, as I said, our emerging markets continue to grow at quite a clip. And this is another 20-year chart. But it is interesting in how -- and think through the impact on our culture and on our company from a trend like this. So back in 2006, we were about 60% U.S., 40% international. That has flipped. Fast forward 20 years, we're now only 40%-ish U.S. and 60% international. And that's a big dynamic change. It's where our people are. We have well more than half our employee population does not live in the United States. That is something new for this company, but I think it's exciting. And I think it's -- it just shows you the amount of world in front of us that we think we can grow at. And it's predominantly been the Jack Daniel's brand up to this point. One of our big strategic efforts in the next few years is going to be getting Woodford out there, getting our tequilas out there. Gin Mare and Diplomatico and many others, we think, have real international potential, and we will do well there. This next slide is one that I think is important and interesting because this is a 10-year CAGR. So a 10-year average basically of our sales by brand. And you can see here the 10-year average on Jack Daniel's Tennessee Whiskey is plus 2%. We'd like that number to be bigger, but being one of the largest brands in the world, you should know we continue to grow. It's a low single-digit rate. But on the scale of the Jack Daniel's franchise, there's a lot of cases. Woodford though. That number on a 10-year basis to have a CAGR of 15% is like there are very few brands anywhere in the spirits world that can deliver that kind of result. That is an enormous number. It is an enormous amount of incremental sales and value that's been created over time. Even our tequilas, which we put a lot of pressure on the tequila teams really around the world as we've not -- we've been losing market share because the tequila absolutely took off starting about 8 or 9 years ago, we did not take off with it. But at the end of the day, we still grew 6% to 7% within our tequila portfolio, which is decent. We would probably take that again if we can continue to grow at a mid- or high single-digit growth rate. And then that's just the Jack Daniel's RTDs there. So it does not include New mix, which would propel that number much higher. But even our RTD business for Jack Daniel's has grown at 8% a year. I say that because all of that, all of that on that page, when you add it all up, there's a lot of cases, it's a lot of value, yet the stock price is lower today than it was at the beginning of that cycle. That is almost hard to believe, I think, in some ways. But it does tell you that we are still growing. We're in what we can control, which is on our own sales, we continue to grow forward. We continue to make this company bigger. We continue to make it more global. The stock price hasn't reflected that. I venture to say it will -- get nervous when I start talking about our stock price. But know that this is what we can control, and this is the kind of things that we're doing inside the company to grow. So it gives me confidence that we're going to get there. Importantly, brands, they don't build themselves. Culture. Culture has been one of our large -- what we call our greatest competitive advantage for years. And we're quite -- we feel really good about it. The culture has changed, though. It's evolved quite a bit in the last 30 years. Part of it is because we've gotten so global. You had to evolve your strategy. We've had to evolve the company, and we've evolved the structure. So look, the environment is constantly changing. The industry is constantly changing. And like strategy, culture has to evolve, too. It's our job, though, to make sure that we keep the best parts of our culture and don't sacrifice what makes Brown-Forman such a special place. It's the respect and the care and the long-term view we have for the world that I do think make this such a special place, and we're going to continue doing that. So look, this is my last -- probably my last Annual Meeting, after this is my eighth one. So it's been an honor and a privilege. I want to thank our employees for everything that you've done. It's been a tough few years, and it's been tough on the employees. But thank you for your commitment and your resilience. Our shareholders and the family, your confidence that we've got the right pieces in place to be able to grow and know that we're going to continue fighting for that, especially the Brown family whose many, many, many of you are in the room today, your trust and support of me and the teams that I have led is incredibly important, and I cannot thank you enough. And to everyone who's helped write this company's story over the last 156 years. I'm very proud of you all. I'm very proud of our teams. And I just want to thank you all for everything that you've done to allow us to grow and just have the confidence that we will continue to grow going forward. Thank you.

Thank you, Lawson. Thank you again for everyone who's come here today and for those listening virtually around the world. For those that are here in the room, you have the great pleasure now to be invited to the Brown-Forman brand experience, which is awaiting you in the Homestretch Club. You will be able to access the Homestretch Club from the escalators that are outside this room, so basically the opposite way from which you came in. I, along with members of the Board and executive leadership team will also be down there and available to meet with you. So with that, our meeting is now over. Thank you.