Q2 2023 Brown-Forman Corp Earnings Call

December 7, 2022

Yeah.

Hello, Thank you for standing by and welcome to the Brown Forman Corporation second quarter, and first half of fiscal 2023 earnings call.

This time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone. Please be advised that today's conference maybe recorded I would now like to hand, the conference over to your speaker today, Sue <unk> Vice President Investor.

<unk> please.

Please go ahead.

Thank you and good morning, everyone I would like to thank each of you for joining us today for Brown Forman second quarter and first half of fiscal 2023 earnings call.

Joining me today are Lawson Whiting, President and Chief Executive Officer, Liam Cunningham, Senior Vice President and Chief Financial Officer.

This morning's conference call contains forward looking statements based on our current expectations.

<unk> 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 2023. In addition to posting presentation materials that Lawson and Leann will walk through momentarily.

Both the release and the presentation can be found on our website under the section titled investors events and presentations.

In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward looking statements.

Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission.

During this call we will be discussing certain non-GAAP financial measures.

These measures 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 would like to turn the call over.

<unk> to Lawson.

Well, thank you Sue and good morning, everyone I'm pleased to share our results with you today as we had a strong first half for fiscal 'twenty three we delivered double digit topline growth on both a reported and organic basis.

This performance was led by the strength of our portfolio of brands, which continued to benefit from strong consumer demand.

We also benefited from the rebuilding of distributor inventories, which continued to recover as supply chain disruptions and constraints eased, particularly for glass.

The recovery, though has added additional costs as overall supply chain logistics and transportation continue to be constrained and we proactively took actions to satisfy the demand from our distributors and retailers ahead of the important holiday season.

These costs, along with inflationary increases and the negative effect of foreign exchange more than offset the positive impact gain from favorable price mix and the removal of the EU and UK tariffs on American whiskey.

<unk> was gross margin contraction, though during the first half.

Now let me provide a few additional details on the first half our reported topline growth increased 11% with organic growth increasing 17% after adjusting for foreign exchange headwinds.

Organic net sales growth in the first half was driven by continued strong growth for Jack Daniel's, Tennessee whiskey across all geographic clusters in the travel retail channel Woodford reserve and the U S.

Jack Daniel's RTD, and Australia, and Germany, along with new mix in Mexico, and Jack Daniel's, Tennessee, Honey, and Jack Daniel's, Tennessee fire in the United States.

Jack Daniel's, Tennessee Whiskey was the largest driver of our topline performance delivering double digit growth with an organic net sales increase of 18%.

The growth was driven by strong consumer demand higher pricing and favorable channel mix.

Our Super premium American Whiskey portfolio also increased organic net sales by double digits, Woodford reserve and old Forester grew organic net sales, 40% and 39% respectively disc.

Despite supply chain supply constraints in the prior year consumer demand for Woodford Reserve remained strong and we were better able to meet this demand as glass by challenges eased and we increased our borrowing capacity.

The consumer trends of convenience and flavors continued to fuel double digit growth of our Tds, which we're the third largest contributor to overall company growth.

Jack Daniel's RTD grew organic net sales, 15% and new mix delivered 46% organic net sales growth.

Jack Daniels, Tennessee, Honey and Jack Daniel's, Tennessee Fire also benefited from the same consumer trends as well as improved glass supply both brands grew organic net sales double digits, 12% and 28% respectively.

I also wanted to mention our full strength tequila portfolio as we shared last quarter <unk> experienced significant challenges during the first three months of fiscal 'twenty three due to supply chain disruption mainly related to glass.

Fortunately glass supply increased through the end of the first half, enabling us to better meet demand and deliver a 9% increase in organic net sales for Dara.

Organic net sales for all of <unk> increased 18% driven by higher volumes in the United States.

So now turning to gross profit.

In the first half of fiscal 'twenty, three our reported gross profit increased 8% or 17% owner or on an organic basis. We continue to focus on our overall strategy to increase prices more consistently year after year and benefited from 240 basis points of favorable price mix in the first half.

Based on Nielsen data Brown Forman remains one of the pricing leaders in the U S with nearly 3% pricing growth outpacing total distilled spirits growth of just over 2%.

This continued emphasis on identifying pricing opportunities not just in the U S. But also internationally is a key part of our comprehensive focus on revenue growth management.

These efforts span across multiple spectrums, including mix, such as channel pack and customer <unk>.

Promotional strategy inefficiency trade.

Trade terms and distributor margins and of course pricing.

However, gross margin headwinds more than offset these pricing actions, resulting in a 130 basis points of gross margin contraction.

Supply chain transportation, and logistics costs and constraints remain challenging and we took proactive steps to ensure our products would be on the shelf ahead of the important holiday season.

We believe these decisions supported our topline growth ensured we met the strong consumer demand for our brands and allowed us to continue to implement our long term pricing strategy.

With our long term perspective, we have the opportunity to continue to invest in the momentum of our brands and ensure we are developing and driving the next generation of growth.

Over the last two decades, we've transformed our portfolio to focus on premium and Super premium brands, we have sold our consumer durables business. The majority of our wines as well as standard brands and slower growth categories. We acquired much more premium brands like Casa Herradura are three single malt Scotches Slane Irish whiskey.

And Fords Gin, we continued efforts to premium is our portfolio through the first half of fiscal 'twenty, three with several new acquisitions and new strategic relationships.

First we're very excited to welcome Jim Murray, a fast growing ultra premium gin and its recent line extension Genmar Capri.

Tomorrow is the world's number one ultra premium gin. According to the most recent <unk> data and is sold in more than 70 countries with the majority of sales in Europe <unk> is the largest <unk> largest market, Italy, followed by Germany, Spain, and the travel retail channel.

The brand will be a strong addition to our emerging brands portfolio, particularly in Europe , where its scale will be beneficial as we continue to build and expand our focused emerging brand sales group.

We believed in Moray at over 200009 liter cases has strong positioning and is complementary to fords gin and our broader super premium portfolio and we are delighted is now part of the Brown Forman family.

We're also looking forward to entering the rum category with diplomatic go wrong.

Based on <unk> 2021 data the Super premium plus rum category has grown at an annual rate of 17% over the last five years and diplomatic who is the number one super premium and ultra premium room.

<unk> has a strong brand heritage has reached significant scale in attractive geographies is growing quickly and has a strong margin profile.

Similar to <unk> the brand has a strong European presence aligning well with our investment in owned distribution in markets, such as France, and Germany, which are diplomatic those top two markets.

<unk> will be part of our emerging brands portfolio in Europe as well as in the United States, which is the brand's third largest market.

When considering the expansion of our portfolio, we look for acquisitions and partnerships that enhance our ability to deliver meaningful growth improve key financial metrics and increase shareholder returns, we believe in Moray and diplomatic over them are well positioned to accomplish all three of these objectives.

And with the addition of these two brands Brown Forman now owns one of the top five Super premium plus brands globally and for strong growth categories U S. Whiskey Tequila gin in Rome. In addition to these acquisitions, we are developing significant relationships that we believe can propel our growth our recently announced global.

Agreement with the Coca Cola company to deliver the iconic Jack and Coke cocktail as a branded ready to drink adult beverage is an exciting play in an attractive category the opportunity for the Jack Daniels and Coca Cola are TD is significant and we believe this will meaningfully expand the growth of both of our businesses.

With the successful launch of the Jack Daniel's and Coca Cola are TD in November in Mexico, I want to thank the teams at Brown Forman and Coca Cola, who work to make the product launch a reality.

I'd also like to take a moment to share a bit more about the significant opportunity we see within the RTD category based on <unk> 2021, the RTD category is a $39 billion business globally and is projected to grow in the high single digits with the cocktail and long drink segment projected to grow even faster delivering double digit.

Growth over the next five years.

We believe our TV cocktails address the distinct consumer occasion and based on our results. We have not seen the growth of our RTD cocktails resulted in a decrease in our full strength products. In fact, we've experienced growth of both of our full strengthen RTD products side by side proving to be a net benefit.

Jack Daniel's existing RTD products hold approximately two five share of $2, 5% share of the global art Td's business and approximately 9% share of the cocktails and long drink segment. We believe there are numerous opportunities for geographic expansion and to gain share based on our <unk> 2021, our current Jack Daniel's RTD.

<unk> have approximately 25% of the global and Colo business concentrated largely in two markets, Australia and Germany.

That's a lot of runway for us to expand geographically and of course Coca Cola is a wonderful company to work with because of the global reach of their bottling network and the strength of our iconic brand standing together beside ours, we look forward to expanding in a number of key markets around the world in the first half of calendar 2023, including the large our TV markets of the.

The U S and U K as well as additional selected European Asian, and Latin American markets and I look forward to sharing more as these markets launch in the upcoming quarters.

In addition to our relationship with Coca Cola in September we announced a new multi year global partnership, making Jack Daniel's and official global sponsor of Mclaren racing, taking our iconic Tennessee whiskey brand to the fastest growing sport in the world Formula One.

Our partnership begins officially on January 1st for the 2023 racing season.

Appeal for Formula one continues to grow at the fastest rate of any major global sport with more than 1 billion fans and viewership that regularly exceeds that of the National Basketball Association. The NFL The Premier League and the Champions League.

The majority of the sports growth comes from the next generation of fans, providing a powerful opportunity to reach new consumers of legal drinking age and expand Jack Daniel's relevance in pop culture.

Identifying the right partner in this space was of Paramount importance and we believe we have found that in Mclaren racing are globally iconic brands share common values and commitments to responsibility and sustainability.

This partnership is an important and high profile global platform to promote responsible consumption and directly combat drunk driving Jack Daniel's has a long track record of promoting responsible consumption of our products and our responsibility message appears in all of our communications and promotional materials, we believe the new partnership with <unk>.

<unk> racing in Formula one creates an exciting opportunity for Jack Daniels to live boldly at every turn engaging a truly global fan base with races on most continents around the world.

In summary, we had a strong first half of fiscal 'twenty, three and continue to invest boldly behind our brands our people and our long term growth.

The global macroeconomic and geopolitical environment remains volatile and uncertain, yet we remain optimistic and confident as we look ahead.

At the heart is our performance ambition that is there'll be nothing better than the market and Brown Forman.

Promise was on the very first bottles of old Forester signed by George Garvin Brown and it remains our pledge today across all aspects of our business. We often describe this ambition not as a goal or destination, but a way of thinking a way of working and a way of making decisions.

<unk> faced numerous economic political and environmental challenges over the past 15 decades, and if thrives because we have the agility and resilience to adapt and seize opportunities where a 152 year old company with a focused yet agile strategy and a clear ambition nothing better in the market.

With that I'll turn the call over to Leann and she'll provide more details on our second quarter and first half results.

Thank you Allison and good morning, everyone as last one reviewed our headlines for the first half of fiscal 2023, I will provide additional details on our business results and our outlook for the full year.

First I will share our topline results by geography for the first six months of fiscal 'twenty 'twenty three.

Results were broad based with each geographic cluster, achieving double digit organic net sales growth compared to the same period a year ago.

Business accelerated through the first half delivering organic net sales growth of 11%.

This performance was driven by an estimated net increase in distributor inventories.

<unk> increases across the portfolio of brands continued premium innovation, along with positive status and channel mix as well as innovation.

Later, well reserve with the largest contributor to organic net sales growth in the first half with a positive impact from higher pricing and higher volumes as glass supply and capacity constraints eased supporting our ability to better meet the strong consumer demand.

Daniel's family of brands also contributed to the increase led by volume growth from Jack Daniel's, Tennessee Whiskey.

In addition, Jack Daniels, Tennessee Fire, Jack Daniels, Tennessee, Honey and gentleman, Jack experience volumetric gains as they benefited from an improved supply chain environment.

The newest members of the Jack Daniel's family, Jack Daniels, Tennessee, Whiskey, and Jack Daniel's Chapel mass risky either first to permanent superpremium expressions and almost a quarter at the century. These brands are off to a strong start as they continue to gain distribution and had been awarded multi.

<unk> gold medals for taste and global spirits competition.

Corbell, California, Champagne, partially offset the growth of the rest of the portfolio. The sparkling wine category experienced significant growth during the pandemic and the trends are beginning to normalize the brand is benefiting from higher pricing, but that benefit is being more than offset by lower volume.

Of pellets takeaway trends continue to be impacted by the shift to the on premise as consumers have made the gradual return to restaurants and bars. The trends are beginning to normalize we see this in consumer mobility data, which has continued to hover around pre pandemic levels.

This channel shift along with account mix and supply chain impact are the main drivers of the difference between takeaway data and our actual results as we have mentioned we continue to work to rebuild finished goods inventory levels across the three tiered system that we still believe distributor inventory levels remain below.

They are pre pandemic levels as consumer demand remains strong and transportation and logistics constraints persists.

Collectively our emerging international markets continued to deliver very strong double digit organic net sales growth, increasing 27% driven by Jack Daniel's, Tennessee, whiskey, particularly in Turkey, Brazil sub Sahara Africa and Poland.

And RTD, which had a strong performance with Jack Daniel's RTD and new mix growing strong double digits in Mexico, where we are gaining share in a growing category.

This growth was partially offset by year over year declines in Russia due to the suspension of our commercial operations beginning in March of 2022.

Developed international markets collectively delivered strong organic net sales growth of double digits for the first half of the fiscal year building on the double digit growth in the same prior year period.

While the inflationary environment is impacting consumer confidence, we have not observed signs of down trading and have been able to continue to increase price to our revenue growth management strategies.

Jack Daniels, Tennessee Whiskey was the largest contributor to growth driven by Germany, where Jack Daniels is gaining share within total spirits and the whiskey category.

<unk>, which is benefiting from the return of tourism and Korea as consumers shift to international Whiskey brands.

Momentum continued for Jack Daniel's RTD is with double digit organic net sales growth led by Australia, and Germany consumers' desire for convenience continues to propel interest in the RTD category in these markets and we gained share.

<unk> Clifford reserve and Glenn Jonnick, each delivered very strong double digit organic net sales growth driven by our emerging brands model, which supports our strategic priority of increasing focus on our premium and super premium portfolio.

Route to market models play an important role not only for our Super premium portfolio, but also our core portfolio owned distribution can fuel a share growth strengthen our position unlock future potential.

And enable us to capture more of the value chain just to name a few of the impact.

Transitioning to own distribution at the beginning of this calendar year, Belgium has more than doubled its organic net sales compared to the same period last year.

Finally, the travel retail channel continued its strong rebound growing organic net sales, 67% led by higher volumes across much of our portfolio as travel continued to rebound with the return of international airline travel and the cruise industry our business in this channel is key.

Recovering and as close to returning to pre COVID-19 levels.

Loss and share the details of our gross margin for the first half I will now turn to our operating expenses organic advertising expenses in the first half compared to the same prior year period grew at a higher rate than our top line growth largely due to the timing of our increased marketing investment in the United stay.

To support Jack Daniel's, Tennessee Whiskey era, the launch of the Jack Daniel's bonded series and Woodford Reserve.

Our organic SG&A investment increased double digits, driven primarily by higher compensation related expenses and the investment behind our people as we are gradually returning to in person events and activities in support of our collaborative culture and relationship based industry and total reported <unk>.

Organic operating income grew 8% and 19% respectively. In the first half of fiscal 'twenty 'twenty. Three these results combined with a decrease in our effective tax rate resulted in an 11% diluted earnings per share increased to 99 per share.

And finally to our updated fiscal 2023 outlook.

We had a strong first half of fiscal 2023 with double digit reported and organic net sales growth driven by strong consumer demand and the rebuilding of distributor inventories as supply constraints eased we.

We remain confident in the collective growth of our U S developed and emerging international markets, along with the travel retail channel as we have now cycled against the more volatile periods of the pandemic and believe we are seeing trends began to normalize.

Do you remain cautious given the current volatility and uncertainty of the global macroeconomic and geopolitical environment as well as the potential impact of inflation and rising energy prices on consumer spending.

We believe the strength of our portfolio of brands innovation increased pricing and our strategic investments will enable continued growth through the remainder of the fiscal year and therefore, we are raising our full year fiscal 2023 organic net sales growth guidance from the mid single digit rate.

<unk> to the high single digit range.

As we have shared with you in previous quarters, I would like to reiterate that the seasonality of our fiscal 2023 results will be impacted by the abnormal seasonality of the fiscal 2022 shipments due to supply chain disruptions and.

In the first half of fiscal 2022 distributor inventories did not increase ahead of the important holiday season as is typical and we experienced stronger shipments in the second half of fiscal 2022 as supply chain challenges began to ease.

And as expected in the first half of fiscal 2023 distributor inventories continue to return to more normalized levels, which benefited our growth rate by five points. Our second half results will lap the increase in the net change in distributor inventory related to the rebuilding of our.

<unk> position in the prior year period as it relates to our fiscal 2023 cost the inflationary environment continues to increase input costs ahead of our expectations and supply chain disruptions, particularly transportation logistics and freight remained challenging as Lachlan mentioned, we have <unk>.

Our proactive steps in the first half of the fiscal year to ensure our products would be on shelf ahead of the important holiday season to meet the strong consumer demand for our brands.

We believe these investments support our topline growth both in the short term and the long term. Additionally, we have noted the impact of foreign exchange on our reported first half results.

The us dollar has strengthened against many major currencies, most notably we are seeing the negative effect of the appreciation of the U S dollar against the Euro Turkish lira and pound Sterling.

While we are actively working to navigate these challenges and their impact we believe the headwinds of inflation supply chain disruption costs and foreign exchange will persist for the full year.

Partially offsetting these headwinds we continue to expect pricing and the removal of the EU and UK tariffs on America whiskey to remain tailwind for the full year.

Based on the stronger than expected headwinds, we are updating our reported gross margin guidance for the full year.

We now project the reported gross margin for the full year to be consistent with the first half of fiscal 2023, primarily due to the combined effects of higher input cost negative foreign exchange and mitigation cost associated with supply chain challenges.

For the last components of our outlook the outlook for operating expenses remains the same in addition to our philosophy of growing the investment behind our brands at a rate similar to our topline growth. We are reinvesting a portion of the EU and UK tariff relief back behind our brands.

And we will also invest behind our people and expect a continued rebound of discretionary spend to support our business needs in a more normalized environment.

We firmly believe that investing in our brands and our people is the right approach to driving strong top and bottom line growth based on these expectations. We are also raising our full year fiscal 2023 organic operating income growth guidance from the mid single digit range to the high single digit range.

Our fiscal 2023 effective tax rate guidance remains in the range of approximately 22% to 23% and our capital expenditures are still planned to be in the range of $190 million to $210 million before I conclude my remarks, I wanted to briefly highlight our long standing.

Capital allocation philosophy, and how it has guided our actions against all four principles over the last 12 months.

The first principle is to fully invest behind our business in the last year, we increased capital investments to expand capacity to support the strong long term demand of our brands, specifically and our Kentucky distilleries Tequila operations as well as our Glenn <unk> distillery.

The second principle is to pay increasing regular dividends as we announced on November 17, the Brown Forman Board of directors approved a 9% increase in the regular quarterly cash dividend. We are proud to be a member of the prestigious S&P 500 dividend aristocrats index having paid.

Regular quarterly cash dividends for 79 consecutive years and increased our regular dividend for 39 consecutive years.

The third principle is to Opportunistically look for acquisitions that we believe create long term value.

While the Genmar and diplomatic acquisition announcements came in quick succession. There has been no change to this guiding principle as timing is reliant on when an owner decides to make a brand available for sale.

And finally, the fourth principle is to seek opportunities to return cash to shareholders in excess of regular dividends as you will recall last year Brown performance Board of directors declared a special cash dividend of $1 per share or approximately $480 million on our class a.

And class B common stock.

These are a few examples of our guiding principles and actions our capital allocation philosophy has allowed us to maintain a healthy balance sheet and has produced superior returns over the long term, we firmly believe our capital allocation philosophy, coupled with our strategic priorities.

We'll continue to deliver strong results for our investors.

In summary, and as a law since David the first half of fiscal 'twenty 'twenty three was strong as we delivered double digit top and bottom line organic growth.

Near term challenges and uncertainties, we continue to be agile as we identify ways to mitigate supply chain disruptions to satisfy consumer demand. We are confident if we use our strategy as our guide stay true to our values and remain focused on delivering nothing better than the market. We will continue to navigate the ebb.

We're changing market dynamics. This concludes our prepared remarks. Please open the line for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from Lauren Lieberman with Barclays. You May proceed.

Great. Thanks, so much and good morning.

I hate to get granular, but it's the thing im getting kind of turns on most this morning is just around the guidance and trying to understand how the pieces fit together, because we don't have visibility into into currency.

So I guess first gross margin outlook is worse, but.

The operating profit guidance. So can you just help US bridge those those two dynamics, how should we be thinking about operating expenses and how we should think about FX and the impact on on those metrics.

Good morning, Lauren So I'll start at kind of the <unk>.

Higher level and welcome all the way through our kind of gross margin components for the full year and we still expect favorable tailwind is from stronger price positioning the innovation, which we've launched with the JAK series and <unk> at that higher margin products and of course, the removal of the EU and UK Paris.

The headwinds that we have been talking about remain the same but they some of them have strengthened.

Firstly I'll start with inflation on our input cost for F. 'twenty three we did plan for inflation on our input cost to be above historic norms, but the current levels on our commodities are beyond what we had expected and the theme really is the key drivers of energy and fuel.

Everything it takes to make and move both our inputs and our finished goods.

So just to give you a little bit of detail around that because I'm sure. It's on everybody's mind.

As it relates to our key components are glass pricing continues to increase because of the commodity you said it takes to produce it which would be natural gas diesel and fuel and labor.

Right.

It's really the cost of fuel that continues to be very volatile and the diesel prices are at all time highs.

We do see the continued imbalance of the equipment from the global freight and transportation system, and we expect that to continue throughout the full year.

Natural gas prices are they remain elevated even though they did moderate as we got towards the end of our second quarter.

And as it relates to grain again, similar elevated above what our expectation was and the freight costs to transport our grains to our facilities has increased.

So moving that we are using many mitigation efforts as we look at these global logistics and transportation challenges.

In this year and when we think about how we planned it we had planned that that imbalance of the equipment wouldn't be as significant as it was in the prior year and we have found that it continues to be so we've had to continue to use things such as airfreight in chartered vessels working to try to get back to our normal.

Shipping lanes as quickly as possible, but with the constraints that were in the environment and trying to get our products on the shelf for the important selling season.

Made the decision to invest in those cost to make sure those products where theyre at.

And then to our FX rates.

Generally speaking as you look at Brown Forman over a long period of time, FX generally isn't a factor or a significant driver in our results as a U S. Based company. This year. It is so as we think about the remainder of this fiscal year as it relates to our foreign exchange.

We see a similar impact in the second half as we have in our first half therefore, leading us to a full year outlook that our growth reported gross margin for the full year will be consistent with the.

The rate that we have at the end of this first half now go into your second part of the question with our strong topline growth loss and we will talk about that but we're continuing to invest from an operating expense perspective.

With our philosophies that we talked about in our prepared remarks the lesson.

Yes.

Lauren was the question about pricing and stronger topline growth a stronger topline growth. So that's what I.

I think look.

The topline organic numbers are very very strong and they have remained very very strong.

A lot of that is I do think the consumer is still pretty healthy.

All indications of our own business.

We are not seeing any kind of trade down and in fact.

Are you actually seeing stronger performance, even at the higher end of our portfolio. So even and I think to everyone. I know it was always interested in the U S. If you look at the Cvs figures in the U S. You are still seeing premium amortization.

Strong strong as ever because it but certainly continuing where the products with 2000, <unk> $40 and above are performing better than a lot of the lower value. So youre not seeing.

The trade down that so many people have suspected.

Would be coming through.

I'd say that is.

I don't know if it's global but it's certainly more than just the U S. We're just not seeing the weaker consumer yet.

And the last thing I would add is we just continue to be really fortunate in an environment with the inflation on our commodities that we're saying is that we have a very strong portfolio of premium and super premium brands that are better able to handle these pressures that we're seeing from the macro world.

Okay Alright, thank you both so much.

Yes.

Thank you one moment for questions.

Our next question comes from Robert <unk> with Evercore you May proceed.

Great. Thank you very much.

Wondering if you could talk a little bit more about.

<unk>.

We all understand some of the supply issues.

But it has had extraordinary growth is.

Is it moderating at all just in terms of what you think underlying demand is.

And in your view.

As Ron potentially kind of the next tequila a few years out thank you.

Let's hope so on that last one so look tequila.

And now predominantly talking about the United States here I mean, we have had some comparisons that have been really really difficult and I think thats true across the category and some of the other brands that have had these extraordinary growth rates over the last few years. So that has something to do with it but we have it's Eric there are probably more than any other brand so far year to.

<unk> has been constrained by glass.

<unk> gotten better over the last few months, but it was really rough in the first quarter and so we are expecting to see improvement as we move throughout the year.

Demand for the brand itself has been so strong in the last few years that I don't really think thats.

I don't think it's so much a weakening of the category are weakening of consumer demand I do think it's mostly comps and then in our case at least glass. So still believe it's going to be one of the fastest growing categories over the next several years and it's still.

We still feel like we have some of the best brands in the business. So.

And then Ron.

We'll see Super premium Roomba is growing very nicely now it is growing really quickly in Europe . So this is one of those acquisitions that.

Really is is much bigger in Europe than it is in the United States, which is different than most of the acquisitions. We've done over the last say 10 years.

There's a lot of there's a lot of room, particularly in southern Europe , but really across Europe . So it's a big category. We've got one of the best brands if not the best brands at these higher price points.

It'll be interesting to see what happens in the U S business and does that does it become a kilo of light.

Growth rate.

It is hard to predict those things, but we're making a bet that we can grow and grow that brand into something pretty sizable in the U S.

Yes.

That helps.

Thank you.

Thank you one moment for questions.

Our next question comes from Bryan Spillane with Bank of America, You May proceed.

Thanks, operator, and good morning, guys.

Good morning, So just maybe a clarification.

<unk> just to follow up on Lauren's question, one clarification, and then I had another question around just the FX piece.

If were.

Looking at the <unk>.

Dave the impact you already said in the back half of the year the impact of foreign exchange.

I guess for the full year will be equal to what it's been for the first half on gross profits.

Is that same does that flow through the P&L as well so with the FX impact on operating income.

For the full year be similar to what it's been in the first half.

Yes, it will flow down through the P&L, Okay, and then just the GAAP. The fact that it's a much bigger.

Impact on gross on operating income can you just kind of give us a little bit, but just why that gap is so much why the FX impact is so much greater on NOI versus gross profit.

So I'll start with I'll start at the top where are.

Strip net sales as we have reported is negatively impacted by a 6% that's largely a translational impact.

As we said driven by the appreciation of the dollar against the currencies that are specific to us which are the euro the Turkish lira and the pound Sterling.

Gross margin, we've already talked about was 140 basis points, that's a bit different because.

Our topline impact because the majority of our products are produced inside of the United States and then just flowing down through the rest of the P&L.

The outsized a magnified impact as you move down just because it's on a smaller base.

But theres a continues to be as low as we've said before no meaningful re measurement of our translational impact and.

We just it continues to be it hasnt been a factor for Brown Forman for a period of time, a key driver and hopefully it's one that reverses then we're not talking about that.

At some point in the future.

Yes, Brian let me add onto it a little bit to the.

If you guys I would encourage everyone to look at page seven on the accompanying slide deck I think it's I mean it.

Lays it out pretty clearly you can see in there that our price mix in tariffs offset the input costs as bad as they were we were falling away with price actions around the world and then we knew about the tariff money, but curious on the gross margin has been the foreign exchange.

So how that plays out the rest of the year.

We will see but.

Yes.

Impacted obviously, we didn't see coming.

Yes. Thanks Watson thanks for that because that was I got that I was looking at the slide and trying to figure out what that looks like for the back half of the year and I guess you kind of maybe answered. This question, but just the fact that so much of this is FX is y.

You wouldn't contemplate maybe raising prices or taking other actions to try to offset.

The margin pressure, because it's really something you can't control is that the right way to think of it.

That is a fair way to look at it I mean, I think on the pricing question I guess, that's a good one.

As we've been talking about I think for the last five or six quarters.

We've been trying to change the company's execution of pricing around the world.

Well I know you've been around long enough I mean from 2000 to the financial crisis was a really nice blend our balanced view I guess between volume and price.

And then the financial crisis hit and we went through 10 years in this industry with virtually no pricing, we're trying to change that dynamic.

Inside the company right now, which involves we've said low single digit that two to three range, but doing it pretty much everywhere and for year and so that.

We're executing against that and in successfully executing against it and it's been something I think the groups are quite happy with but that also means you don't turn around on a dime.

Because of foreign exchange movement, and try to do something significantly bigger or input costs move into either so we're going to continue to continue that steady climb.

And hopefully over the long run that's what delivers the most value at this point.

As we've said we've not we've not chased away consumers through these price increases which is obviously very good news.

We've kind of found the right level of what it takes to maximize sort of consumer demand.

Alright, Thanks, a lot. Thanks, Lianne look I look forward to seeing you guys next week.

Okay. Thank you.

Thank you one moment for questions.

Our next question comes from Peter Grom with UBS you May proceed.

Hey, good morning, everyone hope you're doing well so.

Yes, I just wanted.

To make sure I'm understanding your response to both Brian and Lauren's question. So just to be quite specific I think in the schedule Foreign exchange was a 14 point headwind to operating income in the first half of the year. So.

If that's the same does that more or less imply our math right.

Reported operating income is going to be down.

Kind of in this mid single digit range.

Is that right.

And then I guess, just maybe I would love to ask about the implied organic sales guidance for the back half of the year can you maybe just remind us what your expectation is for distribution distributor inventories I know it was 500 basis points.

Tailwind in the first half, but just any color on what you expect for the second half our full year would be helpful. Just because I guess in that context, the implied organic revenue growth to go from high single digits. After a 17% in the first half is a pretty meaningful slowdown.

Just any color on that would be really helpful. Thanks.

Thank you Peter and then.

I'll start with kind of the reminder of the seasonality of our growth, which is for our seasonality for fiscal 'twenty three on the top line. It is going to be impacted by the abnormal seasonality of our 2022 shipments and we all lived through that which the first half of 2012.

Two.

Glass supply constraints, we didn't build our inventory ahead of the holiday season. The way, we typically do and then when glass supply challenges began to ease in the second half of our fiscal year, we were able to increase the level of shipments out to the market.

So then as we lap that in fiscal 'twenty three we're continuing to work to rebuild our distributor inventories as you noted and you can see on schedule D. Our growth rate in the first half had a five point benefit on a year over year basis, and again that second half of this year has the lap the very strong comparison.

That we had last year related to our inventory rebuild so then going specifically to.

The rebuild effort.

Since we have been working on this and we've said this last quarter as we've been rebuilding inventory. We have continued to experience a very strong consumer demand and we've launched new innovations.

So while our inventory position is improving there are still some brands and sizes that have to be replenished.

So we do believe the inventory distributor a retailer inventories are below.

It remains below pre pandemic levels, we're making progress on that and at this point to the extent that we can look out we believe our target as far as a return to normal levels would be in the early part of F. 'twenty four and we'll talk more about that as we get closer to that fiscal year, but we expect it to remain.

Through this fiscal year.

Yeah.

Okay.

Oh, and then to your other part of FX impact on our and we talked about how it flows down the outside we continue for the second half we only guide on an organic basis, which wouldn't have that FX impact in there.

Our sharing that in this report that our set our estimate would be is like our our assumption would be that the second half impact of foreign exchange would be.

Alert to the impact of the first quarter first half sorry.

Got it thanks, so much.

Thank you one moment for questions.

Our next question comes from Nathan <unk> with Bernstein you May proceed.

Hi, good morning, everybody alright, so given your earlier commentary on gross margin headwind for this year I think that was very clear I'd like to step back and actually focus on the long term story. So how should we think about your gross margin development given today's news over the next one to three years.

You can quantify what you think you can achieve in terms of expansion in that time period.

And then one question on the top line guidance to what extent is there downside risk on the stronger guidance from perhaps weaker volumes or mix. If a recession were to come on the consumer were to weekend. Thank you.

Nadine as we've talked about before on gross margin expansion.

We have the entire company actively working on.

All elements of revenue growth management from pricing to effective promotions to all of the elements of pack says distributor margins and we are working significantly on our.

Costs.

As we look out we continue to hope that the imbalance of the freight equipment.

Will subside in this next kind of one to three year period. So we can return to normal shipping lanes, which will have significantly less cost associated with that we've been two years now with that that higher.

Air freight to get our products to market chickens to continue to support consumer momentum.

FX again, when we when we look back over our recent past it hasn't been a key driver we can't predict what's going to happen in that space, but we would say as we look over history. It generally isn't at key driver and then.

Inflation, that's where.

Working to do everything we can to mitigate those costs, but they are being driven by the macro economic environment in which we're operating and then I think you weren't really let me add a little bit of color to the freight and logistics line, just sort of everyone understands it.

If you if we back up six months, we were in the throes of some serious glass shortages, we still have some problems now, but it's certainly better.

<unk>.

In the summertime when we're looking out at really European and international holiday season, we could see that we were not going to be able to get our product to market in the normal way that we do it and so we were kind of stuck in a corner to say alright, we either going to take on these literally tens of millions of dollars in freight expenses.

So that we can actually get our products on the shelf or just not seller and.

And we chose.

Former.

Which I still think ultimately is the right long term decision, but back to your gross margin expectations going forward, we will not have cash.

Gosh I would hope we don't have those come in over the next.

Once we get through this holiday season, we hope to return to normal it does feel like conditions are moving back towards a normal state again and then some.

That will be a boost to the margin.

And then is there anything else on.

Topline and professional.

So was the question that in the sort of great.

The question was on the top line guidance that you guys have taken up today to what extent is there downside risk.

To that if the consumer were to weaken in a recessionary environment or did you guys build that into your assumptions one putting up this new guidance.

To the extent that we can.

Could build and all of the assumptions that we were aware of what the trends in the information we have it would have been built into the raising of our guidance.

I mean, I think I would still argue we still feel pretty good about the consumer takeaway.

Normalizing if you look at any of that.

Comment.

The Nielsen's a napkin trends, but.

As we've been saying all along here, we haven't seen the trade down we havent seen a weakness in consumer demand yet I just don't.

I tend to believe that not only brown forman, but our this category of Super premium spirits is an affordable luxury that is one people don't.

Like to give up and I think the combination of that with the strong wage wages remained strong unemployment all the other macro things that are working well.

I think it's a relatively low risk.

Very clear thank you both.

Yeah.

Thank you one moment for questions.

Our next question comes from Kevin Grundy with Jefferies. You May proceed.

Great. Thanks, good morning, everyone.

Lastly, I wanted to take a step back and ask you about you are ready to drink strategy just strategically you've had a lot of success, so far and it seems like it is going to increasingly become a bigger part of your portfolio as well.

As your peers, how do you think about it within the portfolio. How do you think about margin implications relative to the base portfolio certainly will be negative from a mix perspective, but just broader thoughts on how this is going to fall within the portfolio. How you attempt to limit cannibalization and maybe some.

Your thoughts on the Jack and Coke RTD. Thank you.

Yes, so I mean thats obviously.

The story right now is the <unk> television, which just launched in Mexico, a few weeks ago. So.

Obviously, it's only the first few days of launch but moving.

Yes, we remain very excited and very optimistic on what we can do in this category are Tvs. Obviously, if you look at the U S trends RTD spirit based our Tvs are flying.

Driven by a few very big brands and we hope to join those ranks over the next year.

We will be launching in the first half of 2023 in the U S and the UK and then.

Handful of different European and Asian markets.

Now just to make sure everyone I don't know how much of this we've given out in the U S and Germany, and Australia Brown Forman will be doing the sales and that is a little bit margin dilutive, if our Tvs where to get massive now, Germany, and Australia already really big businesses and so moving forward. We don't expect a lot of dilution from that from those market.

But when you get to the rest of the world. It's different Coca Cola is doing the sales and we're selling bulk and so that's.

That is not a dilutive margin so it's mixed.

As to how thats going to look going forward, but at the end of the day. These are brands that we really believe are the jet in Cola brand is something that we very much believe in.

As a long term play with really nice.

Really nice growth.

Look at it.

And then what I would add to that is and I know youre aware of this that we've had we've been in this business for 30 plus years, we have had over 20 million cases of.

Of that volume in our sales mix and.

It's going to depend on market by market basis, but we don't see a significant impact to our long term company margin over a period of time, because again in a way we will be transitioning some of this business from the Jack in Cola business that we have which again we do this.

As an attractive opportunity for us to continue to increase our geographic reach and.

And to gain share and to potentially even premium on the product and again, we believe it has a halo effect on our full strength brand and that Halo effect will now be extended into geographies, where we haven't had the opportunity to kind of get our product there before yes.

That's a reference to a lot of it is to the emerging markets around the world, where we're just really small so take on.

Africa, just to pick one big cotton.

Has a hard time affording us.

Full bottle of Jack Daniel's well this is a totally different offering.

And something that we think can be scaled up can be a pretty big off a pretty big opportunity, but then it becomes a sort of a halo effect on the rest of the Brian . It just it develops a lot more awareness because you've got that Canada hand in a market that we think can be very very big.

Okay. That's very helpful. Thank you both.

Yes.

Thank you one moment for questions.

Our next question comes from Nik Modi with RBC you May proceed.

Yes. Thank you good morning, everyone. Welcome I was hoping maybe you could just provide an update on where the glass situations, Dan because it seems like not just.

Spirit companies, but companies outside of spirit.

The fragrance companies are having a big challenge right now with glass avail.

Availability of supply.

I'm just curious do you think it might get worse.

It.

Intend youre ability to rebuild inventories the way you expected.

And if not how are you.

During this glass one I know a lot of your competitors are still struggling.

So I'll start with that one from a glass supply perspective, I think you heard us say multiple times throughout our prepared remarks is that our glass supply constraints are easing. So maybe we were just early.

In the cycle of constraints, but we have done and had the opportunity to really actively work with our current suppliers and we've increased our capacity.

<unk> improve their yield and we've also work.

Closely with them for prioritization of our products on their lines with that we've also taken the opportunity like you've heard US say is broaden our supplier base, we've been able to do that both inside of the United States as well as internationally and that.

So largely for us it's easing we do have some spaces, where we are still facing contract constraints and as Los <unk> talked about that that would be herradura in Mexico and we have.

Our plan in action for increased supply that we're bringing online.

This fiscal year.

So all in all for US. We believe we are kind of moving beyond we're still living with them moving beyond glass supply constraints and you can see in the growth of Woodford reserve and gentleman Jack how they have responded to that that easing of that constraint and returning back to very strong growth.

And then now moving more into the global logistic challenges of the world.

Great. Thank you.

Thank you our time for questions is ended I would now like to turn the call back over to sue them for any closing remarks.

Well, thank you and thank you Lawson and Leann and thank you to everyone for joining us today for Brown <unk> second quarter and first half of fiscal 2023 earnings call. If you have any additional questions. Please contact us.

To wrap up today's call, we would like to offer you addressed to the spirit of the season and a vibrant new year.

Here's to everyone with that this concludes our call.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Hello, Thank you for standing by and welcome to the Brown Forman Corporation's second quarter and first half of fiscal 2023 earnings call.

At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone. Please be advised that today's conference maybe recorded I would now like to hand, the conference over to your speaker today, Sue <unk> Vice President Investor.

<unk>.

Please go ahead.

Thank you and good morning, everyone I would like to thank each of you for joining us today for Brown Forman second quarter and first half of fiscal 2023 earnings call.

Joining me today are Lawson Whiting, President and Chief Executive Officer, Liam Cunningham, Senior Vice President and Chief Financial Officer.

This morning's conference call contains forward looking statements based on our current expectations.

<unk> 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 companys 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.

Both the release and the presentation can be found on our website under the section titled investors events and presentations.

In the press release, we have listed a number of the risk factors you should consider in conjunction with our forward looking statements.

Other significant risk factors are described in our Form 10-K and Form 10-Q reports filed with the Securities and Exchange Commission.

During this call we will be discussing certain non-GAAP financial measures.

These measures 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 conditions and results of operations are contained in the press release and investor presentation with that I would like to turn the call over.

Too often.

This performance was led by the strength of our portfolio of brands, which continued to benefit from strong consumer demand.

We also benefited from the rebuilding of distributor inventories, which continued to recover as supply chain disruptions and constraints eased, particularly for glass.

The result was gross margin contraction, though during the first half.

Now let me provide a few additional details on the first half our reported topline growth increased 11% with organic growth increasing 17% after adjusting for foreign exchange headwinds.

Organic net sales growth in the first half was driven by continued strong growth for Jack Daniel's, Tennessee whiskey across all geographic clusters in the travel retail channel.

Woodford reserve and the U S.

Jack Daniel's RTD is in Australia, and Germany, along with new mix in Mexico.

And Jack Daniel's, Tennessee, Honey, and Jack Daniel's, Tennessee fire in the United States.

Jack Daniel's, Tennessee Whiskey was the largest driver of our topline performance delivering double digit growth with an organic net sales increase of 18%.

Both was driven by strong consumer demand higher pricing and favorable channel mix.

Our Super premium American Whiskey portfolio also increased organic net sales by double digits, Woodford reserve and old Forester grew organic net sales, 40% and 39% respectively.

Despite supply chain.

By constraints in the prior year consumer demand for Woodford Reserve remains strong and we were better able to meet this demand as glass by challenges eased and we increased our borrowing capacity.

The consumer consumer trends of convenience and flavors continued to fuel double digit growth of our Tds for the third largest contributor to overall company growth.

Jack Daniel's RTD grew organic net sales, 15% and new mix delivered 46% organic net sales growth.

Fortunately glass supply increased through the end of the first half, enabling us to better meet demand and deliver a 9% increase in organic net sales for Dara.

Organic net sales for all humidor increased 18% driven by higher volumes in the United States.

So now turning to gross profit.

In the first half of fiscal 'twenty, three our reported gross profit increased 8% or 17% owner or on an organic basis. We continue to focus on an overall strategy to increase prices more consistently year after year and benefited from 240 basis points of favorable price mix in the first half.

Based on Nielsen data Brown Forman remains one of the pricing leaders in the U S with nearly 3% pricing growth outpacing total distilled spirits growth of just over 2%.

This continued emphasis on identifying pricing opportunities not just in the U S. But also internationally is a key part of our comprehensive focus on revenue growth management.

These efforts span across multiple spectrums, including mix, such as channel pack and customer <unk>.

<unk> strategy inefficiency trade.

Trade terms and distributor margins and of course pricing.

However, gross margin headwinds more than offset these pricing actions, resulting in a 130 basis points of gross margin contraction.

Supply chain transportation, and logistics costs and constraints remain challenging and we took proactive steps to ensure our products would be on the shelf ahead of the important holiday season.

We believe these decisions supported our topline growth ensured we met the strong consumer demand for our brands and allowed us to continue to implement our long term pricing strategy.

With our long term perspective, we have the opportunity to continue to invest in the momentum of our brands and ensure we are developing and driving the next generation of growth.

And <unk> Gen. We continued efforts to premium is our portfolio through the first half of fiscal 'twenty, three with several new acquisitions and new strategic relationships.

First we're very excited to welcome Jim Murray, a fast growing ultra premium gin and its recent line extension Jean Marie Capri.

<unk> is the worlds number one ultra premium gin. According to the most recent AWS of our data and is sold in more than 70 countries with the majority of sales in Europe <unk> is the largest Jim Mora is largest market is Italy, followed by Germany, Spain, and the travel retail channel.

The brand will be a strong addition to our emerging brands portfolio, particularly in Europe , where at scale will be beneficial as we continue to build and expand a focused emerging brand sales group.

We're also looking forward to entering the rum category with diplomatic go wrong.

Based on <unk> 2021 data the Super premium plus rum category has grown at an annual rate of 17% over the last five years and diplomatic or was the number one super premium and ultra premium room Dupont.

<unk> has a strong brand heritage has reached significant scale in attractive geographies is growing quickly and has a strong margin profile.

Similar to Gymboree brand has a strong European presence aligning well with our investment in owned distribution in markets, such as France, and Germany, which are diplomatic those top two markets.

It too will be part of our emerging brands portfolio in Europe as well as in the United States, which is the brand's third largest market.

When considering the expansion of our portfolio, we look for acquisitions and partnerships that enhance our ability to deliver meaningful growth improve key financial metrics and increase shareholder returns, we believe gymboree and diplomatic or all of them are well positioned to accomplish all three of these objectives.

And with the addition of these two brands Brown Forman now owns one of the top five Super premium plus brands globally and for strong growth categories U S whiskey Tequila gin and Rome.

In addition to these acquisitions, we are developing significant relationships that we believe can propel our growth our recently announced global agreement with the Coca Cola company to deliver the iconic Jack and Coke cocktail is a branded ready to drink adult beverage is an exciting play in an attractive category the opportunity for the Jack Daniels and Coca.

<unk> RTD is significant and we believe this will meaningfully expand the growth of both of our businesses.

With the successful launch of the Jack Daniel's and Coca Cola RTD in November in Mexico, I want to thank the teams at Brown Forman and Coca Cola, who work to make the product launch a reality.

Growth over the next five years.

We believe RTD cocktails address the distinct consumer occasion and based on our results. We have not seen the growth of our RTD cocktails and resulted in a decrease in our full strength products. In fact, we've experienced growth of both of our full strengthen our TV products side by side proving to be a net benefit.

Jack Daniel's existing our TV products hold approximately two and a half share of two 5% share of the global art Td's business and approximately 9% share of the cocktails and long drink segment. We believe there are numerous opportunities for geographic expansion and the gain share based on our <unk> 2021, our current Jack Daniel's RTD.

Products have approximately 25% of the global and Colo business concentrated largely in two markets, Australia and Germany.

The U S and UK as well as additional selected European Asian, and Latin American markets and I look forward to sharing more as these markets launch in the upcoming quarters.

Our partnership begins officially on January one for the 2023 racing season.

Majority of the sports growth comes from the next generation of fans, providing a powerful opportunity to reach new consumers of legal drinking age and expand Jack Daniel's relevance in pop culture.

Identifying the right partner in this space was of Paramount importance and we believe we have found that in Mclaren racing a.

Ah globally iconic brands share common values and commitments to responsibility and sustainability.

This partnership is an important and high profile global platform.

Responsible consumption and directly combat drunk driving Jack Daniel's has a long track record of promoting responsible consumption of our products and our responsibility message appears in all of our communications and promotional materials. We believe the new partnership with Mclaren racing in Formula One creates an exciting opportunity for Jack Daniels to Luke.

Boldly at every turn engaging a truly global fan base with races on most continents around the world.

In summary, we had a strong first half of fiscal 'twenty, three and continue to invest boldly behind our brands our people and our long term growth the.

The global macroeconomic and geopolitical environment remains volatile and uncertain, yet we remain optimistic and confident as we look ahead.

At the heart is our performance ambition that is there'll be nothing better than the market and Brown Forman.

Thomas was on the very first bottles of old Forester sign by George Garvin Brown and it remains our pledge today across all aspects of our business. We often describe this ambition not as a goal or destination, but a way of thinking a way of working and a way of making decisions we face numerous economic political and.

Environmental challenges over the past 15 decades, and if thrives because we have the agility and resilience to adapt and seize opportunities where 152 year old company with a focused yet agile strategy and a clear ambition nothing better than the market.

With that I'll turn the call over to Leann and she will provide more details on our second quarter and first half results.

Thank you Lawson and good morning, everyone as lesson reviewed our headlines for the first half of fiscal 2023, I will provide additional details on our business results and our outlook for the full year.

First I will share our top line results by geography for the first six months of fiscal 2023.

Strong results were broad based with each geographic cluster, achieving double digit organic net sales growth compared to the same period a year ago.

S business accelerated through the first half delivering organic net sales growth of 11%. This performance was driven by an estimated net increase in distributor inventories.

<unk> increases across the portfolio of brands continued premium amortization, along with positive SaaS and channel mix as well as innovation.

Woodford Reserve was the largest contributor to organic net sales growth in the first half with the positive impact from higher pricing and higher volumes as glass supply and capacity constraints eased supporting our ability to better meet the strong consumer demand.

Jack Daniel's family of brands also contributed to the increase led by volume growth from Jack Daniel's, Tennessee Whiskey.

In addition, Jack Daniels, Tennessee Fire, Jack Daniels, Tennessee, Honey and gentleman, Jack experience volumetric gains as they benefited from an improved supply chain environment.

The newest members of the Jack Daniel's family, Jack Daniel's bonded, Tennessee, Whiskey, and Jack Daniel's Triple Mash whiskey are the first to permanent superpremium expressions in almost a quarter of a century.

These brands are off to a strong start as they continue to gain distribution and have been awarded multiple gold medals for taste and global spirits competition.

Off premise takeaway trends continue to be impacted by the shift to the on premise as consumers have made the gradual return to restaurants and bars. So trends are beginning to normalize.

We see this in consumer mobility data, which has continued to hover around pre pandemic levels.

This channel shift along with account mix and supply chain impact are the main drivers of the difference between takeaway data and our actual results as we have mentioned we continue to work to rebuild finished goods inventory levels across the three tiered system, though we still believe distributor inventory levels remain low.

They are pre pandemic levels as consumer demand remains strong and transportation and logistics constraints persists.

With Jack Daniel's RTD, and new mix growing strong double digits in Mexico, where we are gaining share in a growing category.

This growth was partially offset by year over year declines in Russia due to the suspension of our commercial operations beginning in March of 2022.

Developed international markets collectively delivered strong organic net sales growth up double digits for the first half of the fiscal year building on the double digit growth in the same prior year period.

While the inflationary environment is impacting consumer confidence.

We have not observed signs of down trading and have been able to continue to increase price through our revenue growth management strategies.

Jack Daniel's, Tennessee Whiskey was the largest contributor to growth driven by Germany, where Jack Daniels is gaining share within total spirits and the whiskey category, Spain, which is benefiting from the return of tourism and Korea as consumers shift to international whisky brands.

Momentum continued for Jack Daniel's RTD with double digit organic net sales growth led by Australia, and Germany consumers' desire for convenience continues to propel interest in the RTD category in these markets and we gained share.

Elohim, it or Woodford reserve and Glenn Jonnick, each delivered very strong double digit organic net sales growth driven by our emerging brands model, which supports our strategic priority of increasing focus on our premium and super premium portfolio.

Route to market models play an important role not only for our Super premium portfolio, but also our core portfolio.

On distribution can fuel share growth strengthen our position unlock future potential and enable us to capture more of the value chain just to name a few of the impacts since transitioning to own distribution at the beginning of this calendar year, Belgium has more than doubled its organic net sales compare.

To the same period last year.

Our business in this channel is quickly recovering and as close to returning to pre COVID-19 levels as.

As loss share the details of our gross margin for the first half I will now turn to our operating expenses.

Ganic advertising expenses in the first half compared to the same prior year period grew at a higher rate than our topline growth largely due to the timing of our increased marketing investment in the United States to support Jack Daniel's, Tennessee Whiskey Herradura the launch of the Jack Daniel's bonded series.

Woodford Reserve.

<unk> operating income grew 8% and 19% respectively in the first half of fiscal 'twenty two 'twenty three.

These results combined with a decrease in our effective tax rate resulted in an 11% diluted earnings per share increased to 99 per share.

And finally to our updated fiscal 2023 outlook.

Philip and emerging international markets, along with the travel retail channel as we have now cycled against the more volatile periods of the pandemic and believe we are seeing trends began to normalize.

We do remain cautious given the current volatility and uncertainty of the global macroeconomic and geopolitical environment as well as the potential impact of inflation and rising energy prices on consumer spending.

Arrange to the high single digit range.

As we have shared with you in previous quarters, I would like to reiterate that the seasonality of our fiscal 'twenty 'twenty three results will be impacted by the abnormal seasonality of the fiscal 2022 shipments due to supply chain disruptions.

<unk> position in the prior year period as it relates to our fiscal 'twenty 'twenty three cost the inflationary environment continues to increase input costs ahead of our expectations and supply chain disruptions, particularly transportation logistics and freight remained challenging as Lachlan mentioned, we have take.

The proactive steps in the first half of the fiscal year to ensure our products would be on shelves ahead of the important holiday season to meet the strong consumer demand for our brands.

We believe these investments support our topline growth both in the short term and the long term. Additionally, we have noted the impact of foreign exchange on our reported first half results.

U S. Dollar has strengthened against many major currencies, most notably we are seeing the negative effect of the appreciation of the U S dollar against the Euro Turkish lira and pound Sterling.

While we are actively working to navigate these challenges and their impact we believe the headwinds of inflation supply chain disruption costs and foreign exchange will persist for the full year.

Partially offsetting these headwinds we continue to expect pricing and the removal of the EU and UK tariffs on America whiskey to remain tailwind for the full year.

Based on the stronger than expected headwinds, we are updating our reported gross margin guidance for the full year.

For the last components of our outlook the outlook for operating expenses remains the same and.

In addition to our philosophy of growing the investment behind our brands at a rate similar to our topline growth. We are reinvesting a portion of the EU and UK tariff relief back behind our brands.

And we will also invest behind our people and expect a continued rebound of discretionary spend to support our business needs in a more normalized environment.

We firmly believe that investing in our brands and our people is the right approach to driving strong top and bottom line growth.

Based on these expectations. We are also raising our full year fiscal 2023 organic operating income growth guidance from the mid single digit range to the high single digit range.

Allocation philosophy, and how it has guided our actions against all four principles over the last 12 months.

The first principle is to fully invest behind our business in the last year, we increased capital investments to expand capacities to support the strong long term demand of our brands, specifically and our Kentucky distilleries Tequila operations as well as our Glenn <unk> distillery.

Regular quarterly cash dividends for 79 consecutive years and increased our regular dividend for 39 consecutive years.

The third principle is to Opportunistically look for acquisitions that we believe create long term value.

The Gen Moray and diplomatic O'brien acquisition announcements came in quick succession. There has been no change to this guiding principle as timing is reliant on women owner decides to make a brand available for sale.

And class B common stock.

We'll continue to deliver strong results for our investors.

In summary, and as Lawson's, David the first half of fiscal 'twenty 'twenty three was strong as we delivered double digit top and bottom line organic growth.

<unk> near term challenges and uncertainties, we continue to be agile as we identify ways to mitigate supply chain disruptions to satisfy consumer demand. We are confident if we use our strategy as our guide stay true to our values and remain focused on delivering nothing better than the market. We will continue to navigate the app.

We're changing market dynamics. This concludes our prepared remarks. Please open the line for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.

Our first question comes from Lauren Lieberman with Barclays. You May proceed.

Great. Thanks, so much and good morning.

So I guess.

First gross margin outlook is worse, but.

Tricks.

Good morning, Lauren So I'll start at kind of the <unk>.

<unk> level and welcome all the way through our kind of our gross margin components for the full year and we still expect favorable tailwind from stronger price positioning the innovation, which we've launched with the JAK series and <unk> at that higher margin products and of course, the removal of the EU and UK tariffs.

The headwinds that we have been talking about remain the same but they some of them have strengthened.

I'll start with inflation on our input costs for F. 'twenty three we did plan for inflation on our input cost to be above historic norms, but the current levels on our commodities are beyond what we had expected and the theme really is the key drivers of energy and fuel is everything at <unk>.

<unk> to make and move both our inputs and our finished goods.

So just to give you a little bit of detail around that because I'm sure. It's on everybody's mind as it relates to our key components are glass pricing continues to increase because of the commodity you said it takes to produce it which would be natural gas diesel and fuel and labor.

Right.

It's really the cost of fuel that continues to be very volatile and the diesel prices are at all time highs.

We do see the continued imbalance of the equipment from the global freight and transportation system, and we expect that to continue throughout the full year.

Natural gas prices are they remain elevated even though they did moderate as we got towards the end of our second quarter.

And as it relates to grain again, similar elevated above what our expectation was and the freight costs to transport our grain to our facilities has increased.

So moving that we are using many mitigation efforts as we look at these global logistics and transportation challenges.

In this year and when we think about how we planned it we had planned that that imbalance of the equipment would be as significant as it was in the prior year and we have found that it continues to be so we've had to continue to use things such as air freight in chartered vessels working to try to get back to our normal.

Shipping lanes as quickly as possible, but with the constraints that were in the environment and trying to get our products on the shelf for the important selling season, we made the decision to invest in those costs to make sure those products where theyre at.

And then to our FX rates.

Generally speaking as you look at Brown Forman over a long period of time as ex generally isn't a factor or a significant driver in our results as a U S. Based company. This year it is.

So as we think about the remainder of this fiscal year as it relates to our foreign exchange.

We see a similar impact in the second half as we have in our first half therefore, leading us to a full year outlook that our growth reported gross margin for the full year will be consistent with.

Line with our philosophies that we talked about in our prepared remarks the Lawson.

Yes.

Lauren was the question more than about pricing a stronger topline growth a stronger topline growth. So I mean, that's.

What.

I think look.

The topline organic numbers are very very strong and they have remained very very strong.

A lot of that is I do think the consumer is still pretty healthy.

All indications of our own business.

We are not seeing any kind of trade down and in fact.

<unk> seen stronger performance, even at the higher end of our portfolio. So.

And I think to everyone. I know it was always interested in the U S. If you look at the TBS figures in the U S Youre still seeing premium amortization.

As strong as strong as ever because.

But certainly continuing where the products through $2030 $40 and above are performing better than the lower value so you're not seeing.

The trade down that so many people have suspected.

Would be coming through.

I would say.

I don't know if it's global but it's certainly more than just the U S. We're just not seeing the weakening consumer yet.

And the last thing I would add is we just continue to be really fortunate in an environment with the inflation and commodities that we're saying is that we have a very strong portfolio of premium and super premium brands that are better able to handle these pressures that we're seeing from the macro world.

Okay Alright, thank you both so much.

Yes.

Thank you one moment for questions.

Our next question comes from Robert <unk> with Evercore you May proceed.

Great. Thank you very much.

Wondering if you could talk a little bit more about tequila.

We all understand some of the supply issues.

But it has had extraordinary growth.

Is it moderating at all just in terms of what you think underlying demand is.

And in your view.

As Ron potentially kind of the next tequila a few years out thank you.

Let's hope so on that last one so look tequila.

And now predominantly talking about the United States here I mean, we have had some comparisons that have been really really difficult and I think that is true across the category and some of the other brands that have had these extraordinary growth rates over the last few years. So that has something to do with it but we have it's Eric there are probably more than any other brand so far year to date.

<unk> has been constrained by glass.

<unk> gotten better over the last few months, but it was really rough in the first quarter and so we are expecting to see improvement as we move throughout the year.

Demand for the brand itself has been so strong in the last few years that I don't really think thats.

We still feel like we have some of the best brands in the business. So.

And then Rob.

We'll see Super premium Roomba is growing very nicely now it is growing really quickly in Europe . So this is one of those acquisitions that.

Really is is much bigger in Europe than it is in the United States, which is kind of different than most of the acquisitions. We've done over the last say 10 years.

It'll be interesting to see what happens in the U S business and does that does it become a tequila light.

Growth rate.

It's hard to predict those things, but we're making a bet that we can grow and grow that brand into something pretty sizable in the U S.

Sure.

That helps.

Thank you.

Thank you one moment for questions.

Our next question comes from Bryan Spillane with Bank of America, You May proceed.

Operator, good morning, guys.

Good morning, So just.

Maybe a clarification just to follow up on Lauren's question, one clarification and then.

And another kind of question around just the FX piece.

If were.

Looking at the <unk>.

You gave the impact you are you said in the back half of the year the impact of foreign exchange.

I guess for the full year will be equal to what it has been for the first half on gross profits.

Is that same does that flow through the P&L as well so with the FX impact on operating income.

For the full year be similar to what it's been in the first half.

Yes, it will flow down through the P&L.

And then just the GAAP the fact that it's a much bigger.

Impact on gross on operating income can you just kind of give us a little bit, but just why that gap is so much why the FX impact is so much greater on NOI versus gross profit.

So I'll start I'll start at the top where our strip net sales. So as we reported is negatively impacted by a 6% that's largely a translational impact.

As we said driven by the appreciation of the dollar against the currencies that are specific to us which are the euro the Turkish lira and the pound Sterling.

Gross margin, we've already talked about was 140 basis points, that's a bit different because then our topline impact because the majority of our products are produced inside of the United States and then just flowing down through the rest of the P&L and has the outsize a magnified impact as you move down just because it's on a smaller base.

But theres a continues to be as we've said before no meaningful remeasurement, our translational impact.

And.

We just.

So be it hasn't been a factor for brown Forman for a period of time, a key driver and hopefully this one that reverses then we're not talking about that.

At some point in the future.

Yes, Brian let me add onto it a little bit too.

If you guys I would encourage everyone to look at page seven in our on the accompanying slide deck I think it's I mean, it lays it out pretty clearly you can see in there that our price mix in tariffs offset the input cost as bad as they were we were falling away with price actions around the world and then we knew.

About the tariff money, but curious on the gross margin has been the foreign exchange.

So how that plays out the rest of the year I mean, we will see but.

Yes.

Impacted obviously, we didn't see coming.

Yes. Thanks Watson thanks for that because that was I've got that I was looking at the slide and trying to figure out what that looks like for the back half of the year and I guess you kind of maybe answered. This question, but just the fact that so much of this is FX is y.