Leanne Cunningham
Executive Vice President, Chief Financial Officer at Brown-Forman
Thank you, Lawson, and good morning, everyone. As Lawson reviewed the top-line drivers from a portfolio perspective for the first nine months of fiscal 2023, I will provide a few additional details on the top-line results as well as other items that drove our business results and our outlook for the fiscal year.
First, as Lawson mentioned, for the nine months of fiscal 2023, organic net sales increased 12% compared to the same period last year. The growth was driven by a 9% increase in volumes, particularly for New Mix, Jack Daniel's Tennessee Whiskey, and Jack Daniel's RTDs. We also gained 3% from price/mix, reflecting higher prices across much of our portfolio led by Jack Daniel's Tennessee Whiskey.
From a geographic perspective, for the first nine months of fiscal 2023, strong results were broad-based with organic net sales growth in each geographic cluster compared to the same period a year ago. Collectively, our emerging international markets continued to deliver very strong double-digit organic net sales growth, increasing 26%. This growth was led by Jack Daniel's Tennessee Whiskey, particularly in Turkiye and Brazil driven by improved product availability as supply chain disruption eased as well as increased pricing.
RTDs also contributed to growth with New Mix and Jack Daniel's RTDs growing strong double-digits in Mexico where we are gaining share in a growing category and increasing price. In addition, Jack Daniel's RTDs were launched in Brazil earlier this year and are off to a very strong start. This impressive growth includes the impact of the year-over-year declines in Russia as we suspended our commercial operations almost exactly one year ago in March of 2022. Prior to this suspension, this market represented approximately 2% of our total reported net sales.
Our developed international markets collectively delivered strong organic net sales growth up 13% for the first nine months. We continue to closely monitor the inflationary impact on consumer confidence and still have not observed signs of downtrading. In fact, we have continued to increase price through our revenue growth management strategies as spirits remain an affordable luxury for consumers. Jack Daniel's Tennessee Whiskey was the largest contributor to growth in these markets driven by Germany where Jack is gaining share within the Whiskey category, Japan, which is benefiting from strong consumer demand with growth in both the on and off-trade, Korea as the consumer is continuing to shift to international whiskey brands, and Belgium.
As you'll recall, Belgium transitioned to own distribution at the beginning of calendar 2022. We believe that own distribution transition can fuel share growth, strengthen our portfolio unlock future potential, and enable us to capture more of the value chain. We are seeing that growth in Belgium as Jack Daniel's Tennessee Whiskey recently became the number 1 whiskey brand in Belgium during the holiday season, achieving record market share in the month of December.
Australia and Germany continued to drive the growth of Jack Daniel's RTDs leading to double-digit organic net sales growth, which represented the next largest contributor to growth. The RTD category is growing in these large important markets and we are gaining share. Our emerging brands team in Europe continues to drive the growth of brands such as el Jimador, Woodford Reserve, Gentleman Jack, and GlenDronach. Each brand delivered double-digit organic net sales growth, reflecting our strategic priority of increasing focus on our premium and super-premium portfolio. Of course, Diplomatico and Gin Mare are just getting started. We believe they will soon be a meaningful contributor to this emerging brands business.
The U.S. business is beginning to normalize and delivered 4% organic net sales growth as we have shared with you in the previous three quarters. The seasonality of our fiscal 2023 results have been impacted by the abnormal seasonality of the fiscal 2022 shipments due to supply chain disruptions. In the first half of fiscal 2022, distributor inventories did not increase ahead of the holiday season as is typical, and we experienced stronger shipments in the second half of fiscal 2022 and supply chain challenges began to ease. As expected in the first half of 2023, distributor inventories continued to return to more normalized levels, which benefited the U.S. net sales growth rate by 7 points.
As we are now beginning to lap the increase in shipments related to the rebuilding of our inventory position in the prior year period, particularly for Jack Daniel's Tennessee Whiskey, we estimate the net change in distributor inventories reduced the net sales growth rate by 1 point for the first nine months of the fiscal year. Woodford Reserve remained the largest contributor to organic net sales growth driven by strong consumer demand and an increase in distributor inventories as glass supply and capacity constraints continue to ease.
Organic net sales also benefited from higher prices across the portfolio led by the Jack Daniel's family of brands though partially offset by lower volumes of Jack Daniel's Tennessee Whiskey as the brand lapped a strong prior year comparison. As you will recall, at this time last year, we shared that due to supply chain constraints, particularly for glass, we prioritized Jack Daniel's Tennessee Whiskey. This prioritization was reflected in the year ago results as we met the strong consumer demand for the brand, particularly in the on-premise and focused on rebuilding inventory levels across the supply chain.
Korbel California Champagne is benefiting from higher pricing though that benefit is being more than offset by lower volume. In the U.S., the gap between Nielsen takeaway and our actual results have narrowed considerably as we lap many of the factors that created the disconnect such as the shift to the on-premise with its reopening along with the brand and market prioritization impacts from the supply chain challenges. Overall, takeaway trends improved during the quarter as the industry began to normalize with total distilled spirits value growth in the mid-single digits.
As we lap the impact of the supply chain constraints that previously suppressed our performance, particularly for Jack Daniel's Tennessee Whiskey, Gentleman Jack, and the Jack Daniel's Tennessee flavors, our takeaway performance is accelerating and Brown-Forman has closed the gap with total distilled spirits for the first time in two years. We continue to work to rebuild finished goods inventory levels across the three-tiered system and believe that distributor inventory levels are starting to normalize. We are continuing to rebuild some brands and sizes, but shipments and depletions are now largely imbalanced across our full-strength portfolio. And finally, the travel retail channel continued its strong rebound as travel continued to rebound with the return of international airline travel and the cruise industry. Organic net sales grew 52% led by higher volumes across much of our portfolio and our business has nearly returned to pre-Covid levels.
Now, turning to gross profit. In the first nine months of fiscal 2023, our reported gross profit increased 5% or 11% on an organic basis. For gross margin, headwinds more than offset our tailwinds resulting in 170 basis points of contraction compared to the same period last year. Favorable price/mix and the removal of the European Union and United Kingdom tariffs on American whiskey were more than offset by higher costs due to the impact of inflation on our input costs and supply chain disruptions largely related to global logistics constraints as well as the negative effect of foreign exchange.
Moving on to our operating expenses. Compared to the same prior year nine month period, organic advertising expenses grew at a significantly higher rate than our top-line growth largely due to the timing of our increased marketing investments for Jack Daniel's Tennessee Whiskey, Woodford Reserve, the launch of Jack Daniel's Bonded, and Herradura in the United States. Organic SG&A investment increased double digits driven primarily by higher compensation-related expenses and the investment behind our people as we return to in-person events and activities in support of our collaborative culture and relationship-based industry.
Our reported operating expenses were impacted by two items. A non-cash impairment charge for the Finlandia brand name largely due to macroeconomic conditions, including rising interest rates and increasing costs, and certain post-closing costs and expenses in connection with the acquisition of Diplomatico largely driven by costs related to the termination of existing distribution contract as we integrate the brands into our distribution partners. In total, reported operating income decreased 13% and organic operating income grew 9% in the first nine months of fiscal 2023. These results combined with a pension settlement charge resulted in a diluted EPS decrease of 16% to $1.20 per share.
Lastly to our fiscal 2023 outlook. Our performance for the first nine months of fiscal 2023 was strong with high-single digit reported and double-digit organic net sales growth driven by strong consumer demand, higher pricing, and the rebuilding of distributor inventories. And while there were a number of items in the third quarter that negatively impacted our reported operating income results for the first nine months of fiscal 2023, we delivered high-single digit organic operating income growth. As trends begin to normalize globally, we remain confident in the broad-based growth of our U.S. and international markets along with the Travel Retail channel.
While the global macroeconomic and geopolitical environment remains volatile and uncertain, we believe our business will remain resilient reflecting strong consumer demand, the strength of our portfolio of brands, the continued execution of our pricing strategy, and the return of inventory to more normalized levels. For the full year, the effect of the estimated net change in distributor inventories could range from no impact to a moderate unfavorable impact on our results as we lap the significant inventory rebuilding during the fourth quarter of fiscal 2022.
Our guidance assumes no impact from an estimated net change in distributor inventories for the full year and we now expect organic net sales growth in the range of 8% to 10%. As it relates to our fiscal 2023 costs, the inflationary environment increased input cost ahead of our expectations and supply chain disruptions particularly transportation, logistics, and freight while easing remained challenging. Additionally, we have noted the impact of foreign exchange on our reported results. While the U.S. dollar has weakened from its peak in September, the U.S. dollar remained strong against many major currencies, most notably against the euro, Turkish lira, Pound sterling, and Polish zloty.
As we continue to navigate these challenges and work to limit their impact, we expect the headwinds of inflation, supply chain disruption costs, and foreign exchange to impact our full-year results. Partially offsetting these headwinds, we continue to expect pricing and the removal of the EU and U.K. tariffs on American whiskey to remain tailwinds for the full year. Based on these headwinds and tailwinds, we continue to expect full year reported gross margin to be consistent with the first half of fiscal 2023.
We are reaffirming our expectations for operating expenses as we believe that investments in our brands and our people will drive strong long-term top and bottom-line growth. As a reminder, since the time we were burdened with the EU and U.K. tariffs, we have long been committed to reinvesting a portion of the tariff relief back behind our brands once removed, which we were finally able to act upon in fiscal 2023 driving our brand's investment at a rate above our top-line growth. And we will also invest in our people to support our business needs in a more normalized environment. Based on the above expectations and assuming no full year impact from the estimated net change in distributor inventories, we continue to anticipate high-single digit organic operating income growth. We continue to expect our fiscal 2023 effective tax rate to be 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.
In summary, we are pleased and proud of the strong results delivered for the first nine months of fiscal 2023 with double-digit organic net sales growth that was broad-based across our portfolio and geographies. And as expected, the seasonality of our fiscal 2023 results are being impacted by the abnormal seasonality of the fiscal 2022 shipments related to the supply chain disruptions. As trends are normalizing, we believe our business will remain resilient, reflecting the strength of our portfolio of brands and our talented people. We also believe our long-term perspective enables us to navigate the changes of our world and to deliver sustainable and consistent long-term performance.
This concludes our prepared remarks. Please open the line for questions.
