Leanne Cunningham
Senior Vice President and Chief Financial Officer at Brown-Forman
Thank you, Lawson, and good morning, everyone. As Lawson 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. The strong results were broad-based with each geographic cluster achieving double-digit organic net sales growth compared to the same period a year ago. The U.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, price increases across the portfolio of brands, continued premiumization along with positive size 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.
The Jack Daniel's family of brands also contributed to the increase, led by volume growth from Jack Daniel's Tennessee Whiskey. In addition, Jack Daniel's Tennessee Fire, Jack Daniel's Tennessee Honey and Gentleman Jack experienced 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 two permanent super-premium 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 in global spirits competition.
Korbel 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.
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, though 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 below their pre-pandemic levels as consumer demand remains strong and transportation and logistics constraints persist.
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 RTDs, which had a strong performance with Jack Daniel's RTDs 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 Daniel's 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 whiskey brands.
Momentum continued for Jack Daniel's RTDs 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. el Jimador, Woodford Reserve and GlenDronach, each delivered very strong double-digit organic net sales growth, driven by our emerging brands model which supports our strategic priority and 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 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 compared to the same period last year.
Finally, the travel retail channel continuing 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 quickly recovering and is close to returning to pre-COVID levels.
As Lawson shared 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 States to support Jack Daniel's Tennessee Whiskey, Herradura, 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. In total, reported and organic operating income grew 8% and 19%, respectively, in the first half of fiscal 2023. These results, combined with a decrease in our effective tax rate resulted in an 11% diluted earnings per share increase to $0.99 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 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 begin 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.
We believe the strength of our portfolio of brands, innovation, increased pricing and our strategic investments will enable continued growth through the reminder of the fiscal year, and therefore, we are raising our full year fiscal 2023 organic net sales growth guidance from the mid single-digit range 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.
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 continued to return to more normalized levels, which benefited our growth rate by 5 points. Our second half results will lap the increase in the net change in distributor inventory related to the rebuilding of our inventory 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 remain challenging. As Lawson mentioned, we have taken 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 top line 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 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 U.K. tariffs on American whiskey to remain tailwinds for the full year. Based on the stronger than expected headwinds, we are updating our reported gross margin 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 combined effects of higher input costs, negative foreign exchange and mitigation costs 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 top line growth, we are reinvesting a portion of the EU and U.K. 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 longstanding 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 capacities to support the strong long-term demand of our brands, specifically in our Kentucky distilleries, tequila operations as well as our GlenDronach 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 Aristocrat Index, having paid regular quarterly cash dividends for 79 consecutive years and increase the regular dividend for 39 consecutive years.
The third principle is to opportunistically look for acquisitions that we believe create long-term value. While the Gin Mare and Diplomatico Rum 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-Forman's 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 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 will continue to deliver strong results for our investors.
In summary, and as Lawson stated, the first half of fiscal 2023 was strong as we delivered double-digit top and bottom line organic growth. Despite 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 in the market, we will continue to navigate the ever changing market dynamics.
This concludes our prepared remarks. Please open the line for questions.