Budweiser Brewing Company APAC Ltd
HKEX:1876
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Budweiser Brewing Company APAC Ltd
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2020 results call. Hosting the call today from Budweiser APAC are Mr. Jan Craps, Co-Chair of the Board and Chief Executive Officer; and Mr. Gui Castellan, Chief Financial Officer.
Results of the first 3 months 2020 can be found in the press release published earlier today and available on the Hong Kong Stock Exchanges and Budweiser's APAC websites.
[Operator Instructions]
Before proceeding, let me remind you that some of the information provided during this results call, including our answers to your questions on this call may contain statements of future expectations and other forward-looking statements. These expectations are based on management's current views and assumptions and involve known and unknown risks, uncertainties and other factors beyond our control. It's possible that Budweiser APAC's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.
Budweiser APAC is under no obligation to and expressly we disclaim any such obligation to update the forward-looking statements as a result of new information, future events or otherwise. For discussions of some of the risks and important factors that could affect Budweiser APAC's future results, see risk factors in the company prospectus filed with the Hong Kong Stock Exchange on the 18th of September 2019 and the 2019 Annual Report published on the 17th of March of 2020.
I would also like to remind everyone that financial figures discussed today are provided in U.S. dollars, unless stated otherwise. The percentage changes that will be discussed today are both organic and normalized in nature, unless otherwise stated. Percentage changes refer to comparison with the same period in 2019. Normalized figures refer to performance measures before exceptional items, which are either income or expenses that do not occur regularly as part of Budweiser APAC's normal activities. As normalized figures are non-GAAP measures, the company discloses the consolidated profit, EPS, EBIT and EBITDA on a fully reported basis in the press release. Further details of the 3-month 2020 results can be found in the press release published earlier today.
It is now my pleasure to turn the conference over to Mr. Jan Craps. Sir, you may begin.
Thank you, Desmond. Good morning, good afternoon, everyone. Thank you for joining our earnings call for the first 3 months of 2020. I hope you, your families, your friends and colleagues are staying healthy and safe.
As we experience the COVID-19 pandemic, I would like to express our most sincere and deepest gratitude for the healthcare workers. Their efforts have been monumental in keeping our community safe in Asia Pacific. They continue to inspire us to stretch our abilities and become part of the solutions in our communities. I would also like to extend our sympathy and gratitude to over 28,000 of our colleagues who rose to the challenge and stayed resilient against adversity. Our people continue to be our greatest assets.
During our call today, I will first highlight our operations in response to the COVID-19 pandemic during the first quarter of 2020. I'd also like to spend some time to discuss the situation in each of our key markets before handing over to Gui to discuss our earnings and liquidity in further detail. We'll then open up for questions.
The health and safety of our colleagues, business partners and communities have been and will remain our top priority. We diligently put in place different measures according to the local government guidelines to provide a safe working environment for our colleagues. We implemented various social distancing and flexible work arrangements such as working from home and rotational on-site schedules. We've provided protective equipment and increased disinfection routines at all of our work locations. We established dedicated electronic health reporting channels and provided additional training and technology tools to empower our teams to effectively adapt to the fast-changing work environment during the pandemic.
We also supported our communities and business partners through various initiatives across the region. We've provided protective gears to healthcare workers on the front line, monetary support and clean drinking water to communities in need and various commercial support to our long-term strategic business partners.
As a company of owners, we remain agile, disciplined and resilient. We've worked extensively to minimize the impact on our supply chain within local government guidelines. To date, we have obtained licenses to operate all of our breweries, except for a couple in India due to the continued lockdown. Our robust supply chain network equipped with cross-brewing capabilities positions us well to weather this storm.
We've also adapted our commercial plans in an agile manner and effectively reallocated resources to the most relevant channels across the region. Although the majority of our commercial expenses for the quarter had already been incurred for the Chinese and Lunar New Year campaigns before the outbreak, we have since reassessed and further reduced uncommitted costs and expenses.
For example, our brands leveraged innovative trade programs and digital platforms to engage with consumers and address new consumer trends. We've also reassigned sales personnel from the on-premise channel to the in-home channel after providing them with sufficient online training. The results of these additional cost initiatives started to take effect mainly in March 2020, and are expected to continue in the remainder of the year as we continue to work towards a healthy recovery of our business.
Now let me spend some time on the operations in our key markets during the quarter before I turn it over to Gui for the financial results.
In China, we had a strong start of the year during the first 3 weeks of January, primarily driven by a very successful CNY campaign. The COVID-19 outbreak escalated right before the CNY holidays in late January. Soon after, many provinces implemented strict measures to contain the outbreak. Nonessential businesses such as restaurants and nightlife were closed and people stayed home nationwide.
During this lockdown period, which was mainly from late January through the end of February, we observed almost no activities in the nightlife channel, very limited activities in restaurants and a meaningful decline in in-home although e-commerce accelerated its growth significantly.
During this special time, we recognized our brands has an important role to play. We reallocated our resources to address consumer passion points. For example, we launched a community purchase program in key regions to facilitate group buying with our products on sites in the housing compounds so our consumers could continue enjoying them during the lockdown. Budweiser launched its e-clubbing program, where consumers can enjoy performances from local DJs while simultaneously ordering Budweiser on TMall. Harbin also partnered with e-sports key opinion leaders to host live streaming events during which consumers can enjoy exciting content and make purchases in our store on JD.com.
As a result of swift resource reallocation and effective execution, we grew our leadership in the e-commerce channel to almost twice the market share of the next brewer by the end of March. Our volumes grew by strong double digits in the e-commerce channel overall, and triple digits in the fast-growing new retail sub-channel, including Meituan, Eleme and Hema.
In the in-home channel, despite a meaningful industry decline, we continue to gain market share by value, driven by strong performance in the Premium and Super Premium segments according to Nielsen. Although the performance of our Premium and Super Premium portfolio was impacted by the channel mix, it continued to substantially outperform the other segments and grew its contribution across all channels within our portfolio. We also proactively worked with our customers to further reduce inventories across all channels to prepare for a healthy recovery.
Since March, we've observed an encouraging trend on business recovery as various government incentives were implemented to stimulate business recovery and consumer spending. We estimate that over 95% of our -- of POCs in the in-home channel, over 85% of restaurants and over 25% of nightlife had reopened towards the end of April. We estimate that our volumes in China declined by approximately 17% in April, while staying at healthy inventory levels. We're excited for many of our POC partners return to the normal level of their business in the course of the second quarter, and together, we are preparing for a healthy recovery as more and more consumers resume socializing.
In South Korea, the COVID-19 situation deteriorated significantly after the outbreak in Daegu in late February. However, businesses remained open across most of the country, although people practice social distancing measures. As such, we observed a meaningful decline in demand mainly in the on-premise channel. Since mid-March, thanks to the effective government measures, consumer sentiment started to improve. We focused on connecting with consumer in a relevant and meaningful way.
We continue to invest in Cass, which remains the leading beer brand in the country and connects well with the food occasion. We engaged with the famous culinary celebrity, Mr. Baek, who has a great passion for beer, to highlight how Cass matches perfectly with Korean foods. As a result of our targeted commercial actions, we estimate that we grew total market share quarter-over-quarter primarily driven by consistent performance in the in-home channel and month-over-month market share gains in Korean restaurants.
On the supply side, we have licenses to operate all of our breweries though we have adjusted our operations dynamically according to the lower demand. In addition to implementing protective measures for our colleagues, we also donated sanitary products to the Red Cross Daegu Branch and clean drinking water to communities in need. As the industry leader, we provided strong support to our business partners during this difficult time.
In April 2020, we continue to observe an encouraging trend of business recovery. Although we are facing a difficult comp in revenue due to our price increase last year, we're excited about our commercial plans for the remainder of the year in South Korea.
In India, a national lockdown in response to COVID-19 was implemented on March 24 and extended until May 17. Although all of our breweries were closed initially according to the government guidelines, we have now received permits to resume operations at a majority of our sites. In addition, we have recently observed significant easing of restrictions on the in-home channel in India, which accounts for the majority of our volumes in the country. Nonetheless, it is difficult to estimate the full impact on our business as the different restrictions continue to evolve by district and by states.
In Vietnam and other Southeast Asia markets, we are also starting to experience the impact of the pandemic on our business, which is expected to be more significant in the second quarter. For example, Vietnam implemented strict lockdown measures from 1st of April through April 22, with a slow recovery due to gradual easing of social distancing measures since the end of April. Some of the other Southeast Asian countries continue to be in full lockdown.
Having said that, we are making monetary donations through the India Nightlife Collective, a COVID-19 emergency relief fund for at-risk nightlife workers in India. And we launched the Beck's Ice My Home, My Stage virtual rap contest campaign in Vietnam to amplify positive messages during this crisis.
I'll now pass it on to Gui to take you through our financial results of the quarter. Over to you, Gui.
Thank you, Jan, and good morning, good afternoon, everyone.
Similar to Jan, I would also like to start by extending my gratitude to our colleagues who have been working tirelessly to protect the value of our business across the region during this difficult time.
Our business was strongly affected by the pandemic during the first quarter of the year. Overall, volume declines of 42% were primarily driven by the COVID-19 outbreak, coupled with a tough comp due to higher volumes in South Korea in the first quarter of 2019 in advance of the price increase that was implemented in April 2019.
Revenue declined by 39%, driven by the decline in volumes. Revenue per hectoliter growth of 5.7% was mainly driven by a favorable country mix, continued premiumization in China and the benefits from the tax reform in South Korea. Cost of sales decreased by 29% overall, but increased by 22.3% on a hectoliter basis primarily driven by non-variable costs, such as depreciation and amortization and loss of operational efficiencies due to volume declines.
SG&A decreased by 10.8%, mainly due to lower distribution and sales and marketing expenses. Admin expenses remained stable, as the savings of certain overhead costs were offset by additional costs related to the COVID-19 pandemic. The results of our cost-savings initiatives starts to take effect mainly in March and are expected to continue in the second quarter and the remainder of the year. As a result, our normalized EBITDA declined by 68% and normalized EBITDA margin was 17.9% during the first quarter of 2020.
Our income tax expenses this quarter included an accrual of $34 million for a tax audit in South Korea. This audit, which usually takes place every 4 to 5 years, covered all our taxable items in the country from 2014 through 2018.
So before opening up for questions, let me spend a moment to talk about our liquidity.
Even amid the challenging business environment in the region, we maintain our strong balance sheet as a result of proactive liquidity management actions. We have identified additional efficiencies in our working capital while having access to different internal and external funding sources to support our operations as needed.
Although we only disclose our balance sheet figures in our half-year and full-year results, given the importance of liquidity in these volatile times, we would like to highlight that our cash position was over $900 million by the end of April '20. We continue to exercise our strict financial discipline and apply a ZBB approach in our sales and marketing and CapEx investments to deliver long-term value for our shareholders.
So with that, Jan and I are here to answer any questions you may have.
[Operator Instructions] First question comes from the line of Lillian Lou of Morgan Stanley.
Thanks a lot, Jan and Gui, for the very detailed explanation of the business situation and also outlook.
So my question is a little bit more in detail, aligned with first of all, the current situation and also the recovery pace. It's more on pricing because I think the positive side of the first quarter result was ASP has gone up, both in China and Korea. I just wonder why -- what's the key drivers because I think you explained that it's more premium -- premiumization as well as in Korea, they keep the tax benefit.
But any particular reason behind it? Because I think the market also expected that there was a COVID-19 greater hit on trade channel, which is more premium channel. There could be a mix downward shift, but it still show -- didn't show in the ASP. So I just want to know a little bit more in detail about the driver.
And related to that is more on the outlook of the price. What's our pricing strategy in China and South Korea in the coming months and probably in even longer term? Any price hike plans in China, in particular, because there has been market talks about competitors raising prices and also in some region, even for us, there are market talks about the potential price hike. Just want to get a little bit of clarification on this as well.
Sure. Thank you, Lillian. Thanks for your questions.
You're right. In the first quarter, we had a positive net revenue per hectoliter results. And you're also right that despite a negative channel mix, the key drivers for us, as per usual, is premiumization.
Even if we would have a negative channel impact based on nightlife recovering at a slower pace than the other channels, it's important to know that within every channel that we sell beer in, premiumization continued throughout the first quarter. So we would have seen our Premium, Super Premium business contribute more during the first quarter than last year in every single channel.
On top of that, we would have had the positive VAT impact. Actually, both in China, this is the last quarter of the VAT reduction that happened last year on the first of April. And then indeed in Korea as well because of the excise changes that happened on the first of January. And I should add as well, this positive revenue per hectoliter is despite the impact of the deloading, right? So like we said in the press release and the notes, we are at healthy inventory levels today and also at the end of the first quarter.
And as you might know, if we reduce the inventory levels, but we continue, of course, our wholesalers continue to sell the beer that they had in stock to reduce inventory, that means that we continue to pay discounts on the sales that they do, even if we don't have as high shipments in our P&L, right? So that means that the discounts would be higher than the first quarter, driven by a reduction of the inventory, right? So this increase in net revenue per hectoliter is there because of premiumization of VAT and despite the channel mix and despite the inventory reduction.
If we look out a little bit further, the main driver will continue to be mix, driven by premiumization, both in the short and the long term. We are very confident on our Premium strategy. And just like in the first quarter, we expect our brands to continue to perform in the future with the underlying trend of premiumization.
Yes, we are always looking at opportunities tactically for price increases, which can be different by channel and by province. But I would say the main driver for our business is premiumization. Well, I mean, well more important than any rate changes that we might do on a tactical level.
Next question comes from the line of Euan Mcleish from Bernstein.
I'd like to ask you a couple of questions. The first one is about the nature of the on-trade outlet reopening and the longer-term strategic implications of that. Can you maybe tell us a bit about the main barriers that you're seeing in the outlets reopening? And what's happening to sales within outlets once they've reopened?
And then from the longer-term perspective, are you seeing some of the closures being permanent? Are you seeing a change in the kind of split or mix of access points for alcohol across the country? And how do you think that is going to impact the longer-term growth opportunity in any change in the outlet mix?
Good morning, Euan, and thank you for your question.
So I would say that probably the main barriers for reopening are linked with social distancing, right? So as you can imagine, e-commerce, social distancing is complete, right? There is no social contact. In-home, social distancing is also easier to implement.
As we get to Chinese restaurants, it's, of course, a little bit more difficult to implement. In nightlife, especially in the closed spaces, that is probably, Euan, one of the latest channels to reopen as government regulations get implemented in different sales channels. So it is truly different by channel, just by the nature of the channel and the impact of social distancing on the reopening rates of these channels and sub-channels.
It's also different by province and by city, just based on the number of cases that would have been active, right? Today, especially China is in a much better situation, also South Korea, and so we see that as cities and provinces go to lower health warning levels or even go to normal health warning levels, we see a gradual relaxation happening, which can be different by province and by city. And so these are really the key drivers of the reopening rates. And the main barrier is really the social distancing that is in the nature itself of the channel.
Talking about the sales recovery in the channel, we actually see quite encouragingly that when POCs reopen, we see business coming back, right? So initially, to give it a little bit more color, initially, we would have seen, for example, in Chinese restaurants opening that we would see higher levels of O2O, so home delivery of meals. And as a consequence, maybe a slower ramp-up of beer sales as Chinese restaurants reopens.
But as we look at it today in the last number of weeks, Chinese restaurants' opening rate is very similar to our beer sales rates before the crisis for any venue that reopened. So quite encouraging signs, and we would see the same in nightlife as well. Percentage reopening rates are relatively close to our beer sales rate. It's not that we see a significantly slower pickup of beer sales with the reopening.
Permanent versus temporary, that's more of a qualitative pressure, right? We are still relatively early in the recovery. However, I would totally qualify it as rather temporary. We know that there are real consumer needs for social contact rather than entertainment, which are not different because of the crisis. We believe there is an underlying consumer need for social contacts and entertainments.
There are shifts between sub-channels, right, especially when we look at nightlife. And even within Chinese restaurants, we would see different sub-channels evolve at different speeds. And also with the reopening, we would see certain sub-channels opening faster than other sub-channels. So I would say, the more open the environment, the faster it reopens, the more close to the store that reopens, just again back to the social distancing measures.
But also, as you know, Euan, we have a portfolio approach, right? We are present in every segment in the market. And especially as we go through the nightlife channels, the traditional nightlife would have been very important for Budweiser as we go to more modern, Western bars, Western restaurants, et cetera. Clubs, we are -- we have a very strong Super Premium portfolio, which is answering different consumer needs with different styles of beer, and that portfolio becomes more important.
And as you also know, with the High End Company, we have developed a very specific route to market to cover these channels and so we are in a very good spot to serve our customers in a very good way as the sub-channels reopen.
So to be honest, today, we don't see any impact in the longer term on premiumization. As you know, China is only at about 16% Premium plus Super Premium sales volume versus total volume, where in higher maturity markets, we see that at 35% to 45%. And so we are a strong believer that this is rather temporary and we will reconnect with our normal growth in the future.
Great. And just as a second question, I'm trying to understand to what extent all the bad news is kind of flushed out now. So it would be helpful if you could maybe comment on where you see the biggest areas of risk from here going forward. And where you see the kind of primary green shoots.
Yes. I think when I think about the risks, probably 2 that I would highlight, right?
One is a potential increase of number of cases of COVID-19 in the future. We are very encouraged with how the government has managed the situation. Across Asia, I should say, right, I think there is a number of examples to be taken by how strictly the government has implemented the changes but also how strongly the population has implemented the social distancing in a very disciplined way.
However, we know, and I'm sure you follow that as well that in the last number of weeks, we have seen some spike left and right. For example, today in Heilongjiang is a good example where we've seen a slight pickup again of number of cases.
What is encouraging is that everybody is very close to the situation. Even when there are new cases, there is a very quick and swift reaction. And we see that measures can be taken more on a local basis versus a full national basis which I think is encouraging for us as a business and population at large.
The second risk, of course, is the pace of recovery in the on-premise. As we said, 95% in in-home at the end of April. So Chinese restaurants, 85% and above since the end of April. So very encouraging there. Nightlife, we do see a consistent recovery week after week. But of course, we would like to see nightlife recover in a strong way in the course of the next coming weeks and months.
Opportunities, I would say, our strategy is still relevant for the future, right? I think premiumization, biggest opportunity in China. And I mean, we see a lot of our competitors going in that direction. But as you know, we've been on this track since several years, and we believe we have a very strong portfolio and route to markets to continue to win in this trend.
We continue to see a lot of opportunity for expansion, both in geography and in channel. And then combined with digital, we see an acceleration of the trends towards e-commerce, and as you know, well placed in e-commerce, right? And we expanded our lead almost twice the market share of the #2 in China.
And then, of course, M&A remains on our agenda, right? When we did this IPO, we immediately said that we did see this as an APAC platform that would be a good platform for continued inorganic opportunities as well, which, of course, we always continue to look at.
Our next question comes from the line of Linda Huang from Macquarie.
Management, I have 2 questions. The first one is regarding for China. Definitely, we are seeing that the second quarter will have a certain improvement from the first quarter. And -- but we see that in the first quarter, we -- especially the margin, we see the big decline. So how do we see that the margin recovery for the next coming quarter?
And I also want to know that for China because right now, more people -- they, some people, they're talking about the consumption trade down. Just wondering that whether you see this is happening in beer market? And if this is happening, how will management try to react to this consumption behavior change?
Yes. So thank you, Linda. Good afternoon. So we've seen a strong reopening by channel, right, as I described before. So I mean, that's really in my view, the strongest reason to believe is that we've seen week after week an improvement in the sales channel reopening rates, different by channel but very consistent within every channel. Some channels, back to normal. Some channels, close to normal. Some other channels, we hear encouraging signs, and we see encouraging signs in the markets.
The other element for the second quarter, and as you know, we didn't give explicit guidance, but just to give you some color, right? When we see healthy inventory to start, that is important, right? It's difficult for us to see where competition is at, and I'm sure it's the same for you. But when speaking for ourselves, we know we're in a healthy inventory to start, which means growth on the volume front but also on the net revenue per hectoliter front. That should help us as we kind of start from a good and healthy position.
On the flip side, I would say we do have a difficult comp in the second quarter. As you probably remember, last year, in Korea, we did the price increase early April. So we would have that comp in the -- especially in the second quarter. And then as you remember as well, probably last year in the second quarter, we always have these kind of potential shifts between June and July, depending on when wholesalers decide to take that inventory in, whether that's at the end of June or early July to go for the summer inventory.
Last year happened to be a little bit overweight in June. So you probably remember, we had a very strong second quarter as a consequence and a softer Q3. So that, of course, will play in the comps this year.
Difficult to say what will happen this year. That might be stronger again or softer. We don't know that. It's really the wholesalers who decide it based on their cash position, et cetera. But for sure, last year was higher than average as we flagged in the prospectus last year. We have encouraging signs, right, as we start the second quarter. We decided to disclose our April numbers for China, right, where we were minus 17% in volume, which obviously is quite a bit stronger than the first quarter. And we do see continuation of channel reopening happening. So we were very encouraged seeing that week-after-week improvements.
And yes, and if I just can add one comment on the margin side, right? As we have said before as well, when we look at margin, right, the first driver for margin expansion is premiumization.
So as Jan mentioned before, of course, we still continue with a strong premiumization trend in China in terms of brand mix, right? Even though the first quarter of the year, as we pointed before, was affected because of the channel mix, right? So as nightlife continues to resume its operations, we should hopefully see the channel mix improving as well, which will, of course, impact the overall results in terms of mix.
And then the second driver for margin expansion is operational leverage, right, as we have said before. And of course, every time that we have a big hit in volume as we had in the Q1 caused by the pandemic, we have a natural operational deleverage in our results, right, because there are some part of our costs that they are fixed as depreciation and amortization, right? They don't change due to a volume change, right, due to a volume reduction.
So it's just natural as well that, of course, the more impacted we are on the volume side, the more impacted we're going to be on the operational deleverage side as well, right? So of course, both the channel mix and the operational deleverage for us, they were key figures that impact our margin during Q1. And though we don't give any type of guidance in terms of margin for the remainder of the year, assuming those 2 things improve, we should also see consequently the margin improving.
And the follow-up question is regarding for Korea. Because I know that it seems to me the Korean market in the second quarter, we also see a certain improvement. But right now for the Korean market, especially we can see your competitor is very aggressive, especially in the restaurant channel. And there is always a debate in regarding the Korean market, whether this will be just only cyclical or like a structural for Budweiser. So I just want to know whether management -- you can share with us how -- or you give us some of the comfort, what have you seen in related to the competition in the Korean market, particularly at the new product, your OB Lager? And especially a comment on your -- the competition in the restaurant channel. So can you give us some comfort regarding for your Korea business?
Yes. Thank you, Linda. I see that you're close to our Korea business. So yes, in Korea, we've seen week-over-week improvements in the industry especially since the end of February, when there was the outbreak in Daegu and the social distancing, as a consequence, it happens.
What is encouraging for us is that we have a quarter-over-quarter market share gain in South Korea. For the Q1, market share was higher than the Q4 market share of 2019. When we look at the different channels, we actually had consistent results in in-home. So we actually had a good performance in the in-home channel. And in Korean restaurants, to your account, we saw a month-over-month market share gain in Korean restaurants. So breaking the decline trends from before and improving our market share in a sequential basis.
On top of that, of course, we will get the tax policy benefits, which we have already seen in our results in the first quarter. On the downside, when we look on the second quarter, there will be this headwind of the price increase of April last year, which will come against us.
But we are quite confident on our strategy in South Korea. Cass is still, by far, the strongest brand there and the leading brand in the industry. We're also winning in the premium portfolio. We're now 3 out of the top 5 brands in South Korea. So here, we're quite confident with our strategy and our team there.
Next question comes from the line of Mark Yuan from Jefferies.
Thanks, Jan and Gui, for the presentation, and I hope everybody stay safe, too.
And my first question is on China inventories. How is the China inventory situation in China now especially in nightlife and other on to China? And if there's any product nearly expired, what will you do to help distributors to clean up their inventories?
And my second question is on the growth strategy after COVID-19. In your announcement, you indicated that China and geography expansion will be a key driver. Could you share with us like with China, in what region do you see most opportunities and you would like to allocate more resources?
Sure. Thank you, Mark. Good afternoon.
So channel inventory, we have destocked inventory, more or less, across the board. So of course, as we went into Chinese New Year, we had a very strong start of the year in the first 3 weeks. And that would lead to higher inventory levels, especially in the trades. And so we came back towards the end of March and then continue towards the end of April to healthy inventory levels across the board, which helps us to start the second quarter at the right level. And of course, as you can imagine, that also supports the cash flow position of our wholesalers, so they don't need to tie too much cash into high inventory levels. It will also help us start the summer with a normal inventory level.
Specifically into nightlife, we don't really go channel by channel. But I would say, generally, this will be true across all the channels. Some specific venues that are not open yet, of course, we will access them when they open up. But generally speaking, when you look at the vast majority of our customers and wholesalers, we would be in a healthy position.
And then, of course, if you look at last year, at the end of the second quarter, there would have been a higher than normal inventory level, like we disclosed in the prospectus last year, just simply by the pace of inventory taking that wholesaler hits in June last year, which can change between June and July. If we look back historically at China, there's typically some changes between these 2 months as wholesalers build up for summer.
If you go to the second question, which was growth or expansion across China, I would say, as we look at the different regions, as you probably remember, we have an expansion strategy where we look at different drivers. And we do quite a detailed analysis based on our market share in every province and even every city. And then we cross that with the level of premiumness or premium mix within every given province or city.
We go quite granular in that. We track about 250 different cities in this expansion model. And we have different strategies depending on our market position, the level of development of our portfolio in each of these parts of China. So if you are in a province that we are in a very strong market share position with a high premium mix, we'll typically allocate a lot of resources to our Super Premium portfolio because the market is ready to continue the premiumization in the future.
If you go to an area where premiumization is happening, but we are in a lower market share, typically, you would see us drive Budweiser as a priority first in nightlife because that's where we develop the brand in the on-premise channels. So it's really a differentiated strategy by channel and by province, even at the city level. And we've built over the last 10 years quite a sophisticated model for that. Because, of course, China is a very big country, and the averages don't really work in China. So we have quite a sophisticated approach as we invest in our expansion model.
Thank you for the questions.
Next question comes from the line of Lincoln Kong from Goldman Sachs.
I have 2 questions on China. So one -- the first one is about the incentives. Every year, I know we have some internal growth target for our employees. But given that this year, due to the outbreak, I guess, the original target is difficult to achieve. So in this case, how are we keeping incentivizing our employees? Are we adopting more proactive measures on them? So that's the first one.
And I guess I'll just ask a second one directly. So second one is now as we approach the summer time, so for this year, do we still foresee a relatively strong summer season? How are we prepared for that?
I know in the press release, we talked about we actually are doing more additional cost initiatives and control some of the commercial expenses into the second quarter. So what are those factors? And how we sort of balance those cost control versus the summer season?
Sure. Thank you, Lincoln. Thanks for your questions.
So first, regarding our employees, I think it's clear that we appreciate the resilience of all of our colleagues, right? It's been a very difficult time for every one of us. And we've seen a lot of ownership and strong resilience with our colleagues, taking a lot of initiatives to support our partners and our customers on a day-to-day basis.
Our compensation system has different components. And depending on kind of the situation, we can be flexible in targets, and that's what we have done at the individual level. We can always take into account the situation and look into how the KPIs should be set.
This year, for example, given the very special circumstances, we decided to invest in a summer incentive for all the frontline colleagues, whether that's sales front line or brewery front line to incentivize and to walk the extra mile and really serve our customers in the best way they can. And that's probably a little bit against the trend, but we find it's very important to have all of our colleagues very excited and engaged to work hard for the business and go for a very strong recovery in the summer.
And that, of course, then gets linked to performance and then our business recovery phase to make sure that there is a full alignment between the summer incentive and the company results. Going through the summer, we are very encouraged with the reopening rate of the different channels. I think especially China but also South Korea is probably leading the world when you look at the recovery speeds, the containment of the virus and as a result, the recovery of our business.
Again, we are starting off a good base as well from an inventory position point of view. We are very confident in the strength of our portfolio. As you know, we cover all the different segments in beer. We know we have momentum in Premium and Super Premium, and we've seen a continued growth in premiumization and across each individual channel. And so it's very important for us to continue that.
But as we also see more tactical opportunities in other segments, as you know, we have sizable brands in every single beer price tier. So we can also take more tactical opportunities if they present themselves in the future. And we're, of course, watching the market very closely to make sure we are competitive in every single part of the business.
We decided not to disclose any innovations in our press release, but suffice to say that as every year, we are quite excited as well with our innovation pipeline. And there will be more innovations disclosed in the coming weeks. So I would encourage you to stay very close to our business because we are very, very excited with the plans we have from an innovation perspective as well coming to you in the next coming weeks and months.
Thanks for the questions, Lincoln.
We have time for one more question. Our final question will come from the line of Chen Luo of Bank of America.
I've got 2 questions on the long-term trend or outlook. So 2020 has been severely impacted by the pandemic. But assuming COVID-19 is here to stay into 2021, but might not be as severe as this year, can we say that 2021 could be a largely normalized year? And under these circumstances, will our KPIs for senior management in 2021 be largely back to normal? This is my first question.
And the second question is more on the competition in the premium space. We noticed that CR Beer is rolling out high-necks in -- nationwide and recently introduced high-necks in [ SeaWorld ] and other competitors are also turning pretty aggressive in the premium space. How does that dynamic change our strategies in premiumization?
Thanks for your questions.
On the first one, obviously, COVID had an immediate impact on our business, right? And as you know, our first priority was to keep our teams and our business partners safe and engaged. We've been very close to taking care of our business partners, not only from an inventory perspective, but also offering market intelligence in reopening rates and new consumer trends. We've been reallocating resources to make sure that we guide our business through the changes in an effective way. And as Gui commented earlier, we do remind you that we have a very strong balance sheet with Bud APAC and a strong liquidity position.
If we look at the longer term and 2021 as next year, we are very confident that our commercial strategy remains very relevant. Premiumization, we still see as the biggest opportunity in China, and we're uniquely positioned in that context. And I'll comment a little bit more when I get to your second question.
Differentiating before with our core plus portfolio is also a key priority for us. Growing via adjacencies, we have several initiatives that we have been piloting recently especially in e-commerce and some city level tests to expand our portfolio in adjacencies. And then as I commented earlier, both channel and geographic expansion remain really core in our strategy and in our opportunities for 2021.
Underlying that is an accelerated digitization, especially in e-commerce. Also, in new channels like O2O, we are in quite a good position, and it remains a key priority for us because that channel, even if it is relatively small today in beverages overall, it is more and more important, and we have a leading position in there.
And next to that, of course, inorganic opportunities. I would not minimize that. Of course, always subject to our strict financial discipline, but we do believe it is a key part of our strategy going forward.
Management KPIs, don't really see a reason to change that. So far, especially when we talk about 2021, don't really see any big reason to change our management KPIs.
As we look into the premiumization and our competition, you're right. We've seen a number of moves of some key competitors. As you know, we respect our competitors a lot, right? We believe we have very strong competitors in China. We typically don't comment on our competitors' actions. Obviously, we are, of course, be monitoring every new product launch in the market, whether it's a big or a small one. We're very close to that.
We do see our own High End Company as a real competitive advantage. We have a very strong and diverse portfolio of brands. We're leading every single style and country of origin in China. We continue to see a very strong premiumization happening in every single channel in which we operate, including in the first quarter this year. We have gained market share by value in Nielsen in in-home, led by the Premium, Super Premium brand growth. And we have a route to market that has been dedicated to this High End Company growth with specialized sales teams. And we see it as a key tool to continue to grow our leading position in the Premium, Super Premium segments even further in the future.
They will be complemented with more innovations in the future. As we know, we did the acquisition of the Blue Girl brand early last year in the first half. The brand is performing very well, doing better than average in our portfolio by far. And we will continue to launch new innovations as well to continue to support our premiumization and the High End Company strategy in the future.
So we're very, very excited with our business prospectus and encouraged by the recovery of our sales channels and the continued premiumization we have with our leading position in those key segments.
So thank you, Chen Luo, for your 2 questions.
Thank you. This concludes our Q&A session today. I would like to turn the conference back over to Mr. Jan Craps for the closing remarks.
Thank you, Desmond. Obviously, the first quarter of 2020 was a very challenging quarter for us as well as for our customers and consumers. Our business, however, has been improving consistently week over week since mid-March, driven by the recovery in China and South Korea. In light of the current pace, although different by channel and by geography and our proactive inventory management, we are optimistic about our business recovery ahead of us.
As we look past the crisis, our commercial strategies remain premiumization at scale, differentiating the core, growing via adjacencies and channel and geographic expansion, all of which are supported by our digital transformation initiatives that aim to deliver deep consumer insights and improve our customer experience. We will also continue evaluating and pursuing select strategic inorganic opportunities, subject to strict financial discipline to create lasting value for our shareholders.
We believe that the long-term growth potential of the Asia Pacific region remains structurally intact. Our greatest strength continues to be our people. Our culture of dreaming big and taking ownership is more relevant and stronger than ever. We remain focused on our commercial strategies and our sustainability of Smart Drinking goals to deliver on the long-term sustainable growth of our company.
So thank you very much for joining. Stay safe and stay well, and see you next time.
This concludes today's results call. Please disconnect your lines. Thank you.