Budweiser Brewing Company APAC Limited (1876) Earnings Call Transcript & Summary

Welcome to the 2023 First Half Results Announcement Conference Call for Budweiser Brewing Company APAC Limited, Hosting the call today for Budweiser APAC and Mr. Jan Craps, Chief Executive Officer and Co-Chair of the Board; and Mr. Ignacio Lares, Chief Financial Officer. The results for the 6 months ended 30 June 2023 can be found in the press release published earlier today and available on the Hong Kong Stock Exchange and Budweiser APAC's website. 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 the management's current views and assumptions and involve known and unknown risks, uncertainties and other factors beyond our control. It is 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 especially disclaims any such obligation to update the forward-looking statements as a result of new information, future events or otherwise. For a discussion of some of the risks and important factors that could affect Budweiser APAC's future results, see risk factors in the company's prospectus dated 18th September 2019. The 2022 annual report published in other documents that Budweiser APAC has made public. I would also like to remind everyone that the financial figures discussed today are provided in U.S. dollars, unless stated otherwise. The percentage changes that will be discussed during today's call are both organic and normalized in nature and unless otherwise stated. Presented changes refer to comparisons with the same period in 2022. Normalized figures refer to the 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 2023 first half results can be found in the press release published earlier today. It is now my pleasure to pass the time to Mr. Jan Craps. Sir, you may begin.

Thank you, Anna, and good morning, everyone. Thank you for joining our earnings call. We delivered double-digit top and bottom line growth in the first half of '23 through our sustained recovery momentum in China and strong growth in India. Let me provide some more color on each of our key markets. In China, we have seen a strong recovery of volumes in all channels and city tiers since February. We outperformed the industry based on our estimates. The growth momentum was led by channel reopening and strong sales of our premium and super premium brands. Our revenue and EBITDA in China were above pre-pandemic levels, driven by more than 20% premium and super premium revenue growth for both the second quarter and the first half. In the second quarter, the recovery accelerated with volumes increasing by 11% and revenue expanding by almost 20%. Our premiumization strategy continued to prove effective with our premium and super premium segments increasing their volume weights and the combined volume of both segments growing by mid-20s year-on-year. Budweiser revenue grew by more than 20%, and Budweiser innovations like Bud Supreme and Magnum, grew by strong double digits in the second quarter. We also saw strong double-digit revenue growth in the Super Premium segments, which we continue to see as the next blue ocean in China. Meanwhile, on the digitization front, BEES has been expanded to more than 220 cities, representing more than 45% of our China revenue as of June. In South Korea, our volume and revenue grew by low single digits in the first half, while revenue per hectoliter declined slightly amidst a tough comp, particularly in Q2. EBITDA in the first half was further affected by increased commercial investments and commodity cost escalation. In Q2, we launched the “CassCool” summer campaign along with the introduction of the limited edition “Cass Lemon Squeeze, and innovation that further boosted Cass brand power, which has been expanding for 4 consecutive quarters. In India, we continue to outperform the industry in both the first half and Q2 with strong double-digit revenue growth in our Premium and Super Premium portfolio, which supported a double-digit expansion in overall revenue in the first half. India is now the fourth largest market globally for the Budweiser brand. Before I pass it over to Iggy, let me give you an update on our recent sustainability progress. We have launched a new sustainability program to reduce our value chain partners emissions which is also necessary to achieve our own net 0 ambition. As of now, we have completed this program at 48 manufacturing sites across 26 suppliers, helping them with site-specific carbon footprint maps. We've also made advances in water usage and renewable energy. We lowered our average water usage for beer brewing in APAC to 2.03 hectoliter per hectoliter, which represents a 32% reduction versus our baseline year of 2017. We also went from 4 to 10 RE100 breweries across APAC in the first half of this year. Finally, Bud APAC has been included in Sustainalytics 2023 top-rated ESG companies list for the first time. We have been classified as low risk ranking us fourth out of 84 alcohol companies globally and 10th out of 618 food and beverage companies globally as evaluated by Sustainalytics. I will now pass it over to Iggy to take you through our financial results. Over to you, Iggy.

Thank you, Jan. Good morning, everyone. In the first half of 2023, volumes increased by 9.4% as our business in China continued to recover, further supported by healthy growth in India. Revenue grew by 14%, supported by a 4.2% increase in revenue per hectoliter. Normalized EBITDA grew by 10.7% and our normalized EBITDA margin was 32%. Our net profit declined to USD 590 million, more than fully driven by the release of the tax provision in India in the first half of 2022 without which our net profit growth would have been positive. Cost of sales per hectoliter increased by 3.7% in the first half of '23, driven by continued commodity price escalation and brand mix, partially offset by ongoing cost initiatives. In China, volumes grew by 9.4% in the first half, in line with Bud APAC overall, while revenue per hectoliter increased by 5.5%. Both benefited from the channel reopenings as well as ongoing premiumization, leading to revenue growth of 15.4% and normalized EBITDA increasing by 17.2%. In East Asia, volumes grew by 3% in the first half, while revenue increased by 1.9%. Revenue per hectoliter declined by 1.1% and normalized EBITDA declined by 15.9%. Finally, we reaffirmed the commitment to disciplined financial and cash management practices, allowing us to maintain a solid balance sheet. As of the 30th of June 2023, our net cash position stood at USD 2.4 billion. And with that, Jan and I are here to answer any questions you may have.

[Operator Instructions] Your first question is from Luo Chen from BOFA.

This is Chen from Bank of America. So first of all, congratulations on the strong results, especially in China and India. So I've got 2 questions on the China part. So first, we noticed that in China, most recently, we had a very strong performance of our Premium, especially Super Premium portfolio. But on the other hand, investors currently in general, are very concerned with China's weak macro and also the potential consumer trading down in a weak environment. Do we think trading down will become a concern going forward, and that will negatively impact the future growth of our Super Premium portfolio? And what kind of measures are we going to take if the macro weakness continues in China? This is my first question. I will raise the second one later.

Perfect. Good to hear you again. Yes, I think for China, what is key to remember is that beer is a very resilient category, Premium, Super Premium within beer is a very affordable luxury, which is performing well, and we also expect it to continue to perform well. And when you look at our consumer research, really in China, we split the population in 4 different income groups. And you're right that there are different realities, depending on the consumer group we talk about. When we look at the highest income group, they appear to be retaining the same consumption behavior as before. When we look at the high to middle income group, they are -- I mean they appear to be reducing spending on the reluxury items like, for example, in alcohol expensive, Baijiu and Western Spirits. But in our view, at least in the numbers that we see in our trade is that they do replace it with more affordable luxuries. And in many cases, they actually trade down in a way to Premium, Super Premium beer which in these occasions, is a trade down. But in our portfolio, it is actually a Premium, Super Premium offering. Remember, the price tiers within beer stay relatively affordable if you compare it to many other categories within alcohol. If we look at the middle income group, we continue to see this group spending very well on affordable luxury on Premium, Super Premium beer. And we do see a strong correlation between the growth of this group and increasing demand for Premium, Super Premium beer is very encouraging for our portfolio. When we look at the lower income group, we do see the price sensitivity in our consumer research and the numbers and there is down trading there. But as you know, this part of the brand portfolio is less important for our group in China because, let's say, 2/3 of our business Premium, Super Premium -- so it's much less relevant for this lower income group, right? So we are much less exposed than some competitors to this dynamic. Our main business and our key demographics are in the 2 middle income groups. So they're the high to mid income and the middle income groups. We have seen quite consistent demand for the premium offerings from these target groups. And we also seen in the stated preference in research that they continue to say that they will spend more on beer, about 30% of the mid to high income group that they will continue to spend more on beer. And we know in their spending, the experiences and the rituals are quite important when they decide to spend for Premium and about 75% of Chinese consumers do say that they are willing to pay extra for the emotional value offered by a brand. And as you know, we do have a strong brand power in our Premium, Super Premium brand portfolio. So we're actually quite well positioned for this consumer demand. We see premiumization continue to be ongoing. I mean it was there during COVID as well, but less apparent in our numbers because of the channel closure at a time. We do see today a premiumization ongoing and, of course, further supported with the channel reopening. So we do see us in a very good position to continue to take a disproportionate benefit from the reopening in 2023 with the support of the channel mix coming back in our advantage, we are particularly well positioned for the Premium, Super Premium segments, which we continue to see strong demand for in H1, but to be honest, we are quite optimistic on that front. Thank you for the question, Chen.

My next question is on the market dynamics of our stronghold regions. Can we have some additional color on the premium growth of our stronghold markets such as Guangdong, Fujian and southern part of Zhejiang, how are channels and geographic -- geography evolving in this context?

Yes. Thank you, Chen. I think the -- we continue to see a very strong recovery momentum starting in February this year. We actually see ongoing premiumization across all city tiers. So it's not only a Tier 1, Tier 2 phenomena. We see it in Tier 3, Tier 4 as well. So we -- specifically on our stronghold markets, like you called them, we -- I mean I can disclose that we continue to deliver -- I mean, we actually delivered this year double-digit revenue growth in these markets. If we look at it versus China, it's pretty much in line with our overall China performance. So we are driving the industry premiumization in these provinces as a leader there as well. So we're quite happy with our performance in the stronghold markets. And this is also happening, of course, because of our multi-brand portfolio. So when you look at the maturity in these markets, we do offer a differentiated portfolio to them. We continue to see Budweiser doing well with the trading up in the portfolio from Budweiser to the Budweiser innovations like Supreme and Magnum are both doing very well. And then we continue to see driving up to the Super Premium portfolio as well, right? And we do see Premium and above volume rate continuing to increase in these markets. And then especially our Super Premium brands in the stronghold markets are quite important, and we continue to see them very healthy, leveraging the full strength of our Premium, Super Premium portfolio. And as you know, Super Premium, we see this as the next blue ocean in China, but especially in these provinces, it is really a key growth engine. It's not only on geography, we also see big opportunities in channel expansion. As you know, Budweiser was built in a nightlife channel in the past. And like 10 years ago, 80% of the business was for Budweiser was in nightlife. When we see the opportunity now for our Super Premium brands outside of nightlife, we expect to see a very similar movement as we did with Budweiser, starting from nightlife into in-home and Chinese restaurant channels, we can see a very similar opportunity for the Super Premium brands, and we are effectively covering our expansion strategy, both in a geo, but also in a channel way. Thank you for your question, Chen.

Your next question comes from Xiaopo Wei from Citi.

Can you hear me?

Yes, we can, Xiaopo.

I have 2 questions on China as well. I will ask one by one. The first one, it is about outlook. As we know that there are so many uncertainties on China macro kind of consumption in news exactly what the investors have been focused on. Could you share with your color on your priorities among the probability, top line, market share? And what are possibly positive or negative factors that may impact your premiumization process and the financial target? If possible, could you share color for both 3Q second half of the year and 2024 as well. I'll take a pause here.

Sure. Thank you, Xiaopo, good to hear from you. As a company, we believe in the culture of young, right, not old. So I don't really want to choose between top and bottom line, and I don't think we should, especially in our case in 2023, you know our strategy on premiumization, expansion and digitization. We believe this will be key for us to continue to drive the industry up in 2023 and just like we did in H1, we are quite confident our strategy will also continue to work in H2. If you look at premiumization, as I mentioned, right, we saw premiumization continue as an underlying trend throughout the pandemic. But of course, now that we are post COVID, you see much stronger output of that because we also have the tailwind of the channel we opening. So you would have seen that actually Budweiser had a strong growth of more than 20%. And our Super Premium brands grow more than 35%. So we actually see a very strong business performance in the first half. If you look at the expansion initiative, we are -- I mean, still today, despite the size of the Budweiser brands, only 1 out of 3 stores today in China is selling Budweiser, right? So less than 35% distribution, Super Premium less than 10% distribution. So expansion remains a very big opportunity and priority for us. As we mentioned earlier, right, we want to go Budweiser this year from 200 to 220 cities. I'm happy to report that we are on track, actually slightly ahead of track on expansion, and we do see double-digit growth in these markets, and we are on track to deliver on our ambition to significantly expand our distribution footprint this year. Thirdly, on digitization, we continue to support our top line growth and bottom line growth using technology to enable that. We are basically connecting digital consumers with our sales channels, we are supply chain efficiency. And so that closed loop that we are building, we really see a strong momentum in our digitization efforts, and we continue to expect to bring more and more good news on that in the next coming quarters. Digitally, BEES is now in more than 220 cities and more than 45% of our net revenue was digital in -- by the month of June. So we see strong momentum in there as well. If I look at Q3 and H2 to be more specific on your question, right, we expect the key underlying drivers to be solid and to continue to drive strong results ahead of the industry in Q3 and in H2. So premiumization trend for middle income households continues. When we look at the comps of last year, we continue to see tailwinds -- we expect to see tailwinds from channel opening -- channel reopening if we compare it to Q3 and Q4 last year. As you remember, both in Q3 and Q4, we had headwinds in the channel closures which will turn into tailwinds this year. And we don't see any significant closures this year in any kind of level of city that would impact this momentum or this tailwind in the third or the fourth quarter. So we continue to be optimistic on that. And as I mentioned, expansion is well on track to basically deliver distribution expansion in the second half as well. And again, we don't see any reason to be pessimistic on that for the second half. So I mean, as you can probably hear by my choice of words, right, we are quite confident on our strategy. We are quite confident on the outlook for Q3 and H2 to continue to lead ahead of the industry by leading premiumization in China. Xiaopo, thank you for your question.

We can see optimism on China outlook. Great to see. And my second question actually is getting more detail of the China growth. We have been half year China reopening from the Investor Day in Wenzhou, we can see great job being done by our team to enhance your distribution. So could you give us more color on your year-on-year movement for your partners, distributor or wholesaler you call it on the probability of a distributor so far and how effective the great work you've been done to help them? And any color would be very helpful.

Thank you, Xiaopo. So as you know, right, majority of our wholesalers have been working with us for more than 10 years, some even more than 20 years. So we have very strong relationships with our wholesalers, and we see a very solid wholesaler base with a very kind of, on the one hand, stable relationships with all the wholesalers we've been working with for more than a decade, maybe even more than 2 decades in many cases. And on the other hand, an increase in new partners that are also seeing the opportunity of partnering with us on the premiumization momentum in China. So as you know, we are leading Premium and Super Premium segments with a very strong brand portfolio. And the basic reason why we have been successfully partnering in a very kind of strong win-win partnership with these wholesalers because we do offer higher margins to our wholesaler partners and if you compare to a core or core plus dominated portfolio. We also continue to see significant room for us to continue to grow together with our wholesaler partners through premiumization and expansion because we really believe the size of the China middle income class will continue to grow whether GDP grows by 5%, 7% or 3%, we expect disposable income will continue to increase on average in China and the middle class households are really critical for premiumization in China. We're quite optimistic for that to continue, and our wholesalers are also betting on that, and then they are with the right partner. On digitization, we do see very strong partnerships with our wholesalers as well. We prefer to disrupt the market together, leveraging technology than by being disrupted in the future. And we are actually as we explained in Wenzhou right in the Investor Day, we want to sell more to more box with better ROI and better service, leveraging technology together with our wholesalers to get there. So we went right at first, right, on this 45% digital net revenue is a good number. It will continue to grow. But this year, we are very focused on going deep, which basically means that we will use this scale to improve our algorithms -- to use algorithmic selling to offer the right assortment of our products to the right store by learning from other successful stores in the same cities and the same city channels. And we also leverage BEES to help our wholesalers communicate and engage with the second tier wholesalers and the stores to sell beer in more stores in the future as well. So we've seen a good successful pickup of our wholesalers on these initiatives. And kind of on another front, right, we continue to invest in our capabilities as well. I actually just came back from a trip to Europe with some of our biggest wholesalers that we brought to the Tomorrowland EDM experience, which, as you know, is probably the most successful festival in the world, and I spent quite some days with our wholesalers as well, connecting with -- at his experience, but of course, also in China, we continue to build on their sales, their finance operations, their people processes with our wholesale excellence programs that are really benchmarked at least in the beer industry. So we continue to develop our wholesaler partners. We continue to grow together with them. And I think they're as excited as I am with the opportunity they see this year and coming years on leading premiumization in China.

We are very looking forward to our next Investor Day then.

I keep talking to Mandy as well, right, she did 2 Investor Days in 6 months. So let's see when the next one will come up.

Your next question is from Euan McLeish from Bernstein.

I just got one question about the competition in Korea, please. So I'd like to dig into your commercial response to the launch of Hite, Kelly brand. How have you been investing to counteract this competitive launch? How is your response this time around being different to the way that you responded to Terra in 2019? And how should we think about the sort of magnitude and the duration of investment this time around. Are we thinking about this as a kind of onetime short, sharp scorched-earth approach? Or is this something that's going to take a more continued investment campaign to get on top of really focusing on what the life of the land is in Korea and where to from here, please?

Great question. Thank you for that. Happy to hear you. Korea, obviously, was a difficult quarter Q2, right? There's no way around it. I think when you look at the financial results, this was not a great quarter. However, we are actually quite confident with where we are. And if you look at our -- the way we reacted this year versus 4 years ago in 2019, I believe we are in a much better position than we were 4 years ago. If I would take you back into 2019. At the time, we went into the summer with a significant price gap because we had let price increase at a time without followership. And at that time, the macroeconomic environment was actually better than it is today. But we went through that summer with a significant price gap, which allowed our competitors to get momentum at a time on their innovation. Secondly, we also did not increase the commercial investments to really pick up the battle, let's say, in the store execution, and that's quite different today as well. So we believe, at that time, we were significantly less competitive than we are today. If you compare that to this time around, our portfolio actually continues to perform very well. Actually, if you would look at the first half, I can disclose that we actually continue to grow market share within the core segments across all channels. So overall market share, I'll give you some more color, but if you look within the core segments, so let's say, Cass HANMAC, Terra, Hite, Kelly, Kloud, all of these brands, right? We actually continue to grow market share in the first half, which if you look at the level of competitive investments, I think kudos to our team in Korea that have been very focused on the execution and protecting the momentum of our core portfolio. If you look at our total brand portfolio, including the premium brands, we grew market share in the on-premise channel, which also you see our strength in the Korean restaurants and the other channels that we continue to grow share, if you look at the total on-premise. If you look at off-trade, we were actually impacted in the Premium channel. So that was mostly driven because of a price gap in the premium segment in the second quarter because we took price in the premium brands in April was not at a time immediately followed by competition. But in the meantime, in July, we actually no longer have a price gap in the Premium segment. So in Q2, we were at a disadvantage in Premium, which impacted our overall market share driven by the off-line channel or off-trade channel. Then if you would look at our brand performance, right, we actually continue to build strong brand leadership in Korea, both in core and premium. In the past years, right, we actually solidified our core portfolio with all new Cass innovation plus the launch of HANMAC. If you look at the Cass brands, we actually continue to grow brand power, which is now 4 quarters in a row, we continue to grow brand power on Cass, right? And as you know, the sum of all the brand power in any given country is 100, right? So for us to continue to grow brand power on Cass in the last 4 quarters is actually quite strong, given the competitive investment level. If you look at the second quarter specifically, we increased our commercial investments to support our innovation campaigns and to be competitive in the marketplace. So we had a strong campaign ongoing on Cass with the cool campaign, right, CassCool in the summer campaign. We did launch a limited edition Cass Lemon Squeeze, which has been selling out much faster than we anticipated, is doing very well. HANMAC has launched a first-ever draft beer with a double smooth draft with exclusive glassware. And on the pack price, we also offered specific packaging options to satisfy the consumer need for more frugality. And so we launched in and outs on the Cass 24-pack 350 ml cans in the in-home channel to be price competitive as well versus competition. Meanwhile, interesting to know for you, maybe less visible if you look at the overall numbers, but we are already preparing the future wave of further premiumization as well. So we did take price on premium, which was a strategic move on the 1st of April because it actually for the first time in many years, is connected the premium price promotion in several channels, including CVS where premium is now higher priced from promotion than the mainstream brands, took a while for the price gap to disappear. But after 3 months, we are now line price -- competition is now a line price with us in premium. And our premium segment is officially higher priced than mainstream. We are, by the way, the only brewer with -- to own our own destiny, right, with a premium portfolio leveraging our global brands of Stella, Budweiser, Hoegaarden, required with a balanced portfolio uniquely positioned to meet Korean consumer needs. And actually, we are expanding or at least targeting to expand the premium segment in Korean restaurants as well, and we launched the Stella Artois 500 ml bottle in Korean restaurants with exclusive glassware mini chalices, small glassware on Stella Artois to create a more premium dining experience with better margins for wholesalers and stores or restaurants in this case, to continue to drive premiumization and bring the premium segments to Korean restaurants. So we're actually quite confident on our strong and healthy brand portfolio and our people capabilities to lead the beer industry growth in Korea. I know the financials have been quite tough in the second quarter. But strategy-wise, we're actually quite confident on where we are with these brands. Thank you for your question, Euan.

Sorry, that's -- is it possible just to have a quick follow-up and clarify, because you talked about in your release, you talked about transient challenges in South Korea. Can you maybe just expand on that timing thing? Like what are you thinking in terms of transient? Are you -- are these short-term investment campaigns? Or is this something that is going to be just the new life of the land?

Maybe this 1 I can -- Iggy, I don't know if you are connected on the line here, but I think Iggy will answer it. Go ahead, Iggy. I will refer you to the cost line as well.

Yes, of course. So I think you -- I mean, we say it's transient, right? Because structurally, as we discussed previously, we see the business doesn't have an impediment, right, from kind of a margin perspective. Of course, there's the commercial piece, right, that Jan just discussed, but also even the cost headwinds, right, that we've seen, they're still strong in the first half of this year. But we expect it to start waning right in the second half of '23 and then into '24. So it's more a series of quarters and a series of years. And I think that's why it's a transient headwind as opposed to kind of a structural issue for the Korea business itself.

Your next question is from Lillian Lou from Morgan Stanley.

I also have 2 questions. First of all, costs of goods sold, i.e., the raw material costs because Iggy just mentioned probably the unit cost is going to trend down, the raw material cost is going to trend down lower sequentially. I want to get a little bit better idea in terms of our own unit cost trend in the third quarter and fourth quarter because in second quarter, we definitely already saw increase in GP margin. Are we going to continue to see that in the following quarters? That's my first question. I'll ask the second one after that.

Sure. Thank you, Lillian, and good afternoon, good to hear from you. So this sounds like a good question for Iggy, right, on our raw material evolution.

Yes. Let's build off of the previous one and that's perfect. So, Lillian, to your question, I think, look, in the second quarter of this year our cost per hectoliter increased by 2.3%, which is actually quite modest. So this was driven still by some of the remaining commodity price escalation headwind that we've discussed previously. Obviously, some of it by premiumization inherently, as we premiumize, of course, is a mixed element too. But we significantly offset that with both cost initiatives and, of course, some of the operational leverage benefits on the volume recovery, which Jan would have mentioned earlier. And then this year, specifically, right, if you look at 2023 on a whole, we did still expect commodity prices to continue to increase year-over-year. However, we did say we'd be much more modest than we would have been last year, right? So '22 versus '21? And then from a phasing perspective, the majority of the bulk of that increase was phased into the first half of the year. And that's just by kind of the hedging policy rates and the spot pricing, right, in the second half of '22 already being significantly lower than it was in the first half of '22. So if we look at it from that perspective and we look at aluminum first, the second half, aluminum pricing was already down to about $2,400 last year from kind of that peak number right of close to $4,000. And actually, even if you pass forward a little bit, you're looking now at numbers holding steady near $2,200 per metric ton and even lower from time to time. Barley pricing was, of course, a bit more volatile, and it tends to be in general, but they've also continued to move lower since the back half of last year and even the start of this year. Specifically, the French crop had a very good harvest driven by weather. And then on top of that, and still not factored in, of course, into future numbers. But the speculation is diminished in kind of the barley markets with Australia and China working on resolving the trade dispute of barley imports, the lifting of that barley embargo, we still expect will reshuffle global barley flows and should pressure prices down, hopefully in that space, right? And of course, these would be positive on a year-over-year basis, less necessarily in the second half of this year, more likely in 2024, but it's still good to keep the top of mind. So I guess, overall, when you put in the raw and packaging material kind of evolutions, we're expecting things to start to flatten in the second half of '23 because we get towards the fourth quarter, and that's good because then the commodity price fluctuations flatten, right, you'll only see premiumization impact in COGS per hectoliter. And then you'll see that, of course, significantly benefits our gross margin. So that's the type of kind of healthy cost per hectoliter driver we want to see. And then, of course, we'll continue to offset that with efficiency improvements and cost management initiatives, many of which are still ongoing to ensure that we have a healthy COGS per hectoliter growth, mainly driven by mix in the future. So it's a bit of summary for this year, Lou.

My second question is also on Korea. Jan just mentioned -- in April, we raised the prices for premium products. So I want to understand the overall pricing trend in China -- in Korea because obviously, the competition, especially on the mainstream products. Do we have any kind of price action to take for our main brand Cass in the second half or maybe in 2024?

Sure. Thank you, Lillian. I mean, as you know, we always take price decisions in the context of the macroeconomic environment. So when you look at the current annual CPI excise adjustment system in Korea, the government did take the excise tax up earlier this year, right? And we review our prices on an annual basis. So Korean government took excise tax rates at 3.57% on the 1st of April, which was in line with the current legislation, right? It was actually 30% below last year's CPI. When we looked at the beginning of the year at the macro environment, we judge that the environment was not there for us to take pricing core despite the excise tax increase. So we actually did not take price on core brands. And so our revenue per hectoliter was negatively impacted in the second quarter because excise was up, but price was not up, right? The good thing is that month-over-month, we do see CPI reducing in South Korea [indiscernible] was about 5.1% full year last year, when we look at the month of June was down to 2.7% in June in South Korea. So we see a gradual decrease month-over-month creating a better environment for future pricing. So we actually took price up in Premium, which, of course, is a much smaller segment. So we took 9.1% in the in-home channel on the 1st of April. And with a 3 months -- 2 to 3 months delay, the markets follow that price increase. So at this moment, we have nothing to announce regarding further price increases. But for sure, we will continue to evaluate the macroeconomic kind of context, and we'll take our revenue management decisions to ensure that the timing is right for our price increase, and we continue to evaluate that in the near future. Thank you for your questions, Lillian.

Your next question is from Christine Peng who is from UBS.

So I have only one question. It is about the Korean market. So if we look at what happened in the Korean market, the EBITDA margin has been quite volatile. I understand there are many factors in play, but in the longer term, what should be the sustainable EBITDA margin investors should looking for?

Thank you, Christine. Let me maybe ask Iggy to take this one.

Sure. Thank you, Jan. Thanks for the question, Christine. So look, we don't provide, obviously, specific guidance. We're cautiously optimistic, right, with margin improvements over time. So going back to kind of the previous comments. There really are no structural issues right in the business that prevent both margin recovery to kind of pre-COVID levels, but also improvement kind of on a sequential basis, right? And so that's why we call these -- some of these factors, temporary external factors or transient factors. Just a reminder, again, in the case of APAC East, right, the order of relevance towards EBITDA margin expansion is first and foremost, rate. Second of all, operational efficiencies; and third of all, mix and kind of the impact of premiumization. So in terms of rate, as Jan mentioned, we were able to take price in our premium brands, right, in Q2, so that only just started to kick in to the Q2 results, and of course, will help more so in the second half of '23. Of course, as Jan mentioned as well, the core segment, right, is the majority of the bulk in Korea. So as a result, right, the timing of any future pricing activity will dictate when we get the margin recovery benefits, right, on the rate side there. On top of that, the second point was the operational efficiencies piece. So there's, of course, kind of our ongoing cost and cost management measures. And so these will continue, and they're actually driving quite a bit of benefit. That's what we see still a structural driver as we discussed in both the Investor Days. And then on top of that, the commodity normalization that I mentioned previously today, that will start to take pressure off in Q3 and Q4 in particular. And then, of course, we're seeing a much better picture if you look at year-over-year spot pricing for '24, right, which is very encouraging as well. And then in terms of premiumization, we didn't touch on it as much today, but we know the country is still under-indexed. We're seeing great results as Jan mentioned earlier, in some of our premium brands in the country. So we have lots of reasons to be optimistic, both in the trend for industry long term, but also our ability to compete and to continue to win within the segment with our portfolio. So it's the third of the drivers, but it could still become somewhat relevant. So yes, in the end, we don't see a structural headwind. If anything, right, we see -- we expect actually to be less impacted in Q3 than we were in Q2 for many of these drivers. And then, of course, as we continue to see industry recovery, let's not forget that industry still has not recovered to pre-pandemic levels. As inflation stabilizes and consumer sentiment recovers and we're in a better position from that perspective, we're confident that with the strategy and the commercial capabilities that Jan shared, we're in a great position, right, for future sustainable growth once these headwinds further ease. So thank you so much for the question, Christine.

Your next question is from Lee Liu from Goldman Sachs.

Hello, can you hear me?

Yes, we can.

Ye Liu from Goldman Sachs. So congratulations on the solid performance in AP West and also congratulations on moving into a new office in Hong Kong. So I have 2 follow-up questions for China. I will ask one by one. We are encouraged to see a strong premiumization trend post reopen so far. But if we step back and look from a longer time horizon, would you please share your thoughts and insights about the premiumization trend maybe in 2024 and also longer term in China? That's the first question.

Perfect. Thank you, Lee. I think -- I mean this allows me to take a step back maybe, right? I think when we look at China, China is already the biggest beer market in the world, right, about 1/4 of the total global volume beer is consumed in China. When you look at premiumization, it is still, let's say, midway versus where it can be in the future, right? Because if you look at the share of Premium, Super Premium beer within total industry, it is less than half of the more mature markets. So we do see a lot of growth potential for Premium, Super Premium. It's mostly driven by the middle income households as I was talking to earlier, right? We actually see the number of middle income households quadruple in the next 10 years, at which point, it should become about twice the number of middle-income households than there is today in the U.S. So it's quite a sizable opportunity. And as consumers will be able to afford more Premium, Super Premium beer, of course, the margin pool will expand significantly. And as per our calculations, right, applying the different kind of price structures and gross margin contributions of the different price tiers in the beer market, we actually believe more than 80% of the future gross margin growth will come from the Premium, Super Premium segments. So -- obviously, that's exciting for us because we are well positioned in these segments. We are leading both the premium and the super premium segments. We believe with our strategy of premiumization, expansion and digitization, we are well positioned to take an outsized share of that growth in the future. If you think about the changes that we see over time, we believe that premium will continue to grow. And then once people have enough disposable income to afford Super Premium, we do believe the Super Premium segment will become the blue ocean, right, in terms of being the new profit opportunities for the beer industry. And of course, as consumers evolve into -- from Premium to Super Premium, they look at more and more differentiated offerings. And you really need a portfolio of brands to win with 1 big brand, you can be winning in the Premium segment where you need multiple brands to be able to win in the Super Premium segment, almost by definition, because people want to be differentiated in different brands and different rituals in different occasions. So when we look at the Budweiser brands, of course, we are playing, catering to the needs of more premiumization within Budweiser by Budweiser Supreme which is serving the more premium dining occasion, Budweiser Magnum with a more stronger taste profile. So we have significant innovations there that are offering strong double-digit growth in the second quarter of this year, right, last year, and we expect it to continue to grow in the future. And then for Super Premium, as the blue ocean, we do see a very strong performance of our portfolio, more than 35% growth in Super Premium. Of course, both the underlying momentum, but also the reopening of the different sales channels versus the COVID period. So we're really planning to leverage this leading position, continue to innovate, continue to play the portfolio and drive the expansion opportunities to really advance premiumization at scale in China. So thank you for your question, Lee.

That's very clear. Perfect. And the second question is about China's commercial investment and competition. So actually, we asked a lot question about clear. But after reopen, how do we look at Budweiser's marketing strategy and also commercial investment level in China in this year and also next year, especially, can you give us some insight to compare the investment level in on-trade on premium channels currently comparing to the level during COVID and also comparing to the level of pre-COVID period.

For sure. Yes. I think, Lee, as we get into this year with stronger growth, right? We basically invest at the pace of our business growth. So we invest in our business and we look at our investment as a percent of net revenue. So as you see our revenue grow double digits, our investment level also grows double digits. And if you look at the last 3 years and you would compare the investment levels, we actually did learn very interesting skills on how do we maintain the efficiency of our investment, right? We become much more agile in our resource allocation, and also our digitization efforts, especially with BEES, but also digital consumer, they help us in becoming more and more efficient. So even as our beer volume premiumizes, you could think, well, maybe the investment level will increase because we sell more Premium, Super Premium volume we're actually able to offset that by being more agile and be more digital, which allows us to be more efficient as well, right? And of course, our cost connecting approach continues to apply so that we can leverage the scale that we have save on the nonworking money and reinvest in the working money. So that logic still continues to apply, and we can use our bigger scale for the efficiency as well. When you look at the absolute levels or the, I should say, the relative levels comparing to previous years, we do see a very competitive right at around this 2022 level on a full year basis. You can have some puts and takes at a quarterly level, right? Last year, we had the FIFA World Cup. We had some other puts and takes with kind of the COVID impact over different quarters. But if you would look at the full year level, we believe we are at about the right level in 2022 as a percentage of net revenue, so that probably helps you in terms of estimating what we expect. And as our volumes continue to premiumize, of course, this will help us to invest more per case in the market with a differentiated kind of execution while providing the right margins and strong margins for wholesalers and stores, we believe if we keep this investment level as a percent of net revenue of 2022, it probably helps us to be competitive and to continue to lead the market for more premiumization. So thank you for your questions, Lee.

We have time for 2 more questions. Our final question will come from the line of Linda who is from Macquarie.

So I have the final 2 question. Number one is about Korean market. We saw that the Korea economies are facing some of the challenges such as high inflation, low consumption sentiment. So I'm just wondering that how will that impact the beer consumption? And how will the company react to this macro impact on the consumption? So this is number one. And number 2 is that I want to also ask about India, because we are quite excited about the India, the beer consumption and the company's premiumization. So can you also please give us an update on the Indian market? And how should we think about this market in 2 to 3 years?

Thank you, Linda. Good afternoon, and thank you for your questions. Yes, I think Korea, I mean, as I said, right, it was quite a challenging quarter, the second quarter financially. I mean first driver was the excise tax, right, which went up on beer by 3.57% in April. And we decided not to take price, given the macro environment in the core segments. At the same time, industry recovery was negatively impacted with consumer sentiment down, mostly driven by inflation, in our view, which started relatively high, continuing from last year. And then volume declined low single digits in the second quarter. Revenue per hectoliter, declining mid-single digits because we had, on the one hand, the tough comp because last year same quarter was COVID recovery after the reopening. We have this excise tax increase without price increase, and then we had some unfavorable pack mix as well as consumers look for more affordable options with the frugality in the context of the kind of macro environment. So EBITDA was impacted by all of this plus, of course, an operational deleveraging and more commercial investments. So that's why financially it actually turned out to be quite a tough quarter. If you look at what we did from a brand perspective, we have strong brand leadership in Korea. We continue to connect with our consumers with, in our view, quite successful marketing campaigns with costs with the summer campaign innovations we launched. We actually sold over 1 million cans of our Cass Lemon Squeeze in 2 weeks' time, so which was well ahead of our expectations. So we clearly struck a core there and our brand performance or brand power is actually quite healthy and continues to do very well. If we look forward, CPI did reduce month-over-month to the 2.7% in June. So we do see consumer sentiment recover, which is a good news in Korea. The government kind of reports on that on a monthly basis. And in June, for the first time, we saw consumer sentiment index above 100, which is the first time it went above 100 since May last year, which is quite good. Industry also has room to grow. We are still below prepandemic level. In Korea, as you probably remember, right, in Korea, the Soju is actually lower priced per alcoholic leader than beer. So in the longer term, we see beer gain share of growth versus Soju, whenever there is macroeconomic impact on consumer sentiment and frugality, Soju typically gains a little bit from beer, but we've seen in the past that comes back when the economy gets back to a normal kind of growth curve. So we're actually quite confident with our strategy and commercial capabilities that we are well positioned for future sustainable growth once these headwinds -- the transient headwinds like Iggy explained earlier will settle. Shifting gears to India. It's kind of the other extreme, I would say, rather. I think India had an amazing quarter and is really with very strong momentum. We are quite excited with the industry recovery in India is well above prepandemic levels, and we actually continue to outperform the industry, both in the second quarter and the first half. So as you know, we are, by far, the #1 brewer in Premium, right? We have 67% segment share in the premium segments. And 2/3 of our net revenue in India is coming from the Premium, Super Premium brands. So Premium and Super Premium revenue continued to grow very strong double digits versus last year. In the second quarter, we achieved double-digit growth in revenue driven by premiumization, but also some other profitability improvement measures. And when you look at the strategy in India, we have kind of 3 different fronts, right? We have the premiumization front, which is key for the top line growth. And we've seen great progress there, right? As I said in my introductory words, it is actually the first time right, that India became the 4th biggest market for Budweiser for AB InBev globally, right? So we were, I mean, 2 years ago 6th, last year 5th, in the first half, we became #4. As you can imagine, the team is excited to get on the podium globally quite soon with the Budweiser brand. And we also continue to grow the segment, the Premium segment as a consequence in India. I would say second driver is productivity, we do have a significant agenda on continuing to improve our profit margins in India, and we have a lot of opportunity, actually quite well mapped out by comparing India to China, breweries, right, if we compare the smaller brewers in China to the bigger brewers in India, there is quite a clear road map on how to improve the brewery productivity, how to leverage RevPAC with the increasing scale of our business and how to have the right footprint there to really optimize our product flows between our different breweries and states. And so we do see quite a clear opportunity in productivity in the future to continue to drive our profit margins up. And then the third big priority in India, a little bit different than in the other markets in Asia is really on moderation, right? So we have quite a strong agenda to engage with the different state governments to improve the distorted tax structure between beer and hard spirits, positioning beer, which it is, right, a beverage of moderation. We want to promote low and no alcoholic beverages with a better route to market and better tax structure to basically advance on the one hand, the health agenda and also differentiates the tax structure for beer versus other kind of alcoholic beverages like it is in most other countries around the world would allow us to unlock a lot of industry growth in India, which can continue to improve the attractiveness of the profit pool there. So we're quite excited our team in India as well with the momentum we have there. So thank you so much for the question on that part of the business as well, Linda.

Thank you. Ladies and gentlemen, 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, Anna. So we -- as you can probably hear by the call, right, we remain very confident about our premiumization, digitization, expansion strategies. We are optimistic about our ongoing business recovery, also specifically in China. So I want to thank you all for joining us today, and I look forward to speaking to you again very soon. Thank you.

Ladies and gentlemen, this concludes today's results call. You may all now disconnect your lines. Thank you.