Anheuser-Busch InBev SA/NV Q1 FY2020 Earnings Call

Are Mr. Carlos Brito, Chief Executive Officer, and Mr. Fernando Tennenbaum, Chief Financial Officer. To access the slides accompanying today's call, please visit AB InBev's website at www.ab-inbev.com and click on the Investors tab and the Reports and Results Center page. Today's webcast will be available for on-demand playback later today. Some of the information provided during the conference 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 and uncertainties. It is possible that AB InBev's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of some of the risks and important factors that could affect AB InBev's future results, see Risk Factors in the company's latest annual report on Form 20-F filed with the Securities and Exchange Commission on the 23rd of March 2020. AB InBev assumes no obligation to update or revise any forward-looking information provided during the conference call and shall not be liable for any action taken in reliance upon such information. It is now my pleasure to turn the floor over to Mr. Carlos Brito. Sir, you may begin.

Thank you, Maria, and good morning, good afternoon, everyone. Welcome to our first quarter 2020 earnings call. I hope you and your families are all safe and well during these unprecedented times. First and foremost, I'd like to extend our deepest sympathies to everyone who has been affected by the COVID-19 virus. I want to express our sincere gratitude to those on the front lines for their commitment to keeping us safe, particularly to the healthcare workers around the world. I'd also like to personally thank our colleagues for the work they're doing to ensure business continuity during these volatile times. The global COVID-19 pandemic has altered life as we know it. However, it has not changed our purpose at AB InBev: to bring people together for a better world, even if being together looks much different now. Today, I'll briefly discuss the results of the first quarter, but I'll spend more time providing an update on our business in light of the COVID-19 pandemic. I'll then hand it over to our new CFO, Fernando Tennenbaum, who will address our financial results and the measures we have taken to exercise financial discipline in a time of significant uncertainty and volatility. We'll then be happy to answer your questions. Our business started the year with good momentum. We delivered volume growth of 1.9% in the first two months of the year excluding our business in China where the COVID-19 outbreak began in late January. The impact of the pandemic on our global results increased significantly toward the end of the quarter, leading to a volume decline of 3.6%, excluding China, and a total volume decline of 9.3%. Beer volumes declined by 10.5%, while non-beer volumes declined by 0.2%. Revenue declined by 5.8% in the first quarter as the volume decline was partially offset by revenue per hectoliter growth of 3.9%. Our global brands grew revenue across the majority of our markets, but their total performance was significantly impacted by declines in China, which is the largest market for both Budweiser and Corona outside of their home markets. EBITDA declined by 13.7% with margin contraction of 331 basis points to 35.9% primarily due to the top line decline and higher cost of sales per hectoliter, resulting from operational deleverage and transactional currency headwinds. Our normalized EPS decreased to negative $0.2, while underlying EPS decreased to $0.51. Let me take you through the key takeaways for some of our main markets in the first quarter. In the U.S., the continued implementation of our commercial strategy led to top and bottom line growth. Our Above core portfolio continued to outperform the industry, supported by the successful launch of Bud Light Seltzer, the Michelob Ultra family, and our regional craft portfolio. Our business in Mexico had a very strong first quarter as it had not yet been meaningfully impacted by the restrictions to contain the COVID-19 pandemic. Revenue grew by double digits, and EBITDA grew by more than 20% with margin expansion of more than 500 basis points. We saw healthy growth across the portfolio and continued our expansion into OXXO, the largest convenience store chain in Mexico. We're now present in more than 6,000 OXXO stores. Following a strong 2019 performance in Colombia, we entered this year with continued momentum. In the first two months, we grew volumes by high single digits and regained share of total alcohol in the quarter while continuing to expand the premium segment where we are the market leader. However, our business was significantly impacted by the COVID-19 pandemic in March, leading to a quarterly volume decline of mid-single digits. In Brazil, we had a challenging quarter. Our top line performance was impacted by a soft industry and unfavorable mix shift as the premium segment, where we underindex considerably, outperformed the industry. We're taking a portfolio approach in this segment with a strong base of our global brands and regional craft brands, both enhanced through initiatives in the pure malt space such as the recent launches of Beck's and Brahma Duplo Malte. South Africa had a strong start to the year and delivered balanced top line growth supported by continued share gains in the premium segment. Restrictions on the sale of alcohol in all channels and social distancing measures were implemented in mid-March, with the complete shutdown beginning on March 27, significantly impacting our volumes. Our business in China was severely impacted by the outbreak of COVID-19 in late January with most provinces implementing significant lockdown measures through at least the end of February. We observed virtually no activity in the nightlife channel, very limited activity in the restaurant channel, and a meaningful decline in the in-home channel. However, the e-commerce channel accelerated significantly where we are the market leader and grew by strong double digits. Since the beginning of March, we have observed a steady recovery in the in-home and restaurant channels, though the nightlife channel is recovering at a slower pace. In Europe, our top line declined by mid-single digits as our business was impacted by COVID-19-restricted measures throughout March. We continue to gain market share across all of our markets, supported by our global brands. We expect that the impact on our second-quarter results will be materially worse than in the first quarter as evidenced by a total volume decline in April of approximately 32%. This decline was driven by two main factors. First, during the month of April, the on-premise channel was closed across the vast majority of our markets. In 2019, this channel accounted for approximately one-third of our global volume. Second, in some of our very relevant markets such as Mexico, South Africa, and Peru, we faced a complete shutdown of our beer operations in April. I'd now like to discuss how we're living our purpose in new ways, coming together with a shared determination to prioritize each other's health and safety, build resiliency in our local communities, and find innovative ways to connect with our customers and consumers. Our teams in China and South Korea were the first to be impacted by this crisis. Their experiences and insights have provided best practices that are benefiting our operations around the world, helping position us for a strong recovery. The health and safety of our people is our top priority. We have paid close attention to the guidelines of the World Health Organization and complied with local government requirements. Moreover, we have implemented additional safety measures to protect our colleagues. We continued to build upon the resources available to support the physical and mental well-being of our colleagues around the world. The strength of our global business comes from our local presence. Because the vast majority of our products are sourced, brewed, distributed, and enjoyed locally, we're deeply connected to our communities. Together with local governments and our partners, we're leveraging our scale, capabilities, and resources to support the fight against the pandemic through initiatives such as producing and donating more than 3 million bottles of hand sanitizer in over 25 countries; packaging and donating water; mobilizing our trucks to deliver food, water, and medical supplies; donating medical supplies, including more than 3 million face shields that we are manufacturing; building public health care facilities in Mexico, Colombia, Brazil, and Peru; and collaborating with our sports partners and the American Red Cross in the U.S. to convert stadiums into temporary blood drive centers. We also launched a series of tailored initiatives across 20 countries to support our on-premise partners, including local pubs, bars, and restaurants, such as subsidizing purchases of vouchers for future use and creating platforms to advertise local delivery options. We continue to look for ways to support our partners so they weather this crisis and prepare for a strong recovery. Prior to the pandemic, the on-premise channel represented approximately one-third of our global volumes. But as you can see on Slide 11, all markets vary widely by our exposure to the on-premise channel and market maturity level. The impact of the COVID-19 pandemic on our business in each market is highly correlated to our exposure to the on-premise channel, as this channel is heavily impacted by social distancing restrictions. In mature markets with higher disposable income levels, we've seen an initial uplift in off-premise sales, which I'll now discuss in more detail. Our diverse geographic footprint is a major advantage, as it allows for best practice sharing across our markets as they move through different stages of the crisis and into eventual recovery. To understand the impact of the COVID-19 pandemic on our business and take proactive measures to adapt our operations, we have grouped our markets into four clusters based on three factors: the stage of the pandemic; the maturity level of the market, including exposure to the on- and off-premise channels; and thirdly, the extent of the social distancing restrictions. The first cluster includes markets like China and South Korea that are in early stages of recovery, where we're seeing customers begin to reopen and volume trends improving sequentially. To put this into context, our volumes in China declined by 17% in April as compared to 46.5% in the first quarter. Our priority in this cluster is to support our partners as the recovery progresses. The next cluster is less restricted developed markets such as the U.S., Canada, and Western Europe, where the majority of our sales are in the off-premise channel. In these markets, the on-premise channel is basically closed, but we have seen initial volume uplift in the off-premise channel as consumers prepare to enjoy our products at home, although it's too early to determine the sustainability of this trend. In those markets, our priority is to ensure we're effectively servicing the off-premise channel while supporting the on-premise using our learnings from the recovering markets cluster. The third cluster is less restrictive developing markets such as Brazil and Colombia. In these markets, the on-premise is effectively shut down, which comprises a larger portion of our volumes. Our priority for this cluster is to develop programs to support both the on-premise channel and traditional trade partners, for example, by providing them with resources and technology to facilitate home delivery services. The fourth cluster is more restrictive developing markets such as Mexico, South Africa, and Peru. In these markets, our brewery and distribution operations have been severely restricted. We continue to work with governments in this fast-changing environment and are doing our part in the fight against COVID-19. We look forward to resuming our operations when appropriate. For additional context, you can see the current status of our operations in our top 10 markets in the chart on the right side of Slide 12. Please keep in mind that the current situation is very fluid. And as a result, the status of our operations can evolve quickly. Our culture is one of ownership and resilience, even in the face of extreme adversity. I'm inspired and humbled by my colleagues around the world who are coming together, displaying tremendous agility and working tirelessly to position us for a strong recovery. We quickly implemented a cross-functional COVID-19 task force that connects every day in order to maintain an open dialogue and act with agility and speed. The key priorities of our task force are providing for the safety of our people, supporting our communities and partners, and safeguarding our business continuity. This structure facilitates efficient sharing of best practices across our markets to amplify the impact of new ideas as quickly as possible. As I mentioned before, our colleagues in the recovering market cluster generated many of the best practices that have been shared and implemented around the world. They immediately took steps to protect the health and safety of our people and leveraged technology to keep our teams connected even from afar. Support to our communities and partners has been and remains paramount. Our local teams, with the help of our global procurement team, quickly facilitated donations of masks, disinfectants, and hand sanitizers to local hospitals. We also focused on providing excellent customer service to our wholesalers and retailers with proactive communication. Our commercial teams also acted quickly to allocate resources where they would be most effective, including to the off-premise and e-commerce channels. Our team in China also led the way in finding innovative ways to connect with consumers who are staying home. They launched Budweiser e-clubbing program in collaboration with Tmall, where consumers can enjoy performances from local electronic dance music DJs while being able to simultaneously order Budweiser online. This inspired our teams around the world to leverage consumer passion points in creative new ways such as Circuito Brahma in Brazil, a virtual country music concert series, that generated 3 million live views at its first show and has accumulated over 40 million views to date. In the U.S., Michelob Ultra continues to promote an active lifestyle through livestream home workouts that support local fitness studios which have been impacted by social distancing restrictions. For the past several years, we have been investing in new capabilities to better connect with our customers and consumers. Growing trends such as digital sales, e-commerce, and online marketing are more relevant now than ever before and have rapidly accelerated in recent months. In many of our markets, our customers can place orders online through our B2B and marketplace platforms which we established and significantly invested in enhancing over the past few years. This offers them the flexibility to order when and where it's more convenient while providing visibility into our full set of offerings and their past transactions. Additionally, in 2018, we created a function dedicated to our direct-to-consumer business, which includes several e-commerce platforms across our markets. This allows us to better understand and connect with our consumers in a direct way, and these learnings are providing incredibly useful today. We believe the significant progress we have made in areas such as B2B sales and e-commerce puts us in an advantaged position to capture growth from these trends. While we're rapidly adapting our business to best meet the needs of our customers and consumers in the current environment, the fundamental strengths of our company remain unchanged. We have a clear commercial strategy, the world's most valuable portfolio of beer brands, diverse geographic footprint, industry-leading profitability, and an incredibly deep talent pool and are confident that these invaluable assets position us well for a strong recovery. Now I'd like to hand it over to Fernando, who will take you through our first quarter earnings and elaborate on the steps we have taken consistent with our long-standing financial discipline.

Thank you, Brito. Good morning, good afternoon, everyone. It is a pleasure to be doing my first AB InBev earnings call as CFO. I hope you are all safe and well. Let's start with an update on our net finance costs. Net finance costs in the quarter were $3.16 billion compared to $366 million in the first quarter of 2019. This increase was predominantly driven by mark-to-market losses linked to the hedging of our share-based payment programs of nearly $1.9 billion compared to a gain of nearly $1 billion in the first quarter of 2019. Interest expenses were lower by nearly $80 million. Our normalized effective tax rate, or ETR, was minus 109.3% this quarter as it was heavily impacted by the nondeductible mark-to-market losses linked to the hedging of our share-based payment programs. Excluding the impact of the gains and losses linked to the hedging of our share-based payment programs, our ETR in the first quarter was 25.9% as compared to 27.5% in the first quarter of 2019. The decrease is primarily driven by lower property and country mix. Moving on to earnings per share. Our underlying EPS decreased to $0.51 per share in the quarter as the decline in normalized EBIT was only partially offset by lower tax expense and lower profit attributable to noncontrolling interests. Let me now spend a few minutes on the measures we are taking to exercise our financial discipline. Our commitment to financial discipline is unwavering, especially in the context of the current volatility. We are proactively managing those factors upon which we can have an impact and influence. Efficient utilization of our resources is part of our DNA and an important driver of our industry-leading profitability. We had implemented several measures to reduce or eliminate discretionary spending that may not prove effective in the current environment. This includes noncommitted capital expenditures, variable and administrative expenses such as travel and events, and sales and marketing investments, including sponsorships. Additionally, our senior leadership team has volunteered to reduce their base salaries by 20% for the remainder of the year. We also revised our proposal to pay a final 2019 dividend from €1 per share to €0.50 per share. We determined that this decision was prudent and in the best interest of the company as it was consistent with our financial discipline, deleveraging commitments, and other actions taken to navigate this environment. We have also taken proactive measures to maintain our strong liquidity position, including drawing down our $9 billion revolving credit facility in full and successfully issuing approximately $11 billion of bonds. In addition, the Australian Foreign Investment Review Board has granted regulatory clearance in relation to the sale of our Australian operations. The transaction will close on June 1. As I mentioned, in April, we successfully completed two investment-grade bond issuances to further strengthen our liquidity position, one of €4.5 billion and one of $6 billion. As you see on Slide 24, our bond maturity profile is well distributed across the next several years, and this issuance further extended our weighted average maturity by approximately 5 months. As a reminder, we do not have any financial covenants on our entire debt portfolio, including our revolving credit facility. Our bond portfolio remains largely insulated from interest rate volatility as approximately 95% holds a fixed rate. Furthermore, the portfolio is comprised of a diverse mix of currencies with around 60% denominated in U.S. dollars and 33% in euros. Our weighted average maturity is now roughly 15 years. Finally, we have a weighted average coupon rate of approximately 4%. I will now take you through our capital allocation priorities. The first priority for the use of cash is to invest behind our brands and to take full advantage of the organic growth opportunities in our business. Second, deleverage to around a 2x net debt-to-EBITDA ratio remains our commitment, and we will prioritize debt repayment in order to meet this objective. Third, with respect to M&A, we will always be ready to look at opportunities when and if they arise, subject to our strict financial discipline and deleveraging commitment. Our fourth priority is returning excess cash to shareholders in the form of dividends and/or share buybacks. With this being said, we must exercise prudent measures during times of uncertainty and volatility, including efficient management of discretionary expenses, especially those which may not prove effective in the current environment. And with that, I'll hand back to Maria to begin the Q&A session.

Our first question is coming from Trevor Stirling of Bernstein.

Brito and Fernando, I have a question and a follow-up. Firstly, regarding the U.S., Brito, you mentioned the off-trade strength we've observed in March and into April. Can you share your thoughts on how sustainable that off-trade strength is and how much it is compensating for the weakness in on-trade? Secondly, in Brazil, you noted that you underperformed in the premium segment this quarter. I believe the Brazilian premium volumes actually decreased in Q1 according to the AB InBev release. Could you provide more details on why, despite significant efforts in the premium sector, the results are not showing just yet?

Trevor, thanks for the question. So first on the U.S. off-trade. Because of the stay-at-home order, social distancing, and everything, the on-trade was brought to a shutdown, and consumers had to come up with more activities at home. So meals at home became something that was more important than before. Everybody was having their meals at home. Restaurants were closed, and lots of other things started to happen at home. So with that, the off-trade saw a pickup in volumes at the onset of the crisis. So we observed that uplift in beer sales, especially on bigger packs and also known brands. So it's proportionally benefiting established brands. It's too early now to determine if this trend will demonstrate a longer-term shift in consumer behavior. But at this time, that's what we saw. It's also good to just make an observation here about the performance in Q1 in the U.S. in which net revenue grew by 1.9%; EBITDA, 2.7%; and net revenue per hectoliter, 3%. So it was a very strong quarter. And so that's for the U.S. off-trade. In terms of Brazil premium, a couple of things. First, our premium segment posted double-digit growth in January and February. March then, with all the restrictions, it was a different story. Second, our premium brand portfolio has grown every year for more than a decade. We continue to believe that the best way to position itself to win in the long term in the premium segment is with the portfolio of brands to which we're adding back as an import-style international premium pure malt brand. And it's also good to remember that we have more than 50% of that segment. I wouldn't take one quarter as a signal, but it's true that we are undershared in that segment, and that's something that we still have to solve. But we believe the portfolio approach and we have very strong brands. Thank you.

Our next question comes from the line of Edward Mundy of Jefferies.

Brito, Fernando, two questions as well, please. First question is how do you weigh up your strong liquidity situation and extended debt maturity schedule versus potential for an accelerated deleveraging program as we saw back in 2008? And then my follow-up question is around COGS per hectoliter. Coming into fiscal '19, you have been guiding for COGS per hectoliter to increase by about mid-single digit. It feels like spot prices are probably starting to come down, but the transaction hedging is probably worse for next year. Should we think about COGS per hectoliter in 2021 to be better or worse at this stage relative to fiscal '20?

We feel very good about our liquidity position. When the crisis began, we ended 2019 with $7 billion in cash and issued approximately $11 billion in bonds in April. We also fully utilized our $9 billion revolving credit facility. This morning, we received confirmation of our firm's approval in Australia, and all conditions for the closing are in place for June 1. With all this combined, our liquidity is strong. Regarding leverage, our priorities include using cash to grow our brands and organic business, reducing our net debt-to-EBITDA to around 2x, focusing on debt repayment, pursuing mergers and acquisitions, and returning excess cash to shareholders. We have been prudent, especially in managing discretionary spending, and we revised our dividend from €1 to €0.50. Leverage remains a priority for us. We also had two impacts on our cost of sales this first quarter: commodity prices and foreign exchange rates, alongside operational deleverage due to reduced volumes. Of the 10.3% increase in cost of sales per hectoliter, 33% was from operational deleverage and 25% from commodities and FX. The rest was due to inflation and brand mix. For 2021, it is challenging to make predictions. We have hedged for this year, but for next year, we are still working on it and will continue monitoring the currency and commodity situation. Thank you.

Our next question comes from the line of Sanjeet Aujla of Crédit Suisse.

A couple of questions from me also. Firstly, Brito, can you just go into a bit more detail as to what you're seeing in the off-premise channel in those less restrictive developing market clusters, so Brazil and Colombia? Are you seeing any growth in the off-premise there? Or is that channel also declining? And then my follow-up is just coming back to the smart affordability strategy that you started really talking more about last year. Is there any change to that just in light of the material FX headwinds that we've seen, which will clearly impact from a transactional standpoint going into next year? Does that make you think any differently about that and the associated margin impact?

First, regarding the off-trade in less restrictive markets like Brazil and Colombia, trends during COVID indicate an increase in in-home consumption. Consumers are purchasing more from local neighborhood stores due to mobility limitations. Core brands are demonstrating resilience as consumers opt for larger packs of recognized, established products. Digitization is influencing ordering and entertainment, and there has been a rise in can packaging. While off-trade has shown stronger resilience, particularly in these markets, the impact of on-trade remains significant, meaning the uplift from off-trade doesn't fully offset the losses. This situation contrasts with markets where on-trade is minimal, such as the U.S. and Europe, where off-trade performance can compensate for any shortfalls. In terms of smart affordability, we believe in having a diverse portfolio to meet various price points and consumer needs, and smart affordability remains an integral part of our offerings. Additionally, thanks to the excise tax break on local crops, the margins for these products are competitive with our core brands, making them profitable in relation to the company's averages.

Yes. Just a quick follow-up, if I can, quickly, Brito, on China. You talked about an impact also in the off-trade channel in Q1. I'm just curious, as you're going into April, I appreciate the on-trade channel isn't quite back to normal. But are you seeing any pickup in the off-trade channel within China yet?

Yes. In China, what's happening, Sanjeet, is that different channels are reopening at different speeds. So the in-home, of course, was mostly open during the whole time because people needed to have access to food. So that remains true. Then the Chinese restaurants reopened faster than the nightlife, for example. And so channels are beginning to attract customers back to old habits, to old ways of consuming beer. But in-home, and especially e-commerce and delivery, remains very strong. So that's what we see. Also, going back to your first question on Brazil and Colombia, we have developed some ways to get beer to consumers' homes. You saw in the presentation about Tienda de Circo in Colombia and Zé Delivery in Brazil. So those things we have developed in the last 5 years, and they've proven to be very handy in markets like Brazil and Colombia where the on-trade is very important and where home delivery is growing very fast. So these things that have been developed in the last 5 years came in handy now with the e-commerce and direct delivery being much more relevant.

Our next question comes from the line of Celine Pannuti of JPM.

My first question is on a bit technical, maybe on Mexico and Peru. Can you confirm if we will be able to brew again from June? And how much inventory do you need to replenish the trade with? And how long would it take for you to do that on top of your normal production? And then my second, just as well staying on Latin America, a follow-up. We've seen a lot of FX pressure from many of the Latin American countries, and we are going to see recession hitting those economies almost all at once. What kind of environment are you preparing in terms of the second half and next year? And would it be fair to say that you will have limited ability for price recovery? And hence, how should we think about this on a mid-term basis for your profitability?

Thank you. In terms of Mexico and Peru, yes, so our beer operations are restricted, so we cannot operate. Peru, in the last few weeks, gave us permission to sell the existing inventory. What is true in both countries is that we have enough inventory for when the recovery comes that we're able to supply our customers in a very fast way. In Mexico, for example, the partners are able to sell existing inventory that they have with them. But after the Easter vacation, which in Mexico is a very strong consumption period, there's pretty much no inventory left in the marketplace. But there's a lot of pent-up demand in the market. So the moment we can use our inventory that sits in our breweries and our warehouses, distribution centers, it will be very fast to replenish the inventory to the trade. Same in Peru. In terms of Lat Am FX, as you know, Lat Am is a place where our people are very used to crisis. And they know exactly what to do in terms of being ready for a tough few months or few years. We've done that many times in the past. So we're going to do it again by looking at structure, by looking at discretionary spend, by trying to reallocate resources to channels that are growing, taking it from channels that are more under pressure, by using our portfolio to our advantage and also by using technology. Now we have B2B that even without the presence of our sales rep, partners can get their orders to us. We have direct delivery to customers' homes, all those things. And on top of that, all those things will come in handy. And on top of that, the hedge policy that we have in place for transactional cost exposure that are dollar-denominated, they are pretty much hedged for those exposures this year. So that will give us time to plan price increases that will be necessary going forward. So that's why we hedge, so we have time to plan, and we can read the market to try to understand tax, brands, regions, channels, and plan a price increase accordingly. Thank you.

Our next question comes from the line of Olivier Nicolai of Goldman Sachs.

Brito, Fernando, just one question and one follow-up, please. Could you give us a few examples, in the U.S. market specifically, on the measures you're taking to protect your margin? And just a quick follow-up on the capital structure. I mean, ABI clearly has no liquidity issues, as we've seen from your prioritization, a new refinancing, and then the announcement we see you this morning. But I was just wondering how you're planning to optimize your capital structure in the medium term? You reduced the dividend already. Can we expect a CapEx reduction? Can we expect more non-core disposals? Or should we just assume that the bulk of that net debt-to-EBITDA reduction will come through EBITDA growth? Obviously, for the medium term, not asking for guidance for this year or next year.

In the U.S., we are taking several measures to protect our margins, similar to what we've implemented in Brazil. We are closely examining discretionary spending, particularly in sales and marketing, as well as capital expenditures. Our focus is on investing in channels and products that consumers are increasingly demanding, such as e-commerce and direct-to-consumer initiatives. We are also allocating more resources to the off-trade sector and larger packaging options. Promotion activities are being scaled back, as they're not necessary at this time, and we are considering limiting new product introductions and innovations that do not seem worthwhile. Additionally, we aim to reduce media spending in favor of online platforms, ensuring that our resource allocation aligns more closely with consumer trends. On the capital structure front, our investment priorities remain straightforward. First, we will continue to invest in our business, which is performing well, as evidenced in the first quarter. Second, we aim to reduce our leverage, targeting a net debt-to-EBITDA ratio of 2x, and we will prioritize debt repayment to achieve this goal. Third is our focus on mergers and acquisitions, followed by returning capital to shareholders. Throughout these uncertain and volatile times, we will implement careful measures, especially in managing discretionary expenditures that may not be effective in the current environment. We are committed to making prudent decisions aligned with our financial discipline and deleveraging commitments. We regularly review our asset base each year to identify non-core assets for potential divestment, although at this point, there are no significant divestment plans to announce. This review is a standard part of our annual business operations.

And just to add here, in the short term, we are likely to maintain a large cash position, which is prudent given the current volatility. And as we see the crisis passing away, then the idea is to deploy this cash to redeem short-term maturities. So all the near-term maturities will be tackled.

The other thing, Olivier, just on the U.S., our industry-leading margins also provide us with more flexibility in times like this. So our industry-leading margins is also a very important component of how to weather storms like this.

Our next question comes from the line of Simon Hales of Citi.

Brito, Fernando, two for me as well, please. Brito, can I just sort of come back on those cost-mitigation points you were talking about there? Clearly, now as a business, you've been at the forefront of driving efficiency out of the organization over many, many years. When we look at really where you're targeting these short-term savings, should we really be thinking about the variable marketing spend really taking up the lion's share of those possible synergies? I imagine the fixed costs element of your SG&A expenses excluding marketing are very high and probably difficult to address at this stage. Is that right? Is there any more color you can give me to help me think about the opportunity that you've got to address the cost base there? And maybe secondly, just going back to China and just particularly the Budweiser brand. Could you talk a little bit more about the performance of Budweiser outside the U.S., but particularly in regards to China through the quarter, perhaps how things have developed as we've been through March and into April?

In terms of cost management, a key aspect of our approach is efficient resource allocation. During challenging times, we thoroughly evaluate all discretionary spending, including sales and marketing, capital expenditures, travel, meetings, and training. While we are still investing in sales and marketing, we focus on channels that are effective, rather than those that are less relevant, like on-premise options. Additionally, we're restructuring by redeploying staff to areas with higher demand. For instance, we're moving personnel from on-trade to off-trade activities where needed, and adjusting staffing for e-commerce based on activity levels. This is a dynamic process for us, and our culture thrives in these situations because we are adaptable in our resource allocation. Regarding Budweiser in China, it remains the leading brand in the premium segment and has a robust presence. Like all brands, it faced challenges during the complete shutdown in February, but it's now recovering. However, its rebound is slightly slower than other parts of our portfolio as nightlife is recovering more gradually, particularly in social settings that require stricter distancing measures. While venues are reopening, they are doing so more slowly than in-home channels or Chinese restaurants. As they do reopen, Budweiser will benefit significantly. Moreover, our Super Premium segment in China is consistently growing across all channels, outperforming others and increasing its contribution to our overall portfolio. Budweiser maintains its top position in the premium segment in China and remains strong, especially in nightlife, which is also gradually rebounding.

Our next question comes from the line of Tristan Van Strien of Redburn.

I have two questions. First, regarding South Africa, you've experienced your seventh consecutive quarter of significant margin compression. Have we started to see a bottoming out at this point? What is the trajectory for recovering that margin, which appears to be the lowest it has been in 15 years in South Africa? My second question is about your agility as an organization. You've implemented many rapid changes. Are there any management practices, behaviors, or systems that you believe will become more permanent as we transition into the new normal?

Well, Tristan, regarding margins, we're really pleased with our performance in South Africa. In the first quarter, our volume increased by low single digits, marking several consecutive quarters of solid volume growth. Net revenue also showed low single-digit growth per hectoliter. The margins in South Africa are influenced by higher costs of sales per hectoliter due to our premium product mix, along with some cost phasing in the first quarter of 2019 that will stabilize throughout the year. Additionally, we've increased our sales and marketing investments to support our expanding premium brand portfolio and on-trade programs. We are committed to long-term success, which is why we've made these investments. We also took a price moderation approach with our largest brand, Carling Black Label, in March 2019, resulting in double-digit volume growth. While there may be some short-term pain, we believe these steps are beneficial for the long haul, and we are in this business for the long-term journey. This isn't an indication that margins in South Africa are permanently strained. We've made adjustments and faced commodity and foreign exchange pressures, but we see this as paving the way for better outcomes regarding portfolio rebalancing and more balanced top-line growth. In terms of management practices, it has become clear that existing consumer trends are accelerating significantly, such as e-commerce growth, increased home activities, and demand for larger packs. The Super Premium and Premium segments are both expanding, and e-commerce is gaining momentum. Fortunately, we've been investing in areas like direct-to-consumer and e-commerce for the past five years, which have proven to be wise decisions. What we anticipated for these initiatives in terms of volume three to five years down the line is now materializing sooner. For instance, with our Zé Delivery in Brazil, we achieved the same number of orders in one month this year as we did for the entire previous year. We've also been able to leverage our app-based B2B model, which has provided us with a significant competitive edge. In fact, we're seeing interest from other consumer product companies wanting to join our B2B platform, recognizing that now is the right time for this type of application. We're glad we invested in our ZX and solutions five years ago, and we are now reaping the rewards. Thank you.

Our final question will come from Robert Ottenstein of Evercore ISI.

Brito, my understanding is that you're a very target-driven organization. The targets are developed the prior year, I don't know, November, December, and cascade down from you right through the organization. And they're generally full-year targets. Given the incredible changes that have happened, I mean, it's a whole new world today. And it's not only a whole new world today, but it could be a whole new world three months from now, six months from now. And tremendous volatility, changes from governments that have huge impacts that are very different country-by-country and hard to predict. In that kind of environment, given your target-driven structure, how do you empower local flexibility and agility to best execute?

That's a very good point, Robert, because you're right, targets are important. But even more important than targets is common sense and priority setting. So when this whole crisis started, we set out priorities to our people that were very clear from day one. We said priority #1: safety of our people. Second, we have to be part of the solution for communities. We have to help communities deal with the kind of pandemic they're dealing with. Third, we have to keep our business operating as long as we have the permits and we operate in a safe manner. So business continuity. Fourth, we have to prepare as we learn more through the crisis for a strong recovery. Five, we need to understand consumer trends and what the future will look like so we can adjust our strategy and company structure to what's to come. And on top of all that, we need to keep a very strong liquidity position. So people are very clear from the very beginning of this pandemic on where our priorities were. And because we have an LE system that we review every month, the last estimate for the next few months, that became more the North Star than the original targets. And now in June, July, after we see countries reopening in May and June from what governments are saying, and that can change, we're going to do a review of targets in light of more information we'll have then. But for now, the priorities are very clear, and the LE is our North Star.

And ladies and gentlemen...

Any more questions, Maria?

No. That was our final question.

Okay. So thank you, Maria. Let me just say a couple of things to finish the call here. In these uncertain times, it's important to focus on what we can influence and impact. We're committed to protecting the health and safety of our people, supporting our local community, and connecting with our customers and consumers in innovative ways. We're in this together, and we'll continue doing our part. Our culture is as strong as ever. And our people are stepping up with the passion and commitment of two owners. We're privileged to lead the global beer category, a category that has existed for centuries through many crises. And we'll continue to thrive long after the current crisis is behind us. In closing, I'd like to say thank you. Thank you to those on the front lines, to their commitments, to keeping it safe, especially the healthcare workers around the world. And thank you to our teams for working with tremendous agility, resilience, and dedication, especially those on the ground, in the front line, ensuring business continuity in these challenging times. I'm so proud to be your colleague. Thank you for joining the call today. I hope you and your family stay safe and healthy. We hope to celebrate a strong recovery over a beer soon. Thank you very much. Have a great day. Bye-bye.

Thank you. This does conclude today's earnings conference call and webcast. Please disconnect your lines and have a wonderful day.