Ladies and gentlemen, thank you for standing by, welcome to the Q2 Results 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star and one on your telephone keypad. I must advise you that this conference is being recorded today, I would now like to hand over the conference to your speaker, Torben Sand. Please go ahead, sir.
Yes. Good morning, welcome to the conference call in relation to Scandinavian Tobacco Group's financial results for the second quarter of 2020. Please turn to slide number two. My name is Torben Sand. I am head of investor relations of the company, I am also joined by our CEO, Niels Frederiksen, and CFO, Marianne Rørslev Bock. Today, we will present the highlights for the second quarter. We will give you an update on the implications of COVID-19 pandemic to our company, as well as present you the recent status of the Agio Cigars integration. Following this, we will give you the overview of the quarterly performance in our three commercial divisions and the group as a whole. Finally, we will take you through the updated outlook for 2020 and take your questions at the end.
Before we start, I ask you to pay attention to our disclaimer on forward-looking statements in the back of this slide presentation. With this, please turn to slide number three, I will leave the word to our CEO, Niels Frederiksen.
Thank you, Torben, good morning, everybody. Overall, Scandinavian Tobacco Group delivered better than expected results in the second quarter, with positive growth in net sales, earnings, and free cash flow before acquisitions. Net sales grew organically by 4.6% to DKK 2,097 million. EBITDA before special items was DKK 489 million, displaying a 19.1% organic growth. Free cash flow before acquisitions improved to DKK 425 million, the strong results were mainly driven by increased consumption of handmade cigars and a strong volume growth in the U.S. online business. However, resilience in tobacco consumption across markets and categories amidst the COVID-19 pandemic also contributed positively, as did efficiency gains achieved by a successful initial integration of Agio Cigars and the continued execution of Fueling the Growth, our transformational program.
Based on the performance in the quarter, including a strong performance in the month of July, and assuming that the momentum in the U.S. online business is sustainable throughout 2020, the group's full year guidance was raised on 14th of August to organic growth, sorry, organic EBITDA growth of more than 9%, free cash flow before acquisitions of more than DKK 1,000 million, and finally, the share buyback program announced in February 2020 will be initiated from 31st of August 2020, which is today. Based on this overview of the second quarter, let's turn to the update on the implications of COVID-19 to Scandinavian Tobacco Group. Please move to the next slide. As already mentioned, the negative impact of COVID-19 pandemic on Scandinavian Tobacco Group's business has been less profound than anticipated earlier in the year.
On sales, we have in handmade cigars, smoking tobacco in North America, and in a few machine-made cigars in Europe, actually seen increased demand. In the U.S. online business, we have witnessed growth in both number of active customers and order size. This has more than compensated for the negative impact of border closings and travel restrictions on our border, on travel in general, and on retail sales. Let's turn to the supply chain. We have had all our factories up and running at close to full capacity since April, May. This includes the facilities in Honduras and the Dominican Republic, where governmental declared state of emergencies and curfews have been in place for some time. As for inventories, we are seeing increased pressure on our inventories of premium cigars, as a result of the increased cigar consumption in the U.S.
However, we have revised the operating pattern at several of our factories and been able to increase capacity with more than 1 million premium cigars per week, which is 80% above a normal throughput. This brings me to the COVID-19 risks to the business. Supply chain disruptions and potential inventory shortages across the value chain remain a risk. Factory shutdowns, should they persist over a longer period of time. However, based on our experience and operational performance in the past couple of months, we are confident that we are able to mitigate the risks should they materialize. Other risks are further outbreaks of the pandemic with negative impact on sales and limited restocking of materials from third-party suppliers. Let's go to slide number five. This brings me to an update of the integration of Agio Cigars.
Following the completion of the acquisition in the beginning of January 2020, we announced the financial implications of the acquisition in April, let me just reiterate them here. We expect the integration to deliver approximately DKK 225 million in net synergies by the end of 2022. When full integration has been finalized, we expect to have improved the group EBITDA margin by more than two percentage points compared with the STG group level in 2019. We started implementing the actual integration during the second quarter. It is progressing as planned, with the commercial integration underway and expected to be finalized in 2020. During the initial steps of the integration, market shares and net sales in the businesses acquired are largely unchanged. The expectation for cost savings to contribute with about DKK 70 million-DKK 80 million in 2020 remain unchanged.
Special costs of DKK 70 million in relation to the acquisition has been expensed in the second quarter. The expectation is maintained that total special costs until the end of 2022 will be at the level of DKK 450 million, with cash impact. Sorry, that will be DKK 450 million with cash impact and DKK 109 million in non-cash impairments. The latter were expensed in the first quarter of the year. Please turn to the next slide and the overview of the three commercial divisions in Scandinavian Tobacco Group. Before we go into detail with the performance in each of the divisions, I would like to present you with an overview of the three divisions, as this is the first time that we report in these three divisional structure. The three divisions are North America Online & Retail, headed by Sarah Santos.
This division includes direct-to-consumer sales of all product categories sold via the online catalog and retail channel in North America. North America Branded and Rest of World, headed by Régis Broersma. This division includes sales of all product categories to wholesalers and distributors that supply retail in U.S., Canada, Australia, New Zealand, international sales such as Norway, Finland, Switzerland, Israel, and Russia, Asia, global travel retail, and finally, contract manufacturing for third parties. Europe Branded, headed by Jurjan Klep. This division includes sales of all product categories to wholesalers and distributors that supply retail in Germany, Denmark, Sweden, France, Italy, Belgium, Netherlands, Luxembourg, Spain, Portugal, as well as the U.K. and Ireland. Historic data on the three divisions were announced earlier this month on 18th of August.
In the evaluation of the EBITDA split by division, please be aware that Europe Branded is lower than normal due to a fair value adjustment in relation to the actual acquisition. I'll leave the word to Marianne, and please turn to slide number seven.
Thank you, Niels. For the division North America Online & Retail, net sales increased by 25% to DKK 788 million during the quarter, composed by a 22% positive organic net sales growth and a positive exchange rates effect of 3%. The development was driven by increased consumption of handmade cigars and the shift of consumers from regular retail stores to online, driven by a temporary close down of many retailers. Compared to the first quarter of 2020, the division experienced increases in the number of active online customers and an increase in average order size. EBITDA before special items increased by 60% to DKK 165 million, with an EBITDA margin before special items of 20.9% versus 16.4% last year. The margin improvement was driven by lower promotional and marketing expenses, and continued benefits from the integration of Thompson Cigar and impact from Fueling the Growth.
Due to state-mandated temporary closures and capacity restrictions, the four brick-and-mortar retail stores operated by Cigars International in Pennsylvania and Texas currently operate well below normal activity level. The most recent store in Fort Worth, Texas, opened on the 22nd July, and the construction of two additional new superstores in Florida are progressing as planned and will open during 2020. In the second half of the year, the division is expected to show continued positive organic growth as the increased consumption of handmade cigars brought on by the change in consumer behavior in the U.S. is likely to continue. With this, please turn to slide eight and the update on the division North America Branded and Rest of the World.
The division North America Branded and Rest of the World, the reported growth in net sales was minus 2% and ended up at DKK 629 million during the quarter, composed by a 4% negative organic net sales growth and a positive exchange rate effect of 2%. The development was driven by decline in most product categories, including handmade cigars, in the months of April and May in North America due to the almost complete closure of the brick-and-mortar retail channel. This was only partly offset by improved pricing and the increased demand from the online channel. Towards the end of the quarter, we saw a relatively sharp rebound in buying from the brick-and-mortar retail channel, also stimulated by the higher consumer interest. EBITDA before special items increased by 11% to DKK 230 million, with an EBITDA margin before special items of 36.7%.
The margin improvement was realized with an improved gross profit margin driven by product mix and an improved OPEX ratio, which decreased due to lower sales and marketing spend and general efficiency improvements. In the quarter, smoking tobacco realized positive growth, although the underlying consumption of pipe tobacco and fine-cut tobacco continues its structural decline. This brings us to the update for the last division, Europe Branded. Please turn to slide number nine. For the division Europe Branded, net sales increased by 33% to DKK 680 million during the quarter, composed by 3% negative organic net sales growth and a 36% positive impact from the acquisition of Agio Cigars. Development in net sales was impacted from phasing in the first quarter of the year, but was overall better than expected, as the overall market for machine-made cigars showed resilience to the COVID-19 pandemic.
Also, the acquisition of Agio Cigars contributed positively to the market share development of machine-made cigars in the largest European markets. The combined market share in France, Belgium, the Netherlands, U.K., Germany, Spain, and Italy was 33.3% versus 32.7% in the first quarter of 2020 and 32.9% in the fourth quarter of 2019. EBITDA before special items decreased by 5% to DKK 107 million, with an EBITDA margin before special items of 15.7%. The decrease was driven by the acquisition of Agio Cigars, where inventories were recognized at fair value at the date of acquisition, which led to a temporary increase in the cost of goods sold of DKK 23 million. Excluding the fair value adjustment, the underlying EBITDA margin was 19%. The comparable decrease versus last year is due to lower margins at Agio Cigars, as well as changes in market mix, only partly offset by efficiency improvements.
Please turn to slide 10. In the second quarter, net sales increased by DKK 315 million compared with the same quarter last year. Gross profit before special items increased by DKK 108 million and EBITDA before special items by DKK 91 million. During the comparable quarter last year, Agio Cigars, which was acquired in the beginning of the year, delivered DKK 249 million in net sales. The sales activities in Slovenia and Croatia, which was divested in the third quarter, delivered DKK 30 million in net sales. Adjusted for these transactions and a small positive Forex effect of DKK 3 million, the organic growth in net sales was DKK 93 million or 4.6%. The increase in gross profit was driven by the acquisition of Agio Cigars and the organic growth in net sales. The gross margin was 44.8% versus 46.7% last year and was negatively impacted by the consolidation of Agio Cigars.
This in particular impacted the development in division Europe Branded. Division North America Online & Retail experienced a minor decrease in the margin and division North America Branded and Rest of the World delivered an increase driven by product mix and price increases. The EBITDA margin before special items 23.3% versus 22.3% in the second quarter of last year. The margin expansion, despite the just mentioned decline in gross margin, was driven by cost efficiencies across our operations. Special items was negative by DKK 78 million, with the majority of the cost, DKK 70 million, expensed in relation to Agio integration and the remaining DKK 80 million being expensed in relation to Fueling the Growth and the closure of our factory in Tucker, U.S.
We still expect special costs to be in the level of DKK 415 million-DKK 435 million for the full year, including the DKK 109 million non-cash impairment, which was expensed in the first quarter of the year. Adjusted earnings per share was DKK 3.1 per share, compared with DKK 2.2 per share for the second quarter of last year. Finally, the free cash flow before acquisitions increased by DKK 182 million to DKK 425 million for the quarter, leaving the cash generation for the first six months at DKK 547 million, an increase of DKK 231 million versus last year. With this, please turn to slide 11. During the quarter, the net interest-bearing debt decreased by DKK 440 million, driven by the operating results, and DKK 109 million contribution from working capital, partly driven by timing of payables.
Compared with the first quarter, the leverage ratio declined by 0.4 times to 2.4 times, which bring us back below our financial leverage target of 2.5 times. We expect to deliver further during the remainder of the year. We have previously expressed our intention to initiate a share buyback program during 2020. Friday afternoon, we communicated that based on the half year results and the outlook for the full year, the program will be initiated now. The size of the program is a total value of up to DKK 300 million, and the purpose is to adjust the capital structure and to meet obligation in share-based incentive program with cancellation of shares not used for incentive program. We have appointed Nordea as lead manager to execute a safe harbor-based program. I will now turn the work back to Nils. Please turn to slide number 12.
Thank you, Marianne. I will now give you a short update on the regulatory developments in our key markets. In North America, the U.S. District Court, in the case of the Cigar Association of America versus FDA, has ruled that FDA could not require manufacturers of premium cigars to file substantial equivalence or other marketing applications until the agency had analyzed whether and how to create a streamlined regulatory process for premium cigars as defined by the FDA. We expect this might be a multi-year undertaking. The ruling applies to a large majority of the premium cigars in the STG portfolio. While the ruling lifts the looming, September 9 filing date for substantial equivalence applications, it does not mean that premium cigars are no longer regulated by FDA. Premium cigar manufacturers are still subject to inspections, ingredient and other reporting, and other FDA requirements.
The ruling also upholds the February 15, 2007, grandfather date for all tobacco products, thus continuing to provide some limits to the opportunity to introduce new products. The Court upheld FDA's position as to non-premium cigars and fine-cut tobacco. These products are therefore still subject to the ninth September deadline. For Europe, the two key topics to mention remains firstly, on May 2020, the ban on menthol in cigarettes was implemented. Cigars can still be flavorized with menthol, and we see some traction in this area. Secondly, the Tobacco Excise Directive is still set to undergo a statutory review this year. The timing of completion of the review and the effective dates for potential changes remain uncertain. Please turn to slide number 13.
Based on the performance in the quarter, including a strong performance in the month of July, the group's full year guidance was updated on 14th of August to organic EBITDA growth of more than 9%, free cash flow before acquisitions of more than DKK 1,000 million, and the previous guidance was, as you may recall, organic EBITDA growth of more than 2% and free cash flow before acquisitions of around DKK 850 million. While visibility around the financial outlook remains lower than normal, we are confident in the new guidance that, however, rests on a number of key assumptions. First and foremost, we expect the change in consumer behavior in the U.S. with overall increased cigar consumption to continue for the rest of the year. Further, we foresee no material disruptions to our supply chain.
Finally, we do not plan with any new major COVID-19 breakouts with a negative impact on our sales. This concludes our presentation for today. I will hand the work back to the operator and take questions. Thank you.
Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. To cancel your request, please press the hash key. Once again, please press star and one on your telephone keypad if you wish to ask a question. Our first question comes from the line of Niklas Ekman from Carnegie. Please go ahead. Your line is open.
Thank you very much. Yes, a couple of questions. Firstly, on the COVID-19 impact, can you elaborate a little bit more on how this has impacted consumption? Do you have any examples of what the previous volume decline, how that has developed, and both for North America Branded or for the online business, obviously very positive, but what kind of consumption volumes are you seeing in North America versus Europe, for instance? That's my first question.
Yes. Thank you, Niklas. I think that the best way to explain the situation in North America is that a Handmade Cigar is obviously something that takes a little more time to consume. What we can see with the working from home is a clear direction of consumers smoking more Handmade Cigars. Now, as you point out, this is more easily seen in our online numbers, but actually once the retail stores in the U.S. started opening, we also see increased activity from the brick-and-mortar retailers in the U.S. supporting that consumption is just up. We don't know exactly how much it is up by, but we see this picture quite distinctly. When it comes to Europe, the picture is more blurred.
We do not have a similar reaction to our Machine-Made Cigar business. I think that in Europe we find that the consumption has generally been a bit more depressed, the fact that people have been restricted on movement from their house. Also we know that retailers in Europe seem to have been more slow or strict to release cash for inventory build. Our general view is that there's a quite clear picture for increased consumption of Handmade Cigars in the U.S., both for online and for regular retail. In Europe, we see an impact on the consumption of Machine-Made Cigars, but less than anticipated.
Okay, excellent. Thanks for that answer. As a follow-up, I'm still curious about the North America Branded, down 4.3%, it was up 2.2% in Q1. Looks like it's still a net negative impact still. Can you just provide some more detail there? Is there any phasing differences or anything else here that explains why there's a net negative impact so far this year, if consumption is actually increasing?
I think that the answer is actually in my previous answer in the sense that this division was quite severely hurt by the retail closedowns that we saw coming in the U.S. and both the, let's call it, the individual smaller retailers plus distributors and wholesalers, really didn't buy anything for a period. We have seen is that once these retailers reopen, there is demand, either customers coming to the physical stores and their buying pattern is also more positive towards the end of the quarter than in the beginning of the quarter.
Generally, inventory levels among retailers is lower than normal. Is that the conclusion?
I think that retailers are trying to adapt to inventory levels to increase demand. Clearly all online customers are trying to build inventories because we have consumers moving online, but even the regular retail stores are still trying to balance inventory, and we see this translating into healthy demand on both sides of our U.S. business.
Okay. Excellent. Thank you very much. On Agio Cigars, I'm just curious on how to calculate the impact on EBITDA. You have in your report on page four, you show the acquisition impact where you note DKK 44 million in 2019 and then DKK 23 million in Q2 2020. Can you just explain how we should read these numbers? What is the DKK 44 million versus the DKK 23 million EBITDA impact in the calculation of the organic EBITDA?
Yes, maybe I could take that one. The DKK 44 million is the Agio Cigars EBITDA for the second quarter of 2019. That's kind of taking the base level, so to say, for calculating organic growth. The DKK 23 million is this fair value adjustment that has been taken on the Agio Cigars inventories this year. We saw a similar component in the first quarter of DKK 39 million, bringing the half year fair value adjustment to DKK 62 million. This is basically an adjustment that has impacted the EBITDA negatively. When we calculate the organic growth, we strip that out in order to make an apple-for-apple comparison. That of course also goes when we're looking into the performance next year. It's simply to strip it out so you can make the direct comparison.
Okay. That makes a lot of sense. Thank you very much. Fueling the Growth, can you provide an update there? How far have you come in terms of delivering on Fueling the Growth? How much is left?
I think that what we can say on Fueling the Growth that it's tracking on plan. The plan, as you recall it, was that by the end of 2021, we would deliver DKK 250 million in runway savings. We've also said, I can't remember off the top of my head the exact percentage, the bulk of that has been delivered in 2019, we'll see about equal sums in 2020 and 2021.
Okay. Thank you very much. The final question also, just out of curiosity, your online sales have been a tremendous success in the U.S. Can you tell us a bit how the online market, what that looks like in Europe? Is this an area that could be open for expansion for STG, for instance, or is it a much more complex market compared to the U.S. one?
It's not comparable in the sense that, first of all, you can say that Europe is not legal to ship across borders. You can, of course, execute online sales individual countries. Also here, there are a number of restrictions on both what you can show on an online page and how you can interact with the consumer. The business model, as we know, in the U.S., is not applicable for the Europe market. There is online sales of, in particular, handmade cigars, but it's not of a size as in the U.S., and it's mostly convenience and assortment driven. We can't say that you can't build an online business in Europe, but the U.S. model, as we know it, is not applicable and another solution would be needed.
It's something we look at from time to time, and of course, you can say that the latest COVID-19 may mean that we need to look at it again.
Excellent. Thank you for taking my questions.
You're welcome.
Thank you. Our following question comes from the line of Magnus Jansen from SEB. Please go ahead. Your line is open.
Thank you very much. A couple of questions from my side as well. Maybe starting at a little bit different place. You mentioned in your report that you're starting to do some work on making a broader ERP system changes. Could you talk a little bit about the scope of this, and maybe also what kind of CapEx we could expect from this? That was my first question. Thank you.
Marianne, will you take that one, please?
I will certainly take that, thanks for the question. I think we have also previously drawn the picture of the ERP landscape in STG. We have a very scattered and diverse ERP landscape with more than 12 ERP systems. Running a global operating model on so many systems that are very old are simply not efficient. We are looking into a global ERP platform. We are in the middle of finding out which platform, a potential implementation partner, and also a roadmap for doing that. I cannot, for now, give you any indication of the investment besides that implementing a global ERP system is a significant investment. I would also say, because I'm sure there are listeners on this call that remember the 2017 incident in implementing an ERP system in the online business.
We are very careful, and also will plan this very thorough and learning from the experience back in 2017. We will, when we get to that decision, do it in the pace that the business can also follow. It is correct that we are looking into a global platform. I hope that answers the question.
Thank you, Marianne. Second question goes to basically, you could say, the second half of the year. You talk about that there has been some phasing effect for the first half of the year that will impact the second half negatively. Could you talk a bit about which market that covers and maybe also the size of the impact?
I don't think we will talk to the specific size of the impact, but I think that the best way to think about this is that a number of markets, of course, are occupied with having adequate inventory. What makes adequate inventory a difficult size to determine is the, for example, the opening and closing of borders. If you take two examples, the Norwegian-Swedish border was initially closed, leading to increased consumption in Norway. It was opened, leading to a new balance between border trade and local domestic consumption, and now it has been closed again. Of course our distributors, both in Norway and on the Swedish border, is trying to juggle these sizes. What we are seeing is that the phasing reflects basically trying to be on the safe side for inventory, which is perfectly understandable.
Okay. Now, you talked about 3%-4%, I think, in Q1 going into Q2, which doesn't seem really to have impacted Q2 that much, or anyways, it's been eaten up by really good performance. Is it that kind of size or what should we think? Yeah.
We're not coming any closer to the number. I think I would say that in the end of Q1, there were some very specific events, such as the excise increase in Denmark. There were the closure of the Tucker factory and the distribution of inventory to certain customers. It was some very specific events. When we look at the situation today, it is more spread across a number of countries, and not related to, let's say, to specific events like the first quarter.
Okay, that's clear. Thank you. A last question from my side. You talk about an improvement in the margin in North America Online & Retail and North America Branded and Rest of World, due to lower sales and marketing efforts, I guess because a lot of stores have been closed, and of course, due to COVID-19. Could you say how much that impact is? Second to that, how much and it's going to be an impact for H2 as well. Thank you.
Yeah. Again, we are not quantifying the impact specifically, although I fully understand the reason for asking the question. I think that if we use the U.S. business, it's a little bit of different things. For the online business, you can say that we have seen a significant uptick in customer traffic, and hence we have leveraged this not to apply the same promotional spend to the customer. This is a benefit which I think is fair to assume, is temporary and depending on when the market will normalize. There, we will of course do the marketing spend required to protect and enhance our market share. We are right now simply benefiting also from increased traffic.
When you look at the North America Branded and Rest of World business, it's more a reflection of the fact that we have become better at adjusting our cost base and our marketing efforts to the market situation. We have been able, when we saw the significant reduction in retail activity, to basically reduce spending. As activity goes up again, we will also increase spending. A lot of this has to do with whether our customers are active, and when they are active, we can also be active. It's that balancing. I actually think that it's a sign of our new operating model working as well, that we can tune down and tune up more effectively than in the past.
Thank you very much. That's all from me. Thank you.
Thank you. Our following question comes from the line of Gaurav Jain from Barclays. Please go ahead. Your line is open.
Good morning. My name is Manny Kisanga from Barclays. I'm dialing in on behalf of Gaurav Jain. Thank you for taking my question. My last remaining question really, others have been asked by now, is regarding your expansion of superstores in the U.S. In your press statement, you said you'll continue to expand with three new superstores this year. Given the shift to online channels, which has obviously been shown through COVID, why does management believe that expanding its retail presence is still the most efficient use of capital?
Yes. Thank you for that question. Again, I think actually that COVID-19 and working from home have emphasized, and we highlighted that for this category to be successful, we need consumers to have occasions to sit down and smoke their handmade cigars. During COVID-19, this has been stimulating a higher consumption at home, simply because people have been restricted from moving, and in some instances, the retailers have been closed down. We think that the reason we originally started the superstores was to make sure that new customers, which we know go to physical stores first, needs to have a place to go that is better than the alternatives that exist today. That is still the case, we believe that the COVID-19 pandemic will come to an end.
We may still see, let's say, a new consumer behavior following that, hopefully we will see more customers online. We are reaffirmed around two things. The superstores provide a critical alternative to consumers in terms of creating occasions. Secondly, it is the place where the new consumers can come and engage. One of the early signs we've seen from COVID-19 is actually that there seems to be more new customers coming into the category because we have indications of a higher sales of small humidors, which again, to me, re-emphasizes that we cannot rely on online alone. We need to have the supplement of modern retail formats that appeal to the new consumers coming into the category. Obviously we are looking at all our stores and watching them very closely as the COVID-19 pandemic evolves.
We're actually almost more certain that the role of the superstores is going to be important going forward. We will, of course, only allocate capital to them if our business cases and our models work out as intended.
That's very useful. Thank you. Just a follow on question. Is there any data that you can see to suggest where these new consumers are coming from? Are they consumers of other tobacco categories such as cigarettes, and cigarillos, or are they completely new consumers to tobacco and nicotine categories altogether? Is there any data to suggest how that sort of split?
Yeah, we have data not from COVID-19 time, but from the past that clearly suggests that most handmade smokers doesn't come from a particular source of other tobacco categories. Many of them actually don't smoke before they join the category. They are often introduced by a friend or a colleague who likes the handmade category, and they are almost taken by the hand and brought down to a retailer to get to know the category. That's the general picture. There is a certain overlap with pipe tobacco smokers, but it's not significant. Think about the new customers really as not coming from other tobacco categories, but generally being introduced to the category and finding it interesting.
Okay. I suppose one final question from that then is, I imagine most of these consumers then are mature consumers as opposed to sort of there's no worry on your behalf from the risk of youth consumers entering the category if they're new consumers to tobacco altogether.
Yes. We typically see consumers 30, 35 when they enter the category. They are certainly, let's call it, adults deciding to engage with the category.
Excellent. Thank you very much for that.
Our following question comes from the line of Mathias Nielsen. Please go ahead.
Thanks a lot. I have one question on the fair value adjustment. How does it look for the coming quarters? There was DKK 39 in Q1, DKK 23 in Q2. What should we expect in the coming quarters?
Yes, I can take that one. Yes, you are right with the DKK 62 for the first half. This has been kind of, ended now. There will be no further fair value adjustments for the coming quarters.
Thanks a lot. Just to make sure that I understood it correctly, the DKK 62 million in fair value adjustments, if you keep all else equal in H1 2021, you will report DKK 62 million higher gross profit and EBITDA than you did this year. Is that correctly understood?
That is absolutely correct. Yes.
Perfect. Thanks a lot for that. Then on the leverage and the capital optimization, now we have buybacks on the table. How should we think about the capital optimization going forward? I know you have this target of 2.5 times. Is that a target of not exceeding, you have kind of above, below, or is it something that you could move closer to with buybacks that you can essentially cancel in the case that there's an interesting acquisition target coming up? How should we think about that going forward?
Thank you for that question, Mathias. I think that from the very start from our IPO, you can say we have been maintaining the same capital policy, which is that our gearing should be around the 2.5 times EBITDA. That is still the case. What we've said is that we have an ordinary dividend that is growing, then we have a pipeline of potential activities that we of course take into account. If when we've looked at that, we still have money left, we should return them to shareholders either in the form of share buybacks or extraordinary dividends. As you may recall, we issued an extraordinary dividend in 2017 of DKK 350 million, this is now our first share buyback.
I think that the way to interpret this is that we are committed to returning surplus money to our shareholders. Right now we find the DKK 300 million program to be appropriate.
Should we expect buybacks in the coming years as well to be something that is recurring, or is it more like a special buyback, like once off, one time event? How should we think about that? Can you say something about that?
At the moment, you can say that we are committed to returning surplus cash, either in the form of ordinary dividends, extraordinary dividends, or share buyback. We haven't decided on one particular format.
Okay, that's fine. On cost in this quarter, is there anything impacting this, like salary compensation, something like that, which is of one-off type? Is there anything of that in the numbers or is it clean?
There is no government subsidies in our numbers. I think in general, you can say that when we went into the second quarter, we knew it was going to be a difficult quarter and we of course, have been very focused on managing our costs well. There are certain costs, as you can imagine, that has fallen away, such as travel and other stuff. We've been restrictive on the spending of money. There are no one-off costs in there. There is a high level of cost control.
Thanks a lot. When we look into Q3, like now, you're already two months into Q3, is there anything in particular that we should pay attention to in this quarter when trying to estimate the numbers for Q3?
Yeah, I think the only thing we have made a reference to, Mathias, is that July supported the upgraded guidance, and I think that's what we can say for now.
It's correctly remembered that last year in Q3, the NAB division was under pressure from IT issues at one of your customer. I assume that is fixed now. Is that correctly assumed?
It's correct that in 2019, North America Branded's biggest customers had sustained IT problems. You're also correct in remembering that this was primarily second, third, and fourth quarter impact. Those IT problems are resolved. When we look at the customer base, there are no IT restrictions to what we can sell.
I think also it's fair to remember that given that situation, North America Branded was very fast in reducing their cost base. Basically already at that time, their profits and margins was performing well at that time.
Sure. That's fine. Thanks a lot.
There are no further questions at this time. Please go ahead.
I think we will say thank you very much to all the participants and wish you all a good day and a good week. Thank you.
That does conclude our conference for today. Thank you for participating. You may all disconnect.