Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the HeidelbergCement second quarter 2021 results call. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I would now like to turn the conference over to Christoph Beumelburg. Please go ahead.
Thanks, operator. Good morning and good afternoon, everyone. Welcome to our Q2 results conference call. I'm very glad that you all joined us before the summer break. As usual, we have Lorenz Näger with us, our Chief Financial Officer, who is today a little bit challenged with his vocal cords. Spoke a lot this morning, so please be patient with him later on, and Dominik von Achten. You've all seen our press release and the Q2, sorry, trading statement. We will quickly go through the presentation and then are happy to take your questions after that. With that, Dominik, over to you.
Yes, everybody. Hello. Welcome from Heidelberg. I hope you're all safe and well, and thanks so much for joining us for our call this afternoon, our time, early in the morning for the colleagues in the U.S. Warm welcome to all of you. I would suggest, as Chris mentioned, to go quickly through the key points and some of the key slides, and then we should open it up for your questions. I think that's the focus of this call. As you saw in our press release and also in your presentation, Q2 was a good one. Okay, fair enough. Went also against a little bit softer Q2 last year, driven by the corona lockdowns.
We came up with a revenue increase of almost 20%, EBITDA up more than 20% and operating EBIT more than 35%, and margin improved also 76 basis points on a like-for-like basis against last year's Q2. Second very important point for us during the quarter was the sale of the West Coast business. You know that the set price $2.3 billion. The closing for that transaction is expected for October 1st this year. We have communicated in our Beyond 2020 strategy, the famous waterfall that we've discussed with many of you intensively. The other point that we very much focused on during the Capital Market Day last year, that we said we want to focus on deliver what we promised. Here we go again. We said after we have basically kept our CapEx guidances, we have deleveraged.
We had the BBB rating. We went back to a progressive dividend. We've done the disposal. Now it's between growth M&A and shareholder return and cash returns, share buybacks to our shareholders. That's what we announced last night. Why last night? The clear reason is we have a very strict buy-in regulation here in Germany, and we didn't want to run any risk on the legal side. That's why we went out last night immediately after the decision had been taken in our board meeting yesterday, that for corona reasons, we need to always do midday with U.S. and Kevin sitting in Australia. That was the plain reason to do it that way. I'll come back to the share buyback program in a minute. On the back of the good performance operationally, we also continued the significant deleveraging.
Lorenz will go through those details. Then very importantly for us, we also continue our leadership path on the decarbonization within our industry and obviously more importantly also within Heidelberg Cement. We have decided to join the UN Race to Zero, a very prominent initiative globally. You know that we are running a lot of local initiatives. We are also very active on European level, but this really cuts across the globe. Also running up to COP 26 in Glasgow this year. Both the business ambition for a 1.5 degree and also the Race to Zero has been signed and embraced by us, and also in cooperation with SBTi. Least obviously, we've just done our quarterly management meetings for the last 2.5 weeks.
Coming out of that, and in the end, it's also the share buyback is an indication for that, we have a strong confidence going forward for the remainder of 2021. That's also why we changed our guidance from slightly to strong increase on operating EBITDA, both EBITDA and EBIT, basically for 2021. With that, I would turn the page, and you see the different buckets of the results. Revenue, that was very important for us, that also the revenue now comes back up because you know that over the past quarters, especially last year, we had a little bit of a revenue challenge with the drop in volumes. We are now coming back up. We'll come back to that in a minute, how it looks on a longer-term view.
Like for like, revenues are up in the quarter almost 20%, in the first half more than 10%. Operating EBITDA is like for like up 25% in the first half and more than 20% in the second quarter. Operating EBITDA margin, important for us. As you know, we are chasing our targets from Beyond 2020 strategy. We further advanced to now 23.7% globally with a slight increase even in Q2, but a major step forward in H1. Last but not least, operating EBIT jumps up more than 50% like-for-like in H1 and more than 35% like-for-like in H2. If you look at the drivers of the development, you see the volume development on the next page, that is really very balanced across the different business lines. Obviously, Q2 being stronger than H1. Why?
We had the lockdowns April, May last year. The comp was also a little bit different. Overall, I think an okay, if not good and very good development on the volume side in cement, in aggregates, in ready-mix, and also in asphalt. You see on the right side that this is really also being contributed from most of our markets. Volumes in the U.S. were good. Canada is coming back on the back of a high oil price. There's always two sides of the metal. The Western Canadian business is strongly coming back. Europe stays on a high demand, especially in the U.K., where that's one of the markets where material is even short in some small local markets. We have a very solid demand still in Germany, also in other parts of Europe. France is okay demand-wise, and so is Italy.
Also for us, importantly, going to Northern Eastern Europe, Poland continues to be on a very good level, so is Czech Republic. Romania, a little bit weaker this year. Northern Europe continues to go strong. In that respect, good volume development across Europe. Asia Pacific, very hard hit now by COVID. We just had a call with our global managers a couple of minutes ago. For me, a little bit encouraging news now coming out of Indonesia. Apparently, the situation in Jakarta is calming down again a little bit. That was very encouraging for me to hear. This is really an hour ago. We are very close to the situation there in Asia because India is picking up again after a very difficult month. It went through Indonesia, now a little bit in Australia, only in a few pockets, thankfully.
Also Bangladesh, Malaysia, Thailand, they are still fighting the COVID because the vaccination rates are not as high as in Europe or the U.S. Africa continues to go strong. Good news for us is also that Egypt has now finally turned positive, even after depreciation for the first time for many quarters. In that respect, we absolutely go in the right direction there. African team performing on a very high level. Also Morocco coming back, important market for us. If you could turn the page to page five, you see the details for Q2. You see that the FX impact was around EUR 30 million to the negative side. That's the weakening U.S. dollar. You see the net volume development, very strong, almost EUR 300 million EBITDA contribution on the volume side. You see the negative price over cost.
I'm sure we'll come to that discussion later on. We'll probably then touch on the details on that. I would assume that many of you will have a question around that, just as it is one of the key focus points for us, so we are fully aligned on that. Overall, EBITDA almost EUR 1.2 billion. I think that's, Lorenz, the highest EBITDA ever in the Q2 for HeidelbergCement. In Sweden a year we would say an okay performance. It was quite okay from our perspective. If you look at it from a half year perspective, more than almost 350 million volume. There the price over cost is still positive. I think that looks from an H1 perspective, pretty good. Almost EUR 1.8 billion or clearly above EUR 1.7 billion EBITDA for the first half.
I already shared the language around page seven. You see that the EBITDA growth is very well balanced. We discussed vividly the discussion, do we need one region, five regions, 10 regions? We feel quite comfortable and well balanced with our five areas. In that respect, all of them have contributed well to this good result. You see the numbers here. I don't think I have to go through all the details. I think that's a little bit self-understood. Slide eight, to my earlier remark, very interesting to see that on a revenue perspective, we are absolutely flat to the end of December. We went through a trough there for the last five quarters, now we are basically just exactly on the end of 2019. In the meantime, the structural profitability of the company has improved 16%. That's a lot. 16%.
You see it on the right side, how we QoQ improved our margins, total 300 basis points, and we are now on a rolling last 12 months of 22%. Obviously very importantly, also driving that financial performance is the execution of the portfolio optimization through smaller deals on the right side, Greece aggregates and ready-mix. Hopefully this will close during the remainder of this year. We are working hard on that. Kuwait has already been done. As I mentioned earlier, the sale of our West Coast business, $2.3 billion, the closing of that should happen October 1st this year. Maybe a couple of seconds on the share buyback, because it is the first time ever that Heidelberg Cement, in its history, went on a share buyback exercise. I know some of you had expected that.
Others were very skeptical whether we would ever pull it off. We had yesterday, in the board, clearly decided unanimously to go for it, and to go for it in a meaningful way, up to EUR 1 billion in basically three tranches. The first tranche will start during the month of August, continue four, five, six months down the road. You know that from a regulatory perspective, it's not for us to manage the details. We'll have a bank with us that executes that program. The authorization for that program has already been granted by the AGM on May 6th this year, it's currently planned to hold the shares as treasury shares going forward. Obviously, we have the normal flexibility in those programs that are completely customed to many of these share buybacks programs if the moon comes down.
With that, Lorenz, I would hand it over to you.
Okay.
For the financial part.
Okay. Thank you, Dominik. Page 11, you see the key financial messages. On a like-to-like basis, we see a significant increase in earnings per share. If we adjust it for the additional ordinary results previous year, the earnings per share increased by more than 70% to EUR 3.06 YoY. We have excellent quality of earnings, this comes with a strong cash flow generation. Our last 12 months free cash flow stands at a record EUR 2.3 billion, and this represents a cash conversion rate of 56%. 56% of our EBITDA hits the cash register. That's a very good development. This then, despite higher dividends, translates into solid deleveraging. Our net debt goes down by EUR 1.5 billion. That's the second year in a row. Over two years, we deleveraged by a record EUR 3 billion.
There are now, as a consequence of this, leverage comes down to a very comfortable level towards year-end. We target to the lower end or below our guidance of 1.5x - 2x EBITDA. On slide 12, you see the P&L. You can see that each and every position improved. We have a positive additional ordinary result. This comes from a reversal of past asset impairments related to the U.S. West disposal. We have a significant improvement in financial results. This comes to a smaller part from lower interest expense, and then it's this IAS 37 effect on the valuation of long-term provisions. That's a pure non-cash item, so it's irrelevant for decision making. Income taxes go up to EUR 325, and this is due to a swing in deferred taxes from an income in the previous year to an expense in the current year, also non-cash item.
Net results from discontinued operations. That's our U.S. asbestos obligations. This business also includes a lot of long-term provisions. Here we have the same positive effect as in the financial results, around EUR 15 million, roughly. Non-controlling interest up to 69% because our businesses in countries where we have minority shareholders develop very good. That's Indonesia, Thailand, and Morocco. Very good development. This brings our group share of profit to EUR 755 million, or adjusted for AOR, 6.8%, up from EUR 356 million the previous year. We see here that the good operation development drops through the P&L to the bottom line. Slide 13, you can see the cash development. As I said, cash conversion rate 56%. Relatively small interest payments, relatively small tax payments. Very solid management in the working capital. Disciplined CapEx.
That brings us to a free cash flow of EUR 2.3 billion, despite a significant increase in dividend, that translates into a substantial reduction in the net debt position. Sorry for that. If you go to slide 14, you can see the situation which led us to the decision to make the share buyback. We have more or less achieved all financial targets with branded disposals. We keep the CapEx below EUR 1.2 billion. We have delivered to the lower end of our range in the leverage, we have received a BBB flat rating, we have come back to progressive dividend after our little interruption in the COVID crisis. We have enough funds to finance our growth. We have excess cash, that's what we put into shareholder return, EUR 1 billion until in two years' time, as of September 2023.
The first tranche will be EUR 300 million -EUR 350 million starting right now after setting up the program and lasting through the end of the year or maybe January. That's it. I say goodbye to you. That's my last press conference. With having fulfilled all the targets which has been promised. The only what we lack is that my successor, René Aldach, has to issue a bond at zero or negative interest. That's the only what I wanted still to do and didn't do because we have too much cash in. I thank you very much for your trust, and that's it from my side. Game over. Thanks a lot, and I give it back to Dominik.
Okay, guys. You see him in good mood going into his retirement. Let's still continue with our business, and we will obviously do with the equal if not more energy level. On the ESG agenda, next page 15, you see that we have also put a big focus on this and not just in terms of announcement, but especially really to get going on these topics. We've pushed our Quarry Life Award that's been around for quite a while to really work on biodiversity. The 3D printing has really got a lot of attention, not only from a design perspective, but also from a production perspective. Material elasticity is very interesting. There are a lot of quite interesting aspects of this, and we will continue to push in that respect.
Nicola Kimm will join us September 1, That clearly will put additional knowhow and energy to the Management Board also to drive the agenda going forward. First female on our Management Board since the beginning of HeidelbergCement. We will push also our world's first carbon neutral cement plant in Slite. I know that some of you have questions on the recent developments there. I'm more than happy to answer them. We have the publication of our sustainability report that we shared with all of you that gives you all the details of our ambitions. I think there, in that respect, we still have some upsides in terms of reporting. That's something that René Aldach and his team going into his job together with Nicola Kimm will very much focus on.
Personally, we believe, or as a team, we believe that there's still some step up that we can do also in terms of transparency reporting. We have the taxonomy stuff coming. In that respect, bear with us. We will take also a leadership role in that respect. Many of you have seen the announcement on the Green Deal Fit for 55 from the EU. Personally, I think it's good that the program is now out. Now the negotiation starts. We think it has a couple of good elements in there. We were pleased to see that CBAM is a balancing tool to counterbalance the desired reduction of free allocations. From our perspective, it needs to be closely tied to that.
What we will fight for is, we cannot allow reduction of free allowances without a full implementation of the CBAM being in place because otherwise, the European and continental Europeans fight for a transformation of the industry. They obviously need to get paid for that in order to pay for the investments. That means we need some sort of an adjustment that we cannot have a global import scenario in that respect. I think that's the whole logic about it. The second piece from our perspective is that also the efforts of carbon capture utilization, carbon capture storage need to get credited in the EU ETS scheme. That's the second point. The third point, I think good news on the Innovation Fund. The EU have understood this does cost money. We have always said that. We are fighting for that support, obviously together with our own contribution.
What really is very important, that these funds are also available on rather short notice. We have seen some instances where this has taken, from our perspective, a little too long. I think there we can still all together do better. In that respect, we will also fight for making these funds available fairly quickly. Those are a little bit the three trigger points that we will push for in the next negotiation rounds. Overall, I think we've done a fairly okay job in educating also the politicians in the EU and helping them to understand the challenges of the industry. You've seen that we have further advanced our leadership role on the sustainability front. You know that we have worked very intensively on national and on EU level.
As I said, we have now also moved to the global level by signing the UNFCCC Race to Zero campaign that we strongly endorse, together with the business ambition for 1.5 degree. Basically, the idea is to get carbon neutral by 2050 at the latest. You know that a little bit of the governing body is the Science Based Targets initiative. We have worked with them for a long time, but we have decided on the back of these announcements to further intensify the collaboration with them, in order to make sure that you also, as our analysts, investors, do understand that our targets are real targets and that we are chasing them, and that we are diligently chasing them, and that we are also getting to them.
We more than welcome the combination in the cooperation with SBTi. On the outlook, last but not least, the reason for the strong outlook for the remainder of the year is basically centered around good demand in most of the markets. You see here, U.S., Canada, I mentioned earlier U.K., strong demand. Germany still with very good demand, especially on the residential side. Infrastructure now the first projects are coming in. Poland continues to be good on a very high level, also driven by residential. Egypt, as I said, is now coming back after the market stabilization with the government intervention. Indonesia was a little bit shaky, but I'm encouraged by what I hear now from Christian Knell. I think we should see the demand coming during the second half at some point.
Australia, I'm hopeful that they get the selected lockdowns behind them in Sydney and Adelaide. The demand overall in Australia looks to be healthy. Italy sees already the first infrastructure money coming in and also residential demand picking up. Overall, the markets from our perspective are pretty much intact. That's why we then also turned to our guidance and said, "Guys, we move from slight to strong in terms of our increase of operating EBITDA and operating EBIT." We can do that with even lower CapEx than originally guided. We will stay below the EUR 1.2 billion on our core CapEx net of divests. We will even go higher in our ROIC. We are very confident to get clearly above the 8%.
As Lorenz already said, the clear message is also on the leverage we will get very much to the lower end of our original guidance, 1.5x-2x by year-end. Overall, from our perspective, the clear message, we are confident on the development for the remainder of 2021. Are there headwinds? Absolutely. We'll come to the energy costs in a second during your questions, we are absolutely confident that we can deliver on our guidance from today's perspective. With that, I would love to get to your questions, and we'll try to give you the best answers.
Thanks, Dominik. Thanks, Lorenz. Operator, please start the Q&A.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please hit the handset before making your selections. Anyone who has a question may press star followed by one at this time.
Thank you. I see a lot of people in the queue. In order to make that most efficient, can I please ask you, as always, to restrict your questions to two at a time, and please do not embed five other questions as a sub-question. That would only prolong the process. We have over a dozen analysts in the line, so please stick to that. The first question, I think, Paul, you haven't been the first for quite a while now. The first question comes from Paul Roger from BNP.
Yes. Thank you, Chris. That is very generous. Hope everyone is well. I guess the obvious question is on price cost. You had that EUR 66 million negative in Q2. Clearly, there is more inflation coming. Can you give a view of what that spread will look like in the second half if we assume that price and costs stay where they are today? Is there scope to announce a second price rise in either Europe or the U.S. to compensate later this year?
Paul, thanks. That's a very short and precise question. Thanks a lot.
I thought you'd appreciate that, Dominik.
Yeah. Absolutely. Thanks so much, Paul. Hope you're well as well. Price over cost, obviously that's the obvious question, so thanks for raising that. I assume that's on everybody's mind just as it is on our mind. I would break the answer into three elements, Paul. For us, it's a fixed cost issue, it's a variable cost issue, and it's a price increase issue. That's basically the component of these three elements. In the Q2 margin development, you have to keep in mind, and that's also a little bit maybe you are surprised at the WSE development. Last year, take WSE as an example, we had very suppressed fixed costs because obviously we put our foot on the brake on everything that's sitting on the fixed cost side. We had then also some government support in many countries, and that obviously lowered our fixed cost base quite substantially.
That's something where we always said, "Guys, that's going to come back." Now you have to look at the current volume development. That means, guys, we need everybody on board to produce the volume. I think it was also not for us the decision to say, "Oh, yeah, we keep our capacity low and don't deliver the volumes to the market." That was not the option. For us, we had to bring some of the costs back, and we did not get the same relief from last year. The delta obviously hits here in the Q2 over Q2 view. It is also fair to say, variable cost, Paul, there is a steep increase in energy costs that is visible, and you've heard this also from some of our competitors who have already released their results.
There is a steep inflation on the energy cost side that is driven by coal, petcoke, oil, diesel. It's basically electricity on the back of a higher CO2 cost. It's the perfect negative storm in that respect. If you want to put something on top, it's the freight rates. The freight rates also are now on an 11-year high. Currently, as you see in many other supply chains, there seems to be a little bit of crunch around all these things. The normal relief that you get typically, going into the summer, we do not see yet. We had the flooding events across Europe. We had a fairly cold scenario, both in the U.S. and in Europe now. There seems to be, as I said, the perfect storm. I'll come back to the outlook in a minute. Then we have obviously the price increase issue.
Very clear message from our side, Paul, to your questions. We have already gone for substantial second price increases in our key markets. Some of those you have mentioned, but not exclusively to those. Wherever possible, we go for second price increases. We know this is difficult for our customers. This has been historically not the case. The industry was tuned towards one price increase. We had huge discussions internally already April, May around this. Personally, I'm long enough around the table that I knew it, I saw it coming. In that respect, we have reacted very early. We've alarmed everybody in the group to move and wherever possible, we have already gone for price increases going to effect in July, August or September.
That is not possible in all markets, but in quite a few key markets for us, we've already executed that and we will diligently fight for keeping those price increases. Going forward, I think the fixed cost element that I was describing should normalize because the fixed cost base last year, I'm looking a little bit to René Aldach, our new Chief Financial Officer. The fixed cost base last year was fairly stable. We had good volume development, so the fixed costs were already back. Relief from the COVID was fairly normal. We are going against a fairly normal fixed cost base. Absolutely, the variable cost base is on a substantially higher level versus prior year. Lorenz can maybe say a little bit something to the cost question there specifically in a minute, but we've also obviously done some hedges.
We are not completely going in with open risks into this scenario. That's also, Paul, the reason why we are confident at this point to upgrade our guidance from slightly to strong. That may have surprised some of you because can they still hold up? Personally, there is a risk. Absolutely, there is risk. Always in life is risk, but we are confident from today's perspective that we can, in the combination with good price increases, good fixed cost control and a variable cost development that for the H2 we have somewhat hedged already going forward. We believe that this works out okay and will lead to a guidance upgrade and a strong increase in operating EBITDA and EBIT. Maybe Lorenz, you want to say something on the energy costs development?
As I said last time, that we were covered with relatively cheap energy for the first half year which we covered late in 2020. Of course we have work, and we have now covered to a large extent the second half year, but of course at higher prices than we had it in the first half year. We are relatively safe on our forecast because, as I say, almost all volumes have been covered with exception of power in regulated markets and coal in Indonesia, where there does not exist effective forward buying market. Of course diesel, which has no forward buying market. That's the situation. The remaining open volume are very little, so we are pretty safe on that. For next year, we will have to see, and we will determine the forward buying policy in the coming months.
That's the situation right now. Thank you.
Thanks, Lorenz. Paul, I hope that answered your question quite detailed, but I assume many of you have the same question on mind.
That's clear. Also just to say, can I congratulate Dr. Näger on his retirement and wish him all the best.
Thank you, Paul. What a pleasure. 17 years. Was nice. I appreciate it.
All of a sudden your voice comes back.
Yeah. If I start shouting, that is exactly what I should do.
Keep quiet, Paul. Okay, thanks. Thanks a lot, Paul.
The next question comes from Elodie Rall from J.P. Morgan.
Hi, thanks for taking my question and congrats to Dr. Näger for retirement. If you don't mind, can I just have a quick follow-up on Paul's question on price cost? You answered quite detailed on H2, but if we look at the full year, does that mean that you're comfortable that on a full year basis, basically the price cost will be flat and not down? The next question will be on guidance, obviously strong increase versus a slightly tweaked previously.
Sorry, Elodie, you broke up with your second question. Can you repeat your second question? You broke up there in the middle.
Sure. Can you hear me better?
Yes.
Okay. Sorry about that. On guidance for the strong increase in EBITDA. Obviously, an increase in guidance, but consensus expectation is looking for about 9% increase in EBITDA already. Do you think that's more or less what you're thinking about, is that achievable? Thank you.
Yeah, Elodie. First of all, on your question of price over cost. I haven't done the math, to be quite frankly. We probably have to follow up on that point with a calculation. If I get in my math, the thing right then the price over cost should not go dramatically negative in the second half. Otherwise, we would not come out in our guidance. That's something we have to double-check. I'm sorry, we don't have that calculation done. What we don't do is we don't pre-calculate these price over costs. That's a retrospective development. We obviously manage our fixed cost and our variable cost and our pricing, what I just explained on the back of Paul's question. We do not basically look forward on the price over cost scenario. That is something that we will follow up with Chris and Ozan.
They will come back to you on that, to give you some more flavor. As I said, Elodie Rall, it's our clear focus to fight for a positive price over cost development. Again, let's not forget the big hit here in the second quarter came from the fixed cost side also. Versus last year's, it did come also from the variable cost, but there was also a significant contribution from the positive side, on the pricing side. I think that's very important for you to understand. The price and variable side is still somewhat intact from our perspective. That's the message a little bit. On the guidance, it was not so easy technically to understand. I think you were asking a little bit, slight and strong, what does that mean?
When we discussed with many of our investors and also many of you as our analysts, beginning of last year around guidance in our industry, does this work or not? We always said, "Guys, this industry is not tuned for very exact guidances, especially not in a year where we have such a high volatility on energy costs." We had a long discussion whether we should do anything on the guidance. We then said, "Guys, we are very confident, so we also need to share that with the markets." In that respect, don't get my answer wrong, but strong is better than slightly. I think that's the one clear message. I will leave it also a little bit to your fantasy now what does strong really means.
We want to clearly show that we are more confident at this point to deliver what we are saying than we were at the beginning of the year. That's why we upgraded our guidance. That's the whole purpose of the exercise. The reason that we did the share buyback should also indicate to you and the market that we are very confident that we're up for an okay future. In that respect, if you put these two things together, I leave it for you to speculate a little bit around this. Really, we are confident for the full year of 2021. That's our perspective on that. Okay?
Thanks, Elodie.
Thanks, Elodie.
The next question comes from Barclays, from Nabil Ahmed.
Hello, hi. Good afternoon.
Hi, Nabil.
Nabil.
Thanks for taking my question. Sorry, probably another follow-up on the cost inflation. I was hoping you could share a few numbers on what you are mentioning, which is making perfect sense, which is the unwinding of some government supportive measures that you benefited from into last year, and as well the fixed cost saving, those emergency savings you made last year, which were obviously not sustainable in the more normalized environment. How much is that in two Q2? The second question, I was wondering if you could comment on the Supreme Court decision in Sweden to reject the renewal of the Limestone Quarry. Does it prevent you from operating the plants? If so, how would you supply the market going forward? If you could help us to understand the potential financial impact that we should expect for next year. Thank you.
Yeah, Nabil, thank you very much. Let me maybe take the Slite question and then Lorenz on the price over cost, how much fixed cost effect sits in Q2. We'll give you an indication of that, but Nabil, please understand that we are trying to balance things left and right and center. I'll let Lorenz comment on the fixed cost impact in Q2 to give you a little bit more color. On Slite, we know many of you have picked the topic up. Let's step back one second to the big picture. Obviously, Slite for us is an important plant in our Northern European network. No question. All these plants go through normal permitting processes every now and then. Slite was well known, was up to an extension for its permit until 2041. We had everything in place, including the environmental impact study.
The permit extension was basically granted and then challenged by the court in this famous court beginning of July with a new a surveyor that came a little bit out of the blue for everybody. That led to this decision. You have seen thereafter, quite a splash in excitement across Sweden, even outside of our own company. I was a little bit surprised, but it shows you the impact of this business in the Northern European countries, especially in Sweden. All the politicians are on the fence. Many, many stakeholders are on the fence, including unions, NGOs. It's a big political issue at this point. Clearly, it's our absolute focus. I just got off the line with our GM in Northern Europe a couple of hours ago on this.
It's our absolute focus to make sure that we get our permit extension as originally planned and already granted, before that appeal, by October. It's clear that we will work on a plan B, but I would still put a clearly more than 50% chance on this, that we get the permit finally to continue running by November 1, because this would be detrimental if the plant would be interrupted to the Swedish construction industry. You know that that's basically the only Slite plant that supplies the market there. In that respect, I'm very confident that we get the permit extended, but it will be hard work until October. It's clear that we work on a plan B. Life is never without alternatives. That's also true in this respect, but I think it's too early to say what would be the impact of this.
Again, for us, plan A is the 80% scenario to make sure that we get the permit extended as originally planned and originally granted. That's the story around Sweden. Lorenz, you want to say something on the fixed cost side?
Yeah. I just want to remind you that in 2020, we had fixed cost savings as part of our COPE program in the magnitude of EUR 180 million in the first half year. I don't know, I think between Q1 and Q2.
Most of it was Q2.
Most of it, of course, was as a variable thing. Of course, it was Q2, because in Q1, there was only two weeks of COVID crisis. Now we had re-increase coming back fixed costs in the second quarter of roughly EUR 150 million. Still we are on fixed costs side, EUR 30 million below 2019 levels. That's EUR 130 and you see that our contribution margin, as we show 66% as a total. Still shows positive development in Q2. What we fight for is now to keep the gross margin up in second half-year in order to outbalance the energy price increase with front-end price increase of our sales price. That's the dynamics.
Yeah. I think that very precisely answers your question. I think we know that you are all, just as us, very concerned about the topic. I think we've given you all the transparency to understand why we have increased our guidance, because this Q2 effect is a specific Q2 effect.
Okay.
Thanks. Yeah. Thank you.
Next question comes from Gregor Kuglitsch from UBS.
Hi. Good afternoon. Can you hear me?
Hi, Gregor. We hear you well.
Hi. Yes. Obviously happy retirement. Well, not quite yet. I think you still have to bear with a few questions.
Yeah.
A few questions, please. A couple if I may. The first one is on free cash flow generation. You've printed obviously a very strong number again. I think it even strengthened it a little bit. The question I guess is, do you think you can hold that figure or do you expect some elements unwinding as we kind of think about the second half of this year? If you care to comment, that would be helpful. The second question I have is on the emission trading scheme, and if you could help us, what the reduction in your sort of annual free allowance is this year. I suppose in relation to that, how you see that kind of developing with the proposals from the EU in terms of the reduction factor going forward. Thank you.
Yeah. Gregor, thanks for your questions. I would answer maybe the second one, and Lorenz would take the free cash flow one for H2. Now on the emission trading scheme, as you know, we are not commenting on any developments during the year. By the way, it's also not done yet. It's far too early. I tell you, this is a science rather than art to fully understand the EU and manage the EU ETS allocation. That's a very fluid and ongoing situation. It very much depends obviously also on plant-by-plant view in terms of how much do you produce, what's the demand, how much do you sell, what's your capacity utilization, ai, ai, guys. This is a complex topic and this will take the full year to understand exactly where we end up. That's even difficult to forecast with such a fluid system.
The second part of your question around the emission trading scheme, it's something we discussed yesterday intensively in the board. The current proposal, Fit for 55, if I understand it right, is that they are planning not to substantially touch the allocations are due 2025, so in the 4A. Then we'll try to reduce the free allocations by this factor as of 2025 going forward. That's where my earlier remark kicks in, where we are now helping them to understand, if we want to get this transition happening, we need a counterbalancing effect to safeguard the necessary price increases. That's where the CBAM, Carbon Border Adjustment Mechanism, comes in. From our perspective, this reduction of free CO2 allowances can only start in a moment where the Carbon Border Adjustment is fully in place. That's the message from our perspective. That's our targeted outcome.
We will fight hard for it. Can we guarantee that we get there? I don't know, but the good news is they have understood that that is a communicating development. They've also understood that Carbon Border Adjustment is a necessary, at least interim solution, in order to allow for the industrial transformation in Europe. In that respect, I'm pretty positive that we'll get there. As you know, we are still a couple of years long on our certificates. That has not changed. Then we hopefully work on our CO2 emission reduction in parallel, and then we'll see where we come out. From our perspective, no major change to what we've communicated in that respect.
Thank you.
Yeah.
Lorenz, you want to take the free cash flow?
The free cash flow. As we see, we are at record high right now. This is also driven by COVID measures in the second half of 2020. I just remind you that many countries had suspended tax payments. For example, there is still this in where the, in the second half of last year, we virtually did not pay any taxes, very small amounts. And this will not come back. That's why we would expect that the free cash flow would go down a little bit. Would trend towards maybe EUR 2 billion- EUR 2.1 billion, which is still a very good result and will still continue to lead to strong deleveraging towards end of the year. Please keep in mind that we will receive the proceeds from the sale of our U.S. West business.
That will all together, once again, substantially push down the leverage of the company. Even despite the share buyback program, which will be executed to a large extent for the first tranche until end of this year. We will execute the first tranche until end of this year, and that's already included in our guidance that we will end up at or below the lower level of our guidance from 1.5 x- 2 x. Yeah. Thanks a lot.
Thank you.
Thanks, Gregor. Thank you.
Thanks. The next question comes from Berenberg, from Harry Goad.
Yeah. Hi, good afternoon, everybody. Thank you for taking our question. Actually, just following on from that point you were just making, Dominik , about the buyback and about the balance sheet. Whilst I think the EUR 1 billion buyback is clearly very welcome, if taking that point into account about receiving proceeds from the U.S. asset sale and then I guess organic free cash flow through next year, it looks like leverage even including the buyback will be well below that target range at the end of next year. It'd be useful just to hear a little about your thought process on how you arrived at that EUR 1 billion number, whether there's an element of conservatism in there or whether you're keeping options policy for perhaps M&A through 2022. Thank you.
Harry, thanks for that question. You know, guys, it's always interesting to discuss with you. I love the questions. Guys, let's take one step after the other. I think for us it was very important to deliver on what we have promised. Lorenz and myself and René will do the same thing with me. We want to do the utmost to deliver on our promises. As I said earlier, there was since decades a question mark whether Heidelberg Cement would ever deliver on a share buyback. Here we are. Now, EUR 1 billion is, given the size of our company, not a distinctive number. We deliberately wanted to also say, guys, if we go for something, we go for a significant one. We will deliver it over two years deliberately because again, we are in the long-term business, so we don't do a one-minute one-off exercise.
We really try to have now these three tranches executed. As Lorenz was sharing with you in the waterfall earlier, that's what we are paid for, to take balanced decisions. We are not catering only to one side of the matter. In that respect, absolutely we've understood that we want to work and focus on total shareholder return, and this share buyback also works on that dimension. Let's not forget, we are also paid and mainly paid for running the business. In that respect, the question is how much do we invest into our core business? How do we ensure that our free cash flow development works? How do we ensure that our rating stays in investment grade. How do we ensure that our progressive dividend contributions come?
How do we ensure, by the way, that we grow the company also through M&A, in order to improve going forward? Guys, absolutely we are focused on total shareholder return, but also we are focused on growing the company, and growing the profitability and structural profitability of the company, and that's what we also need to get to. Let's now take one step after the other. Let's first deliver on this share buyback, and then we basically take the next step, Harry.
Harry, relax. Just one point. The shareholders' meeting has entitled us for buying back 10% of our shares. 10%. The program we have announced right now, with EUR 1 billion would already be between 7% and 8%.
6%-8% .
6%-8% .
6%-8% . Something like that. We follow, how you say? We really used, in the very first shot, two-thirds of the total entitlement of the shareholders meeting. In Southern Germany, we say we have to keep the church inside the village. That's what we have to do, and we try, as Dominik rightly said, balanced approach, don't exaggerate, keep it in the middle of the road, and piano, one step after the other.
Harry, you've got our Chief Financial Officer back on the tree.
Yeah, exactly.
That's good. In that respect, no. Guys, just also one additional point from my side. One of the core reasons also for this share buyback is we strongly believe the company is undervalued. We strongly also believe this is a very good investment for our broader shareholder base. We will drive good returns out of this investment. Even the finance guys were for it, to say, "Guys, this can be also financially an attractive move at the current valuation of HeidelbergCement." In that respect, that was one of also the key drivers to move at this point for the share buyback.
Yeah. No, that's all very clear. Thank you.
Thanks, Harry. Thanks also. Only asking one question since we have roughly two handful of gentlemen on the line. I please ask you to restrict your questions to one at a time now, to give everybody the chance to ask a question. The next question comes from Tobias Woerner from Stifel .
Yes, thanks for taking my question. Good afternoon, gentlemen.
Hello, Woerner.
Good luck for your future.
Thank you.
I just was about to say thanks for the two questions, but one question here. Just sorry to come back to the price cost. Let's keep it simple. In 2020, your energy bill was EUR 1.5 billion, the year before EUR 1.9 billion, and the year before that, roughly EUR 2 billion. You hedged your costs. Should we assume that we're going to go back to the 2019 level? That's the cost side of the equation or the energy cost side of the equation. The pricing side, can you just give us an indication what the average price increase was seen in the second quarter for the group? Maybe a little bit of flavor for the regions. Thank you.
Mr. Woerner. First of all, on the energy cost side, we have to go, quite frankly, I don't have the energy cost numbers 2019 with me. Maybe Lorenz, you can check in the meantime and leave the situation on the energy cost 2019. Lorenz should basically work on that. If you talk about price development in the second quarter, Mr. Woerner, obviously, as I said earlier, we are fighting hard to get the price increases done. You should assume that price increases in our core markets, if you take Western, Southern Europe, Northern Europe, and also especially North America, are more around the 5% mark, ±, just to give you a little bit a flavor. That does not incorporate the second round price increases that we have announced now, as I said earlier, July, August, September.
That also gives you a little bit, you are a long time analyst with us, that gives you also a flavor that we are pushing ahead in that respect. This is clearly higher than normal standards on price increases. I continue to remind our colleagues internally, the overall sentiment in the markets, in many other industries also, is clearly inflationary. Let's face it. If I look at other construction materials, steel, wood, plastic pipes, whatsoever, they talk about 20%, 30%, 40% price increases. I think there is a clear pricing momentum now to be grabbed, and that's clearly something that we are working on. Maybe Lorenz, you want to comment on the cost energy?
The 2021 energy bill will stay still below the 2019 energy bill.
Good.
Okay.
That's very helpful.
Yeah.
Like that? The next question comes from Arnaud Lehmann, Bank of America.
Arnaud, hello.
Hello. Good afternoon, gentlemen. Thank you for taking my question. I just wanted to come back on the disposal of the U.S. West region assets. What are the strategic reasons to sell this business? I guess on the other side of it, you're planning to make bolt-on acquisition in the rest of the U.S. I would have thought there are other maybe underperforming assets in the rest of the portfolio, for example, in Asia, that you could have considered selling if you needed some cash to reinvest in the U.S. Would you mind coming back on the disposal and if you're confident about the future acquisitions in the U.S. as well?
Yeah. Arnaud, thank you very much for that question. You know that not only the U.S. West Coast, but also the other divestments that we have already done and those to come, we basically decided on the back of a very rigid portfolio review at the beginning and the first half of last year, where we basically put 10 - 12 criteria, in terms of longer-term profitability, market position, compliance topics, performance track records, volatility of those markets, ESG criteria. There were 10 - 12 criteria that we basically put to those markets. Obviously we also looked into the relative performance in each area, in terms of where do these markets stand, both in terms of historical performance and also potential going forward.
On the back of that, we have decided globally and also within each area of what to divest from and what to not divest from. I ask for your understanding that we are not going through any substantial details on the West Coast sale. I think that is not professional from our perspective. That's a decision between the seller and the buyer in the end. It's clear that for us, the West Coast was a market that we've been in for a very long time. We know the market and the assets very well, and for us, it was not the best market to put our money in going forward. That was the reason we divested. That's coming to the second question. Clearly, that's what we always said, we want to build out our other markets in the U.S. and in Canada.
We are working obviously on potential transactions in the U.S., but also outside of the U.S. Not every transaction comes at the right multiple. You're absolutely right. There are transactions that are, from our perspective, too expensive. We will stay disciplined on these investments, but clearly, absolutely, that's still on the agenda that we continue to strengthen our remaining market in North America with bolt-on acquisitions. To your questions with Asia, to reshuffle money from Asia to the U.S., I think we've got nice proceeds now in the U.S., and let's see what we can do in reasonable financial restrictive terms to also continue to build our U.S. business. I think there is enough money at this time to spend for the U.S., and we have no restriction in that respect, so there is no need to reshuffle the portfolio from Asia to North America.
We obviously will continue to work in each area on divestment and also investment.
Thank you very much.
Thanks, Arnaud.
The next question comes from Morgan Stanley from Cedar Ekblom.
Hey, Cedar .
Hello. One question for me on pricing. I wondered if the decision to go for a second price increase this year could set a potential precedent in some of your core markets in the future. Cement is an industry where you have had historically one price increase annually, and yet your cost line tends to be more variable with more exposure to commodity prices. Would you like to see a scenario where you have some more flexibility in your pricing decisions in the future in order to make sure that we get a better hedge or better performance on the margin going forward? Thank you.
On smart questions, Cedar, you get a quick answer. Yes.
Can you give us some color on how that goes down with your customers? Do you see your competitors doing the same thing? Are your customers receptive? Obviously if you've got a traditional pricing relationship in an industry, changing that can be a little bit difficult.
I cannot comment on the competition. I don't know what they are up to, but I can talk about our own discussions that we had with our customers and our country managers. Is this an easy exercise, Cedar? No. Then everybody could do it, especially, you are right, historical behavior has been different. It's not like we push this pricing, at least for us, I can only comment for HeidelbergCement . We don't have the culture to push these price increases on the throat of our customers. We are spending a huge amount of energy and time with our customers to explain the reason for the scenario that you just painted. We do feel that our customers are not stupid. They are acting in their markets. They see also what happens on their end. They see other construction materials moving in similar situations.
They see massive increases in other materials. In that respect, we are taking the customer along. We are explaining very well to the customer why we are moving. It's not because we are greedy, it's just because that's the nature of business, exactly what you described. That's why we have to also get out of traditional behavior and paradigms, and need to shift the paradigm a little bit in order to respond to the challenges that, last but not least, the climate discussion has brought to all of us. In that respect, we do see positive understandings. Obviously not in every customer, that's clear, but it's a little bit breaking the ice. That's the important piece. You need to start in every market to take a couple of especially larger customers along. Then from our perspective, there is a domino effect on our other customer base.
Let's wait and see. The game is not fully done yet. It's hard work, Cedar, but we are determined to get it done.
Great. Thank you very much.
Okay. The next question comes from Matthias Pfeifenberger from Deutsche Bank.
Yes, good afternoon, gents. Thanks for taking my questions and congrats on the share buyback results. It is basically circling around slide number 14, maybe just some clarification. What is baked in the lower end of the 1.5 x leverage? Dr. Näger said it could even be below. You said the share buyback until year-end is baked in. I guess the U.S. disposal is not included. Is it fair to say all in, we are moving towards 1x rather than 1.5x? Can you maybe update us on the remaining disposals? What are you still working on? Can we expect some news flow? Thanks.
Yeah, Mr. Pfeifenberger. Let me do the second one and then Lorenz will comment on the deleveraging. As I said, the portfolio exercise is not a one-off exercise. I have the clear desire to make this a continuous improvement because this does not only happen on group level, it also happens on country and local level. We are very much also working with our countries on working on optimizing their portfolio. Even in the core markets, personally, I believe you can still optimize your portfolio. I see some early good traction. Absolutely there will be transactions coming down the road, smaller and bigger ones, but that's too early, again, to comment. The program is not done.
I think to say that very clearly, there will still be a transaction coming, and then there will also be obviously investment transaction coming, that I was commenting on earlier. Lorenz, you want to comment on the deleveraging?
On the deleveraging. The guidance factors in the disposal of the U.S. assets, we think, as Dominik said, we are going to close at the latest, early in the fourth quarter. It also affects us in the share buyback program, and the target is to come to the lower end of the guidance or even a little bit below. That's a little bit what we do actually expect right now.
Okay. Thanks a lot.
Thank you.
Thanks, Matthias. Next, is Yuri Serov from Redburn.
Hey, Yuri.
Yes. Hi. Sorry, good afternoon. I would like to actually continue on the topic that Cedar just raised about price increases. As you say, your customers are intelligent people, and they also see your results. They look at your presentations. Investors look at your presentations, but customers look at your presentations, too. They see your margin going up. They see the margin up in 300 basis points. You say you have discussions with the customers, and you try to seek their understanding why you need to increase prices. I am trying to understand why they would have an understanding, because they are seeing that HeidelbergCement is not in it, and they are coming to increase the prices further so that they can increase the profitability. Why would they agree to it? Thank you.
Yeah, Yuri, that's an interesting follow-up question. I'm not sure. What do we all do as customers of Amazon, Google, and Microsoft? If I just see there, I think we have still some room for improvement in terms of our profitability, I would argue. I think, guys, again, we have nothing to hide to our customers. One thing is also clear, the industry and the material itself is up for a massive challenge. We've discussed this many times. One is the volatile input cost development, but our customers also very much understand that we are up altogether for a massive transformation of our beloved construction material. In that respect, there are two arguments to your point, Yuri.
First of all, if you have professional customers, they love to work with professionally run companies, and a good profitability level is a clear indication that the company is run in a very professional way. If you are not trying to hide something, if you say that with some pride, but also some big respect, I think, many of our customers do understand that. The second point is, they also want this strong profitability to ensure that you have partners delivering the materials that are in there for the long run, and that are also able to deliver that transformation, even if it costs some money. There is a need to raise the prices also to pay for the future challenges. We've discussed this many times.
It's not just the argument of the energy cost inflation that sits there right now, but it's also the transformation going forward. Guys, it's very clear from our perspective, we need fundamentally different prices if we factor in the CO2. Everybody knows that, but I remind everybody, if you go for a biological apple in your food store around the corner, it costs differently, maybe sometimes double the price than your normal apple costs. Why should this be different in our industry?
Okay. We are approaching the end of our Q&A. We have three more questioners on the line. Next one is Sven Edelfelt from ODDO.
Hey, Sven.
Good afternoon, gentlemen. Thank you for taking my question. Obviously, thanks to Dr. Näger for his contribution. My question is, I think the Norwegian government is planning a EUR 220 per ton tax for CO2 by 2030. We know you are working on a CCS facility in Brevik, so I just wanted to know more about your other plant in Norway, Kjøpsvik. Is there any plan to close or to transform this plant into a grinding facility?
Sven, there is no current plan on this. We have heard about these discussions in Norway. A massive amount, the clear majority of the Norwegian product comes out of Brevik. That's the center part. Kjøpsvik is a fairly small plant, so this is not going to move the needle dramatically for Northern Europe and yet alone for the group. That's still some time to come. You know that our Brevik project is already under construction, so it's not a feasibility study or anything. This one will go live by 2024, capturing 50% of our CO2 up there. There is still an option to upgrade and continue if everything works well. I'm pretty relaxed about this discussion there in Norway.
By the way, our Northern European colleagues have proven in the past that they have a good customer base that also understands the challenges that are coming. They live with very strict regulations, not only on CO2 prices. You look at other things. The Northern Europeans are a flexible society. They do understand if something needs to transform, then they need to pay for it. I am fairly relaxed about the developments in Norway in that respect.
Thank you.
Okay. Next question comes from Yassine Touahri from On Field Research.
Hi, Yassine.
Good afternoon, both of you. My question would be on pricing. Do you see any risk on pricing at the periphery of Europe in the next five years when you have no protection from import before the Carbon Border Adjustment Mechanism is implemented? I'm thinking of European Union countries around the Black Sea, around the Mediterranean Sea, or countries with borders with former Soviet Union states which have no carbon taxes.
Yassine, thanks a lot for your question. Clearly, if there is a huge price gap between countries, we always see material flowing from one to the other, and that's also true for the areas that you have described. That's exactly the reason why we say, guys, what we cannot do in Europe is try to save the world from CO2. By the way, we cannot do it alone anyway in Europe.
To set a very precedent example globally in how to manage industrial transformation in that respect, but then say, "Okay, we don't care about the rest of the world." Either there is a global carbon price, that is, I would argue, not so easy to implement, or there is a Carbon Border Adjustment to pay for and ensure the transition and to also ensure the fact that there is also the effect that the Carbon Border Adjustment basically safeguards the situation and that there is no reduction of CO2 allowances before, that's why I said it earlier, before the Carbon Border Adjustment Mechanism really works. That's the key argument on the political discussions. Guys, either it is the full allocation right now, and I said earlier, there is no change planned in the very short term, exactly for the reason that you have described.
Either there is the full free allowances allocation as in the past, or there is a fully functioning Carbon Border Adjustment Mechanism. If there is a gap in between the two, there is a clear risk, and that's something that we will fight for in order to let the politicians understand those dynamics. I'm confident that they will take then the right decision.
Thank you very much.
Thanks, Yassine.
Thanks, Yassine.
The final question comes from David O'Brien from Goodbody.
Hey, David.
Afternoon, guys. Congratulations, Dr. Näger. Long and healthy retirement. Just a question on sustainable products. I guess, what is your experience in how they priced or the pricing environment for them versus your more traditional products over the last 6-12 months? Maybe if I could tag on, how are the demands for sustainable products varying from infrastructure end markets into residential and non-residential as well, too?
Important question, David, for the end. I think let's talk about the demand first, and then we'll come to the pricing because the one has the correlation with the other, right? If the demand is high and there are not too many people who are able to produce them, then you also have a pricing power coming with it. I think that's also clear. We see quite a dynamic on the demand side that has kicked in over the past couple of months, because now the things are coming closer.
At least in some of the European markets, our core customers have understood if they want to find, now I talk for example, commercial and even houses that are rented out, if they want to find for the new builds, tenants. You better make sure that you have a very tight certificate on your sustainability efforts and your CO2 footprint. That also drives, obviously, the demand for lower CO2 concrete. I would argue that for the time being, in that discussion, the pricing discussion is clearly not the first point they discuss. It's the matter, what's the real CO2 footprint? How do you deliver it? How sustainable is the way you can deliver it? What's the way you deliver it in terms of CO2 footprint? This has clearly gone to the forefront of some of the key core customers.
Has this reached the broad element of the market? Not yet. Again, go back to the food store example earlier on. I remember very well, five years, you had maybe 20% bio and vegan food. If you go today in a food store, at least in Germany, you have 80% bio and vegan. I would assume that's a little bit the same cycle we will go through. If the politicians really mean business and it gets to the point that are basically currently sketched out, then I'm absolutely confident that there will be a significant demand for these CO2 products.
As I said earlier, David, it is clear that if there is rising demand, and it's not so easy for everybody to deliver that in the right quality, in the right consistency, in the right sequence, at the right location, then I'm confident that you have also enough pricing power to defend or build out your margins.
That's great. Thank you very much.
Okay, this concludes our call. Thank you very much for dialing in. You've seen on page 25 of our presentation that we are active on quite a number of conferences in September, and we hope to see you all there. Once again, thank you, Lorenz Näger, for your contributions for the last-
Thank you, Christoph.
17 years, and speak to you soon.
Yep.
Bye-bye.
Thanks a lot. Have a good summer, and then we'll speak in the fall. Thanks a lot.
Thanks all. Bye-bye.
Bye-bye.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.