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Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the HeidelbergCement Second Quarter 2021 Results Call. [Operator Instructions] And 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 Nager with us, our CFO, who has today a little bit challenged with his vocal chords. So 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 Q1 -- Q2, sorry, trading statement. And 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 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. So a 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 -- 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 lockdown. 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 sales price $2.3 billion. The closing for that transaction is expected for October 1 this year. We have communicated in our Beyond 2020 strategy, the famous waterfall that we've discussed with many of you intensively. And 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 promise. And here we go again. So we said after we have basically kept our CapEx guidances we have delevered, we had the BBB flat 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 to our -- sorry, share buybacks to our shareholders. And that's what we've announced last night. Why last night? The clear reason is we have a very strict BaFin 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. For corona reasons, we need to always do midday [indiscernible] in the U.S. and Kevin sitting in Australia. So 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. And then very importantly, for us, we also continue our leadership path on the decarbonization within our industry and obviously, more importantly, also within HeidelbergCement. 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 COP26 in Glasgow this year. So both the business ambition for 1.5 degrees and also the Race to Zero has been funded in base bars and also in cooperation with SBTi .And then, last but not least, obviously, we've just done our quarterly management meetings for the last 2.5 weeks. And coming out of that, and in the end, is also the share buyback is an indication for that, we have a strong confidence going forward for the remainder of 2021. And 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, but 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. So we are now coming back up. We'll come back to that in a minute. Our look on a longer-term view. But 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 target 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? Because we had the lockdown April, May last year. So the comp was also a little bit different. Overall, I think okay, if not good and very good development on the volume side in cement, in aggregates, in ready-mix and also in asphalt. And you see on the right side that this is really also being contributed from most of our markets [indiscernible] in the U.S. were good. Canada is coming back on the back of a high oil price. There's always 2 sides of the metal. So 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, it's okay demand-wise, so is Italy. Then 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 grow strong. So in that respect, good volume development across Europe. Then 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. So that was very encouraging for midyear. This is really an hour ago. So we are very close to the situation there in Asia because India is picking up again after a very, very difficult month. Then it went through Indonesia, now a little bit in Australia, only in a few pockets, thankfully. But 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, many quarters. So 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 5, 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. And then you see the net volume development, very strong, almost EUR 300 million EBITDA contribution on the volume side. And you see the negative price over cost. I'm sure we'll come to that discussion later on and 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 point 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. So I think that was -- in Australia here, we would say an okay performance. So it was quite okay from our perspective. Then if you look at it from a half year perspective, more than almost EUR 350 million volume, where the price of course, is still positive. So I think that looks, from an H1 perspective, pretty good, so almost EUR 1.8 billion or clearly above EUR 1.7 billion EBITDA for the first half. And then I already shared the language around Page 7. You see that the EBITDA growth is very well balanced. We discussed vividly the discussion, do we need 1 region, 5 regions, 10 regions? We feel quite comfortable and well balanced with our 5 areas. So 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 discussion. Important is then for us Slide 8 to my earlier remarks, very interesting to see that on a revenue perspective, we are absolutely flat till the end of December. There is -- we went through a trough there for the last 5 quarters. And now we are basically just exactly on the end of 2019. But in the meantime, the structural profitability of the company has improved 16%. That's a lot, 16%. And you see it on the right side how we quarter-over-quarter improved our margins, total 300 basis points. We are now on a rolling last 12 months of 22%. Then obviously, very importantly, and also driving that financial performance is the execution of the portfolio optimization, 2 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. COVID is already been done. And then, as I mentioned earlier, the sale of our West Coast business, $2.3 billion and the closing of that should happen October 1 this year. And then maybe a couple of seconds on the share buyback because it is the first time ever that HeidelbergCement in its history went on a share buyback exercise. I know some of you have expected that, others were very, 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. So up to EUR 1 billion, in basically 3 tranches. The first tranche will start during the month of August then continue 4, 5, 6 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 in -- on May 6 this year. And 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 for the financial side.
Okay. Thank you, Dominik. Page 11, you see the key financial messages on a like-for-like basis. We see a significant increase in earnings per share. It also if we adjusted for the additional ordinary result, previous year, the earnings per share increased by more than 70% to EUR 3.06 year-over-year. We have excellent quality of earnings. So 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%. So 56% of our EBITDA, it's the cash register. So that's a good -- very good development. And this then -- these pipeline of dividends translates into solid deleveraging. Our net debt goes down by EUR 1.5 billion. That's the second year in a row. Over 2 years, we deleveraged by record EUR 3 billion. Right now, as a consequence of this, leverage comes down to a very comfortable level towards year-end, we target to the lower end of below our guidance of 1.5 to 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 significant improvement in financial results. This comes to a smaller part from lower interest expense. And then it's this IFRS 37 effect on valuation of long-term provisions. That's a pure noncash item. So it's a bit irrelevant for decision-making. Income taxes go up to EUR 325 million, and this is due to a swing in deferred taxes from an income in previous year to an expense in the current year, also noncash item. Net results from discontinued operations, that's our U.S. west coast obligations. This business also includes a lot of long-term provisions. So here, we have the same positive effect as in the financial results around EUR 15 million roughly. Noncontrolling interest up to EUR 69 million because our businesses in countries where we have minority shareholders developed very good. That's Indonesia, Thailand and Morocco, very good development. So this brings our group share of profit to EUR 755 million or adjusted for AOR EUR 608 million, up from EUR 356 million previous year. So we see here that the good operation development dropped 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 payment. Very solid management in the working capital, disciplined CapEx. That brings us to a free cash flow of EUR 2.3 billion. And despite a significant increase in dividend that then translates into a substantial reduction in the net debt position.So if you go to Slide 14, you then can see the situation, which led us to the decision to make share buybacks. We have more or less achieved all financial targets with funded disposals. We keep the CapEx below EUR 1.2 billion. We have delivered to the lower end of our range in deleverage. We have received a BBB flat rating. And we have come back to progressive dividend after our little interruption in the COVID crisis. So we have enough funds to finance our growth. So we have excess cash, and that's what we put into shareholder return, EUR 1 billion until -- in 2 years' time, until September '23. And the first tranche will be EUR 300 million to EUR 350 million starting right now, after setting up the program and lasting through the end of the year, maybe January. So that's it. So I say goodbye to you. That's my last press conference. Happy to have fulfilled all the targets which have been promised. The only what we lack is that my successor René Aldach has to issue a bond at 0 or negative interest. That's the only what I wanted still to do and I 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. So let's still continue with our business, and we will obviously do with the equal if not more energy level. So on the ESG agenda, next page, Page 15, you see that we have also put a big focus on this and not just in terms of announcement, but especially really did 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. So 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. And that clearly will put additional know-how 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 then push also our world 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. And then 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 upside in terms of reporting, but 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 -- as a team, we believe there's still some step-up that we can do also in terms of transparency reporting. We have the taxonomy stuff coming. So 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. And from our perspective, it needs to be closely tied to that. So 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. And that means we need some sort of an adjustment that we cannot have a global import scenario in that respect. So 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 credit in the EU -- credited in the EU scheme. That's the second point. The third point, I think good news on the innovation front. The UN understood this does cost money. We have always said that. We are fighting for that support, obviously, with our own -- together with our own contribution. And 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 altogether do better in that respect. We will also fight for making these funds available fairly quickly. Those are the 3 trigger points that we will push for in the next negotiation round. 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. And as I said, we have now also moved to the global level by signing the UN FCC 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. And you know that a little bit of a government body is a science-based target initiative. We have worked with them for a long time, but we have decided on the back of this announcement 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. So we are more than welcome -- we'll be more than welcome the combination in the core elaboration with SBTi. And then 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. Also Germany still with very good demand, especially on the residential side, also 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 Chris and Ozan.So I think we should see the demand coming during the second half at some point. Australia also, I'm hopeful that they get the selected lockdowns behind them in Sydney and Adelaide, And then the demand overall in Australia looks to be healthy. And also Italy sees already the first infrastructure money coming in and also residential demand picking up. So overall, the markets from our perspective are pretty much intact, and that's why we then also turned to our guidance and said, guys, we move from a slide too strong in terms of our increase of operating EBITDA and operating EBIT. We are -- we can do that with even lower CapEx than originally guided. So we will stay below the EUR 1.2 billion on our core CapEx, net of investments -- of divestments. We will even go higher in our work. So we are very confident to get clearly above the 8%. And 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 1.5 to 2 by year-end. So 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, but we are absolutely confident that we can deliver on our guidance from today's perspective. And that's -- 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.
[Operator Instructions]
[Operator Instructions] And the first question, I think, Paul, you haven't been the first for quite a while now. So the first question comes from Paul Roger from BNP.
Yes. That's very generous. Hope everyone's well. Well, I guess the obvious question is on price cost. You had that EUR 66 million negative in Q2. Clearly, there's 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. And is there scope to announce a second price rise in either Europe or the U.S. to compensate later this year?
Thanks. That's a very short and precise question. So thanks a lot.
I thought you'd appreciate that, Dominik.
Yes, yes, yes, absolutely. Thanks so much, Paul. So price of our cost, obviously, that's an 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 3 elements, Paul. For us, it's a fixed cost issue. It's a driver cost issue, and it's a price increase issue. That's basically the component of these 3 elements. Now in the Q2 margin development, you have to keep in mind -- and that's also a little bit maybe you are surprised with 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 and this is something where we always said, guys, that's going to come back. And now you have to look at the current volume development that we -- guys we need everybody on board to produce the volume. So I think it was also not for us the decision to say, yes, we keep our capacity low and don't deliver the volumes to the market. That was not the option. So for us, we had to bring some of the cost back, and we did not get the same renew from last year. And the delta obviously this year 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, pet coke, oil diesel. It's basically electricity on the back of a higher CO2 cost. So it's the perfect negative storm in that respect. And if you want to put something on top, it's the freight rates. The freight rates also are now on an 11-year high. So currently, as you see in maybe other supply chains, there is -- there seems to be a little bit crunch around all these things. And 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. So there is -- it seems to be the perfect storm. I'll come back to the outlook in a minute. And 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. So 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 [Audio Gap] price increases going into 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. Now 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 CFO, the fixed cost base last year was fairly stable. We had good volume development. So the fixed costs were already debt. Relief from the COVID was basically very normal. So 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 make a little bit something to the cost inflation there specifically in a minute, but we've also obviously done some hedges. So we are not completely going with open risks into this scenario. And 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, we are -- there is the risk -- absolutely, there is risk, always line 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 maybe Lorenz, do you want to say something on the energy cost development?
Yes. As I said last time, we were covered with relatively cheap energy for the first half year, which we covered late in 2020. Now of course, we have worked and we have now covered to a larger extent, the second half year, but of course, at higher prices than we had it in the first half year. But 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 you cannot -- that does not exist effective forward buying market. And of course, diesel, which has no forward buying market. So that's the situation and the remaining open volume are very little. So we are pretty safe on that. Now for next year, we will have to see, and we will determine the forward buying policy in the coming months. So that's the situation right now.
Thanks, Lorenz. Paul, I hope that I answered your question in quite detailed, but I assume many of you had the same question on mind.
That's clear. And also, just can I congratulate Dr. Nager on his retirement and wish him all the best.
Thank you, Paul. What a pleasure 17 years. It was nice. I really appreciate it.
The next question comes from Elodie Rall from JPMorgan.
Congrats Dr. Nager on retirement. So if you don't mind, can I just have a quick follow-up on Paul's question on price cost. So you answered quite detailed on H2. But if we look at the full year, does that mean that you're comfortable on a full year basis, basically the price cost will be flat and not down? And the next question will be on guidance. Obviously, strong increase [indiscernible]
Sorry, you broke up with your second question. Can you repeat your second question? You broke up in the middle.
Yes. Can you hear me better?
Yes.
Sorry about that. On guidance for the strong increase in like-for-like EBITDA, so obviously, an increase in guidance. But content expectation is looking for about 9% like-for-like increase in EBITDA already. So do you think that's more or less what you're thinking about, is that achievable?
Yes. Elodie, First of all, on your question of price about cost -- and I haven't done the math to be quite frankly. We probably have to follow up on that point with a calculation. But 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, but 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 recalculate these price over costs. That's a retrospective development. We obviously manage our fixed cost and our variable costs and our pricing, what I just explained to -- on the back of Paul's question, but we do not basically look forward on the price over cost scenario. So 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. But as I said, it's our clear focus to fight for the -- a positive price over cost development because again, let's not forget the big hit here in the second quarter came from the fixed cost side also, right, versus last year. It did come also from the variable cost, but it's not that there was also a significant contribution from the positive side on the pricing side. And 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. And then on the guidance, it was not so easy technically to understand. But 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, then we always said, guys, this industry is not tuned for very exact guidances, especially not in the year where we have such a high volatility on energy costs. So 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 market. And in that respect, don't get my answer wrong, but strong is better than slightly. I think that's the one clear message. But let's -- I believe it also a little bit to your extent what a 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. So in that respect, if you put these 2 things together, I'll leave it for you to speculate a little bit around this. But clearly, we are confident for the full year of 2021. And that's our perspective on that. Okay?
The next question comes from Barclays from Nabil Ahmed.
Sorry, but probably another follow-up on the cost situation. 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 supporting measures that you benefited from in Q2 last year and as well the fixed cost savings, those emergency savings you made last year, which were obviously not sustainable in the more normalized environment. So how much is that into Q2? The second question, I was wondering if you could comment on the Supreme Court decision in Slite to reject the renewal of the limestone quarry that it prevents you from priority in the plants? And if so, how would you supply the market going forward? And if you could help us to understand the potential financial impact that we should expect for next year?
Yes. 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, that basically is -- will give you an indication of that, but, Nabil, please understand that we are trying to balance things left and right and center. But I'll let Lorenz comment on the fixed cost impact in Q2 to give you a little bit more color. Now 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 for an extension for its permit until 2041. And we had everything in place, including the environmental impact study. The permit was granted -- the permit extension was basically granted and then challenged by the court in this famous court beginning of July with a new surveyor that came a little bit out of the blue for everybody. So that led to this decision. You have seen thereafter quite a splash excitement across Slite, even outside of our own company. I was a little bit surprised, but it shows you the impact of this business in the normal European countries, especially in Slite. So all the politicians are on the fence or many, many stakeholders are on the fence, including unions, NGOs. So 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 plant is detrimental -- would be detrimental if the plant would be interrupted to the Swedish construction industry. You know that, that's basically a plant that supplies the market there. So 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. The life is never without alternatives. That's also true in this respect. But Nabil, it's too early to say what would be the impact of this. And again, we are, for us, plan A is the 80% scenario to make sure that we get the permit extended as originally planned and originally granted. So that's the story around Slite. Lorenz, do you want to say something on the fixed cost side?
Yes. 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, but I don't know -- I forgot the split between Q1 and Q2. Most of it, of course, was available. Thanks, of course, it was in Q2 because in Q1, there was only 2 weeks of COVID crisis. And now we had a reincrease coming back fixed cost in the second quarter of roughly EUR 115 million. So still we are on fixed cost side, EUR 30 million below 2019 levels. So that's EUR 130 million and you see that our contribution margin, as we show 66 as the total, so it still shows positive development in Q2. So 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. So that's the dynamics.
Yes. I think Nabil, that very precisely answered your question. I think we know that you all just as us very concerned about the top again, 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.
Next question comes from Gregor Kuglitsch from UBS.
Obviously, happy retirement. But not quite yet. I think you still have to bear with a few questions. So, a couple questions, please. A couple, if I may. So the first one is on free cash flow generation. You've printed obviously a very strong number again. I think it even strengthen a little bit. So the question, I guess, 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. And 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? And then I suppose in relation to that, how you see that kind of developing as the proposals from the EU in terms of the reduction factor going forward?
Gregor, thanks for your questions. I would answer maybe the second one, and Lorenz will 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. We saw it's far too early to tell you this is a science rather than hard to fully understand the EU and manage the EU ETS allocation. So that's a very fluid and ongoing situation. It very much depends obviously also on the -- on plant-by-plant view, in terms of how much you produce, what's the demand? How much do you sell? What's your capacity utilization? Aye, aye, aye guys. This is a complex topic, and this will take the full year to understand exactly where we end up. There is nothing you can -- that's also -- that's even difficult to forecast, that's 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 until 2025. So in the 4A and then would try to reduce the free allocations by this factor as of 2025 going forward. And that's where my earlier remark kicks in. Where we are now helping them to understand if we want to keep this transition happening, we need a counterbalancing effect to safeguard the necessary price increases, and that's where the CBAM, carbon border adjustment mechanism, comes in. So from our perspective, this reduction of CO2 allowances can only stop a moment where the CBAM 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. And in that respect, I'm pretty positive that we'll get there. And as you know, we are still a couple of years along on our certificates. That has not changed. And then we hopefully work on our CO2 emission reduction in parallel, and then we'll see where we come out. But from our perspective, no major change to what we've communicated in that respect. Lorenz, do you want to take the free cash flow?
Yes, the free cash flow. Yes 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. So for example, there is still this in the second half of last year, we virtually did not pay any taxes, very small amounts. And this will not come back. So 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 we'll still continue to lead to a strong deleveraging towards end of the year. And please keep in mind that we will receive the proceeds from the sale of our U.S. West business. That will altogether, 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 next year -- of this year -- end of this year, sorry. 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 to lower level of our guidance of 1.5 to 2.0x.
The next question comes from Berenberg from Harry Goad.
Actually, just following on from that point you were just making goes [indiscernible] about the buyback, about the balance sheet. And whilst I think the EUR 1 billion buyback is clearly very well commenced, taking that point into account about receiving proceeds from the U.S. asset sales 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 at the end of next year. So it'd be useful just to hear an overview about your thought process on how you arrived at that EUR 1 billion number, whether there's elements of conservatism in there or whether you're keeping optionality for perhaps M&A through 2022?
Harry, thanks for that question. Guys, it's always interesting to discuss with you. I love the questions, but guys, let's take one step after the other. I think for us, it was, Harry, 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 HeidelbergCement would ever deliver on a share buyback. And here we are. Now EUR 1 billion is given the size of our company, not a stingy number. So we deliberately wanted to also say, "God, if we go for something, we go for a significant one." We will deliver it over 2 years deliberately because again, we are in a long-term business. So we don't do a 1-minute -- one-off exercise. So we really try to have now these 3 tranches executed. And as Lorenz was sharing with you in the waterfall earlier, this is a balanced -- that's what we are paid for to take balanced decisions and we are not catering only to one side of the metal. 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. But let's not forget, we also paid and mainly paid for running the business. So 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? And how do we ensure, by the way, that we grow the company also through M&A and also to -- in order to improve going forward? Because, guys, absolutely, we are focused on total shareholder insurance. 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. So 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.
Just one point. The shareholders meeting has entitled us for buying back 10% of our shares, 10%, yes? The program we have announced right now with EUR 1 billion would already be between 7% and 8%...
6% to 8%.
6% to 8%, something like that. So we are [indiscernible] how you say, we really used in the very first shot 2/3 of the total entitlement of the shareholders' meeting, either we have in Germany, in Southern Germany, we say we have to keep the church inside the village, here? So 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, piano, one step after the other.
You've got our CFO back on the tree. That's good. So in that respect, no, just also one additional point from my side. One of the core reasons also for the share buyback is we strongly believe the company is undervalued. And we strongly also believe this is a very good investment for our broader shareholder base. We will drive good returns out of this investment. So even the finance guys over for it to say, guys, this can be also financially an attractive move at the current valuation of HeidelbergCement. So in that respect, that was one of the -- also the key drivers to move at this point for the share buyback.
Thanks, Harry, and thanks, all. [Operator Instructions] So the next question comes from Tobias Woerner from Stifel Europe.
I just was about to say, thanks for the 2 questions. But one question just sorry to come back to the price cost. I mean, let's keep it simple. In 2020, your energy bill was EUR 1.5 billion; the year before, EUR 1.9 billion; 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.
Mr. Woerner, okay. First of all, on the energy cost side, we have to go, quite frankly, I don't have the energy cost numbers '19 with me. So maybe, Lorenz, you can check in the meantime, maybe the situation on the energy cost '19. And then Lorenz should basically work on that. Now 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 -- so you should assume that price increases in our core market if you take Western Southern Europe, Northern Europe and also especially North America are more around the 5% mark plus or minus.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. So 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. And it also -- I continue to remind our colleagues internally like the overall sentiment in the market -- in many other industries also is clearly inflationary, let's face it. And if I look at other construction materials, steel, wood, plastic, pipes, whatsoever. They talk about 20%, 30%, 40% price increases. And I think there is a clear pricing momentum now to be grasped and that's clearly something that we are working on. And maybe, Lorenz you would talk about the cost of energy.
The '21 energy bill will stay still below the '19 energy bill.
Well, the next question comes from Arnaud Lehmann, Bank of America.
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? And 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 might be 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. So would you mind coming back on the disposal and if you're confident about the future acquisitions in the U.S. as well.
Yes, 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 in the second half -- the first half of last year where we basically put 10 to 12 criteria in terms of longer-term profitability, market position, compliance topics, performance track records, volatility of those markets, ESG criteria. So there are 10 to 12 criteria that we basically put to those markets. And then obviously, [Audio Gap] looked into the relative performance in each area in terms of where do these markets set, both in terms of historical performance and also potential going forward. And then on the back of that, we have then 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. We should -- that's a decision between the seller and the buyer in the end. But it's clear that we -- 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. And that's -- then coming to the second question, clearly, and 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. And 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 restricted 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 divestments and also investments.
The next question comes from Morgan Stanley from Cedar Ekblom.
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?
Smart question, Cedar, you get a quick answer, yes.
And 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? Because, 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 have with our customers and our country managers. Is this an easy exercise, Cedar? No. Then everybody could do it, and especially you are right, historical behavior has been different. And 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 [indiscernible] 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. And 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. So in that respect, we are taking the customer along. We are explaining very well to the customer why we are moving. And it's not because we are greedy, it's just because that's exactly what you described. And 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. So 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. And then from our perspective, there is a domino effect on our other customer base. So 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.
The next question comes from Matthias Pfeifenberger from Deutsche Bank.
And congrats on the share buyback and results. It's basically circling around Slide #14 maybe just some clarification. What is baked in the lower end of the 1.5x leverage, Dr. Nager, that it could even be below you said the share buyback until year-end and is baked in, I guess, the U.S. disposal is not included? So is it fair to say all in, we are moving towards 1x rather than 1.5x? And then can you maybe update us on the remaining disposals, what are you still working on? Can we expect some news flow?
Let me do the second one, and then Lorenz will comment on the deleveraging. Now 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 only does not -- this does not only happen on group level, it also happens on country and local level. So we are very much also working with our countries on working on optimizing their portfolio. And even in the core markets, you can -- personally, I believe you can still optimize your portfolio. And I see some early good tractions. So absolutely, there will be transactions coming down the road, smaller and bigger ones. But that's too early, again, to comment. But 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 on. So Lorenz, do you want to comment on the deleveraging?
Yes, the deleveraging. The guidance factors in the disposal of the U.S. West assets, we think, as Dominik said, we are going to close at the latest early in the fourth quarter. So 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.
Next is Yuri Serov from Redburn.
I would like to actually continue on the topic that Cedar just raised about price increases. And as you say customers are intelligent people. And they also see your results, they look at your presentations, investors look at your presentation, but customers look at your presentations too. They see your margin going up. They see the margin up 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'm trying to understand why they would have an understanding because they are seeing the HeidelbergCement is noting it and they are coming to increase the prices further so that they can increase the profitability. Why would they agree to this?
Yuri, that's an interesting follow-up question. I'm not sure. What do we all do as customers of Amazon, Google and Microsoft. Are we -- if I just see there, I think we have still some room for improvement in terms of our profitability, I would argue. So I think guys, we are -- again, we are trying to be very -- we have nothing to hide to our customers. But one thing is also clear. The industry and the material itself up for a massive challenge. We've discussed this many times. So, 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. So in that respect, our clear -- there are 2 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. So if you are not trying to hide something, if you'd say that with some pride, but also some big respect, I think many of our customers do understand that. And the second point is they also want the strong profitability to ensure that you have partners delivering the materials that are in there for the long run and that they are also able to deliver that transformation even if it costs some money. So there is a need to raise the prices also to pay for the future challenges. We've discussed this many times. So it's not just the argument of the energy cost inflation that sits there right now, but it's also the transformation going forward. And 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. It may be sometimes double the price than your normal apple costs. And why should this be different in our industry?
Okay. We are approaching the end of our Q&A. We have 3 more questions on the line. Next one is Sven Edelfelt from ODDO.
Thanks to Dr. Nager for his contribution. So my question is, I think the Norwegian government is planning a $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?
There is no current plan on this. We have heard about these discussions in Norway, but a massive amount, if not the clear majority, the clear majority of the Norwegian product comes out of Brevik, that's the center. 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. And there'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. And then there is still an option to upgrade and continue if everything works well. So I'm pretty relaxed about this discussion in Norway. And 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. Also, they live with very strict regulations, not only on CO2 prices. You look at alcohol and other things, the Northern Europeans are flexible -- is a flexible society. They do understand if something needs to transform, then they need to pay for it. So I'm fairly relaxed about the developments in Norway in that respect.
Okay. Next question comes from Yassine Touahri from On Field Research.
So my question would be on pricing. Do you see any risk on pricing at the territory of Europe in the next 5 years when you have no protection from import before the carbon border adjustment mechanism implemented? And I'm thinking of European Union countries, around the vaccine -- around the [indiscernible], or countries with borders with a [indiscernible] which have no carbon taxes.
Yassine, thanks a lot for your question. Clearly, if there is a huge price [Audio Gap] 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, there is no -- 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. But 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. So 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 the -- and ensure the transition and to also ensure the fact that the -- 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 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. So either there is the full free allowances allocation as in the past or there is a functioning -- fully functioning carbon border adjustment mechanism. If there is a gap in between the 2, there is a clear risk and that's something that we will fight for in order to let the politicians understand those dynamics, and I'm confident that they will take then the right decision.
And then the final question comes from David O'Brien from Goodbody.
Congratulations, Dr. Nager on a long and healthy retirement. Just a question on sustainable products. What is your experience in how they price or the pricing environment for them versus your more traditional products over the last 6 to 12 months? And maybe if I could tag on how the demand for sustainable products are varying from infrastructure end markets into residential and nonresidential as well?
Yes. 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. So the demand is high, 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. Now 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. And 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 newbuild -- tenants, you better make sure that you have a very tight certificate on your sustainability efforts and your CO2 footprint. And that also drives, obviously, the demand for lower CO2 concrete. And I would argue that for the time being, in that discussion, the pricing discussion is going -- 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? So this has clearly gone to the forefront of some of the key core customers. Now has this reached the broad element of the market? Not yet. But again, go back to the food store example earlier on. I remember very well, 5 years, you have -- 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. And I would assume that's a little bit the same cycle we will go through. But 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. And 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.
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 Nager for contribution for the last 17 years, and speak to you soon.
Thanks a lot. Have a good summer, and then we'll speak in the fall. Thanks a lot 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.