Mondi plc (MNDI) Earnings Call Transcript & Summary

Good morning, and welcome to the Mondi Group Half Yearly Results 2020 Conference Call and Webcast. [Operator Instructions] I must advise you that this conference is being recorded today. I would now like to hand the conference over to Mondi Group Chief Executive Officer, Andrew King.

Good morning, all, and welcome to the Mondi 2020 Half Year Results Presentation. I am Andrew King, Group CEO, and I'll be joined later by Clara Valera, our Head of Strategy and Investor Relations, who will facilitate our Q&A session. Thank you for your attendance in this virtual format. I, for one, look forward to the day when we can again mix digital and some analog. I never thought I'd say this, but I'm really looking forward to seeing a room full of analysts again. Going to the agenda, today, I will give you an overview of our robust performance in the first half of the year. I will then go into more detail on the business unit performance, where you will see we have continued to deliver strongly. We will then review highlights from our strategic progress, which will demonstrate again that Mondi is well positioned to prosper into the future. After that, I look forward to taking your questions. It is clearly in challenging times like these that the culture of an organization is put to the test, and I'm very pleased to report that Mondi and our people can be very proud of how we have risen to the challenge. We acted fast and decisively at an early stage of the pandemic. As a result, we protected our 26,000 people, 100 production sites and the communities we operate in. This means we could continue supplying the essential goods and services that our customers rely on. Also, as you have seen from our results, we have proven the resilience of the business. The benefits we've talked to you about over the years, our integrated business model, our cost advantaged, high-quality operations and our much-needed products have been validated. Similarly, many of the key industry trends that we have leveraged have accelerated through the crisis, including e-commerce, building consumer brand value and, of course, sustainability. All of this, supported by our strong balance sheet, means we are well positioned as the world recovers. Before moving to the numbers, some quick reflections on what we have done in response to the pandemic. Our first priority was protecting our people. We moved swiftly to implement the necessary personal protection measures and hygiene protocols. Where appropriate, we enabled employees to work remotely. I firmly believe it was our well-embedded and our industry-leading safety culture that meant we could respond quickly and effectively. At the same time, we have continued to support our customers in terms of keeping our operations running and maintaining supply chains. I'm humbled by the many inspiring stories of our people going to extraordinary lengths and taking care of each other, our communities, our customers and our business. As you all know, we also acted decisively to preserve cash at the time of peak uncertainty. We reinforced cost controls, slowed down our CapEx program and secured our liquidity. We've also been supporting our local communities by continuing to provide essential infrastructure services, increasing our social investment spend and making significant financial and in condonations amounting to around EUR 3 million. As you all know, through 2019 and into early 2020, we were already seeing a downturn in the pricing cycle for most of our key products. This was, of course, exacerbated by the pandemic, most notably in Fine Paper and industrial packaging, where volumes came under significant pressure. It is against this backdrop that we delivered a robust performance with EBITDA at EUR 738 million, reflecting industry-leading margins and returns. Importantly, cash generation remains very strong. We've entered to this crisis with an already sound balance sheet, and our financial position does remain robust. On the strength of this performance, our ongoing confidence in the business and reflecting our strong financial position, we are resuming dividend payments. I'll come back to more detail on this later. Let me repeat that we are well positioned for economic recovery. We have a high-quality asset base, producing products that people need, and we have the financial strength to give us the necessary strategic flexibility. Going into more detail on the drivers behind the year-on-year movement in underlying EBITDA. You can see the impact of the downturn in the pricing cycle. This affected all business units with weaker paper prices also impacting prices for converted packaging products, albeit with the usual lag. Pleasingly, despite the disruptions caused by the pandemic, we did deliver year-on-year volume growth. Good growth in corrugated and flexible packaging was only partly offset by the expected volume pressures in Engineered Materials, and the sharp drop in uncoated fine paper volumes seen during the height of lockdown. Encouragingly, you will see that in most areas, we do outperform the market. Again, on a positive note, we have seen significant cost relief over the same period. This is partly due to the cyclical reduction in input costs, but also because of our ongoing type cost management. This is, obviously, particularly noticeable in the fixed cost base, where we offset all inflationary pressures. Please note that the bulk of the planned maintenance shuts at our pulp and paper mills have been rescheduled into the second half. So there will be some element of catch-up of these costs over the course of the year. Currency effects, as you'll see, had a small positive impact on underlying EBITDA, with the transactional effects of a stronger U.S. dollar and weaker South African rand somewhat offset by translation losses on ruble and Turkish lira denominated profits. The forestry fair value gain of EUR 19 million in the period was in line with the previous 6 months at EUR 33 million down on the exceptionally high number booked in the prior year. Based on current market conditions, we would expect a slightly lower gain in the second half. Going on to the cash generation, and you can see that the group does remain highly cash generative, delivering EUR 602 million of cash from operations in the period. This included a net cash outflow from working capital of EUR 133 million, a function of the normal seasonal increase in working capital and mix effects, we expect much of this to reverse in the second half. We invested EUR 336 million of this in our CapEx program, representing 168% of depreciation charge, as we do continue to grow the business. In line with the initiatives we took to preserve near-term cash flow and minimize risks at our operations during the height of the pandemic, we slowed down our capital expenditure program. We are now guiding to a full year spend of around EUR 600 million to EUR 650 million in 2020, down from original estimates of EUR 700 million to EUR 800 million. We expect to come back to the delayed projects, hence we are guiding to similar levels of CapEx for 2021. This is, of course, very much dependent on circumstances around COVID and the related effects on our markets. The good news is we do have the flexibility to reduce the spend again, if appropriate. After tax and interest, we finished the period with a reduced net debt of EUR 2.04 billion. The group, of course, continues to be strongly cash generative. When combined with the prudent manner in which we manage the balance sheet, we retain a very robust financial position. Our net debt, is at 1.4x underlying EBITDA, well within our single debt covenant of 3.5x and within the metrics required to maintain our solid investment-grade credit rating. During the period, we acted decisively to secure our liquidity. We issued a EUR 750 million 8-year eurobond and extended the term of our RCF by 1 year. Most importantly, this gives us the strategic flexibility to explore growth opportunities through the cycle. You will recall that we took the decision in April to withdraw the recommendation to pay the final dividend. We undertook to revisit this decision later in the year, recognizing the importance of dividends to our shareholders. This was the prudent choice at the time given the unprecedented levels of uncertainty. We've navigated the past 4 months well, demonstrating our focus on stakeholders and the resilience of our business. As mentioned earlier, considering the group's strong financial position and our confidence in the long-term prospects, the Board is pleased to resume dividend payments. We've declared a dividend of EUR 0.2975 per share relating to the 2019 year bringing the total dividends paid relating to 2019 to EYR 0.5703 per share. This, as you'll see, represents a cover ratio of 3x underlying earnings per share within policy but at the top of our cover range. In addition, we are declaring an interim dividend for 2020 of EUR 0.19 per share. Importantly, through this, our dividend policy remains unchanged. And with these dividends, we continue to pay very much in line with this policy. Now let's look at each of the business units in order. Starting with Corrugated Packaging. The business continued to deliver strong margins and returns despite the pricing pressures. I was particularly pleased to see the strong volume performance in the period. This was partly due to the shifting of the mill maintenance shut program, which did have a positive impact on volumes in containerboard, but we also benefited from our global distribution network. This gives us the flexibility to adjust to global market dynamics and sell our products where they are most needed. For example, we are now seeing a good pickup of -- in demand for our products out of China, which is alleviating some of the pressure on the domestic European market. We're also pleased with the performance of our Corrugated Solutions business. They delivered an excellent growth of 4% in the period, a reflection of our strong positioning in growing markets and our excellent innovation and customer service. Year-on-year volume does -- volume growth does mask a volatile picture over the past few months. As you can see from the chart on the bottom left of the slide, showing European-wide industry statistics. Demand for containerboard in Europe started the year very positively before softening through the second quarter. As you would expect, similarly, demand by end-use varied considerably over the period. We saw strong demand for FMCG and e-commerce applications, while industrial end users will come under some pressure. Encouragingly, we did see good pickup in volumes in June after a weaker May, and the order situation is stable going into the second half. Looking then at flexible packaging. You can see it delivered a solid performance despite the headwinds from significantly lower kraft paper prices and a knock-on effect on paper bags. We grew volumes in kraft paper and bags, despite the relatively high exposure to building materials, construction and other industrial end uses, which one would typically assume to be strongly correlated to the economic cycle. This was achieved, thanks to resilient demand for building material applications and very good progress in diversifying and improving the product mix. We are making particularly good progress in developing our range of specialty kraft paper and bags products, supporting our FMCG customers in their move towards more sustainable packaging. As the clear market leader in both paper and bags, we also benefit from scale and integration. This gives our customers, both the security of supply and the innovation they need. All of this contributed to our resilient performance. On consumer flexibles, business performed -- the consumer flexibles business performed particularly strongly in the period. Demand for everyday consumer items saw during the height of lockdown. The defensive qualities of this business were certainly apparent, and we are delighted with our progress. Pleasingly, we continue to leverage the platform offered by the entire range of flexible products. These products replace less sustainable solutions as paper packaging, where possible and with flexible plastic packaging when useful. I'll come back to some of the recent initiatives later in the presentation. Going into Engineered Materials, which saw good demand growth in consumer end uses as lockdown measures in key markets drove increased home consumption and demand for cleaning and hygiene products. This was, however, more than offset by weaker demand in industrial end uses, affecting predominantly our release liner segments. We also saw ongoing volume pressures in the personal care components segment as a key customer product matures. As a result, we are redoubling our cost control efforts, while continuing to explore opportunities to leverage our coating technologies to develop sustainable packaging solutions. We see exciting opportunities to bring together our expertise in kraft paper, coatings and converting. Going on to uncoated fine paper, the business has unsurprisingly been most impacted by the effects of COVID-19. We saw an almost direct correlation between the severity of lockdown measures and the demand for our products. Remote working, school closures and less marketing spend all contributed to this reduced demand. While demand held up well through the first quarter towards the end of March and into April, the situation declined rapidly, reaching a low point in early May, coinciding with the height of a lockdown across all our key markets. Since then, we are encouraged to see a sharp pickup in demand as lockdowns ease, although demand is clearly still well below pre pandemic levels. Our fine paper pricing held up reasonably well in the face of these demand headwinds, which was nevertheless down on the prior year. Similarly, pulp, of which we are around 450,000 tonnes long as a group, saw pricing down on the prior year. Despite these market challenges, we delivered a resilient performance in the period with EBITDA of EUR 164 million at margins still over 21%. This is a testament to the competitive advantages enjoyed by our business in what is a structurally challenged market. A lot has obviously been said about the structural challenges in fine paper. I thought it would be useful to spend a few minutes outlining the strategic positioning of our fine paper business. As the pie chart shows, our current fine paper capacity is around 1.7 million tonnes per year. 2/3 of this is produced at our high-quality integrated mixed-use mills in Russia and Slovakia. These operations of a highly -- of a highly cost-advantaged production delivered into their home markets of the CIS and Central Europe. Furthermore, because these mills are already mixed-use, they give us the flexibility to increase pulp output in the short term and/or other paper grades in the longer term. Neusiedler, which is our only European partly integrated operation, is very much focused on premium grades for delivery into the European markets. Merebank in South Africa, similarly, is focused on supplying the Southern African region, which has a well-consolidated domestic supply base comprising of 2 players. In summary, then, our UFP portfolio is made up of a combination of highly cost competitive integrated operations and unintegrated facilities giving us geographic and product diversification. It's very clear that our customers value the strength and stability of a committed long-term supplier in this market, and we do continue to gain market share as a result. Moving then on to our strategy. Clearly, it is at times like these that is critical to take fast and decisive action. It is also, though, important we do keep sight of the longer-term strategic objectives, objectives that will drive value well into the future. First, on this slide, as you'll see a short reminder of our strategic framework. The core tenets remain very much in place. If anything, they have been reinforced by recent events. We remain focused on driving value-accretive growth in a sustainable way, employing the 4 value drivers depicted on this chart. Similarly, I believe the megatrends affecting our packaging businesses continue to shape our future. As I mentioned in my opening remarks, the pandemic does seem to have had the effect of accelerating trends than it were already apparent in a precrisis world. This is clearly the case with the trends in packaging, around sustainability, e-commerce and enhancing brand value. On the topic of sustainability, there has been much debate on whether the crisis will put this on the back burner. This is not what we are seeing. From things like the build back better initiatives, to the EU Green Deal, to the many conversations we are having with our customers, it is clear that recent events have reinforced, if anything, the sustainability agenda. At Mondi, sustainability is central to our strategy. Our purpose is to contribute to a better world with a business model, operations and products that are sustainable by design. Our EcoSolutions approach continues to gain traction with our customers. It is proving effective and bringing together all our various capabilities. We offer our customers the best sustainable solution to their packaging needs guided by our principle of paper where possible, plastic when useful. As an example, you may remember our innovative BarrierPack Recyclable, which replaces a nonrecyclable plastic packaging with a fully recyclable solution without compromising performance. We have strong interest from our customers. We're looking for solutions fit for a circular economy. For example, as you'll see on the slide, record bank user, we're looking for a fully recyclable solution for their dishwasher tablets, which we have provided. Next on to e-commerce, which all of us have been using a lot recently. At Mondi, we are uniquely placed to grow with our e-commerce customers. Much of the strong first half growth in our corrugated business can be ascribed to this, but where we are also -- where we are very much unique is that we also have the expertise and capabilities to provide solutions based on paper bags. We see increasing customer interest in our bags offering, in some cases, displacing boxes, but most often to displace less sustainable plastic wrap solutions. I'm personally very excited by the growth potential in this area. As a global leader in paper bags, we have the scale and expertise to capture this potential. One other major drivers of our strong returns has been and will continue to be our willingness to invest in our cost-advantaged assets through the cycle. While we slowed down certain projects to protect our people and preserve cash in the short term, we have continued with all major projects already in progress, albeit with some impact on the start-up timetable in certain cases. We also intend to resume those early-stage projects currently on hold, when conditions allow. Our investment strategy prioritizes assets that have a clear cost advantage and bring market opportunity. We remain confident that our projects offer very good returns through the cycle. This required a huge effort by our people to keep the major projects on track. While we have pushed out estimates to start-up dates of the Ruzomberok paper machine to half year 2021, we're very pleased with the progress we have been able to make. Finally from our side then, a reminder of our cash flow priorities, which remain very much unchanged. Our strong financial position going into this crisis has served us well. It has given us the confidence to continue investing in our cost-advantaged assets, while enabling us to resume dividend payments in line with our policy. This will allow us to prosper sustainably into the future. Similarly, M&A remains very much of growth option for the future, and we are eager and well positioned to consider relevant opportunities that may arise. Going on to the outlook. You will have seen the outlook statements, which we released this morning. I won't go into the details now. But to finish off, just a quick reminder of my opening message. We were, are and will continue to be an inherently resilient business. We delivered strongly in the period, acting decisively to address the many challenges posed by the COVID-19 pandemic. We know the challenges are not over yet, but we are very well positioned to prosper into the future. With that, I'm very happy to take your questions, and I'll hand over to Clara to host the Q&A session.

Thank you, Andrew, and good morning, everyone. [Operator Instructions] The first question is from Alex Berglund at Bank of America.

Two questions from my side specifically on containerboard. Firstly, on supply. I wonder if you think that the current price level is enough to incentivize new supply here. And that if you think that we could see any acceleration in conversions in the coming 12 months, given the sharp decline we've seen in graphic paper. So how do you think that the conversion economics are in this market? And secondly, on demand, and I think, Andrew, you mentioned a bit in your presentation, but what are you seeing on imports from China now when they're banning OCC? Have you seen an uptick in imports in containerboard? And do you think that there's more to come there?

Very well. Thanks, Alex. Yes, I think on the first question, I think, the simple answer is, no. In terms of the economic benefits of conversion as we sit with the pricing dynamic right now. Clearly, in terms of the projects which are currently underway, those are not going to stop. And the ones that are far advanced, we certainly are expecting those projects to be completed and the volume to come into the market. I think you're already starting to see the effects on the current pricing dynamic on what I'd call the next wave of potential projects where you are hearing about postponements or cancellations of potential next wave of projects. But I certainly -- if I was to look at the economics and our understanding, obviously, of the economics of the -- of conversions, I simply can't see the logic in -- given the current pricing dynamic. To me, to convert from a high-cost capacity in 1 grade to convert into containerboard which is often priced at a lower price on a per tonne basis, I find hard to justify. So I think it's extremely difficult. Of course, there's always individual cases, which might be specific, and I can't talk for them but I think on a more general basis, it is. And I think more than that, there's a lot of supply right now at the top end of the cost curve, which must be coming under real pressure. If we try and model the cost curve and current pricing and margin dynamics, I would argue that there's a lot of capacity right now that is -- must be under pressure at the high end of the cost curve. And I think that's something one always has to bear in mind. I think there's a lot of focus on the additional new supply coming in the market. But not a lot of talk about what might rationalize as a consequence of that. And I think there's every possibility that you might see some rationalization of capacity at the top end of the cost curve. Certainly, the economics would suggest that should be the case. I think on your second question, very valid question around the demand situation more broadly. Again, there's a big focus clearly on the European demand perspective, but I think you have to look at this as a global product. And we mentioned in the announcement, and I think I spoke about it in our presentation that we are seeing an uptick in demand out of China, in particular, but more broadly in some of our export markets. We ourselves are selling into China more than we had historically. If you look at the industry statistics, China year-to-date, May, I think we've got the statistics for. It's up around 1.5 million tonnes the demand year-on-year, which is starting to get meaningful. So we've waited a long time to see this come through, but the believe that with them having more and more restrictions about the ability to import paper for recycling, it must be substituted by something, some of which is the import of containerboard, and we are starting to see that play out. So I certainly expect more of that, obviously, contingent on the growth dynamics within China itself, but it certainly is playing out at the moment. Trust that answers your question, Alex. Is there anything else from your side?

Yes. No, definitely.

Our next question is from Cole Hathorn from Jefferies.

Andrew, could you provide a little bit more color on the uncoated fine paper business performance and talk about how you're taking share from some of the smaller players. And then secondly, on the corrugated packaging, you delivered strong 4% box volumes. Can you give us some color on how you see the containerboard inventory levels in Europe at the moment?

Yes. I think on the fine paper, I mean, as I emphasized in the presentation, I think we have some unique capabilities and unique competitive positioning. Just to remind you, I mean, on the -- within the European landscape. And there we sell out of Slovakia and Austria. Slovakia, very much the universal grades and Austria focused on the specialty segments. Clearly, our Slovakian business is a cost leader delivered into our markets and even more so delivered into the markets, the surrounding markets, which have proved to be more resilient as the Central Eastern European markets. So I think that puts us in a very strong position itself. Similarly, in these crisis times where security of supply becomes a major issue. And of course, for our merchant customers it's also about the long-term relationships. They are looking for those people who are going to be there for the long term, and we are in it for the long term. And similarly, we've reinforced that by on -- in very selective ways, supporting those customers through this period of volatility. I think that's served us very well, both in the short term and we certainly believe in the longer term because we will be there for them. And I think we've demonstrated it through these tough times. So I won't give you the exact numbers in terms of the market data, et cetera, because, obviously, also the monthly data is very volatile at the moment, but it's very clear that we have outperformed the market. And I think, for very good reasons. And again, on the fine paper side, you're seeing the cost -- the top end of the cost curve under enormous pressure. It has been for some time. Clearly, any softening in pricing can only exacerbate that. And again, I would expect to see some supply side response at some point because it's simply unsustainable in the current level. So we continue to do well in the context of what is a difficult market at the moment I think, for those very good reasons around our competitive positioning. Obviously, we also sell into CIS market where we are extremely strong player out of our sector cooperation. And then we've got the positioning in South Africa, where, again, as one of the 2 incumbents in the domestic market, we enjoy a very strong market positioning. Of course, these markets have been also impacted in the short term by the COVID pandemic and the effects of lockdown and the like, and one has to adjust to that. But again, our positioning remains extremely strong there. So I think not immune, of course, to the structural challenges within that market, but we are extremely well placed. On the containerboard inventory levels, we can only obviously talk about our own position. We have a fairly normal inventory levels. We are not concerned about inventory buildup at all on the containerboard side. Broadly, there's a lot of focus at the moment around what's monthly numbers around the order situation. I would say we are in a stable situation. You saw from the charts that the containerboard order or delivery numbers have been on something of a roller coaster. On a European-wide basis, you saw a very strong start to the year. You saw some destocking coming through. And now it's more stabilized. So I think it's in a reasonable condition. It's fairly normal for -- frankly, for this time of the year, which is in itself quite extraordinary when you consider the challenges posed by the COVID pandemic and the like. Thanks very much.

Our next question is from Lars Kjellberg from Crédit Suisse.

I just wanted to come back to what you just spoke about, Andrew, about inventories. I mean if you look at the containerboard demand data that you provided versus the box shipment data we've gotten from yourself. Clearly, you may have a different geography than others, but also what we can gauge, maybe continued box shipments were down, call it, 3%, 4% whether containerboard demand seems to be down more in high single digit. When that really suggests that your end consumers have actually been destocking that they would potentially be sitting on low inventory. Or am I misreading that data? On the sack paper side, I guess that euro sack data, does that only relate to the European volumes? And you can give any color how things have progressed outside Europe? Of course, there are pockets of weakness and strict lockdown in some of the key cement markets. If you have any color on that would be really helpful.

Very good. I'm not sure I've quite followed the numbers you were quoting there. I mean in terms of our box shipments, I mean, corrugated solutions, we grew 4% year-on-year in terms of the volumes on the box side. We're also growing on the -- we also grew volumes on the containerboard side. Make the industry more broadly clearly, on a literally a month-to-month basis, there is some element of stocking and destocking that's taking place. I think as lockdown started to take place, there was a scary story amongst -- through the supply chain to ensure there was -- people did have volumes. And you saw a pickup in containerboard demand driven by a stocking effect. But then I think through May and into early June, you saw some reversal of that. And as I say -- I would say we're in a more normalized situation now in terms of stock levels through the supply chain. Obviously, we don't have perfect visibility on that, but that's certainly our best judgment at the moment. On the issue of this -- the kraft paper, as you rightly say, the statistics we showed you there are, firstly, the European-wide industry statistics, they're not ours, which we won't give you but -- individually. But it's illustrative of the European industry more broadly. As you rightly say that the end market dynamics are very different in the different geographies in which we operate. So Europe, just to remind you, is primarily what I'd call a building materials market and also importantly, a growing consumer applications as well in our bags business there. And also some strong agricultural underpin the likes of milk powder, and it has been a very important underpin within the European landscape. As you rightly say, on the export markets, a lot of it is driven by cement, particularly into the Middle East, North Africa and the other emerging markets. And that has obviously been very volatile taken on a region-by-region basis, as you could imagine. But on average, it's been reasonable. It's certainly a bit softer. But I think, again, our positioning in that has been extremely strong. Again, people are looking at times like these for the people who can supply and can offer that security of supply. And of course, we also have our forward integration benefits and as you would see, our bag business has performed particularly strongly over this period, also achieving good volume growth on a global basis, which we're very encouraged by.

Can you comment at all what you're seeing in pricing trends? In a way, it was interesting to see the flat third quarter pricing, as announced by RISI, considering significant weakness, I suppose, in particular export markets. But for you looking into Q4, do you see a recovery in this business of scale and potentially positive price momentum? And the last one for me, I just wanted to understand the dividend. I appreciate you raised -- yes, well, reintroduce the final dividend, bringing it up to 3x covered, fine. And you say you're within the range. So should we think about that range being on an annual basis, i.e., in a -- in the current year, should you too at the lower end of that coverage range? Or I thought it was more across the cycle, just to be clear how we should view this? The interim dividend is any, I guess, any guidance what you think about the full year?

You sneaked in a few more questions there. So firstly, on the pricing, on the kraft paper. As you rightly say, pricing has been fairly stable on a year-to-date basis. We obviously saw pricing coming off at the beginning of the year when primarily, we had a catch-up on the pricing of the annual contract business. And -- but since then, it's been fairly stable and into the second half. Obviously, within that, there's always mix effects, both in terms of our offering, and we've been driving a lot of the growth in the specialty kraft paper. And I think that's been extremely positive for us in terms of developing those higher-value products, which is very important and driving our sustainability offering to our customers and working hand in glove with our other offering from the extrusion solutions through to the end converting. And that's been an important driver for us. I think it's always dangerous, just look in isolation it would call the sacral of business. The kraft paper, more broadly, we've enjoyed that mix effect. On this -- looking specifically at the pricing on the sack kraft, yes, it's been pretty stable through the year. Obviously, extremely difficult, has always -- it's always difficult to predict in the current environment even more so. And so I would hesitate to make any forward predictions in the current world. But as we sit today, pricing is stable, and that's very encouraging. On the dividends, yes. I think most importantly, we remain very committed to paying dividends through the cycle. We took the decision, which is never an easy decision to hold back on that -- on the decision around the final dividend on 2019 back in April, where the world was in such an uncertain state. Having seen how we've come through this period, to say, well, how -- the strength of our balance sheet and obviously considering the future prospects for the business, we're delighted to be able to revisit that decision, reinstate a dividend for 2019. And as importantly, in my view, put down a mark for the interim for 2020, obviously, reflecting that we are very keen to get back into a normal dividend paying cycle. As regards the policy, we've always stated that our overriding policy is a cover policy of being between 2 and 3x covered, yes, on average, through the cycle. We've typically operated within that. Does it mean we can go outside of those bounds on occasion? Of course, we can. But with the benefit of hindsight, which we now have, of course, 2020 has proved to be more difficult in 2019. I think that's self-evident. And as a consequence, we were able to reposition last year's dividend with that, as I say, benefit of hindsight towards the top of our cover policy. And clearly, the Board will be taking a view as to where we think we are in the cycle, in the prospects for the future of the business at the end of this year, bearing in mind both the full year earnings. And of course, what is the appropriate cover. But clearly, we like to operate within that cover policy. And obviously, in the perfect world, we'd also be looking to grow that dividend because we always recognize the importance of it in terms of our investment thesis.

Our next question is from Mikael Doepel from UBS.

Andrew and Clara. Just coming back to the sack kraft, Industrial Bags business, I remember previously talking about the inventories there in the value chain, being a bit of an issue, I guess, at least in the spring. We talked about the inventories in containerboard side not being a big issue, but how do you -- how would you describe the inventory situation that sack kraft, Industrial Bags business right now?

Yes. Thanks, Mikael. I mean you can see, I think, from that chart we showed in the slides, how the early part of the year, we did see quite a pickup in deliveries on a year-on-year basis. And I think, frankly, that part of that was a reflection of an inventory buildup through the whole supply chain. Because you remember, it's hard to think about it now, but in those times, people were very concerned around the security of supply through the whole value chain from getting the raw material through to getting the final product to the end customer. And so there was a natural inclination to try and get buy some stock to make sure that, for example, your cement works weren't going to be stopped because of a lack of supply of bags and the like. So you did see that build up. That seemed to reverse through, particularly into April, May. And as I say, I think it's normalized now. So certainly, our perspective is there's no particular inventory buildup in the system at the moment. And we're in a more normal sort of situation when it comes to the value chain. I think people have got more comfortable with the fact that the value chain or the supply chain did work throughout this period. And we -- I think, not without a huge amount of effort from our people, we're able to continue to supply our customers throughout this, and that, in turn, has given them the confidence to run at more normal levels of working capital. Thanks, Mikael.

Our next question is from Justin Jordan from Exane.

Clara and Andrew. I've got 2 different questions. I guess, firstly, just going to the production statistics again, sorry, on page, I think it's 53. I'm trying to understand positively, and we say, what's gone right as it were in terms of the production in kraft paper? Because if I recall back in the Q3 trading update in 2019, you were taking commercial downtime because of subdued demand. And the sort of 10% volume growth that you're showing versus, let's say, the second half of 2019, how much of that is maybe a little bit of stockpiling as you touched on from customers in Q1? Or how much of this is new sustainability-type customer wins? I'll start with that, and I've got 2 follow-ons.

Justin, I think it's more than that. I mean if you look at the year-on-year production numbers, I thought this might be your question. They would indicate a decline in the year-on-year numbers. I agree, on a sequential basis, they are up. Now obviously, every 6 months, if you're comparing 6 months on 6 months, on a productions basis, there's always the noise created by the maintenance shuts and exactly when the timing of those, et cetera. So that's always a bit difficult to look at it on a like-for-like basis. On a sales volume basis, as we mentioned in the commentary, we were up also on a year-on-year basis. Now that is partly because we took some -- we took down some of our stocks as well that we had started the year with. So we've got an even bigger beat, if you would call it that, on a sales volume basis. And I think that's firstly testament to the strength of our business, both in terms of the integration benefits that we enjoy. But as I keep reinforcing the security of supply enjoyed by our customers, the ability to continue to mix and match across the different supply bases because there has been a huge volatility in demand from some customers because from one day to the next, the changes in the nature of lock down and the change in the nature of the type of products that even our customers are producing, has resulted in us needing to be very agile in the way we do that. Anecdotally, we had a customer in cement, an important cement customer in Turkey, literally from one day to the next needing an extra 10 million bags, no one else could do that. I mean we couldn't produce it all out of our Turkish plant, but we managed to, in very short order, get those volumes out of Spain and Poland, if I recall correctly. And so that's the sort of agility we have, the sort of scale that we bring that really allows us to operate in a much more agile fashion than smaller operators can do. And I think that has allowed us to grow better than the markets. And obviously, that's also supported the growth of our kraft paper business. And recognizing also in kraft paper, we're a global player. We sell to a lot of different markets, and that gives us the ability to mitigate any one risk around a certain market. So I think we've done better than the market. But more broadly, I think the markets have also shown resilience. A lot of people would have anticipated the building materials market in Europe to be, for example, a lot weaker than it has been. It's shown a lot of resilience, which is very encouraging. And also, as I think you pointed out, there has been a gain around the mix, where more of these consumer applications become relevant, driving that sustainability agenda. We're very excited by the fact that we are seeing more and more of our traditional consumer packaging customers looking for bag solutions. And I mentioned the e-commerce opportunity, which I think is a really big opportunity. It's starting to develop. And I think there's a lot more of that to come. So a huge amount of opportunities, both growing our bags business and in turn, obviously, the volume pull from our paper businesses.

Just one quick follow-up just on the capital investments. You're guiding to EUR 600 million, EUR 650 million for this year and then a similar amount for next year. I guess if we think back and reflect on where you started this year with approximately 750, should we think about that as really just like a timing effect as it were, some of the 2020 CapEx being deferred into 2021? Or are you signaling some new capital investment projects for the 2021 year? I'm just looking at Slide 43, whatever, were you talking about some investments in Syktyvkar and Richards Bay. Now are they new? Or are they really just reflagging stuff that you've previously talked about?

Reflagging sounds like they're not exciting. They're very exciting. But yes, it's very much a consistent program that we -- what we've been working on for some time now, there's nothing particularly new in that program. Just to remind you, because what happened was we had previously guided to EUR 700 million to EUR 800 million for 2020 and then EUR 450 million to EUR 550 million type of range for 2021. We are now saying with having slowed down certain of those projects, partly due to the COVID -- well, largely due to the COVID effect, but we still anticipate continuing with the major projects and, of course, reintroducing some of the smaller projects, which we have put on hold as a consequence of the COVID effects because we believe they all saw extremely good projects, which will deliver real value for us. If you take that in combination, it's really just a shifting of the timing of that over the 2 years, it's plus/minus EUR 1.2 billion of spend. If you look at it, it's just a timing effect. So no, particularly, new program around that. More importantly, as we think the projects we have in the pipeline will continue with. But of course, we do have the flexibility that if the world really changed, we would adapt that, but that's certainly the plan as we sit today.

Our next question, and then we'll go on the questions from the webcast, is from Brian Morgan from Morgan Stanley.

Andrew, are you seeing an increase in deals coming across your desk at the moment? So you've spoken about a better cost curve stress that you think is evidence or becoming evident in the markets? And you've always said that one of the reasons that you keep a strong balance sheet is to give you optionality in downturns. Are we there yet? Or is there more to come still?

Exactly right. I mean we always say a strong balance sheet allows you -- affords you the luxury of being able to look through the cycle and potentially be able to move where others can't. And we very much are in that position. As importantly, I think our portfolio of businesses gives us optionality from a strategic perspective. As I outlined, I think, in the full year presentation, we like all our packaging businesses, and we see opportunity to potentially develop those. Obviously, we have a lot of exciting organic growth potential, and we'll continue to leverage that. But of course, if the right M&A opportunities come along, then clearly, we will be looking at those. We continue to scan for opportunities. As you rightly say, we've been saying for some time now that we found valuations pretty stretched. There has typically been a lot of cheap money chasing assets, and that's driven up valuation. So we've been very circumspect around that because ultimately, it's all still about retaining those valuation disciplines. Clearly, in a more difficult world, there might be more opportunities that arise, but it's always extremely difficult to predict. So we'll continue to look. We cannot guarantee anything, of course. But obviously, potentially, it does become more of a buyer's market in more difficult times. And those of us with strength of the balance sheet, with strength of cash generation and this robust business model that we have are the ones that can move when potentially others can't.

And so just to clarify, you haven't seen any major changes in the last 3 months since this debacle began?

I think if we have anything to say on the M&A front, you and the rest of the market will be the first to know. Thanks, Brian.

We have a question on the webcast, which I'm going to just read that out to you. It says, "How does a strong euro affect your competitiveness in the major markets?"

Yes. I mean FX is a big issue. It always has an effect on the business more broadly. As you will see from the first half bridge, the half-on-half bridge, we had a mild positive benefit from FX taken in the round. But right now, going into the second half of the year, the way I look at it, as you say, the strong euro or what -- look, the other way around, the weak dollar is a bit of a headwind going into the second half of the year. To remind you, we obviously have some transactional exposure to the dollar. We sell quite a lot of product in dollar-denominated pulp effectively as a dollar product. Also, we have some dollar-based businesses. So the weak dollar is something of a headwind on a rough sensitivity basis, we say every 1% move in the euro-dollar represents roughly EUR 3 million to EUR 3.5 million EBIT effect on our business. And so you can see, I think, we're of 7%, something around there on the dollar versus the average for the first half of the year. So that must be something of a headwind taken in isolation. Other currency effects around that, as you say, the euro is also strong relative, for example, to the ruble and the Turkish lira, which, of course, also means on translation, some of those profits get slightly impacted by it. Conversely, obviously, things like the rand, which is very much an export currency for us being a bit weaker, is supportive. But taken on balance, as we sit today, the spot prices of the currencies, particularly with that weaker dollar is something of a headwind, not major, but it is something to bear in mind, certainly for the second half of this year.

Thank you, Andrew. And we have -- our next question comes from Matthias Pfeifenberger from Deutsche Bank.

Clara and Andrew, congrats to the resilient results. The first one, I don't know if this has been asked, but what do you make of the recent reversal in containerboard price? Now they have picked up 2030 if they've been quite stable for a couple of months, and now they have come down. Is that intuitive in light of strong box volumes and obviously the lockdowns being eased?

As a big containerboard, Matthias, you would always -- we'd never say it's intuitive to have price reductions in one of our key products. But yes, I think it's clearly the markets are more volatile than they would normally be, given the dynamic around the effects created by the COVID pandemic. Just to remind you, as you say, there was a price increase through the first quarter of this year, and most of that has now been given up going into the third quarter of the year. Clearly, it's a fairly fluid market. Most importantly, I think from my perspective, is we certainly see the long-term structural attractiveness of particularly the market exposures we have remains very much in place. All of those long-term structural demand drivers that we like around e-commerce, around sustainability and the like are very much in place have been reinforced, if anything, through this crisis period. So I think those remain intact. Similarly, we spoke about the demand pull out of China, which is interesting. In the short term, always very difficult to predict how that plays out. But certainly, we strongly believe our position remains extremely robust in the containerboard space, and we think it will serve us well into the long term.

And the second one is more strategically in uncoated fine paper, somebody would look at it at this superficially, I would probably say, with the office lock down and the uncertainty about working from home, but probably working from home increasing versus the past and you slowing down the capital project elsewhere. Is that -- wouldn't that be the right time to expedite some of these, I wouldn't call it conversions, but maybe shifts in terms of pipe capacity that's tighten uncoated fine paper to other grades where there's more growth, couldn't you be kicking off a project already and then spend the money next year? Or is that a tougher decision because the returns in uncoated fine paper, and especially the cost position is quite good and others will give up and you grab the market share. Maybe some thoughts around that in terms of timing.

Yes. I mean as I emphasized in my presentation, we are a long-term player in fine paper. Yes, there has been an effect of the covert pandemic in terms of a demand-side shock in the short term. A lot of that has fortunately come back. You can see it almost a direct correlation between the extent of lockdowns, particularly in Europe, and the order situation with as lockdown has eased, you have certainly seen a pickup. Clearly, there's a big debate as to how much of the demand decline now is structural versus cyclical. But irrespective of that, we've always maintained the strength of our business is that we are fixate on being in the right place on the cost curve. That allows us the luxury to continue to drive delivery of these products and to support our customers through these times. And we certainly -- we are a long-term player in this market. We will continue to be so. And we will continue to serve our customers. And frankly, I think there's a lot of capacity which is under deep pressure in spite of all of those, we see -- we made 20-odd percent return on -- 20-odd percent EBITDA margins, which just illustrates the robustness of our business. So I think it's suffice to say we are a long-term player in this market. We're always looking at the options to how we should optimize our portfolio. As I said in the presentation, we have the luxury of an asset base there, which is extremely strong with being strong integration benefits, obviously, also already mixed-use in nature, and we have a lot of levers to pull both in terms of potentially producing more pulp, potentially producing other products, but most importantly, also producing a core of fine paper products, which will be there for a long time to come.

Okay. And lastly, just quickly on the maintenance shuts. Is there something you want to add because in the release, you mentioned all corrugated news and all kraft paper news? So will this be a very extensive shot? But then also the profitability is down. So maybe you can maybe shed some light on the impact in the second half.

Yes. I mean we're very explicit about it. We estimate the shut impact on the -- for the year at around EUR 100 million. And we say all of them because there were some minor shuts at certain of the -- of certain specific machines in the first half, but that was around -- of that around EUR 10 million of impact. So by definition, we've got EUR 90 million impact coming into the second half is around estimate of the effect of the shuts. So it's the normal shut program, but it's been concertinaed into the second half of the year because we shifted the shuts that would have otherwise taken place in the first half into the second, largely to protect our people because you want to avoid through the height of the pandemic challenges, we wanted to avoid having too many people on-site because it clearly increases the risks. And so that's the reason why we shifted them. Nothing more than that. But as with any well-run business, we will still be taking our shuts, but they are second-half centric for this year.

We have one question on the line and a couple of questions on the webcast. So we have time for a couple of more questions. I have a question from Barry Dixon from Davy.

Yes. Andrew and Clara. Well done on a great performance in such a difficult environment. Three questions from me. First one, really, Andrew, if you can try and just help us on the cost side. So the EUR 170 million of cost benefits in the first half, I'm assuming that EUR 70 million of that is coming from the deferral of the maintenance shutdowns into the second half. So it's EUR 100 million underlying cost savings. How much of that is variable and how much fixed? And of that fixed saving, how much is sustainable, do you think going forward? And as in addition to that, is how much additional COVID-related costs, some of your peers have specified that there was an increase in COVID-related costs that may be permanent into the future? So you might just give us some thoughts around that. Just on the maintenance deferral then, could you give us a sense as to what is the -- what do you think is a normalized sort of maintenance cost? It was EUR 150 million last year, you're saying it's going to be EUR 100 million this year. Is the EUR 100 this year, kind of a shrunk down version of the maintenance? And so therefore, would you expect it to be a bounce back in 2021 in terms of maintenance costs? And then finally, just in terms of capital allocation, and I think it's great to see the dividend coming back, the resumption of the payment of the dividend. You might just give us some -- your thought process around capital allocation priorities. So at the start of this pandemic, you cut back in terms of CapEx and you deferred the dividend. You've now resumed the dividend albeit at a lower absolute amount, but the CapEx is almost -- is still sort of at that reduced level. So you might just give us a thought that, that is does dividend come first. And then when you get more certainty, you go after the CapEx and then the M&A? Or how should we think about that in terms of your capital allocation priorities?

Thanks, Barry. I hope I got all of that. Just on the costs, I think what you're referring to in the EUR 170 million is the bridge on the variance analysis. That can't be directly equated to the maintenance costs because when we quote that maintenance cost effect of EUR 100 million, there's also what I call the opportunity cost associated with not producing the product as a consequence of taking the maintenance downtime. So it's not all a hard cost that you will see in the cost line. There is an element of that, which is the true maintenance costs of buying the new pieces of kit and things that you need as part of that process, but it's not -- but the bulk of that EUR 100 million is actually the opportunity cost associated with not producing at the time. So it's a bit disconnected from that cost bridge that you see. When you look at that cost bridge, you asked the question about the fixed versus variable element. Again, on a year-on-year basis, what I suggested was that the fixed costs have basically stayed flat year-on-year. So we've been able to offset the typical inflationary cost pressures through, obviously, the ongoing cost optimization programs in the group. And I think that's a great achievement. On top of the fact that, obviously, as we come on to this, they clearly are COVID-related costs that have been incurred over this period. But net-net, we've been able to keep the fixed cost base basically flat. So the bridge that you see is largely due to the variable cost element. Again, a lot of that clearly is due to the cycle just as when the cycle was on the way up, we had to caution people to be careful that not all the price increases were dropping to the bottom line. Similarly, you can see there's also some form of cyclical element to our cost base as well. Things like wood costs, obviously, paper, the paper input cost to the extent relevant and similarly, pulp and the like. So generally, our fiber costs are down, chemical costs are down, energy costs are down. So typically, you've seen a range of different contributions from that. On top of that, what's most important is you take full toll of that by ensuring your efficiencies are not lost. And I think, again, we've done a great job in that respect because with these volatile times we're having to take commercial shuts, for example, in our fine paper business, the regulatory-related shut that we had to take in Merebank and South Africa, all of these things, as you could imagine, reduce your efficiencies. But in spite of that, we were able to, as I say, take full advantage of the input cost reductions that we saw. So largely that cost reduction that you see in the bridge is due to the input costs, because we also had no negative offset from the fixed cost by keeping them effectively flat year-on-year. Hope that makes sense. Your question on the maintenance costs and the sort of normalized year, I think we're very clear that last year was exceptionally high. We had to take certain extra measures. Also, we were -- we -- it's a lot to do with when you have a big new CapEx project, which is more brownfields in nature. So particularly in Slovakia, for example, where we were upgrading the pulp mill complex. So you had to take a longer shut. We had to also take a longer shut at Syktyvkar than would typically be normal. So I would say last year was an abnormally high year. This year, I would -- yes, I would say the EUR 100 million, that type of range is a more normal type of cost of maintenance shuts. Obviously, coming back to the -- what I said about it being an opportunity cost, the higher your profitability, the higher that cost becomes as well. So in some ways, I would also like that cost to go up for that reason. On your final question on the capital allocation priorities, as I hopefully emphasized in the presentation, our priorities have not changed in the sense that we like a strong balance sheet. We like to invest in our own business, and we like to support the dividends to our shareholders. And to the extent those are taken care of, and we have the luxury to look beyond that at either increase distributions to our shareholders and/or M&A opportunities, we look at those as well. So I think that's -- remains very much the cash flow priorities. Just to be clear, as I said to an earlier question, this year's CapEx reduction is more reflection of a timing issue, making sure we preserve the on-site sort of people and didn't push too many outside people onto our operations at the height of the pandemic. So there's been a slowdown in that. But as we're indicating around next year, there will be some catch-up of that CapEx. So taken over the 2 years, we are basically indicating we'll be spending the same level of CapEx we would have -- we indicated earlier this year. So we -- for the simple reason that we've -- all the projects that we are doing, we believe, the right projects through the cycle, there's -- and that remains the case. That is the big advantage of investing in those highly cost-advantaged assets. Every new tonne that you bring out is a low-cost tonne, and it will make your money through the cycle, and that's always been our philosophy and remains the case. So in short, no change to the priorities. The ongoing investment in the business is very important, and we effectively remain at the same CapEx level just with timing differences on that, and we've continued to support the payment of the dividend, very much in line with our policy. I hope that's clear.

Okay. Andrew, you might just address the COVID-related costs. You said you'd go back to those.

Apologies. Yes, I mean, clearly, there are some costs associated with this. Everything from -- I look around the room there I'm in today, and we've got hand sanitizers and spacing and all this and Clara and I are 2 meters apart and all of these things cost money and barriers and the like. Simply put, we haven't separately quantified it because, obviously, there's also some element of offset. I mean the fact that we haven't had to travel so much or been allowed to travel so much also is a cost saving now, whether that's sustainable in the long term is also up for debate. But really, these costs are inherent within the business. Clearly, the bigger cost associated with the whole COVID thing has there been the impact on volumes and the overall market dynamics is far more important than the individual cost items associated with having to take the necessary precautions within your organization. So we haven't separately set -- separated them out. There are some costs associated with it, but I wouldn't speculate on exactly what it is because it's extremely difficult to isolate.

We have a couple more questions on the line. Let's try to see if we can do them quickly. The next question comes from James Twyman from Prescient Securities.

Yes. I've got 2 questions. The first one, on the containerboard business, your volumes were up 5% and the market was probably down to flat. Just wondering whether most of that is exports or not. And if you could give some idea of how big the exports are, especially how important your Chinese exports are in terms of scale. And then secondly, on the uncoated paper business, could you give us some idea of the demand decline that you've seen in Russia? Because I know that's a -- the domestic sales there are pretty important. And in the uncoated paper business, the Neusiedler, I don't think has ever really made any money. And I'm just wondering whether in this environment, this is an opportune time to make some changes there.

Thanks, James. I think in terms of the containerboard volumes and exports, it's obviously very much a question of how one defines exports because clearly, we are structurally positioned as an exporter because, for example, we make containerboard out of Richards Bay in South Africa, which we export a lot into the -- mainly into our European network, and that's a structural thing we've always done. But by the same token, our Russian volumes go partly into Europe, partly into the local market and partly into export markets. And similarly, within Europe, our semi chemical production and the like, which are specialty products, we export on a global basis, on a structural basis. So the simple reality is we've always had a global footprint in terms of our sales structure. And that, as I think I said in the presentation, really has stood us in good stead over this period as well. That gives us an extra lever that we are able to optimize our sales strategy at any one time, taking into consideration the full global network that we have. We're not purely a domestic market player who, every now and again, has to look for export volumes if the domestic market is soft. We are structured for exports. We have the sales infrastructure to facilitate that because, a, the way our production is established lends itself to it and also the nature of our products with a lot of specialty niche products within the containerboard space like the semi chemical fluting, which a lot is used in agricultural exports, for example, bananas from Costa Rica and the like, these things are naturally export products. So we've always positioned like that. So it would be wrong to isolate it in terms of what is import, export at any one time. But suffice to say that it is an opportunity that we always have to increase our exports or reduce them depending on the nature of the individual markets at any one time. On the fine paper position within the CIS. The CIS, like all the markets clearly has also been impacted by the nature and the extent of lock down measures. So just like in Europe and also in Southern Africa through the height of lockdown, we did also see a weakening of the order situation within those domestic markets. And similarly, we've also seen a pickup in demand as the unlock has taken place coming into the back end of the first half into the beginning of the second half. So a very similar profile to other markets in that respect. Sorry. And the last question, I take exception to the miss your comment that Neusiedler hasn't ever made money. That is simply not the case. Neusiedler has been a very profitable operation. It focuses very much on, as I said before, the specialty niche applications within fine paper. For example, a growing business right now is around -- based on recycled pulp, so what they call deinked pulp. So it's a recycled grade of paper, which very much plays to the sustainability agenda. People are looking for that type of product, and we can produce it there. We can produce a number of other specialties, which we simply cannot do and wouldn't want to do at a big, fully integrated site. So I think it continues to have a very strong niche position; as always, one looks to optimize that as best we can.

I have a question on the webcast from Ross Krige. "Andrew, could you talk about variable cost direction into the second half and what you saw in the first half? And is the run rate likely to be similar?"

Yes. I think in terms of the input costs, as I said earlier, we saw a very -- a help on a year-on-year basis. But obviously, I think a lot of that is now in the numbers in terms of the first half. If the question is, what is the sequential benefit H2 versus H1. I don't see a lot of incremental benefit from the input costs. I think that's largely in the price. Now it's extremely difficult, obviously, to predict because there's so many moving parts within those input costs. But generally speaking, my sense is that the wood cost situation has stabilized, for example. So is there any more to that, more to come, I think that's limited at the moment. Clearly, there are a lot of costs which are linked to the oil price and they're related to what is extremely difficult to predict that. But the sense right now is that those are fairly stable. So I think the very good news is we took full advantage of the input cost deflation as it were, as you saw in the first half numbers. I'm certainly not seeing any particular inflation into the second half, but I don't see a big sequential benefit from further benefit, should I say, from input costs on a sequential basis. Clearly, if you look ahead, compare last year second half, you will see a benefit.

Thanks, Andrew. And we have a question on the webcast from [ Isaac Van Niakerk ]. Sorry, [ Isaac ]. "So a significant testliner capacity is added over the next couple of years. How confident are you that this liner won't make -- won't take market share from kraftliner grades and that kraftliner grades won't follow this line of prices down?"

Very good. Thanks very much, [ Isaac ]. Clara's very good at Spanish, but [indiscernible] needs a bit of work. No, I think, clearly, there's always a correlation between testliner and kraftliner. We've always stated that's the case because on the margin, there is an opportunity to substitute. Having said that, certainly, within Europe, that substitution as driven by simple economics of price differences has largely taken place. There's always the opportunity on the margin to try and do a bit more. And of course, if there's a total disconnect between the price of kraftliner and testliner, you can see more opportunity for test liner, but it's -- it becomes quite marginal because if you're trying to replace or displace the strength characteristics, the moisture resistance, the hygiene characteristics of kraftliner, you're having to put, for example, more and more chemicals and other additives into your test liner product, which, in turn, pushes the price up of that test liner. So I think there is a clear niche space for our kraftliner grades, and we think that, that's a fantastic position that we enjoy there. There's always a correlation to some extent between the 2 price -- the pricing of the 2 products. But as I say, I think the ability to continue to drive a big substitution is fairly limited and becomes actually economically unviable at some point.

Thanks, Andrew, and we're going to have one last question, and then we'll say goodbye to everyone. So the next question is from David O'Brien from Goodbody.

Just one from me. In terms of the kraft top white machine being shifted into H1 '21, can you be a little bit more specific as the -- when you think it's going to start up? What kind of tonnes we should expect to introduce to the market in 2021? And is the delay purely down to logistics around pandemic? Or is there a bit of pragmatism about supply demand while recognizing it's pretty niche products anyway?

Thanks, David. No, I mean, the delay is purely because of the effects of the shutdowns and the safety measures we had to take around all of that. We firmly believe this is a product that, a, is needed within the market; b, will make us good money on every time we sell. Because, again, it will be the lowest cost product even against the competing, what we believe are more inferior products being the fully recycled testliner grades, for example, we are producing this hybrid product, to remind you, which both has recycled content in it, but also some virgin content -- which gives its strength and other characteristics, which simply the pure recycled product doesn't have. So we think we can bring a product into the market, which is superior and at a better cost structure than the competing products, and that's normally a winning recipe. So we are -- remain very confident in this product. We wanted to bring it on as fast as we can. Clearly, as we enter this market, we also have the opportunity to optimize the mix as we go into the market because you can also produce a pure brown grade. So we will -- we'll be looking at our sales strategy and hence, also the production strategy as we bring the machine in, but very much, we are targeting to bring it in, in H1 2020, and we want to bring it in as fast as we can.

I thank you, everyone, for joining our half year results presentation today. As always, if you have further questions, we will be around. So just get in touch with us. And I now hand over to Andrew. Thank you.

Yes, thanks very much, and thanks, Clara. And just to remind you all, I think we've demonstrated by today's results, and I think we are clearly a very inherently resilient business. We delivered extremely strongly in the period. And more importantly, we are positioned very well to prosper into the future. So with that, I thank you for your attendance. I do hope next time we are able to see each other in person. But again, thanks for your attendance today and look forward to catching up. As always, we are available with any follow-up questions if you have them. So with that, I thank you very much.