Good morning, everyone, and welcome to Monday's 2026 half-year results presentation. I'm Andrew King, your Group CEO, and I'm joined this morning by our CFO, Mike Powell. I'll begin with some key messages from the period under review, and then Mike will take you through the financial performance in more detail. I'll return to provide an update on the performance of our business units and discuss some of the current market dynamics before taking you through various of the actions we are taking to strengthen our competitive advantage in what remains a volatile market backdrop. After that, Mike and I look forward to taking your questions. In the first half of 2026, we delivered underlying EBITDA of €379 million down on the prior year due mainly to margin pressure from lower average selling prices and higher input costs. We were able to partially mitigate these pressures through higher sales volumes, strong cost control, and proactive pricing actions through the period. We remain focused on taking decisive action on those areas we can control. Tight control of working capital mitigated the fall in earnings, allowing us to generate cash from operations of $347 million in the period, while lower capital expenditure also contributed to a stable net debt position. We continue to take actions on cost, operational excellence and portfolio optimisation, while ensuring we are well positioned to serve our customers with our broad range of innovative, sustainable solutions. These actions, together with a significant competitive advantage we continue to enjoy as a business, ensure that India is strongly positioned both to withstand the current market pressures and capture the upside as market conditions improve. With that, let me hand you over to Mike for more colour on the financial performance.
Thank you, Andrea. Morning, everybody. Thanks for joining. Now, let me take you through the group's financial results. And starting with the main movements in underlying EBITDA for the first half of 2026 when compared to the first half of 2025. We achieved higher sales volumes across most of our packaging businesses driven by the ongoing ramp up of our major capacity expansion projects and an improvement in order books along with a resilient performance in our converting businesses. Sales prices were on average below the prior year. Pricing across our paper grades declined in the second half of 2025 and into early 2026 resulting in the group starting the year at lower levels although price increases were implemented during the first half and with some initial benefits realized in the period average prices for the half remained below the prior year we expect to achieve the full effect of these price increases in the third quarter turning now to input costs which increased with higher wood costs in central and eastern european central and eastern europe as well as the impact of higher energy and other categories due to the conflict in the middle east as we enter the third quarter input costs do remain volatile and based on current spot remain above average input cost levels seen in the first half whilst you can see and follow the energy indexes publicly for yourself let me give you a little more colour on central and eastern european wood costs which are firming and may be a little counterintuitive compared to the economic environment as the demand for items such as furniture and european wood exports into the middle east decline we are seeing less harvested volumes therefore there's less sawmill activity resulting in lower wood supply and wood chips into the market. Alongside that, unlike Scandinavian markets where there is currently a degree of calamity wood, Central Eastern Europe has little calamity wood. These factors result in the cost of wood increasing in our Central Eastern European region and will continue to do so in the second half. These inter-European fluctuations are not untypical of what we see in regional markets from time to time. For forestry fair value we recognise the loss in the period of £35 million compared to a gain of £18 million last year and that results in the £53 million delta that you see. This loss was mainly the result of a reduction in local wood prices in South Africa during the period and while the year-end valuation will be based on prevailing prices at the time and reliant on a number of market input factors in South Africa, such as the export price of wood chips, the exchange rate and the South African diesel price, which of course is linked to the oil price. Absent any significant changes to the current market environment, I would expect a fair value gain in the second half. Fixed costs we worked hard on were flat year on year, excluding the acquired Schumacher cost base, which reflects the continued focus on cost control and driving efficiency improvements to offset inflationary cost pressures and we'll touch more on some of these initiatives later in the presentation lastly fx and other totaled 42 million euros and was mainly attributable to the weaker us dollar versus the euro and hence was a year-on-year headwind the dollar has largely been steady actually since the second half of 2025 and even recently shown a little bit of strengthening adding all that up results in an underlying EBITDA of the 379 million euros that you see on the right hand side of the page now looking now at cash flow movements during the period and our teams have worked really hard to mitigate the impact of lower earnings what I've done here is I've simplified the cash flow because those accountants tend to make it rather complicated in the statutory format these days. So I'll start off with underlying EBITDA that you can see at the top of the slide and adjusting for the non-cash forestry fair value that I've just taken you through. Then as expected we had a working capital outflow in the period which we generally do experience in half year one due to seasonality effects as well as the impact of higher prices at the end of the period. Pleasingly, this movement was less than the equivalent period last year. And whilst not shown on the slide, when you do get a chance to look at the balance sheet, you'll see that our absolute total working capital balance at 30th of June 2026 was €122 million lower than the balance at 30th of June 2025. So really a real good testament to the strong focus on working capital management. Tax and interest paid was higher, mainly driven by the timing of Eurobond coupon payments. That's only a timing issue. Investment in property, plant and equipment was around £140 million lower than the prior year. And we continue to apply rigorous discipline to new CapEx approvals, leveraging our well-invested and well-maintained asset base, whilst ensuring we continue to prioritise safety and asset integrity. For the full year, we expect CapEx to be around the €500m mark previously, we guided to €550m, so somewhat lower than previous guidance and well below last year's €690m. I do want to be clear on this we are not storing up an issue for the future here or risking safety or growth and the reductions are spread across a broad portfolio of smaller projects. Taking all that into account while earnings were down on the prior year you can see about half way down the slide the 5 inflow versus the 18 outflow of last year shows our cash movement generated from the business was largely unchanged. Dividend payments reflect the return of the full year dividend to within cover range and taking all of the items into account including the acquisition of Schumacher in 2025 net debt was unchanged at £2.6 billion at 30th of June 2026. While leverage is higher at 3.2 times at the end of the period as can be seen at the bottom of the page this is really driven by the lower 12-month trailing EBITDA which does include a fair value loss for both of the periods shown moving forward we expect leverage to reduce supported by both the ongoing focus on cash management and the improving trading momentum i now want to set out our robust financial position we successfully refinanced our 1 billion euros rcf facility during the period we also repaid the remaining balance of the euro bond that matured in april 2026 which we'd already refinanced in october last year the only notable debt maturity in the near term is the 750 million euro euro bond due to mature in april 2028 so we remain strongly positioned with liquidity totaling 1.15 billion euros and investment grade credit rating and a reminder we have no financial covenants. As you would have seen from our release this morning, we've recognised a €320 million of pre-tax special item charges in the period. This compromised a non-cash impairment charge of €296 million and cash restructuring and closure costs of €24 million, which we expect to flow out as cash in the second half of the year. Impairment charges compromise 206 million euros at Arduino mill in Italy and whilst Arduino continues to ramp up volumes in line with plan and we remain confident in its long-term future the current outlook indicates a lower returns profile than previously anticipated with returns highly sensitive to energy input costs and selling price assumptions both of which are proving to be highly volatile in the current world. The remaining 90 million euro impairment charge was split between our Neussiedler uncoated fine paper operations in Austria, the Schwarzenberg solid mill in Germany and the Stambulinski mill in Bulgaria that ceased operations in 2024. And lastly, technical guidance for 2026. After a normal review of the useful lives of our assets, we've reduced the expected depreciation and amortisation guidance for the year to approximately 475 million euros which reflects our well invested and well maintained asset base. We've also reduced the guidance for the full year impact of maintenance shuts from 100 million to 80 million euros this reduction all attributable to the second half. So to draw to a close we have and continue to take a number of actions to deliver earnings and cash resilience in the short term, whilst continuing to enhance leverage to the upside as markets improve. With that, Andrew, I'm back to you.
Many thanks, Mike. I'll now take you through a review of the business unit performance and thoughts on current market dynamics before again coming back to the actions we are taking to strengthen our competitive advantage. If I move then to corrugated packaging, as you'll see, a highlight was the good volume development across our key segments. Container board volumes were up around 12%, supported by the ramp-up of the recent capital investment projects at both Duino and Cupio Mills. While in the box business, we delivered 2% volume growth on a like-for-like basis. In boxes, we continue to see quite divergent regional growth rates, with the Polish and surrounding emerging European markets seeing continued good growth and Turkey recovering, albeit volatile. while Germany and Benelux continue to struggle. Despite the generally low growth markets, we are encouraged by the pipeline of opportunities in our portfolio, supported by the broader geographic coverage we now offer across Northern Europe as a consequence of the integration of the Chewbalker business last year. In uncoated fine paper, volumes were again stable despite market demand declines estimated at around 3% in Europe. as we continue to gain share at the expense of weaker competitors. Margin pressure came from a combination of the lower average selling prices across all key paper grades and the significant input cost inflation. Prices came off through the second half of 2025, as Mike explained, and into Q1 2026 on the back of both the sluggish demand and the ongoing overcapacity in some of the bulk grades of recycled container board and uncoated fine paper. In response to the sharp uptick in input costs as a consequence of the Middle East war, we have been successful in implementing a series of price increases across all key grays during the period. Although not sufficient to fully offset the impact of the cost increases in Q2, we do see further benefits from these price increases into the second half. While largely cost-driven, it is encouraging to see that the price increases are also supported by strong order books going into the second half. particularly in the virgin container board grades. The focus has rightly been on the continued oversupply and recycled container board. However, I note that the supply-side dynamics in the niche virgin grades, which is our largest exposure, are very different. There is no significant new capacity in Europe, and the large capacity reductions in the U.S. have served to reduce exports to Europe, traditionally an important export market for the U.S. producers. With steady demand, this has served to significantly tighten up the virgin container board markets. We're currently engaging with our customers on further price increases across our range of container board grades, supported by both the tight supply-demand balance in the virgin grades and, of course, the ongoing cost pressures we are seeing in recycled container board. Margins in our corrugated solutions business were pressurized by the lag effect in passing on the rising container board prices through the period and the intense competitive pressures in what remain sluggish growth markets. We also saw a weak performance from the small solid board business acquired as part of the Schumacher acquisition, which Mike referred to in the earlier discussion on impairments. Turning to flexible packaging, we delivered a resilient performance with solid results from our converting businesses, mitigating the squeeze in craft paper margins. Pleasingly, we were able to deliver good volume growth in improving but still generally low-growth markets. Craft paper volume growth was supported by the optimization of recent investments and resilient export demand, while in paper bags we saw ongoing good growth in e-commerce applications in both Europe and North America and regional strength in industrial bags in Central America. Industry volumes for industrial bags in our core European markets remain relatively flat and we still haven't seen a marked cyclical recovery of the lows of recent years, impacted, of course, by the subdued household construction activity. The business saw significant input cost pressures during the period as higher oil and gas prices filtered through to other inputs, most notably logistics, chemicals and wood, as highlighted by Mike. Through very proactive management, our commercial teams were able to limit the lag effect in passing on these costs in our converting businesses. We also implemented paper price increases during the quarter and early into Q3, supported by both the generally higher cost environment and, importantly, good demand driven by the increasing use of craft paper and e-commerce applications and steady demand from traditional industrial uses. I'll come back to developments in the e-commerce market later in more detail while these prices increases had some effect on the Q2 performance we expect the full impact again to come through in the third quarter similarly though we do expect a further uptick in the cost base as central and eastern European wood costs continue to rise and recent events in the oil and gas markets point to further general input cost inflation noting of course that the outlook here is changing on an almost weekly basis, depending on events in the Middle East. We will continue to monitor closely the impact on the cost base and look to respond with pricing actions where appropriate. In the context of the prolonged industry downturn we have been experiencing, I want to spend a few minutes highlighting the various actions we are taking to both ensure resilience in the short term and support long-term value creation for our shareholders. As a group, we do benefit from operating some of the most productive and lowest cost pulp and paper mills in Europe. Coupled with our strength in integration and diversified portfolio of packaging solutions serving structurally growing markets, we are well positioned for the future. However, we are focused on doing more to strengthen performance, cash generation and competitiveness through a combination of plant network optimisation, strong capital discipline, operational excellence and commercial execution. Our ongoing actions around plant network optimisation are tailored to create a stronger, more scalable platform to support growth, drive productivity and cost optimisation and improve returns. We've announced the closure of six converting plants over these last six months. Of these, two plants are now closed, with the remaining four plants expected to close over the remainder of this year. I remind you that these plants were profitable, so the upside comes in successfully transferring the volumes to larger, more efficient sites to improve asset utilization and reduce fixed costs, while of course ensuring we maintain service continuity. To put this challenge into context, it requires the transfer of around 800 customers supported by careful qualification and transition planning. We are relocating 30 major items of equipment and the six closures involve a reduction in headcount of around 580 by year end. We continue to look to optimize our operational footprint to support long-term value creation and will not hesitate to take further action on our portfolio if required. As Mike has already alluded to, the major capital expenditure projects we have been developing over the past four years are now largely complete. Our priority is now to drive cash returns from these investments through both operational and commercial optimization. While we recognize that we are not where we want to be with certain of these projects, as Mike has already discussed in the context of the Duino investment, we are in a position now where we can drive growth from existing installed capacity without the need for further major expansionary CAPEX. We can reduce capital expenditure without prejudicing asset quality or mortgaging future upside. As Mike mentioned, for 2026, we are now planning for full-year capex of around €500 million, reduced from our previous guidance of €550 million. Our investment program is focused on safety, assets integrity and cost optimization, with only highly selected growth capex in core markets. A large component of the current cash-out is linked to the biomass boiler projects in South Africa, Slovakia and the Czech Republic, aimed at driving cost optimization, energy efficiencies and reducing our exposure to the volatile fossil fuel markets. Again, I want to emphasize, as Mike did, that the reduction in CAPEX guidance is not about pushing out urgently needed maintenance CAPEX. We are confident we can run the business with the lower CAPEX levels, given the well-invested nature of our asset base. Operational excellence and continuous improvement is part of the DNA. of the group. It is core to how we seek to drive competitive advantage and unlock value from our asset base. At our flagship or container board mill in Swiecie, Poland for example, paper production has increased by 18% of the past 10 years on the same machine footprint, while in converting our industrial bags business has achieved a compound annual growth and productivity of 5% over the same period. Building on this legacy, we are now accelerating the rollout of our Mondi management system, or MMS as we call it, across our mill network and extending it into our converting operations. This follows successful pilot projects in various of our key mills. I mentioned this initiative at the full year results, but just to remind you, it is a multi-year program aimed at taking us to the next level of operational excellence through a zero loss mindset, embedding standardized processes and ensuring the sharing of best practice, facilitated by empowering our people and strengthening our leadership teams. It focuses on right first time performance, waste reduction, reliability, operator capability and improved run rates. This is not about quick wins. It's a long-term program designed to embed consistent execution and strengthen leadership capability across our operations. I'm very excited that early adopter sites are already reducing unplanned downtime and improving operating efficiency, reinforcing our confidence that we can drive operational excellence to the next level, improving competitiveness and cash returns. Again, by way of example, the switchy mill achieved 4.3% productivity gains over the last 12 months, with production output on selected machines up 11%. While of course not all due to MMS, this is clearly a major contributor. While market growth remains subdued, we are confident that the structural growth drivers for sustainable packaging solutions remain firmly in place. Customers increasingly need partners who combine both broad product choice, innovation, sustainability, secure supply, and reliable execution. We are well positioned in attractive end markets such as FMCG and e-commerce, where customers do remain focused on reducing plastic when not required and improving packaging sustainability. In this market, achieving growth is not simply about pushing products. It is about customer partnerships, technical collaboration and innovation. Some great examples in our collaboration with our leading Ecuadorian banana exporter to develop a corrugated solution using our Smart Craft Brown and Fresco Flute container board. Well, you'll see from the picture, it's not immediately obvious. the design is around 10% lighter while maintaining the strength needed for a demanding export supply chain. Another example you can see in the top left of these images is where we have supported the transition to a recyclable monomaterial solution, which is an industry first for a shelf-to-table tuner product. These examples and the many more we have show how our product offering, technical expertise and customer partnerships help us to win customers and capture growth whatever the market conditions. We do have a particular strength in the strongly growing segment of e-commerce and I just want to spend a couple of minutes around this. Here we can support customers across the complete range of fiber-based packaging. Traditionally e-commerce has primarily been a box business with significant growth seen over the past 20 odd years. It has now a major component of demand, estimated to account for roughly 15% of the European box market. While demand here continues to grow, it is undoubtedly slowing as the e-commerce market matures and the major players look to optimize their packaging. We have strongly focused on supporting our customers in this journey, developing products such as the paper protective mailer, which you see in the pictures, in conjunction with a major e-commerce customer. As the leading incumbent producer of craft paper and paper bags, we have also been at the forefront of supporting our customers' transition to the use of fully recyclable, lightweight, and flexible paper bag solutions. More recently again, as e-commerce customers looked for increased efficiencies in their packaging processes, we have been working with machine suppliers and customers to develop automated packing lines that use our packaging materials, such as craft or functional barrier paper. It is in these craft paper and bag applications that we are seeing the strongest rates of growth currently, and a key reason why craft paper demand is positive going into the second half of the year. Last year, as you know, we combined our e-commerce sales teams across corrugated and flexible packaging, creating a simpler, more coordinated proposition for customers across all applications and markets. Our broad fiber-based e-commerce range is supported by integrated production, technical expertise, and recent investments in Stetti, Switchy, Cupio, and our North American bag network, helping us support existing customers and win new business in these fast-growing applications. Mondi is indeed the home of e-commerce packaging. In summary then, we are well positioned to deliver short-term resilience and sustainable long-term shareholder value as a leader in sustainable packaging solutions with exposure to attractive, structurally growing markets. This is supported by a well-invested, cost-advantaged and integrated asset base. We remain focused on disciplined capital allocation and retaining a robust balance sheet. Importantly, we are taking decisive actions today to drive performance and strengthen our competitive advantage for long-term value creation. I'll then just finish with the outlook for the remainder of this year. We have seen trading in momentum gradually improving through the first half, and we enter the second half of the year with higher packaging prices supported by very good order books. That said, we do see headwinds with volatile energy-related input costs and higher wood costs across Central and Eastern Europe. Of course, we are also mindful of the ongoing geopolitical turbulence in the world. With that, I would take you back to Q&A and Mike and I would be happy to answer your questions.
Operator
Thank you very much. If you have a question, please use the raised hand function in Zoom. If you are dialing in to Zoom via your phone, please use star nine to raise your hand and star six to unmute when prompted. Our first question comes from Cole Haythorn of Jeffries. Cole, if you could please unmute, go ahead and ask your question.
Thanks for taking the question. Mike, I'd just like to follow up on your comments on Central Eastern European wood costs. Would you mind giving us some context of how big the wood cost bucket is and the headwind maybe from a quantum perspective that you see as today into the second half? And are you comfortable that the price action so far are more than offsetting the cost increases?
Thanks, Cole. Yeah, I think I've described sort of the economics of the situation. Central Eastern European Wood, second half on first half, best guess today and pretty likely to happen because you tend to contract forward a little bit. it's probably on its own about a 30 35 million headwind um half two half one if that's what you're after again first half was up probably 25 million on second half last year so i'd probably expect you know year on year central eastern european would to be sort of 60 million something like that so hopefully that's clear second half on first half about 35 million overall a bigger number yes i mean price actions have been taken and but it does moderate the margin improvement if you like so we will get some you know q3 benefit of those prices coming through but obviously we have got those wood costs coming through before any sort of other energy, energy related. But yes, in answer to your question.
Thank you. And then, Andrew, maybe one from your side on the pricing actions, just to confirm, is Mondi out with price increases across container board and SAC craft, like further increases to the ones that you've already achieved? And I'm just wondering, is this, you know, how comfortable do you feel about those price increases? You know, is it is it nicely supported by by order books and maybe following up from that with duino given the impairments i realized this recycled container board market is very challenged but you know one of the reasons that you originally did duino was you were going to export volumes into turkey and turkey had safeguard measures put against europe but europe doesn't have any safeguard measures against turkey um you know when is the time that the industry kind of takes the gloves off and pushes back on some of the turkey volumes that are coming into Europe on recycled container board? And would that be something that you would pursue?
Yeah, so firstly, you call on the pricing actions. Just to be explicit, we are engaged with our customers at the moment on price increases across our container board grades. As I said in my comments Clearly in the virgin grades We are seeing a very tight supply-demand dynamic Driven by a confluence of factors As I mentioned There's reduced supply out of the US For obvious reasons I mean there's huge capacity reductions in the US And export business has never been particularly lucrative It's more marginal business for the U.S. producers, so it's natural that when they shut capacity in the U.S., the first market that they stop serving is exports. And, of course, that's probably exacerbated now by the significant price increases we are seeing being implemented in the U.S. So that's made Europe progressively less attractive. and, of course, the marginally stronger dollar over the last quarter or so has probably also supported that, but that hasn't moved particularly much. But one also has to recognise that has been a big topic is the sort of weak dollar more generally. So any strengthening of the dollar does undoubtedly support European pricing dynamics as well. So, yes, it's across our grades. On the recycled side, I mean, it goes without saying, but it is more cost-driven. Everyone knows about the oversupply issues on the recycled side. But as I think we've said on a number of occasions, there simply isn't the margin to play within the industry at the moment, particularly given the elevated input costs at the moment. As you know, the recycled cost curve is particularly exposed to external energy, to gas and other forms of external energy. And with these elevated gas prices, the whole cost curve has moved up. Margins are under enormous pressure across the cost curve. And that is simply the main driver there. but as I say on the Virgin side and across the piece our order books are very good and you mentioned about craft paper we are not out with a price increase on craft paper at the moment albeit we are very encouraged by again a strong order position as I said stable demand out of the traditional industrial sources of demand And Europe is OK. It's still not kicking on from the cyclical lows we've been seeing, but that is not hard to understand given the ongoing geopolitical issues and the impact that has on consumer confidence that people are not building that extension to their house or investing in a new kitchen or something like that that uses the bags for our products to the extent they were. I mean, it's still OK. Export markets are decent, and that's encouraging. And as I say, we aren't seeing quite strong demand from non-traditional uses of craft paper, most notably the e-commerce, which is what I was discussing in terms of some of the movements in the e-commerce market, which is driving demand for our craft paper applications and our coated products and the like, which is very encouraging. it's tightening up those markets. So we go into the second half with a very strong order position there. And maybe just your last question on Duino specifically. You're right in that one of the logics behind Duino in the first place was we are short of container board in our Turkish operations. We saw this as an opportunity to have leverage into the Turkish markets because Duino is well-placed logistically to supply into Turkey. But as you rightly say, there have been significant safeguarding measures put in place that effectively make it prohibitive to export container board into the Turkish markets from Europe. I think it's a bigger political question as to when the gloves might or might come off. I think it's a topic more broadly for Europe in that as industry we often feel like we're fighting with one hand tied behind our back. Not that we need safeguards per se, but of course when others play that game then it is difficult if Europe doesn't respond. But all you're really asking for is a level playing field and then we think we can compete very confidently in global markets. But at the moment you're not seeing it. you see it in other sectors from, for example, Asian volumes into the fine paper markets and things like that. Not, we'd believe, competitive delivered into Europe, but they are bringing some volume in at different times. So yeah, I think it's a broader topic. And of course, as an industry, we discuss these matters and certainly we would encourage anything that provides something of a more level playing field.
Operator
I trust that answers your question, Thank you very much, Cole, for your question. Our next question comes from Brian Morgan of RMB M. Stanley. Brian, if you could please unmute, go ahead and ask your question.
Right. Hi, Mike and Andrew. Can you hear me? Yeah, it's all good. Just a question on Germany. You called out that it's still quite weak. Eastern Europe is pretty strong and you're saying Germany is pretty weak. we've recently seen PMIs, manufacturing PMIs pop above 52, the first time in years that we've seen manufacturing PMIs pop up that high and certainly above 50. Are you starting to see that come through in your business yet?
No, it's a good question, Ryan. If you look, and you're referring specifically to the comments I made on the corrugated business, where obviously you look very much on a regional basis and so you know in order of magnitude I think first half the industry numbers suggest Germany was still flat to even slightly backwards whereas CE Poland for example is four or five percent type of growth rates but as you rightly say I mean it does look like some of the macro indicators are turning somewhat more positive and it is fair to say Our order books into June, July did start to show quite an encouraging pickup. But two months doesn't make a summer, especially these days in Europe. And so I think one has to be a bit cautious about interpreting that into a general trend. But, yeah, I would concur that what we're seeing on the ground does seem to reflect an improving environment relative to where we've been, but clearly early days yet, but at least encouraging, I agree. thanks adri is it too soon to start thinking about um about capex not you've cut capex to maintenance capex is it's too soon to start thinking about the next um the next level of growth uh yes um in short you know we've we you know we're very conscious we've spent a lot of our shareholders money in expanding our capacity we do have call it capacity to to allow us to grow into growing markets and support growth in these markets through a combination. I mean, essentially, when we bought Schumacher, we knew there was a lot of latent capacity there. That was part of that logic. And so we're very confident. Of course, there's always smaller de-bottlenecking things that might make some sense, but that's very much in that bigger program that we talk about. And so there's no need for us to make significant investments on the capacity side in order to be able to support the growth that we see going into the market. Where we do spend a bit of expansionary capex at the moment is, for example, we've done some work in our North American bag business, where we essentially consolidated into a single plant a lot of our e-commerce business because there's a very strong growth in e-commerce demand for paper bags at the moment in the US market and we're adjusting to that. But these are very selective, smaller CapExes. We are very confident we can work within the kind of CapEx quantum that we spoke about in the commentary and still facilitate the growth that we hopefully can start to see in the markets.
That's cool. Thank you very much.
Operator
Thank you, Brian, for your question. Our next question comes from Detlef Winkleman of JPMorgan. Detlef, if you could please unmute, go ahead and ask your question.
Yeah, morning, everyone. Maybe to start, I mean, we're hearing a lot of news regarding, you know, test line of price increases going ahead. I fully understand that it's cost-driven. I want to get a sense on the kind of supply-demand dynamics downstream at the box level and whether we're struggling to implement all those test-liner pricing increases downstream or not. And then maybe my second question would just be, you know, maybe an update on where we are with Duino right now. I mean, if I think about it, Italian electricity or energy price is extremely high in H1, presumably, you know, still in the ramp-up phase. Just curious how we should be seeing that progress, and if you're willing to share maybe like not an EBITDA number, but EBITDA kind of qualitative assessment, I suppose, going forward. Thanks so much.
Sure. So firstly, in terms of the box supply demand, I mean, just for those comments with Brian, we're seeing different rates of growth in different regional markets throughout Europe. I think if you take Europe as a whole, it's sort of in the 1% to 1.5% growth year to date. If you see the industry numbers, I think they're always a little sort of out of date, but they're in that order, which on one hand has, I mean, the very positive thing is it's progressively got better. I think the May numbers were pretty strong. They just came out the other day, and it just reflects what we feel, which is that there has been a bit of a pickup in momentum over the last couple of months. And as Brian rightly pointed out, the economic indicators feel a bit better in some of those very important markets like Germany for us. And that does feel like it's picking up through the order situation. But it's been, you know, it's been difficult in the first half or first quarter, really. Then it started to improve a bit. Clearly, we have the normal lag effect that comes through when you're getting container board price increases. It does take time for that to come through the boxes. It's always the case. You know, we always say it's a kind of three to six month lag effect. And that holds true. so you know we it's a work in progress frankly in terms of implementing the price increases that have been coming through on the box sorry in the container board and pushing it through into the box business there is you know there is a lot of competition out there that's undoubtedly the case and but it is encouraging that we are starting to see a better demand picture and of course that that all helps in terms of pushing pushing pushing the container board prices through which need to happen because their box market can't absorb these sort of price increases. Maybe then just, sorry, on your question on Duino. Yes, I mean, obviously Duino is very much still in ramp up, which has a few effects. Clearly, every time you produce, you're getting lower unit costs of production because you've got an immediate fixed cost base that you then have to leverage off. We would estimate that this year we probably, it's a 420,000 ton nameplate capacity machine. I think we'd probably blend up doing around, depending on market conditions, et cetera, as well, but probably around 300,000 tons this year, plus minus out of that machine. So clearly next year we'll see the further step up. and certainly by the end of, well, the second half of next year, you should be at, call it, full run rate, all else being equal from a technical perspective. Very important, though, when you bring this sort of volume into the market, you do it in a coherent way. And so we're working very hard with our customers to bring it in and supply the right customer base. And so the mix effect changes over time and that we're working on continuing to optimize. But, of course, as Mike said in his comments, the ultimate returns here are two huge variables at the moment. One is input gas prices and the other is, of course, the selling price. The selling price is something one always knows is volatile. Of course, there's gas. It's relatively unprecedented in the European context for obvious reasons why the gas price is particularly volatile. And of course, Italy is very exposed to that and this mill in particular is exposed. So we had to factor that all in when thinking about kind of the return profile in the short term. but nonetheless our focus there is driving it to full production that gets you much further down the cost curve and it will be a resilient long-term player there and then at the cost levels when it's optimised and an important part of the whole integrated system.
Operator
Thank you very much, Detlef. Our next question comes from Gabriel Simos of Goldman Sachs. Gabriel, if you could please unmute, go ahead and ask your question.
Hi, Andrew, Mike. Thank you very much for taking my questions. So my first one would be on the fires that we're having in Southern Europe at this point. So we just saw news that Smurfit Westbrook was shutting down the Kraft Liner plant. And I wanted to get your views on the impact that would have in the supply and demand and in prices for Kraft Liner. and also the impact that you're seeing on wood costs in that region and if any impact to Maldi in particular because of these fires. So the second question would be on the capacity that we see coming online for Testliner at the end of this year, beginning of next year. So while you're still ramping up the sales volumes in Duino, as you just mentioned, so just wanted to pick your brains on how you're seeing this additional capacity progressing And if you see more potential for new spring conversion still, given the recent announcement that we had from one of your competitors now. I understand that the solution for this market would be potentially capacity shutdowns, given the amount of capacity that is coming online to the Tesla in our market. So we saw Smurfit shutting down a plant in the UK, but just wanted to see if you guys see more moves starting to happen there from a supply adjustment perspective. Thank you very much.
Yeah, we can address those. So firstly, I mean, on the fires, our first thoughts are obviously with all the people directly impacted by this. And, you know, our thoughts and best wishes go to everyone in these regions impacted by these horrific events. and, of course, also to our industry colleagues in Smurfit, in the Smurfit Fractura Mill, as I think what you're referring to there, and we wish them all the best in managing an extremely difficult situation, no doubt. So I think it's first and foremost to remember all the real people involved in managing these situations. and in terms of that the impact on the industry you know I you would have to I don't know what the prognosis is right now clearly in the short term it must cause supply side disruptions so we'll have to see how how long that is for or not but you know these this is a big market and obviously there are different supply side dynamics taking place all the time so I wouldn't want to overplay it and we'll have to understand from a market perspective and also from a customer perspective because we all want to look after the customers here how this might impact them and obviously where we can help will certainly be available. In terms of the impact on wood costs, so firstly, obviously, it's not a wood basket that we are exposed to at all. The wood baskets that we operate in is very much Central Eastern Europe and also Scandinavia and then, of course, South Africa and Canada. So we don't have any particular insights frankly into the impact or otherwise on the wood supply situations in in southern Europe so again I think there are other people who would be better qualified to to to answer that question for you so I'm afraid I just don't have any particular insights certainly we're not seeing any direct impact on on on the wood markets that we serve at the moment albeit you know frankly for other reasons, we've seen pressure on wood costs perversely, largely as a result of the Middle East wars and the impact on the sawmilling industry as a consequence of In terms of RCB capacity additions, yeah, I mean, you know, this market is in oversupply and any new capacity only exacerbates that in the short term. clearly everyone's got their own rationale for adding this sort of capacity and no doubt it makes sense for the player involved. But, of course, it does exacerbate the market oversupply more broadly if it comes on indeed at the time frame, et cetera, as indicated. I mean, what we are seeing with a number of these big projects is that they seem to have been pushed out or delayed for a variety of different reasons. So, yeah, I mean, it's obviously the UK market which will be directly impacted because, of course, there are two big machines coming on in the UK. But, of course, it has a knock-on effect throughout the European market. So we'll have to see how that plays out. That being said, you know, as I've said already, and the reason why there's pricing momentum at the moment is people simply on delivering into these sort of price levels. Industry stock levels are actually in pretty good shape at the moment, which you would say is maybe counterintuitive given the supposed oversupply, but it's a reflection of the fact that there is simply no margin to play with at the higher end of the cost curve. So you're seeing that play out. So we'll have to obviously watch, like we always do with the supply side, what's happening and how that might impact markets in the medium term. But I think to your point, it does highlight the need for probably further capacity rationalization at the higher end of the cost curve. and undoubtedly there's a lot of smaller higher-cost mills which will become under even more pressure if this oversupply continues to lead to the margin squeeze we're seeing at the moment. You asked the question, are there any more newsprint machines? I mean, there are other newsprint machines around. I mean, I don't want to say the uniqueness of this one, But one of the opportunities that this one has, which, again, I don't know the machine directly myself, but I know enough about it, is it was obviously a recycled-based newsprint machine. So it has recycling capacity already on site, which obviously has to be adapted and the like for a different grade, but you're not starting from square one. And a lot of the newsprint machines historically were also based on Virgin Pulp, which is a totally different setup for the mill and the like. So probably not as conducive to conversion as maybe this one was.
Operator
Thank you very much.
Operator
Thank you, Gabriel, for your question. Our next question comes from James Twyman of Prescient Securities.
James, if you could please unmute, go ahead and ask your question. yes um thank you thank you very much and um congratulations on um very good results in extremely difficult circumstances in q2 um my first question is just on sack paper um obviously this is your biggest business you're not talking about price increases but um i suppose we can still hope that there will be some later in the quarter because it is a quarterly price increase But could you give us some quantification of how much of your sack paper is produced in Eastern Europe where you've got this wood cost issue and how much is in Scandinavia where you don't have that issue? Just trying to understand whether this is a margin pressure issue over the next six months or not. And secondly, you were very helpful in terms of giving very clear guidance on these wood cost increases in Central and Eastern Europe. And I was wondering whether you might be able to do something similar on energy and freight. And before I go, just very briefly, working capital was up 94 million in the half. You did call out the fact that you're improving it substantially. So given that it's a seasonal increase normally and you've had these cost increases, where would you see working capital for the year? Could you get it down for the year, given the improvements that you've made? Thank you very much, and well done again.
Thank you, James. We'll take any compliments going. But you're right in the sense that I should, again, emphasize what a huge effort it's been for our teams to drive these pricing actions that we did need in very short order given the huge input cost inflation we saw in a very short space of time and also all the other cost control measures that the teams have been working feverishly on throughout the organisation. So I will pass on your thanks to them. Thank you. Just on the questions you've just raised, So firstly, on the craft paper prices, I mean, I would just remind you, we have been implementing craft paper prices. So I think the question was, are we currently in the market with a further price increase? So just to be clear, we implemented some price increases in Q2 and into the beginning of Q3. As you say, there's a lot of kind of contract business, which invariably means you have to wait until a kind of period in to push it. but we did implement increases. I think the question was, is there a further increase in train? And the answer is no at the moment. But as I emphasize, the order situation is tight and we'll continue to assess what the next step should be. In terms of that question on the C-Scandi split, But we have one mill in Scandinavia in this particular segment, which is Dinos in Sweden. All the rest of the production is in that Central European wood basket, essentially. So it's primarily Stetti and Franschacht mills. So, yeah, it's the majority. So undoubtedly, yes, this segment is being impacted, of course, by this wood cost inflation. And, you know, we're not going to break it down for you, but it's, you know, the total wood cost effect is of the order that Mike referred to. If anything, on a proportionate basis, probably a little bit more in this business than it is in corrugated, given the corrugated also has exposures in other markets. Of course, we also have Hinton in Canada here, but from an impact that's not a craft paper mill, it reports into a flexible packaging, but it's a market pulp. Maybe, Mike, you could comment on the energy freight and working capital. Sure.
Yeah, no, I mean, if I take energy, the answer changes. If you'd have asked me two weeks ago to today, we tend to look at gas as the indicator. And we tend to look at, you know, cost per megawatt hour index, which a couple of weeks ago was up 45. Today is at 60 and has been probably for the last week. So it's spiked up as unfortunately the conflict occurs. so it's pretty volatile in terms of the um if it's stuck at spot today um i call it 60 half two half one just doing some quick maths is probably 20 to 30 million um but it's whilst i'm pretty confident on the wood increase unfortunately um i would say there's a range on gas so you know it can drop quite quickly because it's gone up quite quickly so the range is probably somewhere between a 0 to 30 million headwind um half two on half one of course july will have that cost so again i'd be quite quick to caution on people getting too excited about q3 because the cost base in july is a lot higher than the cost base was in june um as andrew said we we're agile we can manage around it um but people for us about quarters on quarters, you know, the costs in July will be at the 60-ish number. So, to answer your question, James, sort of 0 to 30 on energy. It does knock on to other things, so things such as fair value valuations. I don't always enjoy talking about it because it's a complicated thing. But again, we should just be aware that that depends on South African diesel prices. That's linked to oil. So you touched on freight, and I guess that's partly from a competitor's results that talk quite a lot about freight. I think we're managing our freight costs very well. But if I can sort of broaden it to oil and oil-related costs, at the moment we're not seeing those, but they do knock onto things like fair value, put some risk into that number for the second half, and they could knock onto other things. We haven't seen that yet, call it in the month of July forward. But again, that's pretty volatile right now. And then the last question I think was on working capital. Working capital, I always say if the business is growing and prices are going up, you have more expensive inventory and more expensive trade debtors. That's a good thing. So we would normally have an inflow in the second half, and I'd expect that sat here right now. But of course, if I'm wrong when I sit here in six months, it'll be for good reason. It'll be because the business is growing, there's momentum into 2027, prices are higher and inventories are therefore more expensive in stock and therefore you're carrying in absolute terms a higher working capital balance, obviously lower as a percentage of revenue. What I will assure though is we'll continue to make sure that that percentage of revenue continues to fall as we continue those actions. So it sort of depends on the momentum into 27, James, as I'm sure you'll understand. But absent anything else, normally an inflow in the second half. If we don't get it in six months, it'll be because the momentum's changed and prices and margins are increasing.
Thank you very much. Very good. I appreciate we've already taken a lot of your mourning. But I think there are a couple more questions.
Operator
Very happy to take those if everyone bears with us. absolutely our next question comes from temba kondi of excelsior temba if you could please unmute go ahead and ask your question hi uh morning uh can you guys hear me okay morning mike and andrew uh just have a two questions actually so regarding the the the capacity reductions in Tesla and in the US and the reduced sort of EU imports, I just want to know how much of that, sort of how many tons of Tesla used to come in? Because I'm just trying to get a gauge of, you know, how much of the price increases are due to that. And how much are due to the cost, the input cost pressures that you guys are facing? And then the second question would be just regarding the converting plant closures. So how much sort of costs are you taking out and how much are you saving because of that?
Let me take the second one first, Tamba. So we've said in the past that it continues to hold. Those closures, the sites collectively are profitable. So what we're actually doing is moving volumes to sort of larger scale, more efficient plants. So it's really important to transfer the customers successfully so we continue to service the customer. But these aren't loss-making plants. So you don't gain profitability. you gain efficiency and productivity at the new plants that's something we always do we've done a bit more of it recently for obvious reasons but it really just helps us offset cost inflation elsewhere so that we can continue to invest in things like e-commerce we can continue to pay our people which actually you know are super important to us to retain their skills and knowledge so it helps us really offset cost inflation is the way to think about it you actually saw that Q2 as well I mean that the numbers were good because we made some really good controls around our cost base but it really contributes to that so what you shouldn't do for example is take the number of heads and
multiply it by a salary because of course you have to transfer the gross profit to the other sites too so it really just helps us keep control and keep our costs flat which going into this year I said we could do with those closures I think we've proven in the first half we've done that we'll continue to demonstrate that in the second half andrew yeah and i think just on the thing i was just checking my numbers because i i couldn't remember the exact statistics but if you take it historically the us was probably five six hundred thousand tons into the european market now that's been coming down progressively over the last few years i think last year was about a 350-400 somewhere around there and we're seeing further quite meaningful reductions this year and and it seems to have accelerated a bit so the point being it's quite you know it's it's it's relevant in what remain you know the virgin container board market is six seven million tons that sort of order of magnitude depends how you define it exactly in in europe so that that That scale is one pretty decent sized machine in what is a relatively small niche market. And one also has to remember we sell a bunch of different container board grades. It's not all a homogenous thing. It's an unbleached craft liner. We have what we call our hybrid products. We have the semi-chem products. We have white-top products, all of which have their own dynamics to some extent. So it's always a bit dangerous to look at it holistically. But in simple terms, yeah, it's relevant volumes which have reduced. But I emphasize that that's one component of it. The demand side is decent. No capacity additions in Europe. If anything, there's been some sort of production interruptions and things which have tightened up the markets and, as I say, less imports from the U.S. And if anything, probably the export markets from Europe have become a bit more attractive as well. You know, for example, we sell into Latin America and the like, and the U.S. guys are probably a bit reduced into those markets as well. That's attractive for us. And particularly if the dollar strengthens, it becomes more attractive. So it's a whole confluence of factors, Tim, so I wouldn't focus on any one of those, but undoubtedly this U.S. exports, and that's the structural thing. You know, frankly, it never really made sense for them to be so exposed to Europe as an export destination because the pricing is typically not as attractive as you can as receive. You should always try and sell as close to home as possible. And so it's logical that this capacity rationalization in the U.S. has led to probably a disproportionate effect on their export markets. And just to emphasize, they've closed virgin container board capacity. I think you alluded to recycled. It's pretty much all virgin capacity that they've been closing because these are old, underinvested virgin mills that then come to an end of life. and they have a big CapEx call and they choose to close them. But you have to ask others about exactly their rationale for the closures.
Okay. Operator, we'll take the last question if we can.
Operator
Absolutely. Our last question comes from Andrew Jones. Andrew, please go ahead and unmute and ask your question.
Sure. Thanks, gents. Just to follow up on that theme about container board pricing, To give us some data points, how much do you think costs have gone up per ton of Tesla in a year-to-date as we stand now with gas and OCC where it is? Let's try to contextualize that, the price hikes in the context of how much cost inflation we've seen. I mean, 80 euros from Smurfit yesterday seems pretty high to me in a market with a mid-80s operating rate and a load of capacity coming back end of the year. So, like, how extreme is that cost pressure would be the first question. I'm going to have a follow-up.
I mean, it's difficult. I mean, it's hard to know where you start and where you finish on these sort of calculations. If I guess the question is from the beginning of the year to Q3, are we seeing some margin expansion if you take the both sides of the equation the price increases versus the cost inflation yes we are seeing some some margin we should see some margin expansion but that's off an extremely low basis I keep reminding because Q1 you know we'd seen the worst of these price declines into the first quarter and then you then it's it's been building back off of that But, yeah, I think it would be wrong of us to kind of throw out a cost per ton number because the other problem is it's, you know, every mill has different exposures and the Clearly in Sweet Shea, for example, where we make recycled container board, it's a very different exposure to Duino because Duino's gas, Sweet Shea is an integrated mill producing a lot of biomass energy and the like. So, but in simple terms, yes, we're seeing a bit of margin expansion right now, but it's off a terribly low base. And in my humble opinion, it's not enough to rescue this industry. We're still seeing massive swathes of loss-making capacity out there.
Yeah, no, true, true. and just to follow up to that the craft line spread over test liner is pretty high by historical standards now I mean if test liner does go down back into the year as all this capacity materialises I mean A is that current spread sustainable does it have to contract further and I mean how much of a headwind do you see from returning US capacity I guess back into the year some of those export orientated mills there's a bit of production coming back after some maintenance so I mean I don't know there's quite a few bearish factors there I mean how do you sum those up and you know what is the sustainable spread for craft binary test in your view?
Yeah I don't think there's a magic number I mean we've been saying for some time now it's logical that the spread widens simply because the supply side dynamics and the virgin grades is materially different to on the recycled it's simply that much more difficult to bring in cost competitive virgin whereas on the recycled side I mean and that's where all the new capacity has been coming in both in Europe and the US and it's fairly logical at the same time in europe you know the transition the easy wins in using recycled over virgin have pretty much taken place of course if the price premium gets too extreme you you you get more and more innovative in using a recycled product and and you know so so you're never going to see a decoupling of of the two i mean because on the margin you can substitute but but there's a clear logic as to why that price premium should be bigger than it was historically. I remind you that if anything, over the course of the first half of the year, that premium has narrowed somewhat because the price increases and recycled have been greater than on the Virgin side. And so you've seen a narrowing, if anything. So, yeah, I mean, in short, I don't know what the magic number is in terms of a sustainable price premium, but I do know that it's very clear why it should be bigger than it was historically. And as I say, the easy wins in terms of substitution have taken place, but only to aware that you cannot continue to drive pricing on the Virgin side unless you also see the recycled side over time improve.
Okay. That's clear. Thank you.
Very good. We've taken far more of your time than we had asked for originally, so I do appreciate your patience in staying with us. I appreciate, as always, the interest. If there's anything to follow up on, Fiona and team and myself and Mike are available, so please come back to us. But just in summary, you know, we are encouraged by an improving trading environment. Clearly, we've been pushing price increases. We see further opportunity in that regard going into the second half. Having said that, you know, as we can keep reminding you, there is cost inflation around. When we say things are volatile, we mean volatile goes up and down. And we don't know, simply put, because I don't think anyone has any great insight in that regard, other than, you know, we can point to certain cost items that are going up. But nonetheless, you know, very encouraging in terms of the improved trading environment. And we are certainly well positioned to serve our customers in that environment to continue to grow with our customers with our fantastic range of products that you see hopefully on the screen behind us. and we'll continue to manage the business extremely tightly in what remains a volatile but we believe improving environment. So with that, thank you very much for your interest and we will no doubt keep in touch.
