Rockwool A/S (ROCKB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to conference call regarding ROCKWOOL International's Results for the first 9 months of 2021. My name is Thomas Harder. I'm Director of Group Treasury and Investor Relations of ROCKWOOL International. Today, I'm pleased to present CEO, Jens Birgersson; and CFO, Kim Junge Andersen. [Operator Instructions] As a reminder, this conference call is being recorded. First, Jens Birgersson will go through our presentation and give you an update on the results for the first 9 months and third quarter of 2021. Afterwards, we will be ready to answer all your good questions. Before I hand over the words to Jens Birgersson, I must ask you to notice Slide #2, which is the forward-looking statement. Please be aware that this presentation contains uncertainties. Now we can go to the next slide, which is Slide #3. Jens Birgersson, I will now hand over the words to you.

Thank you, Thomas. Good morning, everyone. As usual, we will not spend too much time on the slides, and then we will leave the more important things to the questions. So I'll start with Slide 3, on the COP. We went there for basically 2 days to listen into some of that and have some meetings. And my observation from the COP is that, first of all, we haven't really been successful at all to reduce CO2 emissions overall in the world. And we were there with the message of renovation. We have done a study of 14,000 people in 6 countries and got an overwhelming feedback that people want to energy renovate their homes. And we have discussed in previous calls that, for example, Italy with the superbonus scheme has gotten up to a very high rate. But when we look at this whole exercise of the COP, it was a little bit disappointing to be there because you saw too many people showing pictures of the grandchildren and then discussing the percentages of the pledges, whether the pledge is big enough or not. But all of that doesn't really matter because by 2050, most of us will not have the jobs we have today, will be retired or dead. So our message when we were there is basically twofold. First of all, stop worry so much about the commitment 2050 because if we are successful here in the next 2, 3, 4 years, we can always sharpen the goals. What matters now is that we break the neck of this trend. And rather than talking about action and now it's time for action then another year goes, so nothing happens, really focus on put a couple of short-term goals and link the people setting the goals with delivering it. That's how we work in business. We need to go from quarter-to-quarter, year-to-year yet keeping a long-term outlook. The other message that we tried to put out was that you have a Paris goal that you cannot achieve if you don't do deep energy renovation. The concept we tried to put out was that as long as when you go to a house and you raise the scaffolding, you need to renovate it deep to reduce the energy or improve energy, doubling the energy efficiency or reduce energy consumption with at least 60%. By taking that approach, you make sure you don't raise the scaffolding or do superficial work and kind of sterilize future opportunities. So it's better to do few houses properly. And then as we learn how to do this in the next 2, 3 years, like Italy have learned now, you still have houses left that you haven't touched. And those were the 2 concepts we tried to put there, and that's the reason where we went there. But it's a little bit pessimistic about the total absence of discussing what did we achieve in the last year and what is the action for the next year. So I'll start with change going forward. If we move on to Slide 4. I think year-to-date, only comment I have on that is that these are satisfying numbers. But one should also remember, when you look at the growth, that the impact of second quarter 2020 is included there. So you have 19% there. And it's not that we see a lower business activity. So if we move to Slide 5. Going forward, it's very high activity. The difference is really only that Q2 is getting more and more diluted, Q2 2020. I think all of the numbers here are within what we expected. I should say that I will come back to that with the profitability. And I'm talking contribution margin, gross margin, some of those we don't show you. But basically, we experienced in this quarter a real uptick in inflationary pressures, raw material, primarily the energy materials, packaging materials, some chemicals, I mean, huge inflection points and then it happened. We had predicted that it would happen, so we had started to raise prices for this period already in June, put the targets out, announced. But what happened was bigger than I expected. But we'll come back to that in a bit. If we move on to Slide 6. I would say both System and the Insulation business had good growth year-to-date. Moving on to Slide 7. Notable here is that the Insulation business had a really, really good quarter, very high business activity and the capacity ramp-up we have done over the last months have also increased our capacity to deliver. And you will see in many countries the delivery times and other things normalizing. So this is good, and we even managed to build a bit more inventory, which we are pleased with. We don't like to sit on absolute minimum inventory because this impacts our production planning. Systems grew a little bit less, still a really, really good level because we had -- especially in Q2, we saw massive growth in some segments. And we also saw -- I'll come back to that a little bit later that, for example, in the Grodan business in Q2 due to shipments and constraints, customer's order, a lot of extra that we then have seen that now they have it on stock. So basically, the North America market had this start and stops on whether you could get containers in, and we had a lot of containers coming into Q2, and then in Q3, we didn't have that. So a little bit lower growth, still really a good one on high level, but not quite as strong as Q2, not the overall level either. If we then go into -- we move to Slide 8, the regions. Western Europe, fundamentally double-digit good growth, some markets stand out and a couple of markets a little slower. But -- and we also had one in France. For example, we had a transformer that got overloaded, and we lost some production time in France when we changed this. Could have been a lot worse, there wasn't a long outage, but it impacted our ability to deliver there for a while. But overall, all positive and all good and high activity. Some countries, for example, in Norway, a little bit lower activity, still growing but slight; Nordics doing well, yes, fine. Then Eastern Europe and Russia, just a higher activity level all over the place. We have seen this now a couple of quarters, and it seems to continue to that. North America and Asia, China, negative growth; Malaysia, negative growth. So Asia, not growing, it's shrinking slightly, doesn't matter too much to us. But then we then go over to North America with the new factory in both Canada and the U.S., really, really good growth, positive development. And it's not -- 10% growth is high growth numbers we see there booming as we have seen earlier in the year. And that linked to the new factory that is running well, has ramped up quickly. It helps us. And now over to Slide 9. And this was maybe the biggest impact we had on the quarter and what will be our main focus over the coming months and quarters, that's what we saw here. Here, we have take -- sampled a couple of things. Logistics also went up but not to this degree. But when we looked at Q3 and Q4 in June and we launched price increases we had -- up to that point, we have relatively little pricing business, which actually was a combination of a moderate price increase together with some maintained or slightly lower pricing in some segments where we wanted to adjust market shares. So we had many products where we have already launched the annual drumbeat. We looked at that point in about June for pricing into Q3 and Q4, and we saw inflation or these raw material pressures come. And we launched price increases but then that turn in August we didn't quite predict. And with our business model of not hedging too much, not buying almost anything a year out, that surprised us a little bit. We still delivered a fine quarter. But once we started to see that happen, we then got back. So if you have 3 numbers, triple digit here in electricity and natural gas, basically, we need to do double-digit price increases in the overall business. And we are well underway with that, and it will continue also in early next year with more price increases. So we had to kind of accelerate the price increases. And there, the speed of how that happens, I don't see it as a problem from the pricing power perspective, it's more the issue of how much orders do we have in the backlog, what type of contract terms do we have, et cetera. And that creates a certain delay. And we are getting the prices we asked for, but we asked for something that was matched with a different inflationary scenario. If we then look forward to how inflation will develop, it's very hard to say. In several of the businesses, now we have gone that down to a more frequent price adjustment. We don't really do surcharges on these things. And some of the logistics and pilots, et cetera, we just allocate at customer pace, what it is. We haven't made some changes. It's not overall in the business, but there's not really a surge on the approach we use. Our assumption, and these are just assumptions, these are not a forecast, it doesn't change how we're going to drive the business. We are building up the stocks. We have a healthy stock. That is one thing we are working on. We are also planning and executing on price increases so that we can get the contribution margins and the gross margins back to where we want them to be on a more normalized level. And then we don't need at this stage to make an assumption on whether inflation would go on forever on this level. Obviously, there are many people now say that gas will start to ease after Christmas when the coke have started to ease, but we don't draw any conclusions about that. I saw Janet Yellen. She mentioned that as long as corono still have the role in the script and especially China is impacted as it is, you can expect continued inflationary pressure, and we just keep pricing for that. And resetting it, I don't see any particular problems with that, even though it's a catch-up to do here. Profitability, EBITDA and EBIT margin, due to the high volumes and the high deliveries, we have an over-absorption of that kind of -- kept the EBIT margin on a good level. And then the material cost took out some of the EBITDA margin there, you see it higher up. The fixed cost has remained relatively stable. And obviously, all those ratios improved. And even with this volume level we have, the extra depreciation for the new factories, the one in Germany, Ranson and Moss, as a percentage of revenue actually on this top line level, you have a lower percentage should we have an over-absorption of depreciation. Move on to Slide 11. Here, you see the profitability of the segments. We are catching up to some degree now on the inflationary pressures on the Insulation. Still more work to be done, but you saw that 11.2%. And then on -- I know I had a question on the System division. This is the new normal, to be on 20%. The Q2 was a very special quarter in the System division, maybe we move. So you see in the Q2, we have 20% EBIT margin in the System division. And there, we have this, on the one hand, a very high volume and a high sales number but gave over-absorption in the quarter. And on the other hand, we have not seen yet the cost increases, and we also have a very favorable mix in the quarter. What do you see happen now from that level from Q2 going into Q3 where we move, it looks quite dramatic, 20% EBIT margin to 14.4%. You see that on the one hand, it's the leverage, the over-absorption because we are selling about 10% less in Q3 than Q2, although the growth number compared to Q3 last year was good. That's about half the decline. And the other half of the EBIT margin normalization you see is due to raw material costs that is impacting us. So I'm not making a forecast, but going forward, but this number is around 15% or 17%. We don't regard that as the normal margin level in that business. Move on to Slide 12. Really, we are not on purpose stopping projects. We see that we need to invest in capacity. The demand is strong for our product and still the factors of that, the new green deal, the need for energy efficiency as a climate action and the transition over time from a non-circular fossil fuel base material to circular natural materials, we are absolutely convinced that we will continue. And we need to continue to invest. But then with this action we have with running the factories, not very high capacity, quite a heated environment in terms of getting subcontractors and other people to come in and do the work. And if you spread that out over, say, 40-plus manufacturing lines, and we have quite a few smaller projects, then it's a matter of finding outage time to make, say, a filter upgrade or replacing something or generally maintain and also small other actions just to keep the factory running. Some of that is slipping, postponing. You can simply decide you don't want to do it. And that is reflected later on in our CapEx forecast, where we're taking it down a little bit. It doesn't mean that we have on purpose slowed down any capacity investments. I'd like to [ underline ] that. Also, there is a small acquisition in Japan. It's not adding to our margins. We still have an investment program to get that up to speed. Every euro we invest, the local government will match with the same amount actually. So we'll invest in this and bring it up to how we want the factory to be. That will take us now 8, 9 months to do that. But this is just a small thing but is a good step for us to get into the third biggest economy in the world, or I think it is. If we go on to the cash flow, I will say that Q3 versus Q3 is normal. So the Q3 in itself, cash flow is absolutely normal. And it looks like we have done a tremendous improvement there on free cash flow year-to-date, EUR 78 million. But we are comparing with the year that was special, the corona year with Q2, et cetera. If we look over the quarter on the net working capital, where we have built inventory, that's good. We have also, due to the growth, stepped up quite substantial on trade receivables obviously due to all the invoicing, but we also have trade payables to roughly the same amount. So the change in net working capital is mostly inventories and some other payables. So nothing dramatic on that, in the inventory buildup we want. So good balance of the net working capital on the creditor and the debtor side. So on the outlook. Sales, it sits on 17% as we had it not for quite a while since August. Obviously, the growth percentage versus last year is a little bit lower now due to that we did speed up. At the end of last year, we had a phenomenal Q4. So -- but that is in hand. And then on the EBIT margin of the above 13%, I would say, when we looked at this in August, we were probably aiming fair amount above 13%. But now with the inflation and adjustment, we do not catch up on margin. This is now tighter, above 13%, but that you had already figured out. And the CapEx, I've already spoken about, the EUR 320 million instead of the EUR 370 million, high capacity utilization in the plants and quite a challenging environment to get contractors, et cetera. So we can get them, but it's just more difficult and more expensive at the moment. And then some smaller projects have been just postponed a bit. With that, I would like to hand over for questions.

[Operator Instructions] And our first question comes from the line of Yves Bromehead from Exane BNP Paribas.

I'll limit them to 2. My first point is on the price cost. I think you just mentioned that you've introduced double-digit price increases in January effectively in Europe and the U.S., from what I can recollect. I guess my question is, with that level of pricing, should we expect a lag in H1 and then that sort of catches up? Are you happy with what you got? Or do you need to do even more price hike in April and into Q2? And my second question is on your comments that you just mentioned regarding the maintenance outages. Is it fair to assume that what you're suggesting is maybe that lapped into Q1 '22 and some of those costs come into 2022 versus 2021?

Okay. On the price, I hinted at that with the Janet Yellen. I think we'll get back to good -- it's still not clear how the import material cost will be for Q1. We have made an assumption and we set the guidance accordingly. My prediction is that we're going to see continued inflation based on the Janet Yellen comment. So I would like to reiterate we keep doing price adjustment with regular intervals going forward. And the first phase now is to get back to good gross margins, contribution margins, and then keep pace with it, to keep ahead of it. So I -- current prediction is that I haven't seen any signs of inflation changing. But doesn't really matter because now we are geared towards more frequent pricing structure. So we'll deal with that. Of course, you could foresee a situation that you suddenly see in 1 month all material costs going down and then up again or some weird happening like that. But at the moment, we are just assuming that this will continue for a bit, and then we change the drumbeat when we see that change. So that's on price. Then on the maintenance, no, we don't give a forecast on next year. But some of those projects we will do because they have been postponed. But that could also mean that other projects that are in the schedule for next year are delayed a little bit. Many of these projects are not time critical to do. So I wouldn't say that you take those meetings and put it in Q1. Don't do that because it's all scheduled and many things impact other things. What I could say, though, we never want to do things that impact the safety and the ability to run the plant. So we never under-maintain. It's just how we scale this. Don't put it just in Q1. Don't do that because it doesn't work that way because we have sustained maintenance organization basically, and we can do certain works ourselves, but some is also done with external help and what we fit into them, yes.

And our next question comes from the line of Brijesh Siya of HSBC.

So I have 2 questions as well. The first one is on France. You talked about some lost production there. If you could, I mean, quantify if that's big enough to tilt the balance in Western Europe. So how was the growth in France in Q3? If you could elaborate that. And the second one is on the cost side. Historically, you've said previously that you have the scope prices which are kind of European based and not really the benchmark we follow with the Singapore-based ones. And the Slide 9 is quite interesting to say that coke prices are up only 146% versus last year-end, whereas we see in the index it's almost 4x now. So if you could say that how the European price is evolving and do you continue to see a lower level of pricing compared to those we see in that headline index numbers?

So first of all, France, we see continued good market activity in France. But we were inhibited by this incident for a while. And we don't see a change in the market. We see good demand and good pricing. So that's as much as I can say on France. And then on the cost side, obviously, here, we are indicating what we are paying, and we have some contracts and we have some clauses. So maybe I ask Kim to comment that on what you are looking at because I'm not quite sure what -- how you follow the coke price, for example. So maybe, Kim, you can.

Yes. As you know, we do on coke, we do secure price agreements 1 quarter in advance. So we're not necessarily following this particular scale that we're seeing here. And of course, it had a sharp increase here at the beginning of -- or late Q3 and into Q4, but now we seem to be dropping off again. And of course, we are waiting to see what would be the negotiated price for first quarter. And we don't expect this to be, of course, at the top of the curve. So we're pleased as we see that it starts to go down a bit, that makes it more favorable to negotiate the first quarter. But Q4 prices, we have already fixed already late Q3.

Our next question comes from the line of Laurits Kjaergaard of ABG.

Kim, just a follow-up to the question I was just proposed. We talked at the end of August about your first half year results, and I understand that the input prices have increased faster than you expected. However, I think it was in the mind of all the analysts. And this Page 9, we can also see that in the end of August, many of these prices were increasing. So I was just wondering a little bit about the dynamics because, in August, you mentioned that you have these input prices secured for 2021, at least you have the hedge for 1 quarter in advance, which you just repeated. And then you also have another quarter of lag in Systems as they purchased from Insulation internally. So could you talk a little bit about the implicit gross margin dynamics for Q4, the expected price increases during Q4 and then in combination with the moderate growth that you expect in Systems that you flagged in the report?

Yes. Okay. So we see that we're going to have Q4 where the gross margins are under -- we haven't recovered. We're not going to recover fully in Q4 the gross margins. And then the timing of the price increases, because we have already achieved quite a lot and now more is coming, so we have enough to deliver on our forecast. And then within the quarter to sit and say how quick are those prices in place or not and some, not all material costs are hedged for the quarter, that I should also say. I mean, yes, coke is fixed for the quarter; but many others, not. So it is a quite varied picture. So my summary would be gross margins, as you would call it, still under pressure in Q4, and we will need a bit of time to normalize this. But it's progressing, and it's the speed of the prices, is the way the orders are being shipped and a whole lot of factors, and we'd get through that, then you see sound gross margins again.

And then if we then look beyond Q4, in August, you mentioned that you have 10% volume capacity for next year if the market sort of demands it, I think those statements, correct me if I'm wrong. But with this thing...

Yes. We -- I think I said more than 10%, didn't I?

At least you can say that now.

Yes. I said I had, but I have more than 10%, okay?

Yes, his line disconnected. So as his line is disconnected, I'll move to the next question for you. That's from the line of Dean Grant of Bank of America.

Great. So I've just got 2 questions. First one is on your Systems business. And then you obviously highlighted there was some substitution effect in Q2, and I think that was primarily driven by Grodan. And at the 17% to 20% margin is not the normal going forward. I mean should we look at the 14% to 15%? Is that a more normalized margin here, yes, in terms of what we look at? And then the second one is just a clarification in terms of CapEx and going into next year. With the EUR 50 million cut, I mean, is there the potential of some catch-up effect in '22, '23 getting back to sort of the EUR 370 million mark?

Yes. So I think it's quite a reasonable margin, 14%, 15% for Systems division. We are certainly happy. I mean we always like more margin, but the System division also have this. On the one hand, we have mix issues that can vary quite a lot between the quarters. And then you have this absorption effect when we get a bit of extra growth. So you can still have quarters with higher margins, but I think the normalization is fine. And that doesn't mean during next year that -- and going forward, that we won't have quarters with very high margins. It's just the way that business works. And then on the EUR 50 million, I would say that several aspects, it's not that, that list of projects we run with the drumbeat and here due to the capacity loading we are -- we postponed these investments. And then depending on how next year will be, we will then slot in. So it's too early to say whether we catch up on all of that or not because it depends what the growth will be next year, how heavy loaded we are and how the supply environment is. But the fundamental spirit is we just keep investing and we keep doing these things. And some of it during corona has been really, really difficult. For example, the plant in China now, the relocation, which is really a new plant that -- and there are some really, really big subsidies to do that, that has been a massive battle to execute because we can't get people there. So you have some of these challenges. And to weigh the balance of plus, minus EUR 40 million to EUR 50 million on all of these factors that are moving all the time, our spirit is we try to get as much as we can done. That's the spirit. And we haven't stopped project on purpose because we worry about the amount of CapEx we spend. We still try to do them. But if it doesn't make sense or we don't have the outage to do it on a plant or we have too much other work to do, then we just postpone it, and we will flex like that. So I can't say how much will come directly on top next year, plus we haven't given a forecast. So we will give a forecast in February, and then you get the number we target. But we have said we don't have the ambition to drastically lower CapEx or anything like that. We want to do our capacity projects, but we also know by previous experience, depending on where you are in the execution cycle in a project that we are executing on a greenfield project. For example, Russia or some other place, it can impact the year just depending on the schedule with EUR 40 million to EUR 50 million you'll spend, even though progress is quite linear. Okay. Does that answer your question, Dean?

Yes, that's great.

And our next question comes from the line of Cedar Ekblom from Morgan Stanley.

Two questions from me as well. On pricing, can you comment if your competitors are following you in all the markets? Because by your own admission, at the beginning of the year, you were a little bit more cautious on price increases in order to defend market share. And we do know that new assets have been ramped up in this industry over the last couple of years, and the industry margin is obviously down versus 2020 levels but still at very healthy levels. So I wonder if your competitors are being a little bit more opportunistic when it comes to pricing. And then secondly, can you please just confirm on your chart on Page 9 in terms of the raw material index that this reflects your realized cost on the income statement rather than the spot market? In other words, is that actually showing where spot prices were trending, say, a quarter ago?

Yes. So on the second question, that's primarily a spot market view, even though that particular coke price is a tricky one. So it's hard to know what to look at that, but this spot, it's not our P&L as it is. But I can tell you this pattern you see there, that's also the type of pattern we see in the P&L, I should say that. They are not disconnected. Then on the price, that capacity that came online a few years or in the last years in stone wool, it's my estimate, extremely well utilized, okay? So I said that in my opening that I'm -- I think the pricing power and our ability to pass this caustic business on is as it normally is. And I think with this level of demand, I don't see a problem with it. Then of course, the competition will follow the same percentage or not, they typically have a premium in the market, and we -- to serve that. But I think everyone in our industry is wrestling with this very dramatic cost increases. So for me, if they don't raise prices now, they're almost going to go into a loss, and I don't -- haven't seen that from them before, but it's not for me to judge. But the supply is quite tight on stone wool.

And our next question comes from the line of Yuri Serov of Redburn.

I would like to ask about your volume developments. You've talked about the fact that the market remains buoyant and it's still buoyant and is continuing to be buoyant. On the other hand, when you talk about your expectation for revenue growth in Q4, you say that your guidance implies a 10% growth in Q4. Now if you're talking about double-digit price increases, that suggests to me 0 volume or close to 0. I want to share for you what you think about that. And also continuing with the volume, we didn't really talk about 2022, but the situation in the world is not changing, people want installation as the prices are high, should we expect that the buoyant market should continue next year?

At the moment, when you look at the construction outlook, it's quite positive view on next year. I just got your construct yesterday. It looks positive. We are setting up the business to -- we're building inventory to make sure we have enough seasonal stock for the next 5 seasons and all that. Yes, I agree with you that the demand for our insulation products looks favorable. But then we now step into an environment with quite broad based, and I'm not sure the right word is energy shock, energy crisis or hyperinflation or just inflation, whatever. It is increasing. And how that will impact demand, I don't know yet. But the outlook is favorable, and we have more capacity to deliver more stone wool. Then on the volume forecast for Q4, Q4 is not an average yet, it's a curve on different markets, different products. We have some markets where the prices are up 15%, 20% across Q4. Some countries where this happened a bit earlier, we already adjusted. In other places, we might have a lower price at the beginning and a higher price at the end, and there are also segment differences. So I'm not saying that we have 0 volume growth in Q4. There will be a volume growth keep going, and there will be a price point that is increasing over the quarter also. And then with your mathematics, okay, you get to that. But there will be a price increase, and there will be also volume growth. But I don't think we see a double-digit volume growth in this quarter partly because the comparable is different. We are out of the worst corona quarter in 2020. But the level of activity in Q4 is very high. It will probably be one of the top, top quarters we have in terms of top line with that outlook, even though the growth over last year is not so high.

Okay. Do you mind if I chip in just one different question? The plant in France, will that be your next one to launch? And when do you plan to launch it?

It has been -- I mean, we are in progress on that plant. So that's being worked at. And the project team is in place. The signs are getting ready. And we're going out to bid for material here in the spring. So that is the one, the next one or the most advanced one in our schedule. Then of course, in Russia, we always try to beat the world record when we build the plant there. We are normally quick, but the French one is the next one in line in our schedule.

So -- and is that 3 year?

2024.

Our next question comes from the line of Manish Beria of Societe Generale.

Yes. So my first question is if you can comment ROCKWOOL, it caters to high-growth areas like data center, logistic, distribution, EV, et cetera. Because when I see your Western Europe volume growth in Q3, it was low single digit versus 2019, so I was just wondering if you are catering to these high growth areas or not really. I will ask a second question later.

How do you get to Western Europe low? Okay, it's the price assumption?

Compared to '19.

'19?

Yes.

Okay. Yes. No, we just see it. We see Eastern Europe very, very high, as you see in those papers. But the Western Europe has just kept up at a very high level. I guess that's really what's happening. And I don't know much -- how much higher it can go, so it's an incredibly good level it's at. So therefore, the growth...

But do you cater to high growth areas?

High growth areas continues to be North America and Eastern Europe. And what applications. You wanted something on the applications, yes? The high growth areas or the highest growth areas on the installation side is ETICS or external wall insulation and flat roof. And part of the reason for that is I think that the supply of stone wool is getting a bit tighter, and we have seen that the stone wool segment might be a little bit lower margin than some other segments, we get left with it. And part of the growth in there is also impacted with the price increases that peer and plastic foams have gone. So I think that this year, you have seen a certain swing over in the favor of stone wool. And therefore, we see high growth in those segments. And when they adjust their pricing, if the chemicals used go down, then that might swing back in the balance between the 2. But I think at the moment, I think stone wool has taken a relative share in that segment. I'm not saying that's a permanent one. It's more so the dynamics on the input material cost. And then over time, my view that over the years to come, I see plastic foam lose to circular stone wool.

And the second question is you made an interesting comment on the gross margin, so I see basically in 2019, your gross margin was 66%. In 2020, it was 67%. Maybe in 2021, you end up with something like 62% gross margin. So what will be the target next year? Do you want to maintain these gross margin?

We calculate gross margin, when I sit with my sheets, I work with contribution margins and a different P&L. But it's related. They are cousins. So I don't have a number, but we have a number to get back. If you have a -- I want to get back on a healthy contribution margin, gross margin, okay? And I'm not satisfied with it when you have this rapid change. So we worked that back up, but I'm not -- I can't say exactly what the number is going to be because it also depends a little bit what mix we do because they have different gross margins on the different businesses. So we want to get back to somewhere near that, 2019. Of course, when you have -- if you go into very, very high loading and very high inflation, we need to tune it a little bit so that we don't go overboard. We want to protect our profitability, and we want to have growth, but we are not in it like for extreme profit taking. But gross margin is to come back to those sort of levels, okay?

Next question comes from the line of Lush Mahendrarajah of Berenberg.

Two from me as well. The first one is just around your pricing strategy. Obviously, in the recent years, we're not used to ROCKWOOL being more volatile or putting through more significant price increases. So if raw materials and energy were -- if become deflationary, does that mean you decrease your prices and you give them back to the market and so your prices become more volatile? Or is it sort of back to normal and you sort of take the margin and keep increasing it steadily? And then the second question is just around the announcement you made a few weeks ago around the investment in Russia. Just be great to get a few more details on timing, how much capacity adds, details into the electric melter and also, I guess, if there's any delays given sort of the CapEx you pushed back this year as well.

Yes. Okay. Thank you, Lush. Yes, so on the pricing, we have acquired -- I mean we have good -- we have our arms around how to execute price increases, price list. the whole framework is there. And with a less inflationary environment or almost a flat cost from years, even inflationary environment, we have gone with this 2%, 3% from big pricing in the last 5, 6, 7 years. So that's our normal way. Obviously, if we do an increase to compensate for some of this, we don't really work with surcharges, so it's not an automatic falling back of it. We have some small elements in some countries where we've said, okay, the pallet, it costs EUR 14 now. Before, it was EUR 7. You just pay whatever it is. We have a smaller portion of the business where that's the way people do it in the market. And I have no problem with that. But fundamentally, not surcharges. And so we will look at it from a market-based pricing even though it's driven by a cost plus here. But obviously, inflation, if all of these energy costs and everything half, we cannot sit up there without doing something, then we will have to lower the prices. But we want to maintain sound contribution margins and sound profitability in the business. We have to our targets. We have the floor target for us. So somewhere in between there, we want to be reasonable and we want to be profitable and have a good margin to sustain the business. And we don't do surcharges.

For the investment in Russia, I don't know, Lush, but I can tell you besides what we've announced already, it is a brownfield investment at our existing site in Vyborg in the northern part of -- western part of Russia. The investment that we will do over the coming years in Russia for this factory and some other improvements we're making is we'll be up to about EUR 200 million. The factory will run in the -- the factory construction will run in parallel with the one in France, and it will also target to be ready by 2024.

And to add to that, what we are doing with the factory also is that we're preparing the Russian operation for take back of old stone wool. So we have a circular program launched. And our ROCKCYCLE project of this new plant based well for that contract to have a high content or recycling of our own role. So that's part of that plan that has added a little bit to the investment in addition to the capacity we have. And we have already started with that scheme in Russia with the [indiscernible].

And the last question comes from the line of Brijesh Siya of HSBC.

I had a question on -- sorry, I lost a bit -- on Eastern Europe, yes. So you talked about it being stronger. And I do see that, that number has kind of accelerated through to Q3 compared to Q2. Any specific element you would point out which is really stand out, probably the auto industry showing some sign of improvement in check or -- I mean you talked about Poland and Russia as the strongest market. But if you can just elaborate a bit how that market dynamic looking when we...

I think what you see is driving some of that. You see a bigger portion of price in that also because you have a generally slightly lower -- so it's good market activity. But in the growth, due to generally a tight situation, we had to be quicker on price. And you see some of that did not grow. So price is part of it and then underlying good activity. So those are the main elements. So I think the growth of that might be too early to say, but we have seen it so many times in Eastern Europe. But sometimes, it grows a lot, and then we have quarters when it doesn't grow as much. But here, you have the price element that contributes.

And we've just had one further question come through, and that's from the line of Pierre Rousseau of Barclays.

Just a small question on the CapEx relating to the take-back program. You're increasingly marketing this as an advantage versus competition, so I was wondering if you could give some details operationally, what do you need, and how much does it cost to implement these take-back programs.

It's not huge. These are not numbers. First of all, when we put -- like we do in Russia, we put an electrical melter in. That's already good step like we did in Norway because there are certain steps in the process you can skip when you have an electrical melter, for example, bracketing to take back the material. So that's the one. And that is not a huge difference. But of course, if you go with it into market where the electricity price is less favorable, and in another market, you might pay the price of that. So first is you go electrical. And then the other is you basically need some space and some rain protection and set up a logistics flow to take the wool back and make sure that it's actually wool. And that cost a little bit. But I will say all of this is relatively small, provided we have space. And we have it in most factories because we have started several years back to get used to it. So it's nothing dramatic in it, so I would say not rounding errors, but you're talking 5 million, 10 million here and there now and then because we think we don't have space. So we need to build something, but it's not huge one.

And as there are no further questions at this time, I'll hand back to our speakers for the closing comments.

Okay.

Ladies and gentlemen, we would like to thank the equity analysts for all your good questions and the audience for listening in today's call. We do appreciate your interest in ROCKWOOL International. If you have any further questions, please feel free to reach out to me, Thomas Harder. You know my contact details or you may find them in the Investors section on our corporate website. Jens, Kim and I thank you for joining today's earnings call. Have a great day.