Ladies and gentlemen, welcome to the conference call regarding Rockwool International's results for the first nine months of 2021. My name is Thomas Harder. I'm Director of Group Treasury & Investor Relations of Rockwool International. Today, I'm pleased to present CEO Jens Birgersson and CFO Kim Junge Andersen. For the first part of this call, all participants will be in a listen-only mode. 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 nine months and third quarter of 2021. Afterwards, we will be ready to answer all your good questions. Before I hand over to Jens Birgersson, I must ask you to notice slide number 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 number three. 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. We start with slide 3 on the COP. We went there for basically two days to listen into some of that and have some meetings. 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. We were there with a message of renovation. We have done a study of or a poll of 14,000 people in six countries and got an overwhelming feedback that people want to energy renovate their homes.
We have discussed in previous calls that, for example, Italy with the Superbonus scheme has gotten up to a very high rate. When we looked 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 their grandchildren and then discussing the percentages of the pledges, whether the pledge is big enough or not. All of that doesn't really matter because by 2050 most of us will not have the jobs we have today. We'll be retired or dead. Our message when we were there is basically twofold. First of all, stop worrying so much about the commitment 2050 because if we are successful here in the next two, three, four years, we can always sharpen the goals.
What matters now is that we break the neck of this trend. Rather than talking about action, and now it's time for action, and then another year goes and nothing happens, really focus on putting a couple of short-term goals and link the people setting the goals with delivering it. That's how we work in business, you know. 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 the energy, doubling the energy efficiency, or reduce the 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. It's better to do few houses properly, and then as we learn how to do this in the next two, three years, like Italy have learned now, you still have houses left that you haven't touched. Those were the two concepts we tried to put there, and that's the reason why we went there.
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. I hope that will 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 Q2 2020 is included there. You have 90% there, and it's not that we see a lower business activity. 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 would 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, a huge inflection points are going to happen. 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 come back to that in a bit. If we move on to slide six, I would say both the system and the installation business had good growth year to date.
Moving on to slide 7. Notable here is that the installation business had a really good quarters, very high business activity, and the capacity ramp-up we have done over the last months have also increased our capacity to deliver. You will see in many countries the delivery times and other things normalizing. 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, but still a really good level because we had, especially in Q2, we saw a massive growth in some segments.
We also saw, I come back to that a little bit later, that, for example, in the Grodan business in Q2, due to shipments and constraints, customers order a lot of extra that we then have seen that now they have it on stock. Basically, the North America market had this start and stop 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. A little bit lower growth, but still a really good one on high level, but not quite as strong as Q2, not the overall level either. We move to slide eight, the regions.
Western Europe fundamentally double-digit good growth, some markets stand out, and a couple of markets a little slower. 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. It wasn't a long outage, but it impacted our ability to deliver there for a while. Overall, all positive, and all good, and high activity. Some countries, for example, Norway, a little bit lower activity, still growing, but slight. Nordics doing well. Yeah, fine. 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, so that's positive. North America and Asia, China negative growth, Malaysia negative growth.
Asia not growing, it's shrinking slightly, doesn't matter too much to us. We go over to North America with a new factory, both Canada and the U.S., really good growth, positive development, and it's not, you know, 10% growth. It's 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. Now over to slide 9. 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 sampled a couple of things. Logistics also went up, but not to this degree.
When we looked at Q3 and Q4 in June, and we launched price increases, we had up to that point we have relatively little price increases, which actually was a combination of a moderate price increase together with some maintained or slightly lower pricing in some segment where we wanted to adjust market shares. So we had many products where we have already launched annual drum beat. 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 the price increases, but then that turn in August, we didn't quite predict. 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.
Once we started to see that happen, we then got back. If you have three numbers, you know, triple-digit here on 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 would continue also in early next year with more price increases. 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 a 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? That creates a certain delay, and we are getting the prices we asked for, but we asked for something that was matched with a slightly 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 up and down to a more frequent price adjustment. We don't really do surcharges on these things. Some of the logistics and pallets, et cetera, we just said, "Okay, the customer pays what it is." We have made some changes. It's not overall in the business, but it's not really a surcharge approach we use. Our assumptions, and these are just assumptions, these are not the forecast. It doesn't change how we gonna drive the business. We are building up the stock, so 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. 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 that say that gas will start to ease after Christmas, maybe coal also have started to ease, but we don't draw any conclusions about that. I saw Janet Yellen.
She mentioned that as long as Corona still have the world in its grip, and especially China is impacted as it is, you can expect continued inflationary pressures, 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 overabsorption, and 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. Fixed cost has remained relatively stable, and obviously all those ratios improve.
Even with this volume level we have, the extra depreciation for, the new factories, the one in Germany, Ranshofen, and Moss, as a percentage of revenue actually on this top-line level, you have a lower percentage, so we have an overabsorption of the 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%. Then on, I know I had a question on Systems division. Is this the new normal to be on 20%? The Q2 was a very special quarter in the Systems division. Maybe we move.
Now, 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 that gave overabsorption in the quarter. On the other hand, we have not seen yet the cost increases, and we also have a very favorable mix in that quarter. What 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 one, on the one hand, it's the leverage, the overabsorption, because we are selling about 10% less in Q3 than Q2, although the growth number compared to Q3 last year is good.
That's about half the decline, and the other half of the EBIT margin normalization you see is due to raw material cost that is impacting us. I'm not making a forecast about going forward, but these numbers around 20% or 70%, 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 European Green Deal and the need for energy efficiency as a climate action, and the transition over time from a non-circular fossil fuel-based material to circular natural materials. We are absolutely convinced that we continue, and we need to continue to invest.
With this action we have with running the factories now at very high capacity, quite a heated environment in terms of getting subcontractors and other people to come in and do the work. If you spread that out over, say, 40+ manufacturing lines, and we have quite a few smaller projects, it's a matter of finding the outage time to make, say, a filter upgrade or replacing something, or generally maintain and also small other actions you just do to keep the factory running. Some of that is slipping, postponing. You simply decide you don't want to do it. That is reflected later on in our CapEx forecast, where we've taken 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.
Yeah, also there is the 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 will invest in this and bring it up to how we want the factory to be, and that will take us now 8-9 months to do that, b ut it's a small thing, but it's a good step for us to get into the third-biggest economy in the world, I think it is. If we go on to the cash flow, I would say that Q3 versus Q3 is normal. The Q3 in itself, cash flow is absolutely normal.
It looks like we have done a tremendous improvement there on free cash flow, year to date, DKK 78 million up. Then we are comparing with the year that was special, the corona year with Q2, etc. 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. The change in net working capital is mostly inventories and some other payables. Nothing dramatic on that and the inventory build-up we want. Good balance on the net working capital on the creditor and the debtor side. Go on.
The outlook, sales, it sits on 17% as we had it now 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. That is in hand. Then on the EBIT margin above 13%, I would say when we looked at this in August, we were probably aiming a fair amount above 13%. 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. The CapEx I've already spoken about, DKK 320 instead of DKK 370.
High capacity utilization in the plants and quite a challenging environment to get contractors, et cetera. 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.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypad now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. We will start with two questions per participant. Please respect this. Our first question comes from the line of Yves Bromehead of Exane BNP Paribas. Please go ahead. Your line is open.
Good morning, gentlemen. Thank you for taking my question. I'll limit them to two. My first one is on the price cost. I think you just mentioned that you've introduced double-digit price increases in January, effectively in Europe and in 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 hiking in April and into Q2? My second question is on your comments that you've just mentioned regarding the maintenance outages. Is it fair to assume that what you're suggesting is maybe that laps into Q1 2022, and some of those costs come into 2022 versus 2021?
Thank you very much.
Okay. On the price, I hinted at that with Janet Yellen. I think we'll get back to good. It's still not clear how the input material cost will be for Q1. W e have made an assumption, and we set the price accordingly. My prediction is that we're gonna see continued inflation based on the Janet Yellen comment. I would like to kind of reiterate that we keep doing price adjustment with regular intervals going forward. 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. Current prediction is that I haven't seen any signs of inflation changing. I t doesn't really matter because now we are geared towards a more frequent pricing structure.
We'll deal with that. Of course, you could foresee a situation that you suddenly see in one month, all material costs go down and then up again or some weird happening like that. At the moment, we are just assuming that this will continue for a bit, and then we change the drum beat when we see that change. That's on price. On the maintenance. No, we don't give a forecast on next year. Some of those projects we will do because they have been postponed. 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.
I wouldn't, say that you take those millions and put it in Q1. Don't do that because it's all schedule, and many things impact other things. What I could say, though, we never wanna do things that impact the safety and the ability to run the plant. We never under-maintain. It's just how we schedule. Don't put it just in Q1. Don't do that because it doesn't work that way. Because we have the same maintenance organization, basically, and we can do certain works ourself, but some is also done with external help, and it's what we fit into the. Okay. Next.
Thank you very much.
Thank you. Our next question comes from the line of Brijesh Kumar Siya of HSBC. Please go ahead. Your line is open.
Thank you. I have two 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. The second one is on the cost side. Historically been, Kim said previously that you have these coke prices which are kind of European-based and not really the benchmark we follow with the Singapore-based one. T he 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.
If you could say how the European prices is evolving, and do you continue to see a lower level of pricing compared to those we see in that headline index numbers?
First of all, France. We see continued good market activity in France. We were inhibited by this incident for a while. We don't see a change in the market. We see good demand and good pricing. That's as much as I can say on France. On the cost side, obviously here we are indicating what we are paying, and we have some contracts, and we have some clauses. Maybe I ask Kim to comment on what you are looking at because I'm not quite sure how you follow the coke price, for example. Maybe, Kim, you can-
Yeah. Yes, as you know, we do on coke, we do secure price agreements one quarter in advance. We're not necessarily following this particular scale that we're seeing here. Of course, it had a sharp increase here at the beginning of late Q3 and into Q4, but now it seems to be dropping off again. Of course, we are waiting to see what would be the negotiated price for first quarter. We don't expect this to be, of course, at the top of the curve. We are pleased as we see that it starts to go down a bit. That makes it more favorable to negotiate first quarter. Q4 prices we have already fixed late Q3.
Okay. Thank you.
Okay. Thank you, Brijesh Siya.
Our next question comes from the line of Laurits Kjærgaard of ABG. Please go ahead. Your line is open.
Hi, Jens and Kim. Just a follow-up to the question that was just posed. 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 on the mind of all the analysts, and this page nine we can also see that in the end of August, many of these prices were increasing. J ust 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 one quarter in advance, which you just repeated, and then you also have another quarter of lag in systems as they purchase from insulation internally.
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 flag in the report? Thank you.
We see that we're gonna have a Q4 where the gross margins are under. We haven't recovered. We're not gonna recover fully in Q4, the gross margins. The timing of the price increases, because we have already achieved quite a lot, and now more is coming. W e have enough to deliver on our forecast, and then within the quarter to sit and say how quick those prices are in place or not. 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. It is a quite varied picture.
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. It's progressing, and it's the speed of the prices, it's the way the orders are being shipped, and a whole lot of factors, and we'll get through that, and then you see sound gross margins again.
If we 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 that was the statement, Jens. Correct me if I'm wrong. With this state-
Yeah. I think I said more than 10%, didn't I?
At least you can say that now.
Yeah. I said I had double, but I have more than 10%. Okay?
Did we lose Laurits?
Thank you.
Laurits, did we lose you there? It went quiet here.
Yeah. The line disconnected.
It was disconnected? Okay.
As this line is disconnected, I'll move to the next question for you.
Oh.
Next from the line of Dean Graham.
You heard the-
Bank of America.
Heard the answer. Okay.
Great. Thank you very much. I've just got two questions. First one is on your systems business, and then you obviously highlighted, you know, there was some substitution effect in Q2, and I think that was primarily driven by Grodan. T hat the 17%-20% margin is not the normal going forward. I mean, should we look at the 14%-15%? Is that a more normalized margin here, in terms of what we look at? And then the second one is just a clarification on CapEx and going into next year.
With the DKK 50 million cuts, I mean, is there the potential of some catch-up effect in 2022, 2023 getting back to sort of the DKK 370 million mark? Thank you very much.
Yeah. I think it's quite reasonable margin, 14%-15% for System 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. You can still have quarters with higher margins, but I think your normalization there is fine. 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.
On the EUR 50 million, I would say there are several aspects. It's not that list of projects we've run with the drum beat, and here, due to the capacity loading, we postpone these investments. Depending on how next year will be, we will then slot in. 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. 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 we get.
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. You have some of these challenges, and to weigh the balance on plus minus DKK 40 million, DKK 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. 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. I can't say how much will come directly on top next year.
Plus, we haven't given a forecast. We will give a forecast in February, and then you'll get the number we target. We have said we don't have the ambition to, you know, drastically lower CapEx or anything like that. We wanna 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 a year just depending on the schedule with EUR 40 million-50 million you spend, even though progress is quite linear. Okay, does that answer your question, Dean?
Yep.
Yeah.
Yep, that's great. Thank you very much.
Thank you. Our next question comes from the line of Cedar Ekblom of Morgan Stanley. Please go ahead. Your line is open.
Thanks very much. 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. 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 costs 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?
On the second question, that's primarily a spot market view, even though that particular coke price is a tricky one. It's hard to know what to look at there, but it's spot. It's not our P&L as it is. I can tell you the 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. On the price, that capacity that came online a few years or in the last years in Stonewall, it's my estimate, extremely well utilized, okay?
I said that in my opening that I think the pricing power and our ability to pass these cost increases on is as it normally is, and I think with this level of demand, I don't see a problem with it. Of course, if competition will follow the same percentage or not, that we typically have a premium in the market, and we deserve that. I think everyone in our industry is wrestling with these very dramatic cost increases. For me, if they don't raise prices now, they're almost gonna go into a loss. I haven't seen that from them before, but it's not for me to judge. The supply is quite tight on stone wool.
That's really helpful. Thank you.
Thank you. Our next question comes from the line of Yuri Serov of Redburn. Please go ahead. Your line is open.
Yes, good morning. I would like to ask you about your volume developments. You talk about the fact that the market remains buoyant and is 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 zero volume or close to zero. I want to hear from you what you think about that. Also continuing with the volume, we didn't really talk about 2022, but you know, the situation in the world is not changing. People want insulation. Energy prices are high. Should we expect that the buoyant market will continue next year? Thank you.
At the moment, when you look at the construction outlook, it is quite a positive view on next year. I just got your consensus yesterday. It looks positive. We are setting up the business. W e're building inventory to make sure we have enough seasonal stock for the next high season and all that. Yes, I agree with you that the demand for our insulation product looks favorable, but then we now step into an environment with quite broad-based. I'm not sure the right word is energy shock, energy crisis or hyperinflation or just inflation, whatever. It is increasing. How that will impact demand, I don't know yet. The outlook is favorable, and we have more capacity to deliver more stone wool.
On the volume forecast for Q4, you know, Q4 is not an average yet. It’s a curve, and it’s different markets, different product. We have some markets where the prices are up 15, 20% across Q4, you know. Some countries where this happened a bit early, 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 zero 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. With your mathematics, okay, you get to that. There will be a price increase, and there will be also volume growth.
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 quarters of 2020. The level of activity in Q4 is very high. It will probably be one of the top quarters we have in terms of top line with that outlook, even though the growth over last year is not so high. Okay.
Okay.
Yeah.
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?
I mean, we are in progress on that plant. That's being worked at, and the project team is in place. The site's getting ready, and we're going out to bid for material here in the spring. That is the one, the next one or the most advanced one in our schedule. Of course, in Russia, we always try to beat the world record when we build a plant there. We are normally quick, but the French one is the next one online in our schedule.
Is that three years?
2024.
Okay, thanks.
Our next question comes from the line of Manish Beria of Société Générale. Please go ahead. Your line is open.
Good morning. My first question is, if you can comment ROCKWOOL, it caters to high growth areas like data center, logistics distribution, EV, et cetera. Because when I see your Western Europe volume growth in Q3, it was low single digit versus 2019. I was just wondering if you are catering to these high growth areas or not really. I will ask the second question later.
How do you get to Western Europe low? Okay, it's the price assumption, no?
Compared to 19.
Nineteen?
Yeah.
Okay. Yeah. No, we just see it. We see Eastern Europe very, very high as you see in those papers. 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 how much higher it can go. It's a incredibly good level it's at. Therefore the growth number.
Do you cater to high growth areas?
Yeah, the high growth areas continues to be North America and Eastern Europe.
Mm-hmm.
What applications? You wanted something on the applications. The high growth areas or the highest growth areas on the insulation side is attics or external wall insulation and flat roof. 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 since those segment might be a little bit lower margin than some other segments, we get left with it. Part of the growth in there is also impacted with the price increases that PIR and PUR, the plastic foams have done. 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.
When they adjust their pricing, if the chemicals they use go down, then that might swing back in the balance between the two. 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 mostly the dynamics on the input material cost. Then over time, you know my view that over years to come, I see plastic foam lose to circular stone wool.
Thank you for that. The second question is, you made an interesting comment on the gross margin. I see, basically in 2019, your gross margin was 66%. In 2020, it was 67%. Maybe in 2021, you end up something like 64% gross margin. What would be the target next year? Do you want
No. Now you calculate gross margin. When I sit with my sheets, I work with contribution margins and a different P&L. I t's related. They are cousins, so I don't have a number, but we have a number to get back. I want to get back on a healthy contribution margin, gross margin, okay? 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 gonna be because it also depends a little bit what mix we do because we have different gross margins on the different businesses. W e wanna get back to somewhere near that 2019.
Of course, if we 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. W e wanna protect our profitability, and we wanna have growth, but we are not in it to take for extreme profit-taking. Gross margin needs to come back to those sort of levels. Okay?
Okay. Thank you.
Thank you. Our next question comes from the line of Lush Mahendarajah of Berenberg. Please go ahead. Your line is open.
Hi there, and thanks for taking my question. Two from me as well. The first one is just around your pricing strategy. Obviously in the recent years, we're not used to stone wool being more volatile or putting through more significant price increases. If raw materials and energy were to become deflationary, does that mean you decrease your prices and can give them back to the market, and 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? 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 it adds, details including the electric melter and also I guess if there's any delays given sort of the capacity being pushed back this year as well. Thank you.
Yeah. Okay. Thank you, Lush. Yeah. On the pricing, we have our arms around how to execute price increases, price lists. The whole framework is there. With a less inflationary environment or almost a flat cost, some years even deflationary environment, we have gone with this 2%-3% run-rate pricing the last 5, 6, 7 years. That, that's our normal way. Obviously, if we do an increase to compensate for some of this, we don't really work with surcharges. It's not an automatic falling back of it. We have some small elements in some countries where we said, "Okay, the pallet it costs EUR 14 now. Before it was EUR 7.
You just pay whatever it is. We have smaller portions of the business, but that's the way people do it in the market. I have no problem with that. Fundamentally, not surcharges. We will look at it from a market-based pricing, even though it's driven by a cost-plus here. Obviously, if inflation, if all of this energy costs and everything halves, we cannot sit up there without doing something, then we will have to lower the prices. We want to maintain sound contribution margins and sound profitability in the business. We have our targets. You know, we have the floor target for us. So somewhere in between there, we wanna be reasonable, and we wanna be profitable and have good margins to sustain the business. We don't use surcharges.
For the investment in Russia, I don't know, Lush, but I can tell you besides what we have announced already, it is a brownfield investment at our existing site in Vyborg in the northwestern 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 will be up to about EUR 200 million. The factory construction will run in parallel with the one in France, and it'll also target to be ready by 2024.
To add to that, what we are doing with this factory also is that we're preparing the Russian operation for Take-Back of old stone wool. We have a circular program launched, our Rockcycle program. This new plant fits very well for that concept to have a high content of recycling of our own wool. That's part of that plan, and that has added a little bit to the investment in addition to the capacity itself. We have already started with that scheme in Russia with the Take-Backs.
Okay. Brilliant. Thank you.
Sure.
Thank you. The last question comes from the line of Brijesh Siya of HSBC. Please go ahead. Your line is open.
Thank you. I had a question on Eastern Europe. Yeah. You talked about it being stronger, and I do see that number has kind of accelerated through to Q3 compared to Q2. Any specific element you would point out which has really stand out? Probably the auto industry is showing some sign of improvement in Czech or you talk about Poland and Russia as the strongest market. If you can just elaborate a bit how that market dynamic looking when we-
I think what you see is driving some of that. It's good market activity, but in the growth due to generally a tighter situation, we had to be quicker on price. You see some of that in that growth. Price is part of it, and then underlying good activity. Those are the main elements. I think the growth of that might, you know, too early to say, but we have seen it so many times in Eastern Europe that sometimes it grows a lot, and then we have quarters when it doesn't grow as much. Here you have the price element, and that contributes.
Okay. Understood. Thank you very much.
Okay. Thank you, Brijesh.
Thank you. We've just had one further question come through, and that's from the line of Pierre Rousseau of Barclays. Please go ahead, your line is open.
Thank you, everyone. Thank you for taking the time. Just a small question on the CapEx relating to the Take-Back program. You're increasingly marketing this as an advantage versus competition. I was wondering if you could give some details, you know, operationally, what do you need and how much does it cost to.
The-
... implement these, Take-Back programs?
It is not huge. You know, 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's certain steps in the process you can skip when you have an electrical melter, for example, briquetting to take back material. T hat's the one, and that is not a huge difference, b ut of course, if you go with it into market where the electricity price is less favorable than in another market, you might pay the price of that. First is you go electrical, and then the other is that you basically need some space and some rain protection and set up a logistic flow to take the wool back and make sure that it's actually wool, and that cost a little bit.
I would say all of this is relatively small, provided you have space.
You have it already in most of the factories.
We have it in most factories because we have started several years back to get used to it. It's nothing dramatic in it. I would say not rounding errors, but, you know, you're talking DKK 5 million, DKK 10 million here and there now and then because we simply don't have space, so we need to build something. But it's not huge money. Okay?
Thanks. All clear. Thank you.
Yeah.
Thank you. 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 investor section on our corporate website. Jens, Kim, and I thank you for joining today's earnings call. Have a great day.