Ladies and gentlemen, welcome to the ROCKWOOL full year results 2018. Today, I'm pleased to present the CEO, Jens Birgersson, the CFO, Kim Junge Andersen, and the IR, Thomas Harder. For the first part of this call, all participants will be in a listen only mode, and afterwards there will be a question and answer session. As a reminder, this conference call is being recorded. I will now turn the presentation over to your hosts. Please begin.
Welcome to the conference call regarding ROCKWOOL International's results for the full year 2018. My name is Thomas Harder. I'm Director of Group Treasury and Investor Relations of ROCKWOOL International. I'm here together with CEO, Jens Birgersson and CFO, Kim Junge Andersen. Jens Birgersson will go through our presentation and give you an update on the results for the fourth quarter and full year of 2018. We'll be ready to answer all your good questions. Before I hand over the words to Jens Birgersson, I must ask you to notice slide number two, 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'll now hand over the rest to you.
Thank you, Thomas. Good morning, everyone. On the slide number three, you see our numbers for 2018. We're very proud of those numbers. It's really top result. There is nothing in it, the guidance we set up to 15% and we came in up to 13%. We achieved all of that. If we flip to slide four, in Q4. We had a relatively uneventful Q4, no surprises. It is the biggest Q4 ever in terms of deliveries. Very, very high capacity utilization. We saw December weather that wasn't great. December came in maybe a little bit worse than it could have done, but totally okay. It was still enough to deliver the numbers. In terms of two-year growth, that 22% in the quarter growth came also in Q4.
When we take Flumroc out, we had another quarter with double-digit growth, which is pretty good because the year before, Q3 and Q4 had started to accelerate. It's good market activity. We saw some markets that stopped a bit early for Christmas. We had some weather effects, but nothing extreme. All in all, it worked out all right. Move on to slide five. Of up to 15, and Flumroc there 2.7. Flumroc had a very good year. Benefited a lot from that we were able to sell some extra volumes out of Flumroc outside Switzerland. We saw straight to the end of the year, the trend that non-combustible insulation is really high in demand. Very nice to see and terrific growth, U.K. in Q4. Systems grew on the full year, only 4.5%. Let's move the slide and look into Q4.
If we move to slide six, I would say that the trends are pretty much the same as we've seen before. There is maybe one positive trend there that is a little bit new. If you look at the bottom of this slide, you see that the system sales is up 5.5% like for like, or 6.2% in local currencies. If you track through the quarter, we started the year with Q1 with zero growth. We had a Q2 around 2% growth. Q3, a little bit lower than 2%, at 1.5%. Now in Q4, we had 5%-6% growth. We have done a bit of restructuring there. We shut down the business in Asia. We saw growth on Continental South. Now I think getting to a stabilizing point.
I think that we now turn the corner on the top line on the system division after a lot of work. We also done one more management change in that business, and we start to see that business pick. I'm carefully optimistic that we have now leveled out in system division and that we are heading north again. Slide seven. Western Europe, double-digit, very good growth. U.K., more than 30% growth in the quarter. Norway, very good. Sweden, very good. Netherlands, very good. France, totally acceptable growth in Q4, mid-single digit. Germany was slower. I'm not quite sure why Germany was slower, if it was a shutdown in December or whether it was just a choke in the market with all the activity going on. We had a little bit of growth. It was lower than the previous quarters.
If we move on to Central and Eastern Europe, including Russia, here we saw tremendously strong market development. If you take Russia, Romania, Poland, Croatia, 20% up. Very good overall. Russia shows a very high market activity right now. North America, Asia, and others. China had another good year and also a good quarter, almost double-digit growth. There is more a capacity issue. The new acquisition, we haven't obviously been able to start to use that. When we come into this year, even though these are small levels in the overall, we hope to be able to grow more in China. In the U.S., we saw the building material market, insulation into buildings, residential, commercial, very good quarter. We had a very slow quarter in technical insulation, and that was a bit of a new trend.
I don't know yet if that means that the U.S. process industry, industrial activity doesn't invest at the moment. It was notable. That said, the building material markets was strong. Move on to slide eight. You look at the profitability. We talked about the leverage here, EBITDA up 14% and EBIT 15% on a top line that grew 10%-11%. Not the 2x leverage or more that we have seen. We made a note there. If you look then at our EBIT margin, we came in at 11.7% in Q4. We were on 11.2% the previous year. When you compare quarter-over-quarter and also the year, we typically have been 2 percentage points or more up on the bottom line. With the high capacity utilization, we had to ship further.
I've told you before about this policy that we don't charge the customer, for example, in Germany, if we ship incremental volume from Denmark. If you dig through the annual report, we put the number here, so it's not a secret number. The impact in Q4 from logistic, longer distances, warehousing, et cetera, is a full 1.7%. The underlying leverage in the business in the sweet spot is there, but 1.7% margin points were given away in Q4. Slide nine. Nothing much to comment on that, but maybe a slight shift here is that we had another quarter now where the system division is up a percentage point in margin compared to the year before. I think that is another small sign that we are getting through some of the adjustments we are making in this.
Should say that it's not a buoyant market we have in the systems in the U.S. Rockfon market, but at least we don't see that decline anymore, which means that the other businesses that are growing aggregated has compensated for that. We have the business and it's not declining anymore in the U.S. in Rockfon. Over the coming quarters, we will then look at whether that really passed and we are starting to head up. Next quarter will be very interesting. Slide 10. Nothing much to say. The plan for the year, we are pretty much kept. Little bit less CapEx spend maybe than as normally happens, but good cash flow. Net working capital due to the growth down a little bit to 7.4%, but the absolute value of inventory and other is a little bit up, but no change.
I would also say that we step into the year with a good inventory level. It's not that we depleted inventories or anything like that. Slide 11. Investments is progressing. We see on some of the investments that steel, civil works, et cetera, strong pressures from a cost perspective. We see the cost situation tricky when we build them. Not alarming, but there is an inflation on materials, steel, civils, et cetera, due to the high activity in the market. Things are on track. In West Virginia, we have continued protests to the plant, but they have reduced in power locally. It was stronger and worse months back, but some of you have seen some of that. I would say the biggest challenge at the moment, we are progressing with the plants. We have the permits, we are moving.
The weather conditions have been challenging, but we are still on track with the project and construction is progressing. We move on to the outlook. Slide 13. We, as many others, we don't know exactly how this year will play out from a global economic perspective. We have made our best effort. What we are saying here is not a conservative forecast. I want to make that clear. I don't want you to write that I don't believe what I say here. I believe what I've written here. The reasoning for it is basically that on the top line, we had a very good growth in 2018, but we see the GDP forecast come down. I also see constraints on the installation labor side in some of the construction markets. I'm not hoping for another 15% year.
As you know before I've said we could, from a capacity perspective, with the de-bottlenecking and all the things we are doing, get to double-digit top line from a capacity perspective. When we now look at the market, and as you are all aware, we don't have backlog. We live from one week to the rest on the run rate, the recurring business. I feel we have made a realistic forecast here, 4%-8%. As the year progress, we will obviously see how the main markets in Europe are developing. Are they getting worse? Are they improving or is it just like this? We have reflected that we see greater uncertainty in the whole economic climate, including with the Brexit effects and other effects this year than we saw in 2018, and hence the wider guidance.
On the EBIT margin, the logic for the margin has been that this year we delivered, 2018, we delivered just short of 13%, so 12.8%. With the new factories that we're going to start up, most of them starting in 2020, we want to do a quick ramp out approach, which means that we will hire people early, we will train them, and we are front-loading the schedule. This, on the full year, gives an impact with our current plan of about 0.5 percentage point. I also see that inflation will be higher. We're talking some EUR 20 million higher inflation what we see now. That can change. It can also vary between the quarters. You know we don't hedge. Of course, we're going to offset that with price.
All in all, with that, plus that we are on a high utilization level despite of de-bottleneckings also in the sweet spots, that impact on extra shipping, et cetera, means that we don't have the leverage on the growth, and therefore, around 12% is what we guide here. It's very realistic. It's not conservative, again, as we move through the years, we will look at the real situation. We are working on price. We are working on cost reductions. We are working on procurement. All of that work continues. With those assumption I've given you, around 12% is realistic. Investment just reflects what we have announced. In the last three years, we have been on an investment level of about 6% of revenue.
Over the last 30 years, we have been on an average investment level of 11% of revenue, and here we are stepping up in the range of 12%-13% to catch up a little bit and create the room for growth, and most importantly, the room for growth in the sweet spots so that we can get rid of that 1.7% negative impact. Again, it doesn't mean when we grow that we don't earn more money. It's obviously the incremental revenues that doesn't have the leverage. We still earn more money when we grow. In the annual report, we have put a section in, and I don't know if you have had the time to read that yet, but our three-year or midterm guidance expired in 2018. We delivered on all those parameters, and now the question is, what do we say about the coming years?
In the annual report, you find something slightly different. We call it trends over the business cycle. We felt that in the current potential inflection point in business cycle, et cetera, that we did not have the relatively stable environment that we had in 2015 when we gave the previous guidance. What we have done here is that we have said that over a full business cycle, what are the trends that could be important for you to know about us? We start here a little bit with the revenue. We are very bullish on the macro trends, and I've listed them there in the material. The positive macro trends for ROCKWOOL, I think have been firmed up during the year.
They have the fire safety non-combustible dimension and the Grenfell Tower and the development there with the ban, and also some changes and other. That seems to be more and more relevant. That's a really long trend. The energy efficiency and the renovation agenda to meet the climate goals. You know everything about 40% of the energy and 40% of the CO2 is from buildings in Europe. Going after the building stock and renovating it, no climate goal will be met unless you do that. We believe in that trend. We haven't seen a lot of it yet, but we think that is partly due to capacity constraint on installation. It's less productive to renovate than to build new.
We should also say in that perspective, that we are doing a couple of showcase renovation cases of our own offices to show what you can do with stone wool and our products to do the energy renovations that it's efficient. I've added a new trend in there, this trend for sure will be a trend that we will live with for as long as we live, and also our children. That's the plastic trend. Many of us do this, that we take a paper bag in the shop instead of a plastic bag, and we wonder, how can we get rid of plastic? Plastic is great for many applications, and it's very hard to replace. We have plastic packaging for our product, and we are working, how can we replace it? It's not easy.
There are places where you can substitute plastic easily, and building insulation is one of them. Glass wool, stone wool, and other insulation materials can do that easily. I think that's a trend we will see over the coming years that become stronger, because certain things are very hard to do. This one is easy to do, and it works, and it exists. I think that's a new trend we talk about, and I think it's there. We have the urbanization where stone wool fit in. We have the growth on horticultural substrates, the precision farming. Another way of expressing that would also be that we believe that there is a growth in precision farming, but more specifically, pesticide-free farming. That is something you can do really well with our substrates.
We have indoor passive acoustics, remains important, and the storm and water management. All of these trends, when we looked at them with the new explicit trend we put in here, are strong. They remain strong. On the cyclicality, I know that in several of the meetings we have, you talk about us as we supply building material, building material market or the construction market is cyclical, and therefore ROCKWOOL is cyclical. We have tried to put some words to why we feel ROCKWOOL is not actually a cyclical stock. If you haven't had time to read it, read those trends. I'll give you a couple of data points now. One data point is that over the last 30 years, there are only four calendar years where ROCKWOOL has not grown. Four years out of 30. I wouldn't call that a cyclical business.
That's a steady growth business. If you look at the years where we didn't have a growth, there were typically big shocks. One in the 1970s, the oil shock. That shock took only one and a half, two years, and we were up on the same run rate per month as before the economic shock. The only one that took longer, it took three years to get up from the Lehman Brothers one too, in absolute terms. One year down and then growth, but that growth, it took three years from the peak before until we have reached that peak again.
I think that's extremely encouraging, and I think in light of when we get to investments, this also give us quite some comfort that provided we know where to put the plants on the ground, that we don't build them in the wrong place because we don't have the right market signals, we should really keep building steadily in up cycle and down cycle. Obviously, we don't want to build so that we build a plant and then we don't need it for five years. That's not the spirit. If we have a location where we made a misjudgment like that, of course, we slow down and we cut back. Fundamentally, steady organic building of factories in light of our track record and the trends forward is our base strategy.
Final comment there at the bottom, sales of our stone wool products should grow on average at least 1 percentage point faster. Here what we did is that we went through all our sales data for the last four years, and we find that, yes, we have taken market share in some places, we have been more successful in some places than others, but fundamentally, when we look at the markets, we see that stone wool as a category has gained or has had a 1 percentage point higher growth than the average of the market is in. The category has grown stronger, and that has been the trend the last two years, but also the last four years. I think it's driven by these trends, and we believe that's a long trend.
That's why we are quite optimistic about that there is a substitution growth happening in the next five, 10, 15, and 20 years. We move on to the earnings, slide 15. 16. 15. Here, you have been riddled with that, but if you look at the 10, 20, and 30-year EBIT margin, that has been on average 8%, between 7.8% and 8.2%. We stepped up in the period I've been here. We have about a percentage point higher of revenue, higher investments in R&D, brand positioning. Positioning is an important area, and also digital initiatives. We have done that. In spite of that, the last five years, 2018 and the previous four years, we have just short of 10% EBIT margin. We have, in my mind, permanently shifted the profitability up due to the way we run the business.
Just to give you a data point for that some of this pays off. In 2018, we started to put in E-Shop e-commerce and hook up customers on EDI and try to get out of the fax orders and the emailed orders and all the rest. We are now running, we increased the amount of orders that we get via EDI or e-commerce or E-Shop with more than 60% during the year. Now one-third of our orders come via e-commerce or EDI. We grew it more than 60%. This investment, even though we haven't spoken so much about it, we are perhaps even a bit surprised ourselves how quickly that grown.
I should also say, in the markets we did it, we did some test markets, and for example, Poland, we are now on higher than 60% via the new solution, and that has basically happened in the course of just a year. The 1% I feel well invested, and we're talking hundreds of thousands of transactions, that is between us and our customers. We move on to the investments. The investments, you saw that we lifted that up. Our return on investing capital is now about 22% or something. We still commit to keeping above 15%. We don't have a goal to get it down to 15%. We keep high if we can, but we don't want to go below that.
Again, when we look at the perspective of ROCKWOOL and the CapEx dollar per revenue dollar, we see that over the last 10, 20, 30 years, the capacity ratio or the CapEx ratio, the investment ratio, including maintenance, the CapEx, has been on average 11%. The last couple of years, it has been 6%, the last two, three years. Now since we have the capacity challenge here, and we believe in the long-term goal, we are stepping up a little bit above 11% the next couple of years to get some capacity in the ground. It's nothing unusual with what we do. It's just a slight elevation above the average, the historic average for a couple of years.
I think the reasoning for doing this in light of how this business works with this business model, it has a strong logic, at least from company management side. We believe in what we do here, and we believe this will work, and we will continue to keep the return on invested capital high. Having said that, we of course continue to look for acquisitions. If you find a factory, with stone wool or an adjacency, we have no problem buying that. The recent acquisition in China, the integration is running without any problems. The place is already starting to look better. We have some more work to do there. We need to up invest that place to get the latest environmental technology and some other improvements, but it is going well, and it is obviously a good vehicle for us when we find good targets. With that, I hand over for questions.
Thank you very much. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Please hold until we have the first question, and we ask you kindly to limit your questions to two at a time. We have a question from the line of Kristian Johansen of Danske Bank. Please go ahead. Your line is open.
Yes. Thank you. First question is regarding this faster ramp-up of factories, which you have highlighted. Can you quantify how many employees are we talking about here? What will be the financial impact looking into 2020 from this idea?
Yeah. You talk more than 100 people to get it off the ground. If you start a factory, you get in the basic indirect people, the warehousing and all the rest, and then maybe go one shift, et cetera. What we do here is that when the factory starts, you do commissioning, and then you start it. Traditionally, very weak on training these people. We have precise number, how many people we are going to train and how we do that by using our other factories. The deal is that we want to move away from this strategy of having a two to three-year ramp up, where we are just idling that asset to be able to do it in a year and go up on full capacity if we need it.
I don't want to give a forecast for 2020, as I said, 0.5 percentage point on the full year this year is the incurred cost that we have planned. You can recalculate, of course, how many million your EBITDA is. There's training, flying some key people around, bringing in some people to train and have them on board and actually burn a fixed cost before they actually produce anything. That's the impact. I don't go into 2020 how big the impact is, but it's not going to be huge in 2020. It depends, of course, on the market condition. If you look at, for example, Romania, we grew Romania in Q4 with close to 30%. That factory, with the market, we're going to be able to fill it very quickly. The payback on the up investment is tremendously quick.
One would just say, should we have a bigger Romania? That's more the situation there. You look in the U.S., when we get to it, if the U.S. economy continues, and we have this argument with the low penetration, there we don't want to have a fully loaded factory from the beginning, because we need two, three years. That should have a low loading, but what we don't want are these quality problems, stops, firefighting, but have a running factory, the few shifts we run it. It's slightly different situations. I don't have an aggregate number I can share. I simply don't have that in my head. I don't want to forecast the ramp up for, say, the West Virginia plant now. I don't do that.
Okay. Just to clarify, do you do this sort of early training on all the five expansions you're currently doing?
It depends. They're slightly different. If you go, for example, in Southern Germany, Neuburg, you have lines next door. We want to be able to hit the shifts we need with perfect quality, basically off the bat. Reality is that we're going to fail a bit because they are big plants we build. We want to be much quicker than before, so that you don't have to hear the stories, for example, in Marshall, Mississippi, where it was just quarter after quarter with problems. In Romania, you need to hire the people, put them there, and train them, and there you don't have experience among the workforce. You have a bigger job. In Germany, the job is smaller because you have a factory next door. You can take half a shift and put over and put new people with experienced people.
It's easier. In Poland, we have a very big population of blue collar, so there it's not as dramatic at all. It varies between the markets. West Virginia, for example, going to be a big impact because you are in a green field, you don't have any people with stone wool experience, and the cost is quite substantial.
All right. Thank you. My second question is on these transportation costs due to longer transportation. I'm just curious how, when you're sort of bridging what you realized in 2018 to what you're guiding for 2019, would there be sort of a continued margin pressure for longer transportation? Is that what you are assuming in your 2019 guide?
Yeah. What we have done in the guidance is that we have not obviously given the leverage on the growth here in the guidance. The reason for that is that in all our actions to debottleneck, we have been successful in the sweet spots, but also in the factories further away to achieve a higher capacity. Depending on where that capacity hits, if we can deliver from the sweet spot, we do it, but we still have in our plan that we will have to ship, because we're talking, we are north of 90% capacity utilization, which is still a lot, that 10%, whatever, I don't give the precise number. We still have capacity, but this still means that we will have these shipments.
Of course, in the lower end of a scenario, depending on how every debottlenecking exercise are playing out when you put it into play, that can vary. We have not factored in the leverage we would have from a comfortable capacity utilization, no cross-border trade. That's not what we have for next.
All right. Thank you.
Thank you. Our next question comes from the line of Claus Almer of Nordea. Go ahead. Your line is now open.
Thank you. Also a few questions from my side, both based on the revenue and the cost side. The first question is about your revenue guidance for 2019. What do you assume for price increases, cost inflation? That would be the first question.
Yeah. The pricing is the normal drum beat, 1% - 3%, and that should cover inflation.
That will be neutral on your revenue side or gross profit, you were saying? 1%- 3% higher revenue or prices, and that will compensate for whatever cost inflation you have full year?
Yeah. Again, you can have a quarter where energy prices spike. We don't hedge. You can have variations over the year, but the ambition is that, let's assume it's 2%, we calculate those millions, and then we compare that to the inflation and the cost increases. They should roughly match out, which means that potentially you could have a slight gross margin deterioration by that if the numbers are exactly equal. If we have a little bit more price, it's neutral. You know the match.
Sure.
Roughly the same amount, and then a little bit up and down. Yeah.
Okay. Moving down in the P&L into, let's just say, your EBIT margin guidance with a neutral ASP and cost inflation picture, a 0.5 percentage point from, as you mentioned, ramp-up for new factories. The decline in the EBIT margin, I slightly struggle to really understand that.
Yeah, Claus. Simple reasoning. A bit of growth, which means that we don't have a lot of leverage on the margin because we're on the high capacity utilization. Deduct half a percent for the startups and put the rest cost increases equal to price increases, there you go.
You are guiding for a decline in the margin. Maybe I can ask in another way, because if you look at your cost structure, if you look at the number of employees you added in 2018, that was around 5%, it's actually up 11% versus 2016. I think maybe that's slightly a surprise given your cost savings program. Can you maybe explain a bit what is happening on the employee side?
Yeah. We grew the top line 14.7%. Of course, we had price in there. You still talk about quite a substantial volume growth, kiloton growth. To produce that, we need more people. That's the one side of it. That's proportional, we have raised the productivity nevertheless, because we didn't really start any new factories. When you start a new factory, you lose a bit of blue-collar productivity, here we just hired more. On top of that, you have another aspect. We don't buy turnkey plants. When we step up the investment level and we build more plants, most of these engineers are in-house. In digital, we are not outsourced.
We did a cut in digital a few years back, a competence and capacity cut, and now we have replaced that with the new type of competencies we have. That's also an adder, and those three together leads to that increase in people. Again, what we tend to look at is top-line growth versus the employee growth, and that we keep raising productivity. The revenue or the sales per employee has increased 2018 and also 2017.
Sure. That I can understand. I'm just trying more. I would have thought, given your cost savings program launched a few years back, that you would say the people you needed to hire due to the growth and digitalization would be compensated by the normal cost savings program, but that's difficult to see in the numbers, at least.
Yeah. You can see it from a productivity perspective, we produce more output on EBIT per employee than we did after the cost-out program. Okay?
Right.
The productivity has increased. We reduced headcount, and now we added in, but we have invested. The 1% of extra cost I talked about investment in digitalization, some of that is headcount, people working on those areas. That's another aspect. The 1% of cost is not only cost that we send to agencies on the outside. We do the work ourselves. That is a large portion in there, too. The productivity is higher. Yeah?
Right. Isn't it just about this 0.5 percentage point margin dilution from ramping up the new factories? Would that be a Q3 or Q4 event, or when will we see these numbers hit the P&L?
Gradual Q3, Q4, I would say.
Okay. You say that would be a, roughly speaking, a margin percent dilution in the second half of 2019.
Sorry, Claus. Kim here. We're already starting that in Q2 with Romania factory. You will see something spread a bit over the year. Of course, a bit more in the second half.
Maybe, just a defined question, looking at your guidance on the revenue growth, can you maybe point to some markets where you see the biggest upside and downsides or you would say uncertainties?
Yeah. What I see, I guess Germany, for example, you have a very high number of approved building permits, and you have a high need for accommodation, houses, et cetera. You also have a constraint in construction. Having met many customers in the market, they all say it's going to be a fine year, but I see signs that I haven't seen negative on Germany, but I believe Germany had a better 2018 than it's going to have 2019, even though many customers say that's not the case in Germany. I have some. U.K., I think will continue unless something terrible happens with Brexit. We have a five-month buffer against a closed border in the U.K., so we should be able to continue business, but if something happens that really crashes it. At the moment, we haven't factored that in.
We have reduced a little bit our growth expectations, but we haven't done a full Brexit disaster. The 4%-8% is more the result of we saying, look at 2018, what happened, assume it's a little bit slower here and there. You can do a scenario for different markets say, this feels all right. It's constraints, it's GDP changes, it's all sorts of factors, we come to this 4%-8%. It's not a specific market where we said, this one will crash or anything like that.
Sure. Okay. I will start asking questions, but just to find, what do you mean about five months in the U.K.? Do we have five months of inventory or what is this kind of a buffer you have?
Yeah. 98%, 99% of what we do in the U.K. comes from the local factory in that. What we do now before the Brexit, we are blessed here. We haven't analyzed how hard will it be to get the product over the border if the customs doesn't work. How we have approached it is to say, okay, let's take the raw materials that we need, that are imported, the small things, and make sure we have three months of that in the warehouse. That's done. Let's go a little bit higher on seasonal stock, so we say have two months of stock. You add that up, you're on five months. That doesn't mean, of course, that every imported roof, ceiling tile, and Rockpanel, that is again not the major business.
Also there, we built a little bit of extra stock where we can. We have tried to physically buffer a hiccup. If the hiccup doesn't happen, then we just work that off. We just flex it a little bit with network and capital and inventories.
Okay. Thank you so much.
Thank you. Our next question comes from the line of Laurits Kjaergaard of ABG. Go ahead, your line is now open.
First of all, thank you for the presentation, Jens and Kim. In terms of the top line first, Jens, you mentioned in your opening statement that the stone wool insulation has been growing about one percentage point relative to other insulation types. Could you maybe talk a little bit about going forward how perhaps plastic substitutes will react? It seems that their input costs are going down, perhaps also they will try to grab market share.
Here, very hard to get data on that, and I always welcome when you dig into this. What I see is that on EPS and XPS, I think I start to increasingly conclude that the markets are disconnected. When I look at the ETICS business in Germany and other markets, it doesn't matter how they price. That's almost my conclusion now. That segment, they have overcapacity, they lower prices, and we don't look at it. When they need stone wool, they come to us or someone else with stone wool, and it doesn't matter that that cost a little bit more because they are doing their own thing. On PIR and PUR, the MDI prices are down. I think, yes, they're going to be tougher. They have lowered prices in some markets now. We saw that in Q4.
We didn't lose much because there are still a lot of projects where people kind of say, "Okay, here I want stone wool," and the intersection where we compete head-to-head hasn't been so big. If they lower price, sure, we're going to lose a few projects in that intersection between, the friction area between. There are also segments here that is clearly stone wool and clearly PIR and PUR. I think that it's not going to hit across the whole flat roof and across the whole facade insulation. That's my observation, but yes, the price competition will increase. Of course, in local markets, if we have the market not growing or shrinking, that could happen in Europe. Italy, for example, is in recession now. Our strategy is to be disciplined on price and cut capacity.
That's what we want to do, that's what we want to execute through. There are different segments of the market. You have the distribution business, bread-and-butter business, long-term relations, e-commerce based now largely, EDI based. I think there you have a more link between inflation and the pricing, and my approach is that that should work. On the project business, there could be a bit more competition because someone is very hungry for volume. They don't want to reduce capacity in a certain market. We see a sort of that, but our approach will be to maintain the price quality and the customer service and, of course, if the market is growing, that's much easier than if it's shrinking. I think we have some increased competition, but I'm not pessimistic about the direct competition if the market continues to grow.
In the areas where stone wool and plastic-based products are competing against each other, can you tell anything about these customers? Are they more price sensitive relatively to before in terms of more price relative to environmentally focused? Also, what type of price differences is there currently on plastic-based products and stone wool?
We have seen anything from 10%-40%, we have won projects and lost projects with all those price differences. Very hard to say. You almost have to dig into each specific market and segment and application and if it's spec or not spec. It's hard to say. It's going to be one of these where we have to look at it and see what's really happening with that. My view is still that the worst competition to stone wool is stone wool.
Okay. In terms of stone wool, Isover, Knauf, and Paroc, they will also, I guess, increase capacity in especially the second half year.
Yeah.
A few thoughts on that?
It depends what happens. If the market keeps growing and renovation starts up where stone wool has a high share, then a bit of capacity increase will be swallowed very quickly. If you have another scenario with the market really going down, then of course that capacity, depending on the strategy of those players, could have a difference. Very hard to say, but there is, in my mind, room in a growing market for more capacity and for stone wool.
Fair enough. The last question on the employee side, especially in Germany, you have mentioned yourself that there's this lack of worker capacity, therefore sales cannot be as high as maybe previously thought. Could you talk about maybe wage inflation in 2019 relative to 2018?
Yeah.
Which is expected to be increasing a lot maybe.
You are so correct that we have the workers to produce. I'm talking about on the job sites, the Polish construction workers, the German construction workers. I see signs of constraints there.
I know.
Yeah. That to say, it's just something I see, that they're very busy and it's hard to get a builder. On a building project, a specific competence on the project can delay also our part, even though those type of people are there. That's I think something we have seen in Germany, even though we don't have proof in numbers that it is that way, but that's what we hear. What was the other aspect you said?
Salary.
The salary. The salary inflation for 2018, we basically follow market, and you see maybe half a percent, a third of a percent higher salary inflation in 2019 than 2018 on average. Let's assume it's half a percent. That should be also said that there could be certain markets where you have much more due to something local, for example, Poland, very tough. We just follow the market, but when you aggregate it all up, it's higher, but it's nothing you shouldn't expect us to work out and live with, okay? We'll deal with that, and it's not dramatic.
Just if the supply is the same and demand for workforce increases quite a lot, which you've seen by some of your customers, then you should see higher wages for them also, no?
We are offering careers at ROCKWOOL. It's not like working at McDonald's when you go in to work, and if Burger King gives you $1 more, you go to Burger King. Many of our workers in our existing factories have been with us for 30 years. They like the purpose, they like the health insurance, they like their colleagues. It's not like a whole factory environment because suddenly the car factory starts, suddenly they take all our employees. We go for our segment within the market. Of course, when you're hiring to a new plant, it could be a very tight situation, and you need to do it.
Even though we feel in certain areas, oh, they steal our people and this and that, on average, it's working out, and it's not going to be very dramatic due to that we have quite a loyal workforce. Again, we're going to have islands or places where it's going to be tough. We have to deal with that. In the aggregate picture, it should work out with a relatively limited hire increase. Okay.
Super. Thank you. Have a great weekend, and see you on Monday.
Okay. See you Monday. Thank you, and have a good weekend, you too. We can finish. We have already talked about more questions. No, no. Any more questions out there?
Yes. Our next question comes from the line of Kristian Johansen of Danske Bank. Go ahead, your line is open.
Yes. Thank you. Just two quick follow-ups. You mentioned this slowdown you saw in Germany in Q4. I'm just curious whether this continued into January or whether you've seen a different trend.
Can't comment. December and January, snow, weather, all of that. Even if I were to open up with all the numbers, our experience is that you shouldn't conclude anything based on January. It's up some years, it's down some years. It's too early to say. We need to see what happens towards the end of February and March. That's when it really starts to take off. As you know, some of the businesses you need the winter to go away. It's the same every year. Then it depends what week are they going broad-based onto the site for certain segments. It doesn't have to do anything with the market activity. If that happens two weeks later, we see a lower number, it doesn't mean the market has gone down. It just means the winter was longer. It's still too early to say, Kristian.
Fair enough. The second question was on this disappearance of the leverage as you guide for 2019. Obviously, this is not the natural state of your business. Can you give any flavor on when we should expect the leverage to come back then?
We need more plants, right? For example, now we supply quite a bit into Romania. When we get the plant up, that gives more leverage. Neuburg, when that comes online in 2020, then you start to see leverage because basically in Southern Germany and that area, there is always good demand for us, has been the last 20 years. All of those factory assets will give a bigger leverage. You look at North America, all the people, you have the West Coast, a lot of economic activity, and then you have flyover country, and then you have the East Coast. Marshall in the South, Toronto in the North, coming in with West Virginia in the middle, very good location to serve up Northeastern U.S. Again, will improve the leverage. I would say all the factory projects do that.
Of course, we do debottlenecking in our existing plants, and of course, we put our focus in the areas where we need it the most. That is the impact. Again, I do not have a number for if that exactly compensates the tons we still shift. Very difficult to answer. The assumption is that debottlenecking alone does not change that, we basically see this trend going forward. Yeah.
All right. The
I should also say, go back to Claus Almer also on the little bit on the focus on the cost reductions. Last year, a lot of the focus was on getting more output on the asset. We had a good year on cost reductions. This year, with this lower market outlook that I have given now, we have more focus on cost reduction now.
All right. Based on what you're saying, it sounds like leverage should come back by 2020.
Yeah.
Right.
Yeah.
If I just may, if we look at this year and take a more positive scenario, say that you are actually able to grow more than the 8%, should we then expect sort of a further dilution of leverage? Given the factors of capacity constraints.
Kristian, again, depends on, of course, where the growth is coming from. Price, of course, will not necessarily give a dilution.
All right. If you're growing volumes in capacity-constrained markets, we should expect more.
Again, it depends on where the volume is coming. I think let's see how the year develops and how quarter by quarter we progress. Whether volumes is coming in higher than what we predicted, I'm sure we will somehow be able to guide you next time after Q1.
Fair enough. Thank you. That was all for me.
Okay. Thanks, Kristian.
Thank you. Our next question comes from the line of Michael Pearson of SEB. Go ahead, your line is now open.
Hi. Thank you for taking my questions. My question is regarding in Western Europe, you said that the key developments have been strong in Norway, Sweden, and Netherlands. Last quarter, you mentioned France, U.K., Italy, and Spain. Since you're not mentioning those countries now, is that because they're performing more poorly? Or how should we understand this?
Yeah. I think when you look at the quarters, they jump around a little bit. Basically, Eastern Europe has just been double-digit, high up all the time. Now we mention those. U.K. has been a very big growth all the time. Norway, I mentioned because it's back up. Norway did this kind of slowdown, and now it's just up and it's growing tremendously. We mentioned that, I would say Germany and France is a huge market for us, but we are around the 5% growth, which is great. It's great. It's no disasters. It's growing. Germany is the one that Q4 was not great. We earned great money, the market was not so active. On the other hand, Germany is also the market where we see the biggest December effect every year. December, certain years are fine, they're very bad.
I would say no big changes on the development. No big worries. It's just that we believe that some of that France as a market, we grew really nice. When you look at France, there's some alarm signal for France overall, that's what I mentioned. Business is good in France. That's it.
Thank you.
Thank you. Our next question comes from the line of Yves Bromehead of Exane BNP Paribas. Go ahead. Your line is now open.
Good morning. I have two questions. The first one is on the EBIT margin. You mentioned the 12% guidance, and you mentioned that you're going to have a 0.5 percentage point margin pressure from the engineering and training costs from the ramping up of those plants. The rest is essentially the logistic cost, if I'm correct. Would it be fair to assume that if you were growing at the low range of your top-line guidance, margins could be higher than if you were growing at the higher range of the guidance, which is 8% in top line? That's my first question. My second question is on your capacity expansion projects. I wanted to know if all those projects are committed or if you could delay some of those expansions if demand is getting incrementally more negative. And finally, my last question is on CO2.
There's a lot of discussions around the CO2 emission scheme and how that impacts the cement sector, but we haven't really looked at other sectors such as maybe the insulation sector and the stone wool production process. I just wanted to get an idea of how the new ETS4 scheme could impact your business at all. Thank you very much.
Okay. Kim will take the first one. I'll take the 2A and B of the second question.
Okay. I'll take the one where you can say the range. Of course, mathematically, you are right. If you get a lower end of the sales, mainly driven by price, obviously, you will see a less negative leverage impact on the volume. I think that's a logical conclusion. Then on the CapEx, would you take CapEx since-
I'll take that. Okay. If you look at the CapEx, Romania, it's all hands on deck to get going. We grew tremendously. Too late to do anything. That one needs to go in the ground. Again, as I said, 30 years, only two years, we're shrinking margin. You can do like what happened, when the Spanish building boom stopped, people just left the equipment on site and left. Our branding and our approach is not that. We have somewhere up to you can buy the land, you can do some land preparations, and you could pause the project. If you look at Romania, too far gone, it's going to happen. The market is there. The ETICS market is very strong, we go ahead with that. Southern Germany, where that project is happening, let's say Germany went into a complete negative business.
That part of Germany is still one of our strongholds. We would finish it, then if we don't need the capacity, we will take the capacity out somewhere else where the VPC, the variable production cost is higher. Then you have project like we bought land in France and Sweden. There we have the option to start. We are pretty sure of the location in Sweden, again, heavy balance, where do we need the capacity and when is the right time? There, if the business climate is worse, we obviously don't start. We have the option. That's pretty much that. Then in West Virginia, with a 2%, 3% stone wool share, and the fact that we keep clocking very good growth in the insulation segment for building, we just need the plant. We're going to build it.
Yes, if it's really would turn sour, we can stop things, generally, build it or don't start it. Then on the CO2, we haven't seen any changes to the regulations, actually. Maybe you are more updated than me, we have not seen any recent changes that have come into effect, we don't have an impact. If the CO2 charges increase, it goes without the allocations we have today and the cost would go up, we fundamentally still see that as a positive thing because we save 80x or 1,000x or 4,000x , depending on the segment, more than the CO2 we use when we produce. Somehow the market will definitely get better if CO2 cost is priced higher. Yes, cost will go up, also the demand for the product.
Okay. Thank you very much for answering those questions.
Thank you. We have no further questions on the line. Please go ahead, speakers.
Okay. Thank you very much for all the questions, look forward to see some of you on Monday, wish you all a good weekend. Thank you