Trelleborg AB

STO:TREL B

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, welcome to the Trelleborg Q2 2018 Report. Today, I'm pleased to present Peter Nilsson, our CEO and; Ulf Berghult, CFO. [Operator Instructions]Speakers, please begin.

[Peter Nilsson]

Okay. Thank you. Welcome to all of you to this Trelleborg half year report 2018. I am speaking, Peter Nilsson, CEO, Trelleborg, and also later on will be joined in the call by Ulf Berghult, our CFO. And also supporting us on this call is Christofer Sjögren, Head of Investor Relations, who might also step in if any specific question put up later. But then moving on to the agenda. And of course, as usual, guiding us through is some slides, which I guess you have picked up on our website. And then turning to Page 2 with agenda in this pack. As usual, starting with some general highlights guiding into the business areas. And then Ulf will guidance you through the financials then finishing off with the summary and some comments on the outlook for the running quarter and then finishing off with Q&A. So that's agenda.And then quickly moving to Page 3, which is the headlines for the quarter. Heading on this slide and also for the report, continued earnings improvement. We continue to move our earnings up and this is actually several quarters in a row now that we've been able to increase profit -- rolling 12 profit actually more than 5 years now. So that has been a steady increase and it continue this quarter.Sales is up in the quarter by 6%, organic sales 2% in total. And then excluding project deliveries as we report these 2 organic figures, then sales is up by 4%. And also to note here we see, let's say, an increase, positive momentum going into here in a running quarter Q3. I mean, we had in the finishing of the quarter some sliding of sales, let's say, impacted by some tightness in certain parts of the supply chain. So we are actually going into Q3 with a better order book than we went into Q2, seasonally adjusted. So we are confident about the running rate here going forward into the running quarter. More comments about that later.EBIT increased by 19% year-over-year, corresponding to margin of 14.7%, highest EBIT for Trelleborg in a quarter and also with the margin, which is well ahead of last year equal quarter. Items affecting comparability came at minus SEK 32 million. Ulf will get back and comment on that. No change. There is, of course, some lumpiness in between the quarters in this. But the guidance for the full year remains on this one.Cash flow, on a similar level as last year. Slightly down on cash conversion, impacted by somewhat higher CapEx this year compared to year. Ulf will comment on that as well. And we also noted satisfaction as we continue being able to make bolt-on acquisitions which is supplementing our already strong positions in these 2 areas. But there some more comments on that as we talk about this in individual quarters.Then moving to Page number 4, a little bit of organic sales growth as you see all across the world basically with exception of Other Europe, as Other Europe is also impacted by some decision to actually step out of some mixing sales, compound sales -- external compound sales related to our operation in Slovenia and also some other items. But generally, not concern about that and good growth and market in all regions, especially strong maybe on China, but Ulf will get back also and comment on that a bit later.Then moving to Page 5, back to the agenda. And quickly moving up to business areas and going to Page 6, start talking about Trelleborg Coated Systems. Organic sales down by 6%. But this is also the business area which has been impacted by this change of sales in the mixing operations in Slovenia. Where we then decide that the focus is mixing units and total demand and on purpose actually stepped out of some external supply of components.Coated fabrics, which now is half of this business roughly, general industry, automotive is strong. Aerospace is somewhat weaker in the quarter, but not really driven by underlying -- less underlying demand where we see this more as an inventory adjustment for 1 of our customers. We don't see that being really -- real underlying demand.Printing blankets, lower sales in Europe and Asia. Up in -- lower sales in Europe and Americas, up in Asia. Basically same development as we've seen for some time. EBIT and EBIT is up; satisfaction here. I mean, we are still some way away from our target. But at least we are now firmly moving in the right direction with margin improvement -- solid margin improvement compared to last year with the result especially on this overall productivity. We have put in a lot of measures here to improve the underlying operations and with some satisfaction we see that improvement is actually kicking in.And also in this area, an important -- small, but an important acquisition of Lamcotech, which is supplementing on our position within a special, niche, within coated fabrics which has been concluded here in the beginning of Q3. So that's basically the comments on Coated Systems.And then moving over the next page, Page 7, Industrial Solutions. Organic sales of plus 6%. Same level as previous quarters. Basically good demand in most segments. We see some building related segments, which is flattish or down, which we see is more related -- not related to underlying demand, but more with some supply chain issues in certain areas of this segment. Which is basically -- generally a common areas in Industrial Solutions. There is tight supply chain in certain areas and we and our customers has been able to really deliver everything which is also -- but we would have seen a slightly higher sales here. But that is something we are working on and something that we expect to be sorted here and going forward.We also have to note a continued tight availability, especially of qualified labor in Czech Republic here and that is also a challenge that we have, which we've been working with in order to improve going forward. But in total, we have also here a solid improvement in profit. Margin is up by almost 1 percentage point and then we have also EBIT is up which is double -- basically the double percentage compared to the sales growth. So this is also good leverage on the increased volumes and generally good managed.Moving on then to Page 8. Trelleborg Offshore & Construction. Here the heading is light at the end of the tunnel. We actually see now for the first time in quite some time where we see a solid improvement, especially in the oil and gas during the quarter. Even though we have to highlight that it will take time before this improved market situation actually kicks into sales. I mean, we have a time lag here of some 6, 9, 12 months depending on the business that we are working with. So this will not be immediate change in the next 1 or 2 quarters here. But definitely we see that we're starting now to build order book and we see with some confidence that we are actually turning a corner here.And we also see within the infrastructure part of that also certain improvements. I mean, there is also some mixed shifts within this business. But we are seeing here that we are actually turning the corner and we are for the next running quarters here actually believing that we're going to be moving in to positive territory here in terms of profit and also organic sales year-on-year. So this is of course satisfactory.On the top of that, we also want to note that the closure of the U.S. plant that has been communicated at end of last year is fully running according to plan and we have now manufactured a last product in this U.S. plant and we are now starting to move all this equipment to our facility in U.K. where we will be up and running then in the next few months and thereby also kicking in some extra benefits related to this closure. So this is Offshore & Construction.And then moving up to Page 9, Sealing Solutions. Organic sales plus 6%, could have done slightly better here. There is some tightness in the supply chain both for us and for our customers and this is impacting. And we have -- also I mean -- some I shouldn't say impact -- disappointment you can be that. But I mean we would have been able to sell a bit more if we would -- we would have been able to sell a bit more, if we would -- we would have been able to actually deliver exactly what the customer asked for, and the customers would have called off what they were actually using.So this is generally good. All geographical markets, all geographies and the most market segments developing nicely. Asia, especially strong. And EBIT and margin is been up almost a percentage point. In the same area, we see that EBIT is growing more than the sales, so we have a good drop through also here from the extra sales.Moving on then to Wheel Systems. Organic sales plus 4%. Especially, strong in Agri OE. Aftermarket ag is more flattish, even though we note that we estimate that we are actually gaining share here about in OE and aftermarket sales, so we actually performing better in ag in the underlying market. Of course, we also note that behind this organic sales figure, there is some impact -- negative impact, which is dry weather that we know about the Northern Euro. Even though, we should not exaggerate this. But it's still probably percentage point for something which we could blame for this.Industrial & construction tires continue to do very well. As communicated before, here we have also saw some tightness and we are actually not able to fully satisfy the demand. But this is something that we are investing and we are building capacity. It will be step by step here coming in to full operational mode here step-by-step for the remainder of the year and actually going into '19, so that is being adjusted. EBIT, substantially up, 34% up. Of course, benefiting from the higher sales, but also benefiting from the continued successful integration CGS and we see now continuation of synergies kicking in.And then also we note after an acquisition, local -- well, regional acquisition which makes us market leader in New Zealand, which is an interesting agricultural market. But -- so this is, I mean, solidifying our position in the Pacific area, say Australia, New Zealand by this acquisition. So that is something which we are also happy to be concluding in here in this running quarter.So then moving over to agenda. Then financials. So I'm asking Ulf to guide you through. Ulf?

[Ulf Berghult, Chief Financial Officer]

Thank you, Peter. So let's dig a bit deeper into the financial numbers. On my first page -- slide -- on my first slide Page 12, sales development. You can see that organic growth in the quarter was plus 2% and excluding project-related business, the organic growth was 4% coming mainly then from Industrial Solutions, Sealing Solutions and Wheel Systems. The impact from currency was plus 3%. Structural growth is 1% coming from the Dartex and White acquisition in Coated Systems and Wheel Systems.Next slide. Page 13 describes the historical performance of our growth. As you can see, we have had growth in the last 9 quarters. Organic growth has been positive the last 6 quarters. On Slide 14, you will find the reported sales development for quarter as well as rolling 12 months which is mostly impacted by structural growth.On -- Slide 15 presents our EBIT development. This was our single best quarter to date measured in absolute terms. Our EBIT reached SEK 1,293,000,000 equivalent then to an increase of 19%. The EBIT was positively impacted from currency translation of SEK 29 million in the quarter. EBIT margin excluding items affecting comparability ended up at 14.7% versus previous year of 12.3% (sic) [ 13.2% ]. And the year-to-date EBIT in absolute terms and the EBIT margin are the highest so far.Slide 16 presents EBIT and margin on a rolling 12 months basis. A stable EBIT margin looking 4 years back. On a rolling 12 months basis, we are currently at 13.7% EBIT margin. The next slide presents the profit and loss statement for the total group. Items affecting comparability was minus SEK 32 million in the quarter related to the structuring cost, and it's in line with our annual guidance of SEK 250 million. The tax rate was 25% in the quarter. Our guidance of an underlying tax rate of 26% for the full year still stands.On Slide 18, presents earnings per share. Adjusted for comparability items, the earnings per share was up 16% to SEK 3.40 for continuing operations. Slide 19 describes the development of our operating cash flow. The operating cash flow was mainly impacted by an improved EBITDA, but also increased CapEx spend which is in line with our annual guidance of SEK 1.8 billion to SEK 2 billion. On Slide 20 presents a rolling 12 months operating cash flow. Our cash conversion is on a healthy level. However, impacted by the increased CapEx activity lately.On Slide 21 shows the year-on-year development on leverage on continuing operations including or excluding comparability items. Net debt is impacted by a negative translation difference of SEK 789 million. Slide 22 shows the leverage and net gearing development since 2010.On Slide 23 describes the return on equity with a long-term targeted 12% on continuous operations including items affecting comparability. Actual outcome is 9.8% versus 12.7% a year ago. Prior year rolling 12 months was a positive impacted by the capital gain from the disposal of the Czech compounding operations executed in Q1 2017. Rolling 12 months 2018, this year's rolling 12 months is impacted by a higher restructuring charges coming from a closure of a factory in business area, Offshore & Construction which was communicated then in end of 2017.Finally, on the Page 24, I would like to finish off this part of -- by my presentation by repeating our financial guideline for the full year 2018. As I mentioned then the CapEx is then -- guidance is SEK 1.8 billion to SEK 2 billion. We are running cost -- and restructuring cost will be about SEK 250 million. The underlying tax rate that is 26%. And then as per information that we have amortization of intangible assets in the size of -- above SEK 300 million.So Peter? Back to you.

[Peter Nilsson]

Thank you, Ulf. Back to the agenda, summary and then finish with outlook. Moving on to Page 26. Said before we continue to move. I mean, we have 21 quarters now with stable and continuous improvement on EBIT and we continue that. Sales is up by 6% in the quarter, supported by organic sales of 2%. And also then excluding project deliveries, somewhat better up to 4%.And also note, we want to -- so highlight is we are going into Q3 with a positive momentum. I have been mentioning a few times that we had tightness in the supply chain. It shouldn't be exaggerated really. We are working on that. But there is some limited impact from this in Sealing Solutions and Industrial Solutions. And then also some lack of capacity, especially for construction-related tires within Wheel Systems.All of this is being addressed. And most of it is actually related to fine-tuning with the exception of this construction tire capacity in Wheel Systems, which is more driven, by let's say, major CapEx especially down here in Serbia, but also supplementing a little bit -- step-by-step process in China and U.S. in order to move into that segment. So we don't feel that being a major problem. But nevertheless, it has been a smaller -- yes, smaller issue here, especially ending here of Q2.EBIT is up, as I said 19%, and then to be compared with sales up at 6%. So good leverage.Margin of 14.7%. even though of 14.9% for the 6 months. Even though all of us know that we have kind of more heavy sales in the first 6 months, in the second 6 months within Trelleborg, so we shouldn't -- so we are still some way away. Even though getting close for the 6 months to our long-term target of 15%. But this is a full year rolling 12 figure and that will, of course, go down now as we will have less sales in the second part of the year.Items affecting comparability, relatively low in the quarter. But as you heard from Ulf, overall guidance for the full year remains. Cash flow also -- somewhat lower cash conversion, but still on a healthy level. But good control of that, and really not driven by an increase in working capital. It's actually increase of CapEx which is then used to increase efficiency further and to improve our geographical balance. And of course, also to grow capacity in the areas where we deem that being beneficial.Also satisfactory, 2 bolt-on acquisitions. Continue to work on acquisitions. We continue to have -- see possibilities in that area. Even though, I mean, organic efforts always top priority, and then we're using more the bolt-on acquisitions that capitalize us to improve in the area of where it makes sense.Moving on to Page 27. I mean, our own priorities, same as before. Adding a 1 bullet here, manage constraints in supply chain. Once again, not to exaggerate this. This is something which is, of course, in a way of positive challenge for us. That we have increasing demand in certain areas. But it's definitely becoming a priority for us going forward, being able to actuallydefinitely becoming a priority for us going forward, being able to actually cover the demand that we have. And this, of course, also the constraints in supply chain is also somewhat pushing up the raw material pricing in certain areas. But that is also something we feel that we are well under control and don't see any problems related to that.On Page 28, so outlook for Q3 remain the same, as the outlook for Q2. Q2, as you see, slightly lower organic sales compared to Q1 for us. But we see with more let's say confidence that maybe Q3 we'll be closer to Q1 than Q2 in terms of organic growth. That is what we see at the moment. So that is why we have this comment that we're going into Q3 with more positive momentum then actually going into Q2.So that is finishing off. And then by that quickly moving then over the Q&A on Page 30 and then opening up for questions and comments.

[Operator]

[Operator Instructions] Our first question comes from the line of Klas Bergelind from Citi.

[Klas Henrik Bergelind, Director]

It's Klas from Citi. A couple of questions from me. First, I want to come back to Sealing Solutions and the slower growth. You talked about deliveries being pushed, is it right? Is it really only bottlenecks? Or are we seeing customers being more cautious in light of the trade war narrative? Others in this sector haven't seen any weakness yet. So I'm interested in terms of what you are hearing on an underlying basis?

[Peter Nilsson]

Let me comment on that. I mean we actually, we have a stronger order book now than we had going into. We have continuously built order book in the quarter. And I mean -- so, we actually -- we don't see a softening. Other 1, of course, we are very well aware of these trade discussions if you want to call it that. But we don't really see this in the business at the moment. Then, of course, we have to be careful whether this growing order book is on the back of longer delivery times. But as we see it today, we don't really see any softening anywhere, to be honest, looking at fuel. So I mean, we don't really see it anywhere else. I mean, it's stronger in Asia. North America, continuing very good. I mean, then Europe is, of course, a little softer compared to North America and Asia, but still holding up on a very good level.

[Klas Henrik Bergelind, Director]

Okay, perfect. Then on Offshore & Construction. Seems like infrastructure deliveries can help you in the second half, better oil and gas deliveries to improve in 2019. You talked about quotation activity picking up. But can you tell us about the actual orders? How much really increase have you seen so far? So how much of the lost volumes here in the near term can you recover? Would obviously be great if we get a feel for the annual run rate looking at the orders? And then on the margin than just a follow-up. You previously said that you can reach the previous peak demand in this division without seeing a super cycle volumes and that it can happen pretty soon. Can you provide us an uptake here on when we can get to maybe low double-digit margin?

[Peter Nilsson]

I mean, it's difficult to give exact guidance exactly when it happen. But we have a firm growth in order book for the first time in 2 years, I guess. So after 2, 2.5 years back -- before we can see this. So we have big orders. I mean -- because in oil and gas we've been lacking really big orders. So we have a few big orders coming in for North America, for Brazil, for Mexico we had one, so that was actually coming. But what we are tracking is what we call orders to be placed, because we know that our customers has gotten the order and then they're getting to back to us. And that kind of orders we place has been growing a lot the last few quarters. So we see the coating activity going up and we expect fairly strong order intake here in the second part of the year. And then we have some order to deliveries is going to take us basically 3 to 12 months. So that is what we say. I mean, we're probably going to get some benefit also due this year. But the major benefit will be here going into '19. And then which relates to infrastructure, as we comment on that -- that is more. We have a good underlying demand in the infrastructure. We have a good order intake there. That is more phasing of individual projects where it's going to be slightly stronger, we expect here in the second part of year compared to the first part of the year. So, of course, all-in-all we expect this to -- in Q3 to get close to breakeven or maybe moving slightly into positive. And also -- and that relates also to organic growth year-on-year, we're on the same -- slightly positive or 0. And then going into more positive territory in Q4 and then even more so going into next year. That is what we see at the moment to be very open and transparent on that. But then to comment on exact -- when they are kicking, whether it's Q1 or Q2 and effectively what the margin will be. But we're definitely moving in the right area and for the first time in quite some time we feel firmly, let's say, confident that this improvement is actually coming.

[Klas Henrik Bergelind, Director]

Okay, that's good. The next one is on the aftermarket in ag. You say growth would have been 1% higher for Wheels if it wasn't for the weather. So the aftermarket would have been growing maybe 2% more than if it wasn't for the weather, is that correct? So what would the aftermarket volumes have been?

[Peter Nilsson]

It is very difficult to disclose -- to give you, let's say, guidance. We see there is a few individual percentage points on this. I mean, we not -- that is more a guidance. We're not talking 10%. But whenever we talk 1% or 2% or 3%, it's really difficult for us to estimate. Of course, we see that there is underlying -- and we also have to say, because it's Northern Europe. And of course, we all know, we're selling a lot in South. We're selling in North America, selling China, selling everywhere. So, of course, we shouldn't overestimate this. There is a negative impact, yes. But whether that is 1% or 2% of sales, I honestly, I don't know.

[Klas Henrik Bergelind, Director]

Okay. Because my point -- I'm coming -- maybe I'm looking at like this, but it is only 1% to 2%. And I thought that the weather impact wasn't bigger in aftermarket, because otherwise it would seem that the underlying momentum in the aftermarket is also not great or...

[Peter Nilsson]

But it is definitely big in Northern Europe. But Northern Europe is not only market we're working in. So that is why -- I mean -- and of course, we know it's basically softer. We say ag in total is 60% or something of -- 60% of Wheel and out of that probably Northern Europe is, I don't know, 20% of that probably something is Northern Europe. So that is what has been impacted. So, of course, so that is where the impact is. So shouldn't kind of exaggerate that. Because we have to know also that underlying tractor registration -- still negative in Europe. Even though we understand from OE, we're sort of expecting a pickup. Even though turning slightly positive in North America, tractor registrations. But that is still small figures, so maybe hovering around 0 growth in OE segment. So that is really what we can't comment about that.

[Klas Henrik Bergelind, Director]

Quick one, finally, bottleneck I mean, in relation to your increase in CapEx. Wheel System growing 4%, but what would have -- if the bottlenecks starts to ease, which will release all the growth, what can we see here into the second half. I guess, is it the second half that you expect the bottlenecks ease to?

[Peter Nilsson]

The bottlenecks in Wheels is something -- it's more related to our -- kind of following the CGS acquisition, we have been pushing quite a lot in to the construction segment. So that is more related to that. Really that is related to strategic effort. And steel is a small part of Wheel Systems, but nevertheless, we would have been able to -- there is also 1% or 2% probably on the total of Wheel Systems that we've been able to sell. And that is a little bit dependent here for the remainder of the year. But that is also something that we, especially, will see going into '19 actually when we are pushing that. Because we're little bit reluctant. We get a lot of interest for our efforts into that segment, especially from OE. But we need also to balance OE compared to -- and also because this is also -- I don't know if you noticed. We had also an acquisition in our Wheel that comes through one of our main competitors in material handling tires, was acquired by Michelin only a few days ago. And that is of course also changing a little bit the OE's ways of that. So there will be some turbulent for us in a positive way. We believe that is positive for us. But there will be some turbulence in that arena going forward which is something we are working on. We don't really know exactly the impact. But we believe that's going to be positive for us.

[Operator]

Our next question comes from the line of Erik Golrang from SEB.

[Erik Golrang]

First question on Wheel Systems, and you talked about your capacity there limiting growth. If you could put a number on how much better organic growth would have been, do not have the capacity constraints you talked about.

[Peter Nilsson]

I mean, once again, the capacity constraints here is not really related to the base business. It's related to our efforts into construction. I mean, that doesn't matter 1, 2, 3, percentage points. But that is something that will come and it's not really related to our underlying demand, it's more related to us pushing in for that segment. So that is something which is not related to the underlying market. It's more related to our strategic efforts. An efforts that's been kind of more successful than we expected since we got higher demand for that segment than we expected or not planned for. Because we planned for is that we would been -- been able to sell more quicker than we will. But that will come. That is simply a matter of when we have this Serbian factory up and running. We will get this capacity. And especially now we have, let's say, substantial interest so for us to move into that arena.

[Erik Golrang]

Okay. Thank you. And then, the second question if you could just repeat what you said for Offshore & Construction. If I heard you correctly there, organic growth around 0 in Q3 and then potentially positive in Q4. And margins to be around breakeven in Q3, was that correct?

[Peter Nilsson]

Yes. We -- also be fully transparent, our own estimates here show a slight positive organic growth in Q3 and a slight positive also EBIT. But then of course, if you remember, on phasing on individual projects and all of that. But we look let's say, the full second part of the year, we firmly believe in a positive organic growth and yes positive EBIT. Of course, let's say, not really getting anyway close to what we are aiming for long term, but definitely, let's say, turning the corner and we feel that we have both positive organic growth as a positive result for the remainder of the year.

[Erik Golrang]

Okay. Thank you. And then, a follow up on that. Last time around, when we've seen improving demand from low starting points in that business, it's often been on extremely challenging pricing conditions. Is -- what -- how is that developing now when you've started to see some demand coming back here?

[Peter Nilsson]

It's always the same here. Of course, the first big orders you have to be calm and you need to wait and I mean, that is always a balance. So that is what you see. The first orders will be with lower margin and the better margin orders will be only on later end of these first orders. Once again, we talk about in a year's time or something when we're going to get the benefits of this better orders. The first order is always -- but that is a kind of already in the order book. So that is why we see -- on a normal pricing, we will make -- probably make more money than we will do in a Q3.

[Operator]

[Operator Instructions] Our next question comes from the line of Johan Sjöberg from Danske Bank.

[Johan Sjöberg, Analyst]

I appreciate your comments on Wheels Systems, also the impact from -- in Q2 from the warm weather. If you were to guess now for the Q3, would you say that it would be roughly the same impact? Or is it getting worsening, i.e., you have been referring to Q2? If you were to make a guesstimate for Q3, should be we more worried about Q3 than Q2?

[Peter Nilsson]

I mean, the seasonality here also going down. I mean, usually the first part of the year is stronger in aftermarket. I mean, it's going to be weather dependent here. And also what's going to happen here with the kind of some government support or something. So, yes, it's really difficult to just speculate. I mean, we don't see any change. If we look at the weekly figures at the moment, it's actually continuing on the same path. I mean -- so we not really see any major changes compared to the -- to what we have seen in the first 6 months. But it's going to be weather dependent, going to be government support. But the steel hovering around the same kind of demand as we seen, I don't Ulf...

[Ulf Berghult, Chief Financial Officer]

No, no. As Peter said, there's seasonality. And then the focus we have is then to building a -- we have to capture the synergies and then do have a -- and if the market comes to -- it will come, so to say, then we are prepared. And -- but the weather is weather. And as you remember also, we had a very bad start the beginning of the year with really, really wet and long winter and then coming in these months. So it's not been ideal conditions for these poor farmers.

[Peter Nilsson]

But then, once again, I want to remind all of you, this is for Northern Europe. I mean, we're working globally. So this, of course, we're sitting here. Most of us is working out of the Scandinavian region and we are heavily impacted by this and we read the papers and everywhere. But it's not really the, let's say, the fact of life. Everywhere that -- this is an issue.

[Johan Sjöberg, Analyst]

Yes, understood. Could it -- maybe Ulf you can talk a little bit about the raw material cost that you saw or the headwind you saw in 2017. When you look at now the 2018 figures here, obviously there's a dramatic improvement in underlying EBIT. Would you say that you still -- we should still expect some raw material cost -- easy comps in Q3 or would you say that, that has now been phased through in first half?

[Ulf Berghult, Chief Financial Officer]

If you remember coming back then that we had a very kind of a headwind in the first half of 2017 and then we moved in than with a more of a -- on par in Q3 and then slightly better in Q4. So we are moving into -- on a year-on-year comparison, we are more or less on the same level, so. And we -- then the rest of the organization there -- I'm quite impressed with -- that we are proactive and we are on it and so we are ready with -- if something comes we are ready with -- to compensate that fully.

[Peter Nilsson]

What we see now, I mean, based on this demand that we see and you are following other companies as well, you see demand. Of course, there is a new -- renewed push upwards on raw materials in general at the moment. So we are already implemented price increases and we are working proactively on that. So that is something we are expecting further price ups from raw materials here in the second part of the year. But we are well -- as Ulf said, we are well on top of that and we don't really -- we are not in any way concerned about that.

[Johan Sjöberg, Analyst]

Now when you're moving into a slightly calmer environment to organic growth in Wheel Systems, I mean you've been talking about the synergy progress being kind of put on hold or at least being postponed. How is that activity going right now, since the underlying demand is slowing?

[Peter Nilsson]

I mean, that's well under control and we were getting the benefits that we have. I mean, I must say that we've been having impact, as Ulf said, especially on the ag side from this late winter and now the dry summer and all of that. So there is, of course, a negative. We still expect that we are kind of ahead of the peak in ag. I mean, we are still expecting an uptick eventually on ag -- we and also for the, let's say, aftermarket demand. So we don't seeing that we are in any way have the peak behind us, we actually still have the peak in front of us. And then, especially when it's happening, it's difficult to say, because a lot of things is impacting that. But we don't see that this kind of needed upgrade on agriculture equipment has not really happened yet.

[Operator]

Our next question comes from the line of Olof Cederholm from ABG.

[Olof Cederholm, Analyst]

It's Olof from ABG. I have a couple of questions. First, going back to the Offshore & Construction business, and just to get a sense of 2019. Would it be possible for you to share sort of current book-to-bill ratios or maybe what the order growth is year-over-year just to get a sense of what the top line recovery can be in 2019 as it looks right now?

[Peter Nilsson]

It's really difficult, Olof, because I mean, we are well ahead of 100, of course, book-to-bill at the moment. But exactly when that will kick in -- and we need actually to get back and give you a better guidance on that when we have more orders. What we see now is that we are getting the first orders and we have booked some orders. But we also -- what we are more positive is that we say these orders to be placed. We know there is a lot of orders out in the market and we are going to get our fair share of that. But that's going to happen here in the next few months or up till the end of the year. So, of course, I guess in '19, but it is will really be a wild guess and then I prefer to wait with that until we have a firmer view on that ourselves.

[Olof Cederholm, Analyst]

All right. That's fair. And turning a bit to Coated Systems, the internal change of mixing operation there. How long should we expect that to be a drag on is it basically a couple of quarters? Or how does it look?

[Peter Nilsson]

Now, it will be still a negative impact from that in Q3 and basically going in -- but little bit more or less than in Q2 and basically going in Q4. So that is something we started a year ago or a short year ago, so that will be up in run rate here mid Q4 or something like that and we'll have no impact from that.

[Olof Cederholm, Analyst]

All right. And how should we think about organic growth for this business in the longer run? I mean, you have some -- printing blankets is not exciting maybe, the coated fabrics should be growing right now. But if we look at Q2 and take out sort of the negative internal effect, those 3 percentage points, but how is coated performing versus printing blankets right now? And how do you think about the long-term growth?

[Peter Nilsson]

Coated is running -- I mean, frankly printing is running with a good efficiency, good cash generation. But we maybe shrinking with the percentage here or something like that. And then, the other part of it should be growing, but well within our range there between 5% and 8%. So I mean in total we should be, let's say, between 3% and 5% positive organic. So that is really what we see for this full business area. In the individual quarter, as we hinted here also, we been negatively impacted by some lower aerospace orders which is not really based on any underlying demand going down and definitely not -- we are losing -- we are not share. We're actually gaining share in that segment. So that is more supply chain on the manufacturing of the appliances. So we don't really see -- we're little bit more negative in the quarter than it should have been, especially driven by the lower aerospace delivers.

[Operator]

Our next question comes from the line of Hampus Engellau from Handelsbanken.

[Hampus Engellau, Automotive Analyst]

2 questions for me. If I look at your guidance, you're repeating guidance for third quarter -- so maybe [ also that's ] for second. At same time you say that your order book is better moving into third compared to moving into second quarter. Is this related to the tightness in the supply chain that we should see some of that in business and moving into the third quarter or how should we think of that? If you could maybe talk little bit about that.

[Peter Nilsson]

Really, I mean, to be -- also, as usual, we're very transparent. I mean, sales in individual quarters fell a little bit short of our expectations going into the quarter. So really the guidance here -- that is we're more firm that we're going to get closer to the organic growth that we have in Q1. And there is some benefits or also some delay on some project orders into Q3. But, overall, we see is basically the same as -- yes, as year-to-date or slightly better than year-to-date, if you want even more firmer guidance here going in Q3. That is really what we want to say, Hampus. So it's not really a change in guidance. It's simply that this -- our sales expectations in Q2 fell slightly short due to little bit on the tightness of supply chain, but also to a few individual orders being pushed into Q3.

[Hampus Engellau, Automotive Analyst]

Fair enough. And on the operating leverage, very good operating leverage in Wheel Systems, 40%, if I am right in my calculations. And apart from this system added in second half, should we expect the better operating leverage for Wheel Systems going forward, if you take in both the volume side and where you are on prices compared to raw material.

[Peter Nilsson]

Little bit careful here, Hampus. Because I mean, also the benefits is also coming from synergies kicking in. So I don't think we will see in an -- we still have some synergies that's going to be kicking in, especially here related to -- we have the new factories up and running and we still actually have some synergies in front of us. Because we said that synergies will run here going into 2020. There are some actions that are still not being implemented so that we'll continue to get kind of synergies on top of the operating leverage and that is also what we see in the individual quarter. But we see that kind of format continuing here for the next 1 or 2 years.

[Hampus Engellau, Automotive Analyst]

All right. And then last question. Still moving around with systems, can you maybe give us an update on where you are on in Spartanburg in the U.S. and how things are going there?

[Peter Nilsson]

U.S. is moving in a more positive note. That is where we see tractor registrations going up, and we also see that we continue to grow where we continued to grow our share in that area. So that is still moving. And I mean, as you know, we have 2 factories, Spartanburg and one of in the -- what's the name of the -- Charles City, Iowa. So that is -- both of them is moving in a positive way. But, of course, there are always some bump there as you are gearing up and you are going into more and more tire models and pushing that into the market. But, overall, we firmly believe that our move into U.S. is positive and it's going to continue to be positive.

[Operator]

Our next question comes from the line of Malte Schulz from Commerzbank.

[Malte Christoph Schulz, Industrials Analyst]

Basically 2 questions left. First of all on the on the one you just mentioned on the synergies. Can you give or maybe quantify which synergy you still target until 2020? And my second question would be on the organic growth. In Asia, we've only seen 5% this quarter. And you especially mentioned that China was quite good. Is there any other regions which -- where you had some problems.

[Peter Nilsson]

I mean, to talk about -- the first, the China growth. Ulf maybe you can share which growth did we had individually in China this quarter.

[Ulf Berghult, Chief Financial Officer]

And for total?

[Peter Nilsson]

Yes.

[Ulf Berghult, Chief Financial Officer]

For total group?

[Peter Nilsson]

Yes.

[Ulf Berghult, Chief Financial Officer]

We had -- in China, we had 14%.

[Peter Nilsson]

So 14% organic there, so that's continuing and the negative is more related to some individual territories.

[Ulf Berghult, Chief Financial Officer]

Yeah. Basically we then regard the China together -- with Asia together with Africa and Middle East. So we -- so basically Asia is growing -- we had some in quarters, in rest of the world as we say. But we had good growth in China and in Asia.

[Peter Nilsson]

So it's continuing. And then of course, about the synergies...

[Ulf Berghult, Chief Financial Officer]

The synergies is that we're -- so Peter then said earlier then that we are building -- we've done some CapEx and then also moving into some -- into construction tires and the building capacity. And those will then be -- and that is in mid of it.

[Peter Nilsson]

Can I just add also that -- Malte, you know this slide we showed in Ulf's package during the Capital Markets Day, there you have this phasing, and we are phasing according to plan basically.

[Ulf Berghult, Chief Financial Officer]

So there is some slide on that if you go back on the Capital Markets Day and that guidance still remains.

[Operator]

[Operator Instructions] We do appear to have no further questions at this time, so I will hand the conference back to you, sir.

[Peter Nilsson]

Okay, excellent. Thanks to all of you for your continued interest in Trelleborg. And as usual, Christofer is fully available for any kind of follow up questions. And then following that, I wish those of you going on to vacation, a nice vacation. And then meet all of you here early Autumn, I guess, in various forums. Take care and have a nice summer. Thank you.

[Operator]

Thank you for attending. You may now disconnect your lines. Thank you.