Good morning, ladies and gentlemen, and welcome to the PolyOne Corporation second quarter 2019 conference call. My name is Katherine, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will have a question and answer session at the end of the conference. As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Joe DeSalvo, Vice President, Treasurer, and Investor Relations. Please proceed.
Thank you, Katherine. Good morning, and welcome to everyone joining us on the call today. Before beginning, we would like to remind you that statements made during this conference call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties, any of which could cause actual results to differ materially from those expressed in or implied by the forward-looking statement. Some of these risks and uncertainties can be found in the company's filings with the Securities and Exchange Commission, as well as in today's press release. During the discussion today, the company will use both GAAP and non-GAAP financial measures.
Please refer to the earnings release posted on the PolyOne website, where the company describes the non-GAAP measures and provides a reconciliation from the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the second quarter of 2019 to the second quarter of 2018, unless otherwise stated. Joining me today on our call is our Chairman, President, and Chief Executive Officer, Bob Patterson, and Executive Vice President and Chief Financial Officer, Brad Richardson. Now I will turn the call over to Bob.
Well, thanks, Joe, and good morning. At $0.74, we finished the quarter at the high end of the range we communicated when we raised our projections in early June, and this represents a 4% increase over last year. Sequentially, margins expanded in all segments when compared to the first quarter of this year. This helped us to offset much of the weakness we continue to experience in certain end markets and regions, as well as unfavorable foreign exchange. As a result, we are now increasing our outlook for the balance of 2019, such that we expect EPS to expand 4%-6% for the full year. I'll have more to say on our outlook in a moment, but for now, we'll focus on current results and initiatives. Compared to the prior year's second quarter, our Engineered Materials segment led our performance with a 22% increase in operating income.
I am very pleased with the investments we have made in composites, wire and cable applications, which have helped us to drive this growth. As you know, this has been a significant area of focus for us as we build out a portfolio of more specialized materials and solutions in this segment. I am also pleased with the expansion of our sustainable solutions portfolio, which was up 7% year-to-date versus last year. These products are focused on reducing carbon footprint with lighter-weight materials, increasing the recyclability of packaging, and reducing water usage, to name a few of their benefits. Our efforts to build and leverage this portfolio with our customers cannot be overstated. We're playing a crucial role in the growing desire for brand owners and consumers to bring more sustainable products to market that create value for our planet and our performance.
At a time when global trade wars and political uncertainty are negatively impacting commerce and consumer confidence, sustainable solutions are expanding. This, of course, is in stark contrast to what we are seeing in China and Europe auto, for example, which were down 23% and 7% respectively in the second quarter. Building and construction in the U.S. was again weak compared to last year. In fact, overall macro conditions really haven't changed much since we spoke last in April, and looking back at our improved performance against what we expected at that time, the drivers largely fall into the self-help category. We have reduced costs, done a better job of pricing, and improved mix led by composites and growth in SEM. We also benefited this quarter from several years of focus on end market diversification.
Two of our key markets, healthcare and packaging, which now represent a combined 25% of our total company sales, were both up in the second quarter at 3% and 4% respectively. All of this helping to offset the demand weakness in other markets I just described. In addition, we also have the ability to pull out another self-help driver that you have listened to us describe often in the past, and that is our Lean Six Sigma team and culture. With over 4,100 associates who are trained in Lean principles, we are continually seeking and seizing opportunities for quality and efficiency improvements. At any given time, there are around 450 process improvement projects in flight, and those results, once completed, generate true bottom-line value. More recently, PolyOne customers are now directly benefiting as well.
Our Lean Six Sigma customer-first service offering has been extremely well-received since launching it in 2015, and to date, we have trained more than 180 customers in LSS methodology and project management, and they are now implementing process improvements in their own companies. LSS is no doubt an investment, and while we have been taking prudent actions to control spending in discretionary areas this year, we have not cut back on the strategic investments that enable our long-term strategy. We remain steadfast in our invest-to-grow approach and continue to pursue the organic improvements and technology advancements that allow us to best serve our customers. One of the most important measures we use for gauging our performance in this area is our vitality index, and that measures how much of our revenue is from products introduced in the last five years. For the second quarter, we remain world-class at 35%.
We have invested in innovation in our longer-term technology portfolio. You will see the parallels between our R&D focus on sustainable solutions and our vitality index will strengthen even further. We see this dynamic currently through our composites and barrier technology offerings, and going forward, new products that enable our customers' sustainability goals will increase in concert as well. Brad will now provide a segment review and go a little deeper on our performance for the second quarter. Brad?
Well, thank you, Bob, and good morning, everyone. Let me first start with our GAAP results. In the second quarter, we reported GAAP earnings per share of $0.54. Special items in the quarter resulted in a net after-tax charge of $15.2 million, compared to $5.29 million in the prior year. The increase is primarily related to the earn-out adjustment associated with the Fiber-Line acquisition, as the business performance in the first six months has been exceptional and exceeded our original expectations. Adjusted EPS for the quarter was $0.74, a significant sequential improvement from the first quarter, where we reported $0.64. This sequential growth in adjusted EPS was driven by a $9 million improvement in operating income on flat sales of approximately $900 million. As Bob mentioned, the second quarter performance was made possible by our ability to expand margins with better pricing, lower cost, and improved mix.
We're particularly pleased with our team's execution to navigate the macro external challenges that persist across most end markets and regions. Let me provide some additional perspective. Regionally, excluding acquisitions, sales in Europe were down 7.5% due to weaker foreign currencies, which negatively impacted sales 6% and softer end market demand in automotive and construction application. Asia sales were down 5% due to FX, and on an organic basis were flat, as weaker demand for automotive applications was offset by growth in the packaging end market from our barrier additive technologies. From a key end market perspective, transportation sales, which are primarily automotive-related, make up about 16% of PolyOne sales. This quarter, we experienced an 8% decline in global transportation sales, with North America and Europe down 7% and Asia down 23%. Weaker transportation sales impacted all four segments.
The construction end market accounts for about 10% of total company sales and was down 7% compared to the prior year's second quarter. These sales are primarily in North America and most significantly impacted our PP&S and Color segments. In reviewing our segments, as Bob mentioned, SEM led our performance, growing revenue and operating income 18% and 22% respectively. Organically, operating income increased 4%. The benefits of price, mix, and strong performance from composites and North America wire and cable sales were partially offset by negative FX and underlying weakness in Europe and Asia. Healthcare was also a bright spot, as SEM sales in this end market improved 24% in the second quarter. New closes in healthcare applications take significant time, dedication, and technical know-how. That's why they're specialty, and that's why customers are choosing PolyOne to collaborate with.
Last quarter, we closed a fantastic healthcare project with a longtime customer, a large global medical device manufacturer. Recall back in 2015, for those of you who were at our investor day, where we talked about our Versaflex TPE, providing material substitution of rubber in syringe stoppers. The performance attributes of TPEs are significant: safer, cleaner, more efficient by taking several steps out of the manufacturing process, and they also provide greater design freedom. Over the last four years, we have continued to see growth in applications providing an alternative to traditional materials in various medical applications, such as syringe stoppers. This past quarter, we did so with a new business close for a customer's product line, the first of four models, all of which will be launched by 2020 with an expected annual revenue of $10 million.
Looking at our Color segment, revenue and operating income were down 2% and 7% respectively, impacted by weaker foreign currencies. From an end market perspective, growth in packaging was more than offset by weaker automotive sales, primarily in Europe and Asia. Packaging continues to be a great story, as sales were up over 6% for the segment, driven by the continued market demand for our barrier additives. These sustainable solutions extend shelf life, improve recyclability, reduce material consumption, and allow for the design freedom made possible in PET bottles. As you know, barrier technology has been an area of strategic investment for us for years, and it continues to deliver returns. With regard to PP&S, their margins expanded 200 basis points sequentially from Q1.
This was driven by sales of our Geon brand formulations in North America, which modestly improved from the delayed and difficult start to the construction season in the first quarter. That being said, it remains down year-over-year. Additionally, the weak demand in automotive end market, which accounts for about 16% of PP&S's sales, also negatively impacted year-over-year results. Overall, this led to a 9% and 14% decline in sales and operating income compared to the prior year. Distribution performed very well given the backdrop of some of the end markets that we've just been discussing. Operating income was up 7% on operating margin improvement, driven by mix and pricing. The mix improvement was primarily related to gains in healthcare applications and outdoor high performance.
To summarize, sequential margin improvement in each segment demonstrates that the actions and projects we put in place have been effective in navigating the clearly and continued sluggish end markets and regional demand slowdown. At the same time, our prior and ongoing investments in sustainable solutions and specialty M&A continue, which is making important contributions to grow now and positioning us very well for the future. Before I hand the call back to Bob, I want to point out our recent share repurchase activity. We've said we will do so opportunistically as one of the ways we deploy cash to generate shareholder value. The second quarter certainly defined opportunistic from our perspective, as we bought back 1 million shares at an average price of $26.91 a share. Bob, I'll turn the call back to you.
Well, thanks, Brad. Certainly some of your last points on where we are investing are important. With respect to barrier technologies and composites, these are two sustainable solutions that have been a consistent theme in our communication, and they have been consistently growing as a result of these prior investments. Last quarter on earnings call, we spent some time discussing Fiber-Line solutions in detail. We discussed both the near-term demand and the tremendous long-term opportunity that 5G and other fiber optic cable requirements expand. This morning, I'd like to highlight another important area where composites are currently growing and will continue to play in the product design for the foreseeable future, and that's in reinforcement applications. We often talk about composites replacing metal, glass, or wood, but many times they're used to reinforce these materials as well.
By applying a thin composite tape to reinforce an underlying base material, we can improve the strength of that material by up to 400%, which takes the weight out. It's taken us a few years to get here, but we are finally realizing multiple opportunities in transportation as well as in recreational equipment. Overall, composites reached a record level of profitability at 10% return on sales. Those sustainability considerations are increasingly important. Just like our customers, PolyOne is taking a proactive role to both design and leverage the inherent sustainable benefits that plastics can have on the planet, as well as our performance. Through our product portfolio and operations, we take pride in our contributions to sustainability, and hopefully we can begin to shift the narrative. Plastics are sustainable, but plastic waste is not.
That's why we joined as a founding member of the Alliance to End Plastic Waste earlier this year, along with other leaders in material supply, as well as several of our large global customers and partners. Earlier this month, I attended the Alliance Board first CEO meeting, and I couldn't be more proud of the single voice and commitment underway to reduce plastic waste through four pillars of focus, infrastructure development to collect and manage waste and increase recycling, especially in developing countries where the need is greatest. Second is innovation to advance and scale new technologies that minimize waste and make recycling and recovering plastics easier. Third, education and engagement of governments at all levels, businesses, and communities to mobilize action.
Fourth and finally, cleanup of concentrated areas of plastic waste already in the environment, particularly major rivers that carry vast amounts of land-based plastic waste to the ocean. Collectively, as an alliance and individually in each of our company's day-to-day endeavors, we are working to address the waste problem. At the same time, we are educating consumers and companies on the important role plastics play in these solutions for many years to come. We expect that this will bode very well for PolyOne as a specialty provider focused on sustainable solutions. As our industry collaborates to set this record straight on the importance of plastics, and as end consumers understand the inherent and sustainability benefits, this will ultimately lead to growth for us. This is one of the reasons why I have an increased confidence in our ability to deliver earnings growth this year.
When we started the call today, we initially commented on the better-than-expected near-term results with where our current quarter ended at $0.74. We are now raising our outlook for the full year to 4%-6% growth over last year from an adjusted EPS perspective. I think this is saying a lot. Market conditions are not great right now. Of course, this assumption of ours assumes that they don't get any worse. As we already described, many end markets such as China and Europe Auto are down substantially. U.S. construction has had a slow start to the year. In addition, the world continues to trade cautiously as a result of global trade fears. No one seems to be able to predict what will happen next. At times like this, we have to focus on what we can control.
With this in mind, I am pleased with what we have accomplished so far this year. The self-help initiatives we discussed throughout our call today have made a difference and will do so for the balance of the year. We also have to look past 2019 and continue to invest in innovation, commercial resources, and specialty acquisitions to drive long-term growth. In short, we are managing for today while leading for tomorrow. That concludes our prepared remarks for today. I'd like to now open the call up for questions.
The call lines are now open. As a reminder, you will need to press star one to ask a question. Please limit your questions to one question and one follow-up. Our first one comes from Mike Harrison with Seaport Global. Your line is open.
Hi, good morning.
Good morning. Hey, Mike.
Was wondering, regarding some of the cost actions that you've taken, were there specific segments that were receiving greater focus? Are these actions complete at this point, or are there more to come? I think you commented that you're continuing to invest in commercial resources, but just maybe comment on how you balance trying to take out costs with how you want to continue focusing on organic growth?
Yeah. The actions are completed, Mike, and they really were across all segments as well as at corporate. With respect to your last question, to put things in perspective, sales headcount this quarter was actually 3% higher than it was in the year-ago second quarter. That balance really comes in where we're controlling discretionary costs, back office resources across the company as a whole. That is, of course, always a challenge with respect to doing those actions and trying to invest for the future. I think we've found the right balance.
All right. In terms of the strength that you're seeing in engineered materials, just wondering how sustainable you feel like that could be given the momentum that you're seeing in certain areas, of course, under the backdrop of some macro uncertainty and underlying macro weakness.
Yeah. I think we're right in the middle of macroeconomic weakness. To see the growth that we have gives me a lot of confidence in the underlying portfolio and performance of the segment. My expectation is that we will see some traditional seasonality in this business in the third and fourth quarter, with the second being our strongest. If I put that in the context of how well we're doing versus year-over-year performance, I feel very good about the sustainability of their results.
All right. Thanks very much.
Yep. Thanks, Mike.
Thank you. Our next question comes from Mike Sison with KeyBanc. Your line is open.
Hey, guys.
Hey, Mike.
Nice quarter there. If you think about the second half, Bob, you're looking for earnings growth to accelerate versus the first half. As you noted, it doesn't seem like demand's getting much better. Can you maybe walk us through some of the drivers of the improved year-over-year earnings growth in the second half?
I think first of all, Mike, some of it is obviously just relative to where comparable results were in the prior year. If you recall from our third quarter discussion last year, September was one of the worst months we've ever had, and that really led to a really difficult fourth quarter. That plays, I think, a role, Mike, in terms of how the year shapes up and how that earnings growth takes place over the back half of the year. We obviously knew that when we talked a quarter ago. What's different now, though, is really, I think, our ability to deliver on the cost reductions, the pricing improvement, and margin expansions. Lastly, really just the underlying performance in engineered materials. That's what really gives me confidence. Again, that assumes that things don't get any worse, and that may be a big assumption.
With that in mind, that's where we come up with that full-year estimated EPS growth.
Got it. Composite seems to be gaining a lot of momentum here. Can you maybe talk about where you're at in terms of profitability and size of the business and maybe give us some feel of how fast that business is growing year-over-year?
Yeah. In total, when I combine Fiber-Line with what PolyOne already had in the composite space, which you know we have put together over the last four or so years through a series of acquisitions. Composites is getting close to being about a $200 million business. That's on an annual basis. As you know, we invested quite heavily in thermoplastic composites over the last few years, and that is just now starting to turn a profit. When you put the whole thing together, we are now well into the black. Really appreciate where we are from a composites perspective. Admit that Fiber-Line is a big part of that, which was a recent acquisition at the beginning of this year. Their results are really doing better than we expected.
At the time we did the deal, Fiber-Line was doing about $12 million of EBITDA and is exceeding that this year.
Great. Thanks, Bob.
Thank you. Our next question comes from Frank Mitsch with Fermium Research. Your line is open.
Hi, guys. It's Aziza on for Frank.
Hi, Aziza.
Hi. First off on the buyback, I just wanted to get your thoughts on the balance of the year and if any level of buyback is embedded in that 4%-6% EPS growth forecast.
We typically don't ever give any projections on what our plans are with respect to the share buybacks, don't intend to change that right now. It may be something that helps us get to a higher level of performance if we find that it's opportunistic to keep doing so. At this point, I think with the margin improvement, cost reductions, and performance in SCM, we feel comfortable getting inside that range with the shares that we've bought back already this year. Hopefully that helps put that in perspective for the second half.
Okay. On the M&A environment, any thoughts on possible acquisitions? Are composites still the favorite sector?
We're always looking and certainly looking at, it seems like lots of stuff. I would absolutely love to build out the composites portfolio in a faster way. As you know, Chris Pederson joined us in November of last year, who has a long history and background in composites. I think with him here as part of our team, that's only going to help us get that done faster. Certainly an area of focus. You're spot on in that regard.
Okay. Thank you.
Thank you. Our next question comes from Colin Rusch with Oppenheimer. Your line is open.
Thanks so much. Can you talk a little bit about the opportunities for margin expansion, and particularly gross margin expansion on the Specialty Engineered Materials and how you're balancing that with your growth plans?
I would say, look, first of all, with respect to the expectations that we have, if you just look at where we are in the second quarter column relative to what we did in the first quarter. In many respects, for the company as a whole, sales were effectively flat, and we did see margin expansion. Across the board, it really was the categories that I've already mentioned. We'll continue to see the benefit of the cost reductions in the second half of the year. I do think that generally just on our own better pricing and how we have been managing things like freight costs, implementing surcharges, et cetera, and being more tactical in that regard also remain an opportunity. That I think really kind of summarizes some of the tactical stuff.
When it just comes back to what we do and how we do that with our specialty materials, I think we have the opportunity for better margins and pricing improvement. That's not any one particular move, it's just how we actually manage the portfolio of a whole. It's kind of hard to describe really in an elevator speech how that could work for color and engineered materials, but that's where the focus is.
Okay. That's helpful. Just shifting gears on the distribution business. Is there some growth there, like meaningful growth there? Obviously, you're kind of running similar run rate to the second half of last year and here in the first half. Is there something more that you guys can do there? Is that an opportunity or should we be thinking about that as kind of a flattish situation?
Well, if you look at the second quarter, sales were actually down versus last year, but operating income was up. I give the team a lot of credit for managing pricing, doing the things that I just talked about around discipline and transactional basis, but also managing inventory levels, and that can play a huge role in the profitability of a distribution business in any one quarter. Our operating income growth really comes as a composite, if you will, of all those things. Underlying demand right now is not great. Even in North America and where we're seeing things. That's impacting distribution. In the short term, just based on what we're seeing from a macro standpoint, I don't have expectations for a high level of growth in distribution.
Longer term, of course, there remains a lot of opportunity to expand this business with more commercial resources and investment. This is a business that can be influenced by having more sales and marketing resources. We've seen it year after year, and that's one of the reasons why I said our sales force is still up 3% on a headcount basis this year.
Okay. Thanks so much, guys.
Thank you. Our next question comes from Ben Kallo with Baird. Your line is open.
Hey, thanks.
Hey, Ben.
Hey, guys. Just back on the question around acquisitions. Maybe Brad, can you just kind of talk us through the levers you have for liquidity, and kind of the deal size that you're looking at and where your leverage ratio targets would get out of hand?
Yeah. Happy to do that. We had, as you'll see in our Q, our liquidity as a corporation was right at about $400 million as we finished out the second quarter. A very strong position in our net debt to EBITDA was a little over three. That's been coming down. It went up a little bit because of the Fiber-Line acquisition. That'll continue to trend down throughout the year as we generate cash. I don't think our view on acquisition have changed. We've said, look, for the right opportunity, we'll go up over three, maybe even the upper band of three, but we have to have a clear line of sight in order to be able to get back below three in an 18 to 24-month period. Our financial framework in terms of how we look at this hasn't changed.
Great. Bob, you talked about the integration of some of the stuff you've done in Specialty Engineered Materials. Could you talk about the IQAP acquisition, Mesa, and just how that's been performing?
Yep. Actually, we've done a number of deals in the last few years in the Color area. Mesa, we also picked up the Rutland Inks business, and then more recently, IQAP, based in Spain. All three of those businesses are performing better than they had in the year prior to us acquiring them. They've done a great job of really becoming part of PolyOne and fitting well with our culture. That's so important in the first year. Everyone has had an improved safety record. We've retained all of our customers, retained all of our key employees, and seeing very good integration to date. I'm very pleased with those three acquisitions, which really kind of accounts for the last couple of years of activity in Color. Mesa itself has brought us some interesting technology in one or two markets where we didn't have much of a presence before.
We're excited about that too.
Finally, one of your competitors reported, I think yesterday or day before, and their EM business, I think, was a little weaker than expected. Can you just kind of walk us through maybe the differences in what you're seeing in that business and the strength in your business? Thanks.
I'm not sure I can comment on anyone else's performance, but from our perspective, the engineered materials business did see weakness in some of the areas that really are getting a lot of headline attention right now, like China and Europe, and specifically, in transportation applications. That's true. There's an underlying macro effect there. What has really made a difference for us in our results this year has been that we have obviously added Fiber-Line. The growth in fiber optic cable, and specifically that longer term pull for 5G is just marching forward, right? It hasn't been influenced yet, really by any of this macroeconomic noise, so that's a good guy. The composite wins. I think that there's a lot to be said for just winning new business out there, regardless of what's going on in the economy.
I think those are really two of the big reasons for the growth. It's really around 5G, fiber optic cable, and wire and cable applications, as well as composites in general, Ben, that probably is the biggest differentiator.
Great. Thanks, guys.
Okay, Ben.
Thank you. Next we have Dmitry Silversteyn with Buckingham Research. Your line is open.
Good morning, guys. Thanks for taking my call. Congratulations on a solid quarter. A couple of questions. First of all, in terms of your raw material environment, it should be getting better for you, I guess, given particularly the recent declines in some of the upstream chemicals. Can you talk about what you see happening in the second half of the year? Not just in the sort of the commodity plastics area, but the other stuff that you buy as well, the pigments, the TiO2, whatever it may be. How are you looking at your basket of raw material costs in the second half of the year?
Right now, what I would say, Dmitry, is the basket's probably moderated from a year-over-year standpoint. There really are probably a couple of things moving in opposite directions. A number of underlying base resins have come down slightly versus the prior year. Where that's been offset in terms of our total spend and impact has been around some of the special sauce ingredients, if you will, like dye stuffs for our color segment. There was a fire and explosion at a plant in China earlier this year that has had a ripple effect through anyone who is buying those materials, and so that has actually skyrocketed. As I stand here right now, I'd say, well, some things have gone perhaps favorably, but we've had some of the other special sauce items that have gone against us.
I give the team credit for managing through both of those scenarios and doing well because we are getting margin expansion. That's kind of how I see things right now. There's nothing that I would say that's different, Dmitry, about how the second half plays out versus what we just saw in the second quarter, if that helps.
Okay, that does help. Thanks, Bob. As a follow-up on PP&S business. You spent several years sort of moving it away from the more commodity construction type businesses and more into medical and other stuff, and that was sort of driving your margin expansion. We get into this construction market slowdown in North America, and it seems like PP&S is sort of behaving like it behaved prior to your making this move. Can you kind of size for us the relative sizes of the business in PP&S that's still going into construction and more traditional applications versus the repositioning that you've done into medical and some of the higher growth and more stable markets?
Yeah, I can. Look, I'd say that this business still does have a concentration of sales in those two end markets, really building and construction as well as transportation here in the U.S. Building construction, I think, is right around 25%-30%. Transportation's around 17%, 18%, high teens, to put things in perspective. While we're on that word perspective, if you go back in time and recall, there was a time when this business was almost entirely housing and auto, right? We've really come a long way from where we were, and yet we're feeling the impact of slower conditions in those two end markets we just described. I can tell you, if it hadn't been for the work that we've done over the last decade, it'd be a lot worse.
We have to take that into account that, look, we're still connected to those two industries, and when they're down, we'll feel it, but nowhere near to the extent that we would have, say, seven or eight years ago.
Okay, Bob, that's helpful. I appreciate that perspective. It does look like over 50% of your sales are outside of the kind of the old traditional markets for this business.
Correct.
Okay. Thank you.
Yep.
Thank you. Our next question comes from Jim Sheehan with SunTrust. Your line is open.
Thanks. Good morning. Could you provide a little more detail on how you're reviewing the 5G opportunity? Just how large is that addressable market, and how quickly do you expect it to ramp?
Yeah. I think, Well, first of all, 5G is going to take place. There's going to be global pull for it. I would say that, I probably talked about this on our last call, my recent visit to China, where you can just see towers going up on every other corner and block. They're going to be a leader in terms of getting out there and actually getting an installed base. I think that what you'll see is actually something that probably looks similar to how other generations have expanded. Even if you look at 4G right now or predecessor technologies, they don't encompass the entire United States, if I pick the U.S., for example, right? There's still plenty of places that don't have access to the latest technology.
One of the things that I like most about 5G is that this is a multi-year growth opportunity for this business and for our segment. It's not something that's going to happen in one year, and I really believe it will take place over the course of 12 or 15 years, but be a very solid and steady double-digit grower for us. That's how to put that in perspective, notwithstanding just kind of all the noise around Huawei and all that stuff that's going on right now. Technology's going to move forward, right? People are going to put this in if they perceive it's better, and so I don't see that changing as time moves on.
Thanks. Regarding Performance Products and Solutions, how are you evaluating your strategic options for that business at this point in time?
I don't think there's anything different to say about that with respect to how we think about our portfolio. No new news.
On that segment, would you say that second quarter represented just a catch up from maybe business that was lost due to weather in the first quarter? How sustainable are your second quarter results in PP&S?
First of all, yeah, you're right in pointing out that the first quarter was very difficult just in terms of how things started out From a weather impact in the construction space. I think there's some pickup. Year-over-year, I'd still say construction is down. As a result of that, you see the PP&S segment impacted by it, but much better than what we saw in the first quarter, and I believe that's sustainable. My sense is, if you just want to put things into perspective here for the balance of the year, you'll see some traditional seasonality with respect to Q3 and Q4, but I'm not expecting else beyond that. My view where we're at is quite sustainable.
Thank you.
Thank you. Our next question comes from Kevin Hocevar with Northcoast Research. Your line is open.
Hey, good morning, everybody. A nice quarter.
Hi, Kevin.
Brad, the cash flow is pretty strong in the quarter, and in particular, like working capital. You control that quite well. Wondering what drove that, and what type of cash generation do you think you can realize this year?
Well, Kevin, as you know, we continue to have a laser line of sight focus on our working capital. I think we're best in class in terms of our working capital as a % of revenue, and the organization clearly is focused on that. Look, we're on track. I said last quarter, and I feel very good about our ability to generate $200 million of free cash flow this year, and that's after funding our capital program. Again, it's a combination of obviously the earnings performance, but then the working capital to drive that $200 million of free cash flow.
Okay, great. Bob, did I hear you right there? Did you say that composites had a 10% margin now? If so, if my memory serves me right, that seems like a nice improvement from where it was a year or two years ago. Maybe correct me if I'm wrong anywhere in there, but if I'm right, what's driving that nice improvement? As it's growing, you're just getting nice leverage to the bottom line. Fiber-Line, is that adding to the margin profile? Maybe just help me understand how that's improved, and how should we think of the margins there over the next two, three years?
Yeah. Well, as you know, we don't really get into specific product line detail for obvious reasons. I can tell you that certainly Fiber-Line helped with that margin improvement as we added it to our portfolio this year. If you look at the legacy businesses that we have in composites, Kevin, you know for probably two years, it was running on a negative EBIT basis, just based on the level of investment we had in it, and those have turned positive in the first half of this year. While those legacy businesses may be in the low single-digit type territory, we're seeing really good growth. Particularly around, today on the call, I talked about these reinforcement applications. Many of these are wins that have taken us three years or so to start to actually bring into the portfolio.
I feel very good about our longer-term projections with respect to getting that business up into the double digits here. It's not there yet, but on its way.
Okay, great. Thank you very much.
Thank you. Our next question comes from Laurence Alexander with Jefferies. Your line is open.
Hi, Adam Bubes on for Laurence today. I was wondering, firstly, have proprietary products seen volumes swing more or less than the total business?
Yeah, I think that it really does depend by end market. It's difficult to answer that question quickly, because I'd say, well, I can look into transportation and say a large chunk of that is specified material and proprietary in nature, but if they're making less autos, it's just down. That doesn't really say anything about the underlying technology of us and whether or not proprietary or standard is moving that. It's difficult to bifurcate that impact. Where I think, though, that we have seen the greatest impact from proprietary solutions has been in these sustainable applications, particularly in barrier properties, packaging, and those are certainly some of the best performing products that we have this year. That's the best way that I can answer that, and don't really have a pie chart that would sort of break things down by proprietary versus not so.
Okay, great. That's helpful. The last question: in a situation or hypothetical world where demand were to accelerate into next year, then how do you start to think about incremental margins?
Well, I really like that hypothetical view you present. Hopefully it comes to fruition. I think that one of the things that I think is always helpful for people to think about how margins evolve in our business is just to look at the seasonality across quarters. It varies by segment. If you look at the fourth quarter, which is traditionally our weakest of the year, then compare it to the first or second, it can give you a better sense of how margins can be influenced by simply top-line growth. That's a good starting point. Certainly, I think there is more going on than that right now with respect to better pricing and cost reductions and mix improvement that I think can help us do even better than that.
If you go back to our last Investor Day, what we said about margin expansion is that is going to be heavily driven by sales growth in the long term. Obviously, what we're experiencing right now is some benefit from these other actions. I think that's a good way to do some of that homework and maybe put that into perspective on what happens when the market comes roaring back.
Okay, great. Thanks, guys.
Thank you. Our next question comes from Rosemarie Morbelli with G.research. Your line is open.
Thank you. Good morning, everyone.
Good morning.
Good morning.
I was wondering if you could give us a better feel for what contributed to Fiber-Line's better expectation than you previously thought when you bought it?
Really, I can't get into the intricacies, if you will, of the earn-out adjustment that Brad talked about and we disclosed. At the time of a deal, you just have to make your best estimate, really about the near-term performance and how an earn-out will ultimately get paid out when it does. Look, they're having a great year. It is entirely driven by the fiber optic wire cable applications. If I were to cite one particular factor that was better than we expected, it's probably that underlying demand in that area really hasn't been impacted by some of all this other macroeconomic noise that's going on. That doesn't mean that it can't, but it hasn't been to date, and so that's probably the single greatest factor.
Okay, thanks. Then you keep mentioning seasonality, but construction, given the slow start of the year, should still show continuing improvement in the third quarter versus the second quarter. Unless, I'm totally wrong, of course. Wouldn't that be the case this year? I mean, the third quarter is still a construction seasonality, strong seasonality type of environment. Which other areas are you being impacted in the third quarter?
Look, I would tell you that over the last 11 years of my time here , at PolyOne, if I just look at construction-related business, the second quarter is the strongest, third quarter is the second strongest, first, fourth. It's two, three, one, four. I don't expect that to change. Given how slow things started out in the first part of this year, you might conclude that more activity takes place in Q3. That's possible, At the same time, it could just be that there's a delay in projects and that gets pushed out to Q4 next year. I think we really need to see how that happens. Potentially, there could be a little less seasonality than what we've seen because of that catch-up effect, I haven't seen that yet.
Okay. In your projections, you are anticipating the same seasonality as in the past?
Yeah, I am. I would say that if you went back to where we were at the end of the first quarter and some of the comments we made at that time, my expectations for the performance of PP&S segment is better now than it was then. That's a good thing, but I think that's captured already in sort of our perspective on EPS growth for the company for the full year.
Thanks. Just quickly for Brad, I didn't catch the number of shares you bought back either year to date or in the second quarter, Brad. If you could give me that number.
Yeah, absolutely. In the second quarter, we bought back 1 million shares at an average price of $26.91.
Do you mind giving me the year to date?
That's the same.
Oh, okay.
We didn't buy shares in the first quarter.
All right, great. Thank you.
Bye. Well, thanks, Rosemarie, and thanks to everyone who joined us on the call today. We appreciate your time and attention this morning and your continued investment interest in PolyOne. Look forward to updating you on our results at the conclusion of our third quarter. Take care.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.