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Operator
Welcome to Schweitzer-Mauduit International's Second Quarter Earnings Conference Call. Hosting the call today from Schweitzer-Mauduit International is Mr. Frederic Villoutreix, Chief Executive Officer. He's joined by Pete Thompson, EVP, Finance and Strategy, and Scott Humphrey, Corporate Treasury Director.
30 PM Eastern Daylight Time. The dial-in number is 800-642-1687 and enter pin number 80343605. At this time, all participants have been placed in a listen-only mode and the floor will open for questions following the prepared remarks. (Operator Instructions)
It is now my pleasure to turn the floor over to Mr. Scott Humphrey. Sir, you may begin.
Scott Humphrey - Corporate Treasury Director
Thank you, Wes. Good morning, I'm Scott Humphrey, Corporate Treasury Director at Schweitzer-Mauduit International. Thank you for joining us to discuss Schweitzer-Mauduit's second quarter 2010 earnings results. Frederic will discuss the key factors impacting our business. Pete will then provide additional detail related to our second quarter results and outlook. We will then take questions.
Before we begin, I'd like to remind you that the comments included in today's conference call constitute forward-looking statements. Actual results may differ materially from the results suggested by these comments for a number of reasons which are discussed in more detail in the Company's Securities and Exchange Commission filings including our annual report on Form 10K.
Certain financial measures discussed during this call exclude restructuring expenses and are therefore non-GAAP financial measures. A slide presentation accompanies our formal remarks, a copy of which can be found under the Investor Relations portion of our website, or you can follow along on the Webcast. With that, I will turn it over to Frederic.
Frederic Villoutreix - CEO
Thank you, Scott. Good morning, everyone. During today's call I will share some comments about our second quarter performance. I will also cover a working agenda for 2010 and our priorities moving forward, including updates on the progress of our expansion plans in Europe and Asia. Pete will then take you through a more detailed review of our financial results and guidance.
Slide four summarizes our financial results for the quarter and year to date. As you can see from the press release issued yesterday, second quarter results were mixed. Despite the challenging economic environments, we delivered solid top line growth on paper products, both conventional and lower ignition propensity or LIP cigarette papers, enough to offset the $6.9 million sales decrease and our Malaucene facility which is no longer operating.
The sales mix was less favorable than previous quarters as a result of a lower rate of shipments of reconstituted tobacco leaf or RTL due to timing of customer orders. Pulp prices and yield currency strength relative to the dollar trended worse than expected for the quarter and added significant pressure to our earnings in spite of an accelerated rate of cost savings. While we expect wood pulp and currency translation to remain headwinds in the months to come, the situation has stabilized. We've projected pulp prices to moderate in the latter part of the year.
All in all, second quarter adjusted earnings per share or $0.93 fell short of our expectations; however, the underlying fundamentals remain strong as reflected in our continued generation of cash and I fully expect our rate of earnings to increase during the balance of the year. Next I will adjust the key operational developments that impacted the second quarter and Pete will further review the financial results shortly.
Moving to slide five, the second quarter presented several business challenges, both external and internal which impacted our results; however, none of these factors signal a fundamental change in our business strategy or future prospects, especially concerning the expected benefit from our continuing initiatives to grow our high value LIP cigarette paper and RTL franchises.
Several of our major RTL customers are taking action to reduce their inventories of RTL to adjust to continued declines in cigarette demand, primarily in Western Europe. This manifested itself in a sharp decline in second quarter RTL sales and production volume, especially relative to the first quarter when we outpaced our customers' needs.
As our customers' action became clearer during the second quarter, we quickly responded by advancing planned downtime on the smallest of our RTL facilities in France from the third quarter to the second quarter. We will return to normal shipment patterns in September and still expect full year revenue growth and (inaudible) to be in line with our original expectations for 2010 including mid single digit revenue growth.
Moving LIP cigarette paper, we remain pleased with the solid growth of this product segment which posted a 48% volume gain over the prior year quarter. Our Chinese paper joint venture continues to perform well. Recent share gains in the premium cigarette segment are encouraging and position the business well for further earnings growth in the second half of the year.
Our operational excellence program continues to gain traction and contributed to a total benefit of $8.5 million in cost savings and lower manufacturing costs this quarter including the benefits of restructuring actions. Our performance would have been even stronger if it were not for a one-off operational issue at our St. Girons mill in France, since corrected, but caused us to shut down the pulp mill for six weeks while resourcing flax pulp at a much higher price point on the open markets.
Turning to slide six, we continue to work hard to advance four of our growth initiatives. Notably, we continue to expect and EU LIP test to be approved for publication in August-September 2010 with country by country enforcement. And therefore with LIP cigarette paper, the amount increased across the EU progressively during 2011 to full implementation by the beginning of 2012. As a result we are proceeding at a fast pace in establishing our EU LIP manufacturing footprint and to negotiate supply terms with customers. In addition to the extensive construction activity for our new RTL facility in the Philippines, we are advancing efforts to develop new sources of customer demand for RTL in Asia.
Now a word on our restructuring program on slide seven. The complete closure of the Malaucene facility is taking longer than expected due to issues related to the dismissal of 25 protected employees. Protected employees are union leaders and other employee representatives. Under French law, dismissal of such protected personnel requires prior authorization from the works inspectorate which we have not obtained yet. The situation has resulted in further operating expenses and severance related restructuring expenses than originally planned; however, we are making progress in addressing the final administrative issues and expect resolution this year.
Similarly, we're progressing with restructuring activity at our Brittany, France paper mill, PDM, and expect to achieve the planned headcount reduction and associated savings by year end. One area where the execution of restructuring actions has not occurred as smoothly as planned is the transfer of flax based paper production from our Spotswood, New Jersey facility to France. We have experienced operational issues primarily impacting efficiency and further work is required to achieve expected performance levels. Now we continue to make progress addressing these issues and expect resolution during the third quarter.
To summarize, restructuring actions coupled with ongoing operational excellence are yielding significant year over year cost improvements but have fallen short of the full level we expected and we are redoubling our efforts to address these short falls.
Let me now wrap up with our priorities for the balance of the year on slide eight. Overall we continue to make good progress on our action agenda. It is a complex undertaking with a lot of moving parts. The temporary setback we experienced in the second quarter should be put into perspective considering the solid execution we demonstrated during the previous quarters. Our teams are working diligently to carry out our plans with an acute focus on the quality of execution wherever it is advancing, our expansion plans in Asia for RTL products or in Europe with LIP or securing customer agreements or LIP legislation taking effect in Europe starting next year, we're delivering earnings growth with our high value products and our Chinese paper joint venture as it further strengthens its position in the premium cigarette markets.
We're mitigating the impact of pulp price and Euro translation by accelerating the deployment of our operational excellence program and other cost reduction measures. Last, completing the restructuring measures in France and the US and addressing operational issues we faced in 2010. We still have a lot of work to do. I am certain we are doing the right things with what is under our control. We are also focusing on the right areas to build new positions of strengths and I remain confident that we are on a solid trajectory and we continue to deliver earnings improvement in 2010.
With that, I will turn the call over to Pete to cover financial results and outlook.
Pete Thompson - EVP, Finance and Strategy
Thank you, Frederic. I will now review our results for the quarter and update our financial guidance. On slide ten, net sales as noted in our earlier financial highlights slide were essentially flat year over year for the second quarter. Excluding currency impacts and the idle Malaucene, France finished tipping paper facility, net sales increased 3.9% for the quarter. This is largely on the strength of full LIP sales in the North American market coupled with good volume performance in our global based paper business.
The pictures of our sales volume trend is mixed for the second quarter with continued growth in total SWM sales volume but a decline in high value product sales volume due to the RTL customer inventory declines Frederic mentioned earlier more than offsetting LIP unit sales volume growth of 48%.
The year to date growth rate for high value products is more representative of ongoing results as it cancels out the quarter to quarter variation in RTL customer orders and reveals that both our high value and tobacco papers businesses enjoy increased sales volume to date in 2010. Our major customers reported shipments both US and multinational were mixed with declines as expected in shipments to North America and Western Europe and growth in other markets. Reported China cigarette shipments grew over 5% through the first quarter of 2010.
In operating profit comparisons, the $13.1 million or 27% increasing operating profit through the first half of 2010 reflects costs reduction efforts including the benefit of restructuring actions and despite and accelerating rate of inflationary increases primarily from higher wood pulp prices. The rate of year over year operating profit improvement slowed during the second quarter to $2.3 million primarily due to external factors. Improvement in cost performance benefited year over year operating profit comparisons by $8.5 million for the second quarter with $7.8 million of this gain in our French business segment.
This level of cost performance was despite the impact of lower RTL production volumes, operational issues associated with a pulp mill mechanical failure that's now fixed at one of our French paper mills and transition issues associated with the transfer of flax base paper sourcing from the US to France that has impacted operational efficiency. The increased level of operational cost improvement was largely offset during the second quarter by sharply higher wood pulp prices, a less favorable product mix, and unfavorable currency impacts including the US dollar strengthening by 8.8% versus the prior year.
North American NBSK wood pulp prices averaged $990 per metric ton for the second quarter or 54% above prior year levels. Both the US dollar at $1.22 versus the Euro late in the second quarter and NBSK prices reached levels worse than the expected ranges noted during our first quarter earnings call.
Earnings per share excluding restructuring and impairment expenses for the second quarter totaled $0.93, below both the prior year quarter and the first quarter of 2010. Year to date EPS now stands at $2.12, up 12% despite $0.40 in dilution and inline with our expectations to deliver significant earnings growth as a result of our business strategies.
In addition to the operating profit factors previously discussed, the year over year EPS comparison for the second quarter benefited from our China paper JV, CTM, generating net income versus a net loss in the prior year offset by currency related impacts on favorably impacting other expense and causing a portion of the higher reported effective income tax rate.
It's important to note that the sequential decline in EPS from the first quarter level of $1.19 to the second quarter's $0.93 mark in part reflects the shift in customers' RTL order patterns between quarters in addition to the second quarter's sharply higher pulp prices and unfavorable currency impacts. We estimate the shift in customer's RTL order patterns effect inter-quarter results by approximately $0.10 per share.
Adjusted EBITDA grew by 7% during the second quarter versus the prior year and totaled $155.5 million for the last 12 months. Due to continued strong generation of cash flow from operations that totaled $74.7 million through the first half of 2010 caused by continued higher levels of net income and a $11.9 million reduction in working capital, we have now grown cash net of debt to $45.1 million. Borrowing activities on our credit facility continues primarily to manage certain foreign currency balance sheet exposures. We expect to reduce cash on hand during the balance of 2010 as we continue our significant strategic investment in the Philippines and Europe.
We continue to expect 2010 cash needs to be significant, ranging from $145 million to $180 million with one half due to the noted strategic investments. We continue to tightly control maintenance capital spending. Other cash needs remain sizable, especially restructuring related cash severance amounts which are expected to accelerate through the balance of this year as we conclude actions underway. Cash needs include estimates for potential requirements, notably any equity investment for an RTL JV in China which is dependent upon timing of an agreement to proceed. We expect to be able to readily manage opportunistic cash requirements such as for a China RTL JV or other purposes should they arise.
Our 12 month return on invested capital remains at a historic high level of 16.8% reflecting the sustained shift in our business to higher profitability products that leverage returns on our existing asset base, especially the growth of LIP cigarette paper. We now project earnings per share excluding restructuring and impairment expenses to be at least $4.25. We are lowering our projected earnings for 2010 to reflect both the actual results achieved to date which are below the full year pace previously expected and the continued external and internal business uncertainties that we face. Although recent trends in both pulp prices and foreign currency relationships are improving in terms of our earnings, we simply face too much uncertainty to be more bullish in our near-term outlook.
This said, we reiterate our confidence in the projections for the present strategy of SWM to generate a sustained increase in earnings in the upcoming years as we bring to fruition our strategic investments and high value LIP and RTL products.
That concludes our remarks. Wes, please open the lines for questions.
Operator
(Operator Instructions) Our first question is coming from Bill Chappell of SunTrust.
Bill Chappell - Analyst
Good morning.
Pete Thompson - EVP, Finance and Strategy
Good morning, Bill.
Bill Chappell - Analyst
I guess first, this is a hindsight is 20-20 type question, but I'm just trying to understand both pulp and currency and the changes since you last talked in early May. I guess the question is did you make a mistake in not being more conservative in guidance back then? And what gives you comfort that's $4.25 or at least $4.25 is conservative going forward?
Pete Thompson - EVP, Finance and Strategy
The answer on did we make a mistake in guidance--we were wrong in guidance so I guess we were mistaken in that regard. But the specific answer is that both on pulp and currency, we had given an expected range on pulp, if you recall, we said we could absorb from the first quarter average a 5% to 10% further increase which would equate to $925 to $975 per metric ton for northern bleached soft wood which is a grade of pulp. The price of northern bleached soft wood today that we're consuming right now is $1,020 a metric ton. We blew through that range and that's why it hurt us in terms of actual results and our now current expectations.
The key on pulp in terms of our current guidance is how fast does it turn? We've got two issues on that standpoint. One is the uncertainty of how fast it'll turn. It's very, very difficult to project accurately a price for a commodity like pulp but then the other practical issue is even as it turns as we're already now well into the third quarter, we have to consume out of our inventory the high priced pulp that we've already bought and we try to anticipate price declines so we don't have as much inventory so we can turn that higher cost product quicker but it still takes time to work it back through and see it show up as a lower cost in our P&L. So, our current guidance reflects that we blew through the previous range on pulp and we're going to be consuming pulp at that high end rate for awhile longer here before it starts to turn and then the biggest thing is that would be either good or bad to the $4.25 is what happens with pulp going forward and what's the pace of the decline?
Very similar situation on currency. On currency we have said quite specifically because of the exposure to the Euro that we thought at least $4.60 was safe in a range of $1.30 to $1.35 to the Euro and we blew through that on the low end. Now we're coming back to the $1.30 mark but it's just happening and the damage has been done for the second quarter. So, on that one too, in hindsight, no, we did not predict currency and no apologies. Going forward, we're uncertain about what's going to happen. Though it's gotten back to $1.30 and a little bit above and we very much hope for it to get stronger, it's good for us, the risk is a little bit of bad news on European banks or sovereign debt and it could well be that the Euro tanks again. So, our guidance is consciously conservative when it comes to both pulp and currency given how difficult it is to accurately predict those.
Bill Chappell - Analyst
So, just to follow-up, are you expecting currency $1.30 to $1.35 and pulp to be flat the remainder of the year in your guidance?
Pete Thompson - EVP, Finance and Strategy
No. Specifically we expect currency to get back to $1.30 for the balance of the year. So, we can--we're at the--we know we're starting the third quarter below that $1.30. It just depends on where it gets to. But, yes, it would be based on $1.30 and not any better than that at the $4.25 with some risk that it doesn't stay at the $1.30. On the pulp side of it, the second quarter NBSK average was $990. We think that the third quarter is going to be right around $1,000. We largely will be sure of that because again it takes time to turn our inventory so we know what we're paying right now. So, the real question is how fast does it fall in the fourth quarter? But what it means is that we're going to be consuming pulp on average for the back half of the year at a cost above our previous high end $975 and that's what it's based on. The range of estimates for this NBSK as a bellwether, the range of estimates are that on the low end fourth quarter could be down to $848. So, a fairly sizable drop. The faster it is, the better for us. But our guidance would not reflect that quick of a rate of reduction.
Bill Chappell - Analyst
Okay. And then just two last ones. Can you quantify, Pete, just what the operational issues (inaudible) and others what the impact is on earnings for the full year. And, Frederic, I'm not sure I've heard you talk as specifically about EU LIP conversion as you did today in terms of actual timing coming out in the next 60 days, actual ramp up in the next 12 months which seems to imply countries converting before January 1, 2012. What gives you confidence there in terms of--also you seem to be stepping up the spending to really get Poland up and running faster than expected? Can you give us some more color there? Thanks so much.
Pete Thompson - EVP, Finance and Strategy
Sure. Let me take the operational side of it first. Between the pulp mill issue that we had at the St. Girons mill in France which will carry over, we didn't fix the issue until into the month of July. So it will have some third quarter effect and the transfer of the flax base paper. All told those operational effects could be approaching $0.20 for the full year. Part of that depends--the one that's the hardest for us to state with great certainly is the transfer of flax paper production to France and how quickly we'll iron out the operating issues. The issue is that we have base paper that's made on a paper machine and our LIP product then takes that paper and prints it and we have issues with the efficiency of being able to print the French paper. That takes time to address what are the fundamental paper making issues. They have to get resolved. In the meantime we're making good quality product and meeting orders but we have high waste and low productivity which is costly. So, how quickly that gets fixed is a bit of a guess. We're making progress but we're not there yet. So, all told, one-offs, probably about $0.20.
Bill Chappell - Analyst
And Frederic, just some color on what you're seeing?
Frederic Villoutreix - CEO
Good morning, Bill. Let me address your question on the EU LIP schedule. I think what is clear is that negotiations with customers have accelerated over the past few months as the date for publication of the EU test standard and therefore the timing for implementation of the EU LIP becomes clearer. The target is still for the CEN, the European norm commission to publish the test standards in August-September this year. Based on the EU product safety commission's stated expectations for compliance, we anticipated EU demand will approach 100% of LIP product demand by early 2012. And then you have to take into account the time for the cigarette companies to build inventories and fill the pipeline.
So, our expectation is it would be scheduled country by country. We know that some countries have already stated their intention to go quick after the test standards are published and we also know on discussions with customers their plans and therefore our plans is to start building up production of LIP cigarette paper during the course of 2011. Now, what is unknown is the pace or the curve or the ramp off if you want and we do not expect to have any more clarity on this until probably a few weeks or months after the test standards are published and the EU product safety commission makes, I would say, their plans more visible to the industry.
Bill Chappell - Analyst
Just to make sure I understand, you're building up pretty quickly for November to be--are any of your other competitors building capacity just in case countries start going in October, November, December?
Frederic Villoutreix - CEO
I would say nothing that has been made public the past several months. I think as I had mentioned in May, our position is we are the leader in the industry. We believe it's important to be ready for a possible quick implementation during the course of 2011. We know that there's additional value that can be captured by being first with the right amount of capacity. We are accelerating our plans to be ready by the end of this year. Obviously the ramp up of our capacity, the staffing in Poland is something that we are adjusting and will be adjusting as we get a better understanding of what the ramp up curve is going to be but our belief is that there will be demand in 2011. The demand could be significant. We don't know how sizable yet. But we want to be ready to capture up to 100% of that demand when it comes.
Bill Chappell - Analyst
Thanks.
Operator
Your next question comes from Ian Zaffino of Oppenheimer.
Ian Zaffino - Analyst
Thank you. Just a real quick question as far as the mechanics at the cigarette companies. When do they need to select who they would like to use before they begin manufacturing the cigarette? As far as working through their standards? When would you know or how soon before they begin production would they come to you and select you? Thanks.
Frederic Villoutreix - CEO
Good morning, Ian. Couple of points. First, we are already qualified on all their requirements for Europe. We're already--first point. Second, the cigarette companies are waiting for the publication of the European test standards so that they know exactly what they are going to be measured against to finalize decisions. The third aspect, it takes about four to six months for them to be ready ahead of a single country electing for making effective the LIP regulation. This will--we're seeing four to six months of a progressive ramp up.
So, put that all into play with the fact that the schedule will be clearer by later this year and with the expectation that some countries may elect to implement LIP regulations sometime during the course of 2011. You can see that quickly they--the cigarette companies will have to start procuring paper in maybe the second quarter of 2011 or earlier as some countries speed up implementation of the new law. Then in terms of contracts, it's a little bit different because you look at multiyear supply agreements, it's something that will be, I would say, on a case by case basis, some cigarette companies wanting to build a high level of security of supply. Others will be finalizing their decisions just ahead of them actually needing products.
Ian Zaffino - Analyst
Okay. Thank you very much.
Frederic Villoutreix - CEO
You're welcome.
Operator
Your next question comes from Ann Gurkin of Davenport.
Ann Gurkin - Analyst
I wanted to start with the US, some questions. One, can you update us on the future of Spotswood? Any plans, updates there?
Frederic Villoutreix - CEO
Good morning, Ann.
Ann Gurkin - Analyst
Good morning.
Frederic Villoutreix - CEO
Assuming your question is related to our Spotswood Philip Morris USA?
Ann Gurkin - Analyst
Right. Correct.
Frederic Villoutreix - CEO
I would say there's no new news to report. We continue to monitor both the market and other terms. We've seen no material changes other than an increase in DCP orders which we attribute to an inventory build in advance of union negotiations that are taking place this summer at the Spotswood mill and I would say no new news and positive trends as far as our sales of the DCP product for Philip Morris USA.
Ann Gurkin - Analyst
Okay. And it looks like the amount of money in dispute with PM USA increased Q2 versus Q1. Any timing of when that might get resolved?
Frederic Villoutreix - CEO
No. I think there is no--nothing to report in the sense that there is no visibility as to what will happen next. I mean, as we have said before, we are very confident that we have been suing the proper formulas, the historical formulas for the calculation of the established prices and there has been no action on Philip Morris USA's part other than just reserving the right to claim.
Ann Gurkin - Analyst
Okay. And then operating margin in North America came in shy of our estimates and sequentially. Is there anything going on there that explains that change?
Pete Thompson - EVP, Finance and Strategy
The three primary items driving the sequential earnings change in the US, one is the shift. We had a very high level of shipments of the Philip Morris proprietary LIP product relative to our Alginex proprietary product. And we have a lower margin under the cost plus arrangement with PM USA than we do on our outright sale of the Alginex product. So, that mix shift was a contributing factor. And that, as you know, Philip Morris had lower sales of finished cigarettes but their share performance was pretty good. So, it's really just reflective of their requirements.
The other key factor was higher pulp prices which show up in the US segment because we use wood cigarette paper to print to make LIP paper. So, that higher wood pulp price flowing through and then the flax paper operational issues that we had out of France affected the efficiency of our US LIP production facility. So, that affected cost as well. And those are somewhat in order the three primary drivers.
Ann Gurkin - Analyst
That's great. That helps. It's our understanding you were able to increase prices mid year due to the significant increase in pulp. Do you think you can maintain those higher prices as we go into 2011.
Pete Thompson - EVP, Finance and Strategy
That's an excellent question. It's hard to say. We do have one major account, one of the global multinationals is up for global negotiations on base paper this fall and it will be challenging. The difficulty will be on base paper. Pulp prices as we discussed previously are expected to fall through the course of this year which will set a difficult stage for negotiations. So, it's probably going to be a challenging price environment on the more commodity based paper products. It won't have a real effect on the LIP pricing.
Recon, of course is a totally different set of drivers. But on base paper, it probably will be a tough pricing environment come early 2011. Now, tough in our business it's never more than a few percentage point movements up or down. So, it's not going to be that prices drop 10% or 15%. They are going to likely follow down though pulp prices.
Ann Gurkin - Analyst
But you do expect to hold prices on LIP in the US?
Pete Thompson - EVP, Finance and Strategy
Yes. In fact we've announced, back in the first quarter we had said that we had renewed agreements. So, yes, that--we don't see the carryover to LIP product pricing.
Ann Gurkin - Analyst
And the expectation is that pricing for LIP for EU should be comparable to that of the US. Is that still--?
Pete Thompson - EVP, Finance and Strategy
Yes. Economics, the profitability--yes. Europe being a bigger market and having a larger manufacturing footprint we may well and expect to have an even better cost performance on LIP product in Europe and we may chose to therefore lower the price of the finished product in Europe but our profitability, the goal would be--and the strategy is to manage margin and be equivalent to our North American experience.
Ann Gurkin - Analyst
Okay. Great. And then output and profit in Brazil came short of our estimate. How is that mill faring? Is there any change there to the operating efficiency of that facility?
Frederic Villoutreix - CEO
I think the main driver has been the inflation of wood pulp.
Ann Gurkin - Analyst
Okay. And then can you just help me with the tax rate for the year and our expectations for share repurchase in the second half?
Pete Thompson - EVP, Finance and Strategy
On the tax rate we had the impact during the second quarter of the way that we do the accounting for effective tax or taxes around currency with our foreign holding company structure where we've got different denominations of intercompany debt, one currency versus another. So, we had about a 2% or 3% impact. So, ongoing it's probably more going to be around 34% to 35% effective tax rate. That is higher than where we've been historically. Forget about the second quarter noise. It's higher ongoing than historically for two fundamental reasons.
One is we're making more money so our--the benefit of our foreign holding Company structure gets diluted as we make more and more taxable income so we move closer and closer to statutory rates reflecting the mix of our earnings around the world. The second issue is that as we--in France as we saw the change in business tax that's now recorded as an income tax, it moved just dollars or Euros from a cost of sales line to a tax line. It affected the tax rate but overall profitability is unaffected. It simply moved expense from one bucket to another. So, we have two structural changes in the business. Neither one of them necessarily bad but a better ongoing tax rate now is that 34% to 35% range.
Ann Gurkin - Analyst
That's great. And share repurchase in the second half?
Pete Thompson - EVP, Finance and Strategy
We announced that we increased the authorization up to $30 million. That's both housekeeping because we have a bigger market cap and the $20 million had been in place since we became a public Company. Obviously we said that we've got cash and we will act opportunistically if it makes sense. So, with that you can put the one and one together but not saying specifically that we do or do not plan to purchase shares but we are authorized to do so.
Ann Gurkin - Analyst
That's great. Thank you.
Pete Thompson - EVP, Finance and Strategy
Okay. Thank you, Ann.
Operator
Your next question comes from Rich Skidmore of Goldman Sachs.
Richard Skidmore - Analyst
Good morning, guys.
Pete Thompson - EVP, Finance and Strategy
Hi, Rick.
Richard Skidmore - Analyst
Let me just ask a couple of quick questions. Just any update on the litigation in the US? Anything new to report there?
Frederic Villoutreix - CEO
No. There is nothing new to report, Rick.
Richard Skidmore - Analyst
Is there any changes in how you're seeing your competitors in the US act in LIP In the US?
Frederic Villoutreix - CEO
No. No chance. I spoke earlier about we're monitoring the market as it relates to our business with Philip Morris USA. I would say if you look at the growth year on year in our US segments, I think we are doing well and our view is that we continue to maintain a very strong share of the market.
Richard Skidmore - Analyst
Maybe just on that topic in the US, I believe you may have touched on it a little bit on the mix issue, but if I look at the US business in the second quarter you made roughly $15 million in 2010 in the second quarter. You made $13 million a year a go. But LIP volumes were up 48% I think is what you mentioned in your press release. So year over year you're up only modestly. We would've thought that would've been a bigger number. Can you just talk about why the US hasn't--isn't up more? Is it just the issues you just mentioned in response to the prior question--
Pete Thompson - EVP, Finance and Strategy
Yes.
Richard Skidmore - Analyst
--or is there something else happening?
Pete Thompson - EVP, Finance and Strategy
No. It's really the two drivers. So, yes. Excluding restructure impairment, $15.4 million in OP for the US segment second quarter of this year, $12.6 million in the second quarter of last year. So, with a 48% increase in LIP volume, you would think it would be more. On that comparison there's two primary factors. One is the reset of the PM USA pricing agreement which if you recall we said that would have a $6 million to $8 million impact year over year.
So, we're making less profit on the BCP product, the proprietary product we developed with Philip Morris USA. Still profitable, better than conventional cigarette paper, but not as profitable as it was. Then the second factor is higher costs for the variety of reasons we mentioned. Pulp price, et cetera, the operational issues. So, we have higher cost of the LIP product that we're selling. Now, all that said, if we would provide what is the profit per unit of our Alginex product and how does that compare year over year and what's happening with absolute profitability of that product, it is performing in line with the volume changes. But there's the other factors in the business that are impacting that.
Richard Skidmore - Analyst
Okay. And I apologize if I missed it but did you quantify what the pull forward of the down time in RTL from the third quarter to the second quarter was in the second quarter?
Pete Thompson - EVP, Finance and Strategy
There's two factors. There's a pull forward from the third to the second. There was also customers took product in advance of starting their inventory corrections the first quarter. So, across when we say the intercompany effect was about $0.10 a share, that--both first quarter being better and then the second quarter being worse that it otherwise would've been because we pulled down time forward. To give you a normalized rate across first, second, and third is very difficult to do. It's going to be, in hindsight, once we get through the third quarter, it's really going to be an average of whatever one, two, and three were.
What we're saying when we stand back from it is that full year Euro profits for recon is no different than what we thought it was going to be all year long. The timing of when we realize it and report it is changing because of the shifts in customer orders. The value in dollars is different because during the second quarter we had the currency fall off. But all told by the end of the year we still expect the same--to make the same amount of Euros that we've always expected to make this year from our recon business.
Richard Skidmore - Analyst
Okay. And maybe just to follow-up on that, the expense of the downtime in the second quarter on RTL?
Pete Thompson - EVP, Finance and Strategy
If we had--probably the cleanest measure is from the second quarter versus the first quarter, RTL profitability, earnings per share contribution, as off by at least $0.10.
Richard Skidmore - Analyst
But that also included some pull forward of volume from the second into the first, right?
Pete Thompson - EVP, Finance and Strategy
Yes. That's why that comparison--if you look year over year then the recon performance isn't that much of an effect. We made the $0.93 this year versus $1.02 last year as a total Company. Profitability was a positive. The negative was really dilution and some other below operating profit items. The recon factor is really a second quarter, first quarter and then somewhat third quarter effect. The number to kind of point to would be we had about a $0.10 impact more or less between second and third to what the first would've been. To say with precision what was downtime, that we've quantified. We provide that in the MD&A. But in terms of all told, the volume shift, the production downtime, et cetera, it's moving about $0.10 between quarters from RTL volume shifts.
Richard Skidmore - Analyst
Okay. And then maybe just one last question. As you look at 2011, you had a number of operational issues in the second quarter. As you get to 2011, do you anticipate that most of these things will be behind you and such that the real earnings power of Schweitzer hasn't really changed for 2011?
Pete Thompson - EVP, Finance and Strategy
Correct. Especially if--the big caveats there would be if pulp goes down that's an improvement over the 2010 cost picture. Currency? Who knows? That's a big one, obviously. And then what happens with base paper pricing, as Ann Gurkin had asked earlier. Those would be some unknowns. In terms of operational performance, the only big deal we'll have going forward will resolve the flax paper sourcing issues. That will get fixed.
The only big deal we'll have going forward operationally is the startup of the Poland mill. That will speed up. We'll have some startup costs later this year. But it's not that large of a facility that it should be a significant issue in terms of startup expenses. Then similarly, late next year we'll have startup costs associated with the Philippine mill. So, we will have those startup expenses to eat through but the real driver for 2011, no change at all, just subject to finalization of when does the ramp up in demand begin if the contribution and earnings improvement will be driven by LIP in Europe.
Richard Skidmore - Analyst
Great. Thank you.
Pete Thompson - EVP, Finance and Strategy
Sure.
Operator
Your next question comes from Ryan Rosenthal of Sidoti.
Pete Thompson - EVP, Finance and Strategy
Hello, Ryan.
Ryan Rosenthal - Analyst
Hello, everyone. Sorry if I missed this earlier but I want to inquire about your contracts with cigarette manufacturers for capacity for LIP at the Poland facility. Previously I believe you disclosed 30% of your capacity was already agreed to with the manufacturers. Has any change occurred there at this time?
Frederic Villoutreix - CEO
Ryan, this is Frederic. I mentioned earlier the negotiations have accelerated with all our customers but nothing has been finalized yet. To your question, as we stated in May, we have already secured one third of the plant capacity which the size is to serve about 50% of the EU demand and I do not expect any significant news to come until such time as scheduled for implementation roll out until 2011, 2012 becomes clearer which should happen months after the EU test standard is published which the target date right now is August-September of 2010.
Ryan Rosenthal - Analyst
Great. Then in terms of internal production versus licensing for LIP in the EU, could you address what your expectations are there for total market share and also the profitability of each relative to each other?
Frederic Villoutreix - CEO
Yes. I think our expectations have not changed in terms of we are installing capacity to serve up to 50% of the EU market. We obviously have the ambition to achieve that. We also stated that we have the ability to add more capacity if it's wanted. Our view is that the bulk of this capacity would be to address direct selling of our proprietary Alginex products which carries the highest profit margins. Part of this capacity may be also used for other paper producers to have an independent party coat. The Alginex bands on their competitive base papers, they're open platform proposal to our customers but again the view, the vision is that most of this internal capacity would be for direct selling activities.
And then going back to a comment Pete made earlier, if you look at the profitability potential of EU compared to the North American market, we certainly will have a better mix than in the US where in the US we serve the largest cigarette company, Philip Morris USA, with their proprietary product MOD papers which comes at a lower profit margin than our own proprietary LIP solution.
So, going back to how do we size all of this, what we stated all along and we continue to be convinced that this is a potential--if we convert the existing share of the EU market, our existing share of the EU market which is about one-third of the demand, the potential is as large as our experience in North America where we have market share of 80% or so for direct selling. In this experience, if you look back since 2005, is worth in excess of $50 million in EBIT.
Ryan Rosenthal - Analyst
Great. Then turning to the Chinese RTL JV and your progress there, could you address the issues that have delayed your timing at this facility and your expectation going forward?
Frederic Villoutreix - CEO
Sure. We continue to make progress in the negotiations with the Chinese partners. It's hard to believe what kind of progress when you see there's been little movement over the last several months; however, we continue to expect our planning for this project to go forward in 2010. The project is at the highest level of approval at the Beijing administration level and one would expect that the Western Europe timeframe, schedule, decision making process are not necessarily good predictors of how it works in China. Possible it relates to the administration. But what I can tell you is that discussions are very productive. We have very strong support from both the tobacco monopoly and the cigarette companies in the Hunan province and we remain very confident that this project is going to move forward.
Ryan Rosenthal - Analyst
I'll turn it over. Thank you for your time.
Frederic Villoutreix - CEO
You're welcome.
Operator
Your next question comes from Eli [Maschan] of [quest air] Capital Management.
Eli Maschan - Analyst
Hey, guys. Couple of questions. The first one, on the tax rate, Pete, you mentioned that probably we should going forward use 34% to 35%. A lot of that sounds like it's due to you guys are making more money and geography contribution is changing a little bit. Is that something that's new? Isn't that something that you guys would've known coming into the year? I think we were talking 32%, 33% tax rate for 2010. We probably could've--that probably should've been higher it sounds like.
Pete Thompson - EVP, Finance and Strategy
The 32%, 33% is good. The structural difference between 32%, 33%, and 34%, 35% is this reclassification of the French business tax. But from a net income standpoint it's no effect. We saw lower cost, higher OP, higher taxes, same net income. So, the recalibration is this tax law change in France that resulted in an accounting pronouncement on where to book that expense. So, no, the 32%, 33% is same-same to the 34%, 35% in terms of net income. So, from a modeling standpoint, if you up your effective tax rate, you should equally up the profit from France. I mean, separate from business activity.
Eli Maschan - Analyst
Right. Okay. Just moving to the--what you guys call the non-recurring operational issues that you've experienced, I think you guys have walked through the RTL downtime and the pulling forward and that's sort of just a quarterly issue for the year to be no change. But in terms of the other effects, in terms of the flax supply where you guys have had to buy it sounds like more in the market and sort of the inefficiencies that were created by capacity moving out of spots into other areas, could you guys quantify that? If you can, I'm just wondering why you have the adjusted EPS of $0.93. I'm wondering why some of these things weren't adjusted for in that adjusted EPS number.
Pete Thompson - EVP, Finance and Strategy
We don't want to--on the second part of your question, we don't want to start saying, "But if for this and that and this, we would've done $4.60 a share." We don't want to do that. The numbers are the numbers. What's interesting and very important is we delivered an $8.5 million improvement in cost year over year. We didn't deliver more than $8.5 million because of these operational issues. So, the first and foremost context is what actually happened in cost performance and it improved. But specific to the point on--especially the two operational issues, the St. Girons pulp mill issue and then flax based paper resourcing. Kind of directionally, I mentioned earlier one off issue, those being the primary two, about $0.20 a share roughly. Call it $0.15 of the $0.20 in the second quarter, $0.05 of the $0.20 in the second quarter.
That's somewhat directional because there's other activity that we talked about that makes the second quarter noisy, especially the RTL situation and then the pulp price and currency effects that were acute, especially currency in the second quarter. But the operational issues, generally the one-off part of it is about $0.20. The caution there is so nobody says, "You told us it was going to get better", we still have the acceleration of the Poland startup facility to weather yet this year. So, sequentially we've got that cost pressure because we're going to be ramping up that facility, be ready to meet demand, and we're going to have expense before we have revenue. All that is baked into our current guidance.
Eli Maschan - Analyst
Okay. So, going forward it sounds like it will be end of Q3, Q4, we're going to start seeing these ramp up costs in Poland. Will that be something that you'll flag in the future press releases and quantify?
Pete Thompson - EVP, Finance and Strategy
if it's big enough. It depends on the level that it gets to. What will be most improvement is, and what we don't know, we've obviously talked to here is that once the test standard is out and we start to better know firm plans for a ramp up, when do we expect to see volume? Now that we expect to see any yet this year but the level of activity at the Poland facility will somewhat depend upon what is the latest and greatest understanding of customer requirements because the activity level will go up even further right in advance of customer production beginning.
Eli Maschan - Analyst
Right. That makes sense. So, the guidance of at $4.25 for 2010 includes startup costs at the Poland facility and no revenue?
Pete Thompson - EVP, Finance and Strategy
Correct.
Eli Maschan - Analyst
Okay. Great. Thanks, guys.
Pete Thompson - EVP, Finance and Strategy
Thank you.
Operator
Your next question comes from [John Hines] of Long Green Capital.
John Hines - Analyst
I mean, we're up 37 on it but we're down 93,000 on it today.
Pete Thompson - EVP, Finance and Strategy
John, do you have a question?
Operator
This question has been withdrawn. I'm showing no further questions at this time.
Pete Thompson - EVP, Finance and Strategy
Very good.
Frederic Villoutreix - CEO
Thank you, Wes. And thank you, everyone, for attending. While the quarter was not what we expected, I think we need to keep in mind that we did improve our resources last year in spite of challenging external factors and our confidence on the business fundamentals is unchanged. In fact, we reiterate expectations for significant earnings growth for 2012 and the two big drivers obviously are LIP coming to Europe starting next year and the startup of our recon facility in the Philippines in late 2011. Thank you again. Have a good day.
Operator
Ladies and gentlemen, we thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.