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Executives

Len Texter - Director of Investor Relations

Brian J. Robinson - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Gregory B. Kenny - Chief Executive Officer, President and Director

Analysts

Shawn M. Harrison - Longbow Research LLC

Richard Wesolowski - Sidoti & Company, LLC

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

General Cable (BGC) Q4 2012 Earnings Call February 25, 2013 10:00 AM ET

Operator

Good morning. My name is Martina, and I'll be your conference facilitator. I would like to welcome everyone to General Cable Corporation's Third Quarter 2012 Earnings Conference Call. This conference call is being recorded at the request of General Cable. Should you have any objections, you may disconnect at this time. [Operator Instructions] General Cable, you may begin your conference.

Len Texter

Good morning, everyone, and welcome to General Cable's Fourth Quarter 2012 Earnings Conference Call. I'm Len Texter, Director, Investor Relations at General Cable. Joining me this morning are Greg Kenny, our President and Chief Executive Officer; Brian Robinson, our Chief Financial Officer; and Bob Siverd, our General Counsel.

Many of you have already seen a copy of our press release issued this morning. For those of you who have not, it is available on First Call and on our website at generalcable.com. Today's call will be accompanied by a slide presentation also available on our website. If you have not downloaded a copy, we recommend that you do so as we will refer to the presentation throughout our prepared remarks today. Due to the timing and final preparation of the company's restated financial statements, we have provided select financial data in today's materials.

The format of today's call will first be an overview by Brian Robinson of our fourth quarter results, followed by comments on the company's outlook for the first quarter. Secondly, Greg Kenny will provide additional comments on 2013, including full year business trends, followed by a question-and-answer period.

Before we get started, I want to call your attention to our Safe Harbor provisions regarding forward-looking statements and company-defined non-GAAP financial measures, as defined on Slide #2, as we may refer to adjusted operating income and adjusted EBITDA in today's call.

To begin, please turn to Slide #5, where we have included a reconciliation of our previously communicated outlook.

With that, I will turn the call over to Brian Robinson. Brian?

Brian J. Robinson

Thank you, Len. Good morning. We are pleased to report that our adjusted operating income for the fourth quarter was slightly above our previous communication provided a couple of weeks ago. As we discussed then, and as shown on Slide 5, typical seasonal patterns in the fourth quarter were partially offset by strong contributions from our recent acquisitions, housing-related utility and construction product shipments in the U.S., a record level of quarterly metal pounds sold in our legacy General Cable transmission business and strong results in Asia Pacific, driven by construction and electrical infrastructure investments.

Overall, global unit volume was in line with our expectations for the fourth quarter. Metal pounds attributable to our recent acquisitions more than offset typical seasonal declines in many of our base businesses. Net sales were slightly below our expectations, principally due to lower average copper costs during the fourth quarter and a slightly greater mix of aluminum-based product shipments.

The company's effective tax rate for the full year was adversely impacted by valuation allowances recorded against losses in certain European business units and one-off tax charges in connection with the legal entity restructuring to integrate Alcan Cable Canada. Due to the timing of these charges and the mechanics of the quarterly computation under applicable tax rules, the tax benefit was recognized in the fourth quarter. We have removed this tax benefit so as to present the fourth quarter at an adjusted effective tax rate of 38.5%. For 2013, the company expects its full year effective tax rate to be in the range of 36%.

Moving to Slide 7, our credit profile remains strong, with the financial flexibility to fund our working capital requirements and capitalize on global opportunities. In the fourth quarter, the company continued its balance sheet transition by calling all of its outstanding $200 million of 7.125% senior fixed rate notes due in 2017 and retiring all of its outstanding $11 million of 1% senior convertible notes due in 2012 using part of the proceeds from the September 2012 $600 million issuance.

In addition, once the financial restatements are complete, the company will consider whether to tender for all of the outstanding $355 million convertible notes or retain a portion of the proceeds [ph] to repay the 2013 convertible notes at maturity later this year. In the interim, part of the proceeds from the issuance have been used to reduce the ABL borrowings to 0.

Net debt for the fourth quarter was unchanged from the end of the third quarter. The company made no common share repurchases during the fourth quarter under its $125 million share repurchase program authorization, which expires at the end of October of 2013. The company will utilize this buyback authority in the context of economic conditions, as well as the then-prevailing market price of the common stock of the company, regulatory requirements and alternative capital investment opportunities. The company will not make any repurchases under the stock repurchase program before its restated financial statements are filed with the SEC.

On Slide 8, we are pleased to report that operating cash flow and free cash flow exceeded management's expectations for 2012. Efficient management of working capital over the second half of the year resulted in $206 million of operating cash flow in the fourth quarter and $289 million for the full year of 2012. Overall, the company's ability to consistently reduce costs, as well as execute on its strategy of geographic diversification and product portfolio expansion, has resulted in the third consecutive year of adjusted operating income in 2012, without the benefit of a meaningful and widespread global construction recovery.

On Slide 10, you'll see our expectations for the first quarter of 2013. Unit volume in the first quarter of the year is generally lighter due to the typical seasonal factors such as weather-related limitations on construction activity and typical holidays in ROW. As a result, we expect the first quarter to be the weakest of the year with a sharp improvement in the second quarter as construction activity accelerates. Additionally, the Alcan Cable North America business is a bit more leveraged toward construction activity, which is an element of the sharp seasonal improvement expected in the second quarter.

Overall, we expect to report adjusted EPS in the range of $0.22 to $0.32 per share, excluding the impact of the recent Venezuela currency devaluation, which is expected to result in a onetime charge of $42 million or $0.82 per share, principally due to the re-measurement of the local balance sheet.

Before turning the call over to Greg to provide some comments on 2013 full year business trends, I wanted to briefly touch base on the restatement of our financial statements. The company intends to file its restated financial statements this week. We have completed our internal review conducted with the assistance of outside counsel and a forensic accounting firm. The previously disclosed estimates of understated cost of sales and overstated inventory will not change materially. The company has determined that a substantial portion of what was previously believed to be system-related accounting errors in Brazil was actually theft of inventory. We believe a portion of this may be covered by insurance, and we have initiated the claims process.

With those comments, I'll turn the call over to Greg. Greg?

Gregory B. Kenny

Thank you, Brian. Good morning, everyone. Our guidance has not changed since our last discussion 2 weeks ago. We expect operating income in the range of $300 million to $340 million on 1.4 billion to 1.5 billion metal pounds sold, assuming average year-to-date metal prices. That said, if you turn to Slide 13, I want to provide a few thoughts on some of the demand drivers for 2013.

Overall for 2013, we are expecting a volume improvement in North America and ROW, driven in large part by volume attributable to acquisitions, which collectively are expected to contribute in the range of 350 million to 400 million pounds in 2013. We expect a meaningful seasonal step-up in the second and third quarters of the year, principally due to the Alcan Cable North American business, which is fairly construction-driven. At the midpoint of our guidance, volume in our base business in North America and ROW is expected to improve approximately 4% to 8% -- 4% and 8%, respectively, principally driven by electricity grid expansion and reinforcement and construction-related spending. In the Europe and Med business, demand is not expected to change materially in 2013. Overall, volume is expected to somewhat be skewed toward the second half as construction activity ramps up and metal-intensive aerial transmission projects in Brazil begin to shift.

On Slide 15, we have provided some information on our construction-related business in North America. As we've said before, residential and nonresidential construction activity affects nearly all of our product categories in some way. However, there are certain products that are more directly linked to construction spending, which we've provided on a pro forma basis, including Alcan Cable North America. As you can see, construction-driven product demand has started to improve but remains well off 2006 peak levels.

The operating leverage in the business remains intact and is further -- and has been further enhanced with the acquisition of Alcan Cable North America, as reflected by the 2006 pro forma North America adjusted operating income, which is roughly double our pro forma results in 2012.

Moving on to Slide 16, in Europe and Med, we anticipate these businesses to contribute 3% to 6% of consolidated operating income in 2013, despite our submarine turnkey project business operating around breakeven for the year. As illustrated on Slide 17, we maintained a sizable backlog in both submarine and land-based turnkey projects of approximately $650 million at the end of 2012.

Overall, growth prospects over the next several years are encouraging for both land and submarine, despite recent results experienced in our submarine project business. Actions taken over the last couple of years have reduced our ongoing cost base, and our pan-European go-to-market strategy is providing better market coverage, improved logistics and plant optimization, all of which we expect to help offset some of the continuing weakness.

Finally, on Slide 18 and 19, we expect mid-single-digit GDP growth rates on average in ROW, supported by investments in construction, energy and infrastructure throughout the region. Specifically in Brazil, spending ahead of the World Cup in 2014 and the Olympics in 2016, as well as government-sponsored programs such Lights for All and My House - My Home are expected to drive demand for the company's products in 2013. In addition, the company expects the next phase of major aerial transmission projects' products to start shipping in the second half of this year. Overall, we are well positioned to benefit from global growth trends, energy, infrastructure-related investments and improving construction activity.

That concludes our prepared remarks. I'll now turn the call back over to the operator, who'll assist us in taking your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Shawn Harrison from Longbow Research.

Shawn M. Harrison - Longbow Research LLC

I was wondering just if you could help me out in terms of the M&A contribution to volumes, if you can break that up into Rest of World and North America for me.

Brian J. Robinson

Yes. Shawn, from a volume perspective, you're talking specifically around 2012, Shawn?

Shawn M. Harrison - Longbow Research LLC

Around 2012 and 2013, just so I can...

Brian J. Robinson

Okay. So yes, so the volume in 2012 -- just bear with us one second. Let's call it in the range of 100 million pounds, broadly, let's call 90% of that in North America. And then as we look to next year, we're looking at an improvement there sort of at the midpoint, say, of about 275 million pounds, with a little more mix towards ROW because of – we pull their full year of Alcan China and Procables.

Shawn M. Harrison - Longbow Research LLC

And then I guess just a few brief follow-ups. Venezuela, you guys are ahead of the curve, and so we saw the devaluation. How does that change, I guess, the $20 million you had previously talked about? Is that included in the number now? And just any update on kind of the costing questions from the last call?

Brian J. Robinson

Yes, okay. Shawn, there was no change in terms of the base, the 300 to 340 in that headwind. We believe that even though there's that -- the devaluation has an impact, our ability to do -- to manage the business locally will allow us to deliver as we thought we would. So no change to the base guidance. The only change is the onetime charge that we announced just after the release 2 weeks ago for re-measuring the balance sheet, which we'll call out in the first quarter and that we referenced in this earnings release.

Shawn M. Harrison - Longbow Research LLC

Okay. But I guess, net-net, the way I'm looking at it is potentially, maybe you have a little bit more wiggle room since the devaluation was less than you would have anticipated?

Brian J. Robinson

Again, yes and no, Shawn. I would say, when we talked a couple weeks ago, we were saying it's just -- it's very tough to give a very direct linear sort of reaction as if the currency had devalued 50% as it did or 100%, so we had sort of -- there's enough moving parts. So I guess long story short, we're comfortable with the guidance, and the headwind is consistent with what we thought year-over-year, '12 to '13.

Shawn M. Harrison - Longbow Research LLC

Got you. Then 2 final clarifications. On an adjusted basis, what was SG&A for the fourth quarter? And then what do you expect interest expense to be on an adjusted basis for the March quarter?

Brian J. Robinson

Yes, Shawn, on the SG&A side, let us come back to you on that one. I guess on the interest expense, Shawn, I would say from a -- for the first quarter on an adjusted basis, we should be at about $25 million of net interest in the first quarter.

Operator

Your next question comes from the line of Rich Wesolowski from Sidoti & Company.

Richard Wesolowski - Sidoti & Company, LLC

Is the expected 2013 operating income contribution for the 3 acquisitions in aggregate commensurate with the share volume?

Brian J. Robinson

I would say it's in the range of -- I would say the thinking is sort of in the same range, Rich, meaning that the -- as we said on the volumes, the increase in the base business is low single digits. So I think in the base business, it's probably that same range. And then we, of course, also have significant -- we believe a significant benefit or improvement coming with the acquisition as well.

Richard Wesolowski - Sidoti & Company, LLC

Okay. And would you comment on the risk to your outlook in ROW, specifically with regards to Brazil? It seems from the headlines and from the page in your slide deck here, there's an overwhelming number of project plans. But on the other -- we always read about delays in permitting and getting a lot of the jobs off the ground.

Gregory B. Kenny

Yes, Rich, we -- Brazil, I think you're right to think that those projects are -- we had very little project volume in the first quarter, and then it's -- moves up materially. It moves up in the second quarter and then substantially in the third and fourth. So we actually see the transmission line business in Brazil actually above last year but well below 2011. So it is lumpy. We also have introduced a whole series of new products, which are in the ramp-up stage. And overall, all of that is the frenzy around the construction. So I would say, Rich, I feel that Brazil, with the projects, you always have your eye on that. On the other hand, I've just come back from Venezuela, and I feel great about where we are there. It's obviously a difficult environment but a fine team. And our first quarter was burdened by really implementation of a new law, which basically said people need to take their vacation and can't work through it, so the country was largely shut down through well into February. But we see, despite the devaluation, generally strong conditions for this year. So I would think of those 2 as somewhat balancing. Elsewhere in ROW, it's -- broadly, looks similar to where we've been, and we're working hard on just bolting hard the new greenfields and brownfields, and so we feel okay. But Brazil, I would say, is a little trickier with the projects, offset probably with Venezuela and activity elsewhere, improving brownfield and greenfield performance.

Richard Wesolowski - Sidoti & Company, LLC

Lastly, if you haven't mentioned already, are there going to be any large inventory swings in the first half?

Brian J. Robinson

Not -- Rich, not -- probably in order of magnitude up to, say, $50 million kind of range. So we didn't call those out in our guidance.

Richard Wesolowski - Sidoti & Company, LLC

Okay. For a very involved quarter, this is an exceptional slide deck.

Brian J. Robinson

Thanks, Rich. Just want to come back, sorry, to the question that Shawn Harrison asked before, the Q4 SG&A on -- excluding adjustments, would have been around $115 million.

Operator

Your next question comes from the line of Anthony Kure from KeyBanc.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Just got a couple of quick more questions on Venezuela. Greg, you mentioned you just came back there, and then you alluded to the fact that, that period of vacation, mandatory vacation ends in February. I guess if you can just expand on that a little bit, is -- was it a law that was passed and that's what's giving you confidence that, that should abate -- that impact should abate in the second quarter?

Gregory B. Kenny

Yes, the country was just -- we made money in Venezuela but much less than we did prior year because the country really will -- only operated fundamentally for -- well, didn't operate for -- depending on what customer but 5 or 6 weeks through January and February with the extended Christmas and statutory holiday. So this was basically saying you can't pay people overtime for them to work through their vacation. The demand seems good and -- in Venezuela. And as a result, we'll have to ship more and meet that demand beginning in March and then through the year. So broadly, demand hasn't disappeared, and we have a fair amount of production capacity. We always are looking to get metal and raw materials imported in the country, but I think that because of the criticality of what we produce, that will happen. So broadly, I feel good about where we have planned for the year, which, as said earlier, included a devaluation, and there may even be some upside given the strength of demand.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Actually, you sort of led into my second question. But with the demand being colored as such, relatively positive, and the devaluation, will this now provide you or do you think that it'll provide you a opportunity to "catch up" on price commensurate with the devaluation? In other words, I think, and correct me if I'm wrong, last time there was a devaluation, the impact was minimal because you were able to reprice pretty rapidly. Is that the -- do you -- are you factoring that in first into your devaluation that you're still going to be able to reprice? Or does your $20 million sort of allowance on the impact on your operating income assume no catch-up on the repricing of products there?

Gregory B. Kenny

Well, certain products are required -- they're under an element of price control, and the government, obviously, has an interesting issue with devaluation. And then we have to pay for these products and pay more in local currency terms for all the things we do. So you have a stew that's brewed between price control and non-price-controlled elements. So yes, we -- and then you have orders that were entered under old price conditions that you have to go ahead and honor. So net-net, we should be able to -- it's -- the market, we believe, will strengthen for many product areas. In terms of pricing, you have to go through the old product or the old contracts and then look for the new ones to be repriced, and it depends on the channel, whether it's utility versus distribution, et cetera. But broadly, yes, you'd expect to recover this over time, as has happened in the past. Again, the government can change its mind about things or have new directives. But right now, it's a strong team, and I feel good about our business plan, which already had contemplated both the devaluation at least from a P&L standpoint, not a balance sheet standpoint, and also the time it takes to recapture some of the higher costs inherent in the devaluation.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Okay. So that $20 million allowance is really the impact from the timing of the repricing. Is that a fair way to sort of characterize it?

Gregory B. Kenny

Rich, the $20 million you're talking about is what...

Brian J. Robinson

Year-over-year headwind.

Gregory B. Kenny

Year-over-year headwind. Yes, and so we need to be cautious and -- but I would say internally, we would look at -- the headwinds are really the lag as you try to recalibrate to the devaluation and the loss of 6 weeks or so in the beginning of this year. On the other hand, we'll go after some of that headwind, and we'll have to see what we can deliver for our shareholders.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Okay, great. And then just sort of a bigger picture question. Once the financial -- restated financials come out hopefully later this week, and then given the sort of flurry of activity on the acquisition side in 2012, would it be fair or is it fair to assume that now share repurchase, with your $125 million, I think, is what's available, does that become maybe the highest priority maybe or I should say ahead of the acquisitions in 2013?

Gregory B. Kenny

Yes, I think we're -- we'll always be alert to opportunities such as Alcan and Prestolite and Procables presented. I think it's -- as we said before, we're really focused on -- and those acquisitions are being well integrated, and then getting a position where NSW, Mexico, India, South Africa, Peru and the Brazil new product startups are all accretive economically to the company, not slightly dilutive as they are today, so that with our -- as we've looked at ROW, we've been able to sort of pour additional resources into getting that right. But we'll always be alert for good ideas. But I would say we really just need to mature those investments that we've made, and that's without commenting on purchases, which, as you know, that program exists into October or thereabouts of this year. So yes, I'm at a point where I want to get a high return on capital. I want to get my investments fully matured in terms of these greenfields, brownfields. I feel great about where we started with Prestolite and Alcan and Procables. And then we've had a management transition that I think has been successfully undertaken. And we've got -- we're getting great focus on Asia Pac, sub-Saharan Africa, and then we pulled the Americas together, and I think that's expanding opportunity as well. So without telling you which way we're headed right now, we want to be pushing cash off out of the balance sheet and keep improving our return on capital.

Operator

Your next question comes from the line of Noelle Dilts from Stifel, Nicolaus.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

My first question is I really am just trying to understand your first quarter guidance a little bit better. The way you're laying it out, it's looking a lot like the fourth quarter results, which were hampered by this big $12 million charge on the revaluation -- reevaluation of the submarine profitability. And also you won't have the drag associated with pulling down inventory. So can you just kind of lay out how much sequentially of a headwind is the decline in Venezuela going to be? Are you looking at a loss in the NSW business in the first quarter? Can you just help us understand some of those moving pieces?

Gregory B. Kenny

The NSW, Noelle, will be operating at a loss because you can't do a lot of work at this time of year in North Sea, Baltic Seas. Europe largely is moving sort of sideways, with the exception of NSW, which is still -- which is down from prior year but is running a loss, and we expect Europe to be at an operating loss in the first quarter, moving to profitability in the second. Venezuela is a big headwind because it's -- we lost half the quarter, and we had sort of the pause due to the devaluation, which is millions of dollars in materiality. And Noelle, frankly, our second quarter, because of the Alcan and some of the peakedness, our second quarter, with both some of the projects, as well as the construction-driven nature of the business, is looking quite strong, so we have a little bit of a push there. North America is pretty much, broadly, the same sort of run rate, slightly stronger in the first quarter. And I would say that net-net, it looks a lot like the fourth but with a sharper movement up in the second quarter, probably stronger than some of the movements we've seen before.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Can you give us a sense on the NSW business kind of just how for the year by quarter you'd expect revenue or volume to trend, what's embedded in your guidance?

Brian J. Robinson

Yes, I would say the volume in the NSW business or in the offshore business is a little tricky as an indicator because of the service component of the business. But generally, I would say we'll have a tougher first quarter simply because of the conditions that we mentioned around the construction, the weather primarily in the North Sea, probably moving towards a more normalized into the second quarter, and then in the third and fourth quarter improving. So maybe if I put it into halves, maybe it's sort of 60% second half, 40% sort of first half in that business.

Gregory B. Kenny

And we'd expect that, Noelle, the second quarter to be more than double the first quarter revenues and probably materially more than double.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Okay, perfect. That's great. One last question. Can you give us an update on EBIT margins, how they're trending in Alcan, both North America and China?

Gregory B. Kenny

The -- China is -- other than there's always competition in China, China, we expect to be profitable this year, and it would be profitable in the 5% to 10% operating margin range. North America, we would see also in the 5% to 10% operating margin range, Noelle. And Prestolite would be at the high end of that range. Noelle, once second, on Prestolite, it would be, I would say, in the 5% to 10%, maybe in the middle. The ROW -- I should point out, the first quarter, with the holidays, ROW has always been weaker in the first quarter than the other quarters, and then we've had it exacerbated by this Venezuelan thing. So we're not surprised in what we're seeing in ROW in the first quarter, and we expect to see it improve materially in the second.

Operator

There are no further questions. I turn the call back to General Cable.

Len Texter

Thank you for joining us this morning. That concludes our conference call. A replay of this call will be available on our website later today. We appreciate your continued interest in General Cable.

Operator

Ladies and gentlemen, thank you for your participation today. You may now disconnect.

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