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General Cable Corporation (NYSE:BGC)

Q3 2009 Earnings Call

October 26, 2009 8:30 am ET

Executives

Michael P. Dickerson – Vice President of Finance & Investor Relations

Gregory B. Kenny – President, Chief Executive Officer & Director

Brian J. Robinson – Chief Financial Officer, Executive Vice President & Treasurer

Robert J. Siverd – Executive Vice President, General Counsel & Secretary

Analysts

Will Stein – Credit Suisse

Gary Farber – C. L. King

Brent Thielman – D. A. Davidson

Shawn Harrison – Longbow Research

Matt McCall – BB&T Capital Markets

Stuart Bush – RBC Capital Markets

Joseph Gibney – Capital One/Southcoast, Inc.

Richard Wesolowski – Sidoti & Company

Jeff Beach – Stifel Nicolaus

Anthony Kure – Keybanc

Nate Kellogg – Next Generation Equity Research

Brett Levy – Jefferies & Company

[Kevin Sarnsey – Legend Merchant]

Operator

I would like to welcome everyone to the General Cable Corporation third quarter 2009 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. All participants have been placed on mute to prevent any background noise. There will be a question and answer period after the speakers’ remarks. (Operator Instructions)

[Michael P. Dickerson]

Joining me today 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 from this morning. For those of you who have not, it is available on First Call and on our website at www.GeneralCable.com.

I want to call your attention to the Safe Harbor provision for forward looking statements that can be found at the end of our press release. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our current Form 10K report and other periodic filings on file with the SEC provide further detail about the risk factors related to our business.

During this call we may refer to adjusted operating income and adjusted EBITDA which is defined as earnings before interest, taxes, depreciation, amortization, plant rationalizations, lower of cost or market LIFO inventory adjustments and other restructuring items. These non-GAAP company defined measures are being provided because management believes they are useful in analyzing the operating performance and cash flow before the impact of various reorganization and other charges. A reconciliation of adjusted operating income and EBITDA to GAAP net income is available on the investor relations section of our website at www.GeneralCable.com.

The format for today’s call will first be some discussion by Greg Kenny about the current business environment. Secondly, Brian Robinson will provide some financial details about the third quarter and finally, Greg will provide some comments on the company’s fourth quarter 2009 outlook and 2010 trends followed by a question and answer period. I want to thank everyone for joining us early on this Monday morning and apologize for not providing an earnings release the night before as has been our practice. However, this timing was necessary as we work around other items on our corporate calendar. I expect to return to our normal practice next quarter.

Finally, as the operator mentioned, due to the number of participants on today’s call, I would ask that you limit yourself to one question and perhaps one follow up. You are of course, more than welcome to get back in to the queue. With that I would now like to turn the call over to Greg Kenny.

Gregory B. Kenny

As outlined during our last conference call, we expected volumes to be done from the second quarter due to summer shutdowns and vacation. We also expected difficulty in catching rapidly rising metal costs. Our results were in line with our expectations as volumes were down 7% from the second quarter and we were unable to catch copper increases. I’m pleased to report that the company was able to achieve earnings at the high end of our guidance as well as generate an additional $228.9 million of cash flow from operations. This brings the total non-GAAP adjusted earnings per share for the first nine months of 2009 to $2.57 and our total cash flow from operating activities for the first nine months of 2009 to $365.1 million.

I’m extremely proud of the work that has been done and the sacrifices that have been made by our associates around the world to achieve these results. In response to sharply deteriorating market demand, we have taken actions over the last 18 months to reduce output and accelerate a meaningful reduction in fixed costs as part of our continuous cost improvement efforts. Many of these actions have been difficult but have been necessary reductions in personnel. Despite the fact that we are in the most difficult economic period since the depression, the company has maintained both profitability and a rock solid balance sheet.

Brian will talk to you in a bit about some of the specific financial results but let me share some statistics with you that will highlight just how difficult an environment we face. In the third quarter, the volume of distribution cable sold to electric utilities in the United States is 40% below its 2001 to 2003 lows earlier this decade. The volume of portable power cords sold which is used in thousand of OEM and portable power applications is down 50% from its peak in the second quarter of 2007 and is nearly 10% below its 2001 to 2003 recessionary lows.

Our business in Spain which helped carry the company through the last recession is now down in excess of 50%. The difference today in what many termed The Great Recession, is that we have many more areas of strength geographically to carry us through such as Southeast Asia and South America and strong product families such as high end extra high voltage energy cables and specialty undersea cables.

The lean initiatives that the company began at the beginning of this decade which are now well embedded within the culture of the company worldwide, have contributed significantly to lowering our breakeven point and have allowed us to continue to focus on long term product innovation, geographic expansion and strategic investment opportunities. As an example, in 2002 to 2003 during the trough of the last cycle for the company, the North American industrial business was losing $1 million to $2 million each month. Today, despite volumes similar to the 2002 to 2003 time frame, we are making money.

Our lean initiatives and intense customer focus have made a big difference. Even our North American telecommunications business which is down about 75% in volume from its peak earlier this decade has generated positive earnings and cash flows this year. This dedication to lean has resulted in several of the company’s manufacturing facilities being named as finalists in Industry Week’s Annual Best Plants competition.

Since 2001 General Cable has had 13 plants as finalist in the best plants competition. Five of those plants have gone on to achieve the title of one of the top 10 plants in North America. This year the company has three plants that have reached the finalist stage Altoona Pennsylvania, [Piedras Negras] Mexico and Franklin Massachusetts. I am proud of their accomplishments and wish them well in their pursuit of excellence. They are all top plants in my opinion.

We talk a lot about lean so I wanted to give you a real world example of what this may mean in a typical manufacturing facility. In Rayong Thailand, and Tarlac Philippians, we have implemented what we call world class total productive maintenance or TPM. What this means is to take operator led process one step further. Operators work together with engineers and mechanics with the objective of improving the long term reliability of equipment. By training operators to handle the basic maintenance needed to maintain the machines, we can prevent unnecessary downtime thereby improving the uptime of the equipment. Early results are encouraging.

After implementing this program a cabler in Thailand has now run 1,100 hours without machine downtime and is still going and a [dry] machine in the Philippians is running 700 hours without machine down time. These both represent an approximate 10 fold improvement from prior performance which is already good to begin with. We salute our thousands of associates worldwide for fully embracing the lean sigma journey.

The company through its global operating councils continues to make good progress in leveraging our worldwide footprint. It seems each day we are able to find a way to leverage our joint known how and safety, human talent development, manufacturing best practices and technology as well as sourcing and customer development. The transforming Phelps Dodge International acquisition occurred almost two years ago and we continue to find joint opportunity.

In addition, we have made progress in bringing our recently acquired European and North African operations together creating new market opportunities and organizational efficiencies both regional and globally. Because of the significantly improved operational and financial strength of the company over the last several years, during this recession rather than take offensive position we’ve been able to continue to prudently invest in new products and in new geographic markets which will great long term growth and value for our shareholders.

I’ve been talking for some time about the opportunity that economic stress will create for us as less efficient or more narrowly focused competitors struggle to remain viable. The combination of very week end markets, relatively inefficient production, limited geographic coverage and high and increasing raw material costs is proving to be quite demanding as many competitors lack the resources, market breadth and access to credit to get them through this deep recession. We’re actively evaluating opportunities in many regions of the world focused primarily in Latin America, Africa and Southeast Asia but also looking in to the Middle East and Eastern Europe. For the most part the opportunities are geographic expansion with revenues in the $10 to $100 million range.

Let me touch a bit on each of the geographic segments and the current environment before turning it over to Brian. The rest of the world continues to over deliver compared to North America and Europe on a relative basis. While pricing and demand in many geographies has deteriorated following global trends, our relative cost structure has allowed us to maintain good profitability despite difficult conditions in Central America, Mexico and Oceana.

Significant investment continues to occur in many areas of South America and Southeast Asia while Southern Africa is experiencing some renewed strength with investment focused on infrastructure, mining and oil production. I expect the rest of the world region to continue to demonstrate relatively better fundamentals. This is why our internal investments are principally focused in the developing world and include a [inaudible] project in India now under construction along with several other ideas in play at any one time.

North America continues to suffer from extremely week end markets with no signs of any meaningful rebound in sight. Currently, the leading indicators such as the architectural billings index are suggesting a continuing period of non-residential construction spending contraction which ultimately influences many areas of our business. Following two years of energy usage declines, I see no strong reason to expect a significant increase in electric utility spending on the distribution network as we move in to next year.

Inventory replenishment by business and the apparent bottoming in home construction are positives however. Additionally, opportunities in transmission and alternative energy may help as customers begin to access the $6.5 billion for new transmission, $4 billion in matching grants for grid modernization as well as $1.6 billion in renewable energy stimulus and $8 billion in loan guarantees. Overall, for North America, I expect difficult conditions for some time with weak pricing and flat to slightly declining volumes to continue to pressure earnings.

Europe also continues to be weak. Our exposure in Spain is not helping us today as it did most of this decade. We realized several years ago that while the construction boom in Spain was helpful to our results, it could not last. Many of the product and market expansion efforts that we have completed have been in part to diversify our European business. We completed several transactions which significant expanded our presence in the European union and beyond.

Beginning in late 2005 we acquired Silec located in France. In 2006 we entered the overhead transmission market in Europe. In 2007, we purchased NSW in Germany and in 2008 Enica Biskra in Algeria. Silec and NSW are both regional and global businesses. Additionally, we focus on expanding our regions to export markets including Northern Africa and the Middle East and today nearly one half of the production in Spain is sold outside the country. These diversification efforts of the past are now paying benefits as we are able to better weather the storm in a tough Spanish economy and benefit from stronger fundamentals in Northern Europe and North Africa.

I’ll now turn the call over to Brian Robinson who will provide further details on our financial performance for the third quarter.

Brian J. Robinson

In order to allow more time for Q&A, I’m not going to go through all of the details that you’ll find in the press release but focus on other items such as the balance sheet and cash flows as well as highlight other key points. As Greg mentioned, conditions in much of the world continue to be weak. Volumes as measured as metal pounds sold before the impact of acquired businesses were down 20.5% compared to the third quarter of 2008 and down 7.3% compared to the second quarter of 2009. Volumes in the quarter have been negatively impacted on a year-over-year basis by the significant reduction in construction activity, very weak spending by the electric utilities on their base load networks as well as lower alternative energy investment and lower industrial factory utilization rates.

Overall, third quarter results were about as we expected. Volumes feel in the mid single digits from the second quarter in normal seasonal fashion. Rapid increases in copper and to a lesser extent aluminum prices have been difficult to recapture as reflected in declining margins. We were however able to generate a significant amount of cash from reductions in working capital partially resulting from extended plant shutdowns during the period.

Removing about a $0.06 per share benefit in the third quarter related to a reduction in our estimated 2009 effective tax rate to 30% would result in earnings of $0.49 per share still well within management’s guidance. During the third quarter copper averaged $2.67 per pound compared to $3.45 in the third quarter of 2008, a decrease of 23% but up a very strong 44% from the first half 2009 average of $1.86. More recently copper was trading for as much as $3.06 per pound.

In part the continuing and rapid increases in metal conductor prices this year have been more difficult to recover in this low capacity utilization environment and have put pressure on earnings during the quarter. Additionally, the company’s LIFO accounting for metals burdens our earnings relative to our major competitors who are not on LIFO in a period of rising prices. In contrast, falling metal prices late last year and early this year were in part reasonable for a stronger than expected earnings in the first and second quarters.

On balance, over time there should be no material impact from the accounting for metals on our results however, the large and rapid changes in metal prices has resulted in forecasting challenges as well as large favorable and unfavorable earnings swings in the short term. Pricing for the unhedged portion of many of our products continues to lag behind the 70% increase in copper prices we have experienced from the first quarter to the third quarter and the 33% increase in aluminum prices over that same period. With copper prices recently rising about another $0.40 from the Q3 average of $2.67 per pound we expect copper prices to continue to pressure earnings as we try to pass these increases in to the market while from an accounting perspective immediately burdening our cost of sales.

Our focus on continuous cost reduction and lean thinking is a big part of our corporate culture and extends in to our back office functions and management of working capital as well. Since the end of 2008, in order to continue to balance production with end market demand and reduce operating expenses, the company has reduced its labor force by over 1,200 associates. While much of this is direct labor, some of this reduction has been focused on selling, general and administrative and other fixed costs.

In addition to personnel reductions, cost reduction efforts have also included salary freezes, reductions in discretionary expenses and the like. Much of this benefit can be seen in the reduction of the SG&A line of the income statement over the last several quarters. We were running about $95 million per quarter in 2008 and are currently running between $80 million and $85 million per quarter. While some of this reduction is variable selling expenses, we expect that the company will be able to retain much of these savings as volume recovers. The company has been absorbing the cost related to headcount reductions through its P&L throughout the year.

Net interest expense for the third quarter of 2009 before the non-cash convertible debt interest expense charge was $10.7 million, down 21% compared to $13.5 million of net interest expense on the same basis in the third quarter last year. This decrease is due principally to lower overall short term variable rate borrowings resulting from the company’s strong positive operating cash flows in the first nine months of 2009.

Reported net interest expense in the third quarter of 2009 was $20.5 million and includes $9.8 million of non-cash interest expense resulting from the change in convertible debt accounting for interest expense which was effective with the first quarter of 2009. During the third quarter the company generated $228.9 million of cash flow from operating activities and $365.1 million for the nine months year-to-date period. This is an improvement of $40.1 million and $236.4 million over the prior third quarter and prior nine months year-to-date period respectively.

Part of this improvement reflects lower working capital levels as a result of declining end demand for our products. Additionally, the liquidation of net account receivables related to the dollar decrease in average copper prices during a nine month period ended October 2, 2009 compared to the full year 2008 average and the $0.46 or 38% reduction in aluminum prices over that same period have contributed to strong cash flow as well.

Finally, the company has remained focus on flexing down production during the year in order to balance inventory and end market demand. Throughout the year and particularly in the second half, we have taken considerable costs through the current year’s income statement in the form of unfavorable production variances resulting from running our manufacturing facilities below daily sales trends. We believe this leaves us in a much better position to improve earnings leverage when our end markets for our products improve.

The company reduced inventory levels by $50 million during the third quarter. Because of our expectations for weak demand near term, we are planning to continue our recent practice, particularly in North America of temporarily extending planned shut downs of certain manufacturing facilities. These temporary planet closures range in length from one additional week to approximately 90 days and are taking place throughout the fourth quarter and in to the first quarter, the seasonally slowest periods of end market demand. We expect that as a result of these actions the company will be able to reduce inventory in the fourth quarter by an additional $50 million or more.

Net debt at the end of the third quarter was $764.4 million, down $187.3 million from the end of the second quarter of 2009. This decrease is principally the result of positive earnings coupled with reductions in working capital in each of the company’s geographic segments more than offsetting capital expenditures. Through a combination of existing cash balances and available lines of credit, the company maintains adequate liquidity to fund operations which could include increased working capital requirements as a result of hire metal costs, internal growth and continuing product and geographic expansion opportunities.

During the third quarter of 2009, the company made no common share repurchases. The company’s one year share repurchase authorization will conclude with one million shares purchased at an average price of approximately $11.65 per share.

Adjusted EBTIDA was $73.3 million for the third quarter of 2009. This results in $393.3 million of adjusted EBITDA for the trailing 12 months and a leverage ratio of 1.9 times on a net debt basis. Capital spending in the third quarter was $23.2 million while depreciation and amortization was $26.7 million. As we have said for several quarters, the company has been working on many large scale projects focused on international, geographic and product expansions which are now largely behind us.

Spending is expected to slow considerably following below depreciation for our existing facilities. Our ongoing capital programs are more narrowly focused on developing regions of the world coupled with an ongoing global focus on lean initiatives and continuous improvement in the areas of safety, quality, material usage, conversion costs and throughput. We expect to finish 2009 with capital spending of approximately $140 million.

As we begin our preliminary 2010 planning, excluding the impact of potential acquisitions and joint ventures, we are anticipating a capital expenditure budget well below $100 million for 2010. We expect to have a more precise estimate when we report results for the fourth quarter. With those comments, I’ll turn the call back to Greg for some final remarks.

Gregory B. Kenny

As a management team, we’ve always been very direct with our investors and have called market trends as we saw them. We haven’t always gotten the timing exactly right but in hindsight we’ve often been able to spot both direction and opportunity. The cable business is not linear and can be discontinuous, powerful both on the up and downsides. We have talked about peak to trough movements far more volatile than G&P and pricing at cash costs of the least efficient competitor and some downside scenarios.

While it is not our intention to give any specific revenue or earnings guidance for next year, I would like to expand a bit on how we are thinking about 2010. As you know from following our business over the years, this industry can experience volatile movements in demand and pricing. We are certainly suffering from deep declines in demand and pricing today. The pricing environment has become more difficult as we have moved through 2009 and is expected to remain difficult in 2010.

This is true in nearly all of our product families and geographic regions. Because of the late cyclical nature of the majority of our product mix, as we have always said, we expect that demand for many of our products will lag the general economy and more specifically construction by six to 18 months. If green shoots in the economy are real and the overall economy is actually entering a recovery now, 2010 may be the period our developed economy businesses begin to bottom.

We are currently preparing our 2010 internal business plans and based on our preliminary work I would like to share the following thoughts about each of our segments. During the year, the company has taken a tremendous amount of costs out of the business both in the SG&A line which you can see in our income statement and manufacturing overhead costs. These costs reductions are expected to materially offset ongoing pricing pressures in 2010. Our goal is to make them permanent.

As we look forward, we expect the developing economies that we serve to perform relatively better than the developed economies of the world. For 2010 in the rest of the world, which is further along in this recovery from a much milder decline, we expect volumes to be flat to slightly positive. In the US we expect continuing declines in non-residential construction spending as well as a residential construction market that will recover slowly. These are direct or indirect end markets for many of our products.

Additionally with [inaudible] of companies in the United States using electricity for the last two years, we do not expect [inaudible] utility spending on the distribution network to increase next year in any meaningful way. However, we do expect the US transmission and wind farm segments to begin to improve as the stimulus bill begins to gain traction over the next year. Overall, in North America we expect volumes to be flat to slightly down in 2010 compared to 2009. We are watching our earlier cycle businesses both our communications and industrial horizons very carefully. We do expect an uptick in transmission cable and wind farm demand over the next year.

After a decade of exceptional growth, Spain continues to suffer from a severe correction in the construction markets and nearly 20% unemployment. We do not expect this market to return to growth quickly. In Europe overall, we also expect flat to declining volumes with good long term fundamentals for transmission lines of submarine cables. In each of these geographies, what we don’t know is what pricing will be. Also, if recent history is a guide, we cannot accurately predict what he cost of our largest material inputs, copper and aluminum will be, roughly have of which we cannot contractually pass on to the market.

What we do know is we are in an outstanding financial position. We are leaner today than we were a year ago and we’ll be leaner a year from now than we are today. The improvement over the net last five years is very substantial. We are not expecting the business to erode materially from here but we are expecting a period of difficult demand and continued weak pricing as we lag the general economy.

As you know, the company’s capital structure is in excellent shape with no significant maturities until late 2012 and the company is generating high levels of cash. Our balance sheet is in a very strong position. We continue to maintain an open dialog with our advisors and as in the past expect to periodically take advantage of market opportunities to further strengthen our capital structure. We are fortunate today that we do have access to the credit markets. While we do not have to access the credit markets but we could chose to do so for the right opportunity and the right terms.

In the end, I believe we have done a good job over the last several years preparing for the possibility of more difficult times and will continue to size the business appropriately. If we are wrong in our assessment of next year, and I hope we are, we are not at risk of missing the upside case. Capacity can be ramped up quickly. We have been careful in our cost cutting efforts not to eliminate critical institutional knowledge and in fact, we continue investing in critical resources that will allow us to develop new products and open new markets.

Or business does have it bright spots and catalyst for growth. Angola continues to build infrastructure such as transportation, hotels, sports stadiums and telecom networks in preparation to host the 2010 African Cup of Nations. Brazil is now gearing up to host the 2014 World Cup of Soccer and the 2016 Olympics which over the next several years will provide a tremendous opportunity for General Cable to leverage it’s one company approach to the vast and varied needs of the government’s plans for infrastructure, sporting venues, transportation, hospitality and the like. Not to mention the massive transmission investment projects to move power to the west that will begin late next year.

General Cable has already received awards totaling over $110 million for these projects. Additionally, over the last year, we have entered the large Mexican market and have seen relatively strong performance in Southeast Asia. Our new facility in India will open next year. In Europe, large energy transmission interconnection projects between countries are beginning to take shape and as one of the top three competitors in Europe we expect to meaningfully participate in these efforts over the next several years.

In the US, continued administration support for energy and independence and security, alternative sources of electricity such as wind and solar as well as alternative energy mandates put in place by about two-thirds of the states so far may provide important catalysts for growth for many of our products. This may include medium voltage energy cable for wind farms, low voltage energy cables for solar fields, nuclear rated cables for new or expanded nuclear facilities and certainly the required transmission and distribution cables to move this power to those places to where it is consumed.

Transmission cable demand is up nicely in 2009 and we expect this trend to continue. As the global economy recovers and our industry follows, we expect these catalysts to spark growth in many o four end markets. We believe that long term themes of growing populations and increasing demand for energy and communications as well as governmental desire for energy independence and security will be important drivers of growth for our products. We have the right strategy and we have the right long term fundamentals.

While comparable earnings will be difficult over the next few quarters mostly due to the outstanding results the company reported in the first two quarters of this year, the company is possibly in the best financial position it has ever been and we continue to stay on the offensive with respect to continued geographic and product expansion. That concludes our prepared remarks. I’ll now turn the call over to the operator who will assist us in taking your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Will Stein – Credit Suisse.

Will Stein – Credit Suisse

I was wondering if you can talk a little bit about the strategy in China? That was one of the regions you didn’t talk about in the prepared remarks.

Gregory B. Kenny

China is an interesting place for us. We have a business that we have a minority position in, in the southern part of the country as you know and we’re on the [upside] peninsula with an energy cable investment where we have a minority position as well. We also have a wholly owned business around the automotive industrial business. We continue to look for China to begin to develop stricter standards around product design. There is a lot of small facilities, it’s really regionalized. So I think again, we’re doing probably on a combined basis more than $100 million of revenues in China as if we owned this companies and didn’t report for them on an equity basis.

We have a good window but I continue to see China as a place we’ll come back to as that market sorts itself out. We do sell in to China, high voltage cables and extra high voltage from France which is another look in to that market where there is a lot of interest in world class specifications and standards. We will focus more in the Southeast Asia Will and keep our eye on China but probably I think it’s a year or two before we go back in a more earnest way. Clearly, they’re reporting strong demand globally, it’s just related to product design and also the ability to access that market. We’re watching, we’re participating but our interest is right now in other markets.

Operator

Your next question comes from Gary Farber – C. L. King.

Gary Farber – C. L. King

Can you reference some of these macro indicators like the architectural billing index and things like that? Can you elaborate as to what levels of recovery you need to see in those kinds of macro indicators or others for your business to start to leverage the cost structure? And, if that doesn’t happen what additional actions can you take on your cost structure?

Gregory B. Kenny

We’re broadly selling in about 100 countries and we have some business like data communications and harnesses that are probably earlier cycle businesses and then others that lag financing and design by some months. I would say we’re seeing as I read monthly operating reports and weekly reports, we see a mixture of some things that are encouraging and other things that are sort of moving sideways. We expect North America non-resi to back off and resi is apparently bottoming. We’re also tied to industrial capacity utilization which is at a record low of I think 67%.

Again, as the credit markets begin to reestablish and people begin to take risks, that all pulls through. But, each market is quite different. France, as I said previous calls and Northern Europe is relatively strong by utility spending. Brazil is in many areas in the energy area is quite strong and we’re seeing good trade out of Thailand and Philippians throughout the region all the way to the Middle East. It really depends upon the market but broadly there’s always things you can do but most of our plans are built against specific geographies for specific products but clearly if demand were to remain at this level, which I don’t think it will do, we would look at a couple of envelopes but it’s not a major kind of opportunity.

Again, I don’t think – I’ve seen multiple cycles in my career, this one is the toughest but we are extraordinarily well prepared. We look at that constantly. We’ve done a great job accelerating our lean and again, it saddens me to see the number of people that aren’t with the company now but it’s what we needed to do to protect the whole. So, I’m in a way encouraged and we are hammering through extremely tough conditions. We continue to pull the inventory down as low as we think we can and hopefully as we see these more positive signs it will flow right back through our production and you know when we run these facilities, the kind of absorption we get and operating leverage.

There are a few flickering greens around the world, some sort of sideways movement in a lot of markets but we’ll have to see. I think 2010 is clearly a transition year for us and I think we are ready for it.

Gary Farber – C. L. King

Bob, on this [AVI] does it have to clear 50 for you guys to see demand?

Brian J. Robinson

Well technically that’s sort of the clearing point but we’re seeing demand now. As you know, a fair part of our business is also moves and changes and retrofit, that kind of a thing which is sort of a base part of the business. But I think the US particularly, and again the US is 30% of our worldwide business so we’re talking about a third of the company but over 50 and we start to see it trace the other way, but we do expect non-resi to be weaker next year and as it begins to reverse and go over 50 then it would start to pull us back through again.

Operator

Your next question comes from Brent Thielman – D. A. Davidson.

Brent Thielman – D. A. Davidson

Greg, I was hoping you could just expand on the communication segment. It saw a pretty sharp drop year-over-year but I think also sequentially I just wanted to get a sense of what’s going on in that?

Gregory B. Kenny

Well, the communications business is primarily a North American business and in there is probably 70% North American. In the North American piece there is a telephone cable business that continues to shrink though it’s been profitable for us. That’s the old exchange cable business for the telcos which was once a very important part of the company 10 years ago or five years ago is now a relatively small business but a successful one for us and I think impacted by housing substantially as well as technology.

The bigger part of the business is really the data cable and then to a lesser extent electronic cable which we actually categorize in a different area but the data cable has been a nice story for us and we think that’s one of the areas that will come out a bit earlier as we’re tracking semiconductor, IT spend, etc. and have built a range of high end products as well as products at the center of the market.

We feel good about it, we’re making money in communications and then when you look at our other businesses, we also sell a leader in undersea communications through NSW and we sell data cable and a little bit of telephone cable in Europe and a few other parts of the world. Communications is contributing, it’s probably 15% to 20% of the company and we have become over the last two years under the leadership of [Bob Kenny] and his team I think recognized as one of the leaders of product innovation in the 10 gig and beyond space.

Brent Thielman – D. A. Davidson

Then just as a follow up, with copper prices still sort of rising subsequent to the end of Q3 can you just expand a little more on your guidance for Q4 and how much improvement in pricing is sort of built in there?

Gregory B. Kenny

We averaged $2.60 something in the third quarter. Copper this morning is $3.05 and again, we’ll put through our P&L whatever we pay for copper December 31st. So, we obviously don’t know. There’s a report this morning that China demand, which is obviously good for our entire Asian operations and the world operations, China demand in part because of the stimulus was up and copper demand was increasing in China. We’re at $3.05 today. We sort of have a tendency to look from today’s call forward and look at that as likely what we’ll pay. We know it won’t be but that’s in the back of our minds as we look forward.

Clearly, in a very weak environment, we’re trying to recover that metal. Again, I had not expected copper to be trading that high but it is. We’ve been great on the velocity that we’ve been getting and getting material moved through the system. We also are continuing to produce less than we are selling and have pulled down inventory and will continue to slow operations. So, when we get some demand, we should be able to turn these factories back but I’ve got over $3.00 copper to deal with which is $0.40 a pound and we’re processing something like 150 million pounds, just to use a number, or more a quarter.

Half of it is formulaically protected, the other half we have to go out in the market and get. So, 150 divided by two is 75 times $0.40 a pound, these are huge numbers in terms of headwind which is in our thinking as we’ve arrayed the guidance of $0.20 to $0.30 non-GAAP.

Operator

Your next question comes from Shawn Harrison – Longbow Research.

Shawn Harrison – Longbow Research

I wanted to follow up just on pricing. I think Nexans last week made a comment that they either saw the pricing environment getting a little bit better or getting a little bit more receptive to pass throughs. I was wondering if maybe you could comment in terms of what they’re seeing in the market and if you’re seeing to an extent the same thing given the fact this morning you’ve also talked about the pricing environment still being negative, just kind of a bad dynamic in general. Maybe how that looks in early 2010 if the market gets even more receptive to allowing you to pass through these higher copper prices?

Gregory B. Kenny

Again, Nexans is a larger European player than we are. They also have a larger business in the submarine and extra high voltage which is project driven and I have looked at their release. I would say that we broadly agree on organic revenue views in terms of what happened. They’ve looked backward and we’re very much similar to the way they’ve reported the business. They have been very strong in the submarine business and we are only entering that business now so that is a large business that has been a very material one for them.

But broadly, I think we agree. We do see attempts to raise prices in some markets to offset these raw materials and in some cases it holds and in some cases it doesn’t but again, we’re making markets probably in 100 countries. There are lots of projects. Our factories are actually I think in 26 or 28 countries and then trading regionally. It’s a complex equation but we do know eventually either people have to come out of the business, the high cost players, or get price relief and we have seen it in some areas so we’re hopefully. We’re hopeful and we hope Nexans is correct on this but I don’t have their specific comments on pricing in front of me.

Shawn Harrison – Longbow Research

Maybe it would suffice to say that the markets you are seeing are a little bit more agreeable to taking pricing are also the same ones that are you are citing as flat to up a little bit, those kind of flickering green lights.

Gregory B. Kenny

It depends on where you are and in some cases in some areas we have a very strong cost advantage we think, against some competitors and perhaps better access to credit. Other places, the competitors have maybe comparable costs. It depends and you can see some international projects fiercely competitive over. We’ve seen a lot of pressure from the Korean competitors as they export strongly out of Korea which is a market that we have not been able to really enter. It’s a mixed group but we’ve seen this behavior at bottoms before and yes, we are encouraged by some attempts to recover cost, etc. in markets and we’re strong supports of getting paid for what we do.

Shawn Harrison – Longbow Research

Then two very briefly follow ups, the tax rate for the fourth quarter and then 2010, what should we assume? Then, what is global capacity utilization currently or maybe you can just give me the numbers by region, manufacturing utilization?

Brian J. Robinson

On tax rate for the fourth quarter we would expect 30% and I would say for 2010 let me range it for you because we’re somewhat early there but I would say probably 30% to 33% would be a fair assessment.

Gregory B. Kenny

On the capacity, as you know, there isn’t any independent studies that actually list capacity. Against our demonstrated capacity, and I haven’t run this recently, but I would judge that we’re between 45% and 70% utilization depending upon the product family. A few areas on the high voltage and some of the specialty cables busier and some factories much busier than others. We do have some that are still operating up in the 90s and I would say where we see that – or the 80s is more in the rest of the world markets is where we see a greater level of utilization and you can see it in the numbers obviously in the third quarter.

Operator

Your next question comes from Matt McCall – BB&T Capital Markets.

Matt McCall – BB&T Capital Markets

I think you commented that volume was essentially in line with normal seasonality in Q3. The two issues you’ve cited, facility shut downs and the copper pricing impact, the first part of the question is where those basically in line with what you expected in Q3 and then in Q4 what would be the normal seasonal pattern you should expect? Is that kind of what’s baked in to guidance? Then, can you tell us about the relative impact of shutdown days, maybe talk about the average number of days you expect?

Gregory B. Kenny

I would say in this third quarter versus second, it was probably a little bit weaker than historical patterns and that was primarily continued economic shutdowns in the US and extended vacations in the holiday period and I would say very slow Europe in July and August, slower than we have normally seen offset somewhat by the rest of the world hanging in there. The fourth quarter we’re seeing businesses, it’s a mixed bag but generally sales volume moving sort of sideways which is from the third quarter which is down just a little bit.

Normally, fourth quarter would be flat to down in the fourth quarter so we’re slightly encouraged by that. We are going to make less than we sell in the fourth quarter so we have assumed further plant shutdowns to continue to push cash out of the company as well as we also have tough pricing in that we have that $0.40 a pound higher than our third quarter so we’ve got to recover that. We talked about that being tens of millions of headwind in the last question or two questions ago.

We continue to assume demanding pricing generally despite the comment that we said we were seeing some attempt in some markets to see prices kind of lift and recover this. Net lower production than sales, a huge copper and to a lesser extent aluminum headwind and the assumption that pricing is broadly difficult.

Matt McCall – BB&T Capital Markets

Greg, can you give us an idea about the total shutdown days and what was the impact in facilities shutdown working down the inventory, what was the lower absorption impact in Q3 and what is the expectation for Q4?

Gregory B. Kenny

Well, we’re not going to get in to a discussion of what we’re shutting down and where. I would say as we’ve said earlier, we think our inventory can come down another $50 million or more and you can do your own math around that but we’ll run a very light December and we’ll have extensions over Thanksgiving holidays, etc. I think the happy news is demand seems to be maybe stepping sideways and could even been in some markets slightly better than we can expect in a normal seasonal patterns but we will make less than we sell. Inventory will come down $50 million please on top of the reduction in the third quarter.

Operator

Your next question comes from Stuart Bush – RBC Capital Markets.

Stuart Bush – RBC Capital Markets

When you look at the forward trends in the US electric utility business, your distribution versus transmission, do you think your assets are appropriate size? Would you consider shutting them down for good or can you retool a distribution plan to a transmission cable plant for example?

Gregory B. Kenny

Yes, the distribution plants do make transmission cable. We have furloughed two plants right now as the capacity is in excess. I think over time this comes back Stuart, we’re operating in the distribution business at levels that have never, ever been touched before. It’s almost down 45% from the ’04 to ’06 timeframe and frankly, when we look back this business was fairly flat from 2001 to 2006 and as we reported earlier it began to come down in ’07.

Clearly housing, there was less need for the utilities to build out and connect and now we’ve seen demand for the first time in a life time actually go backward but this does not have the technological threat that say the telephone utility business does but we’re operating at 45% off of the ’04 to ’06 timeframe. My view is it comes back but we if it remained at these levels we would look at envelopes.

Stuart Bush – RBC Capital Markets

Your position right now is holding on to those assets assuming you get back eventually in the cycle to those ’04 to ’06 levels?

Gregory B. Kenny

Or, I’ll take ’01 to ’03 levels and be thrilled. We do have these assets also make wind farm cables which has been this year approximately half of last year but we think it’s going to come back and that’s material. In transmission these assets can also make transmission cables and happily transmission is actually showing a positive trend. In fact, transmission in ’09 we think will be the highest since 2001 and we think it can improve again next year.

That’s all the offsets to the utility distribution spending with wind and transmission and again, these plants can do both and I think that’s reason for optimism. I’d love to see the utilities get back to ’01 and ’03 and we’d be really happy around here. These plants as you know, the average fixed cost of a plant is $3 to $7 million depending on plant so these are interesting discussions. A thing we have done in the past, always have done, in terms of making sure our envelopes, always trying to make sure we have the right envelopes, right now we’ve got two plants on 90 day furlough, they’re smaller plants and one of them is a mixed use plant. That furlough starts in December.

Stuart Bush – RBC Capital Markets

The last question a follow up on this transmission trend, you mentioned that you expect to see some of the stimulus dollar impacting in the 2010 timeframe. In general, once these projects are out there and awarded, what is the lag time between overall awards and when you guys get the business?

Gregory B. Kenny

If it’s awarded and there’s no groups fighting it and obviously it’s there’s a bill, I think it’s [Nelson’s] bill that would help with a lot of that stuff. If they have a go we’re probably three to six months behind. Wind we’re early probably in that timeframe. Some of the wind projects we can be very early.

Operator

Your next question is from the line of Joseph Gibney – Capital One/Southcoast, Inc.

Joseph Gibney – Capital One/Southcoast, Inc.

Most of my questions have been asked and answered, just a couple of minor follow ups. On the India Greenfield expansion, just curious you mentioned that opens next year, can you provide a little bit more granularity on timing there and specifically what this is going to bring to the table for you in that particular market? Also, I just wanted to touch base on the acquisition and opportunity side, Greg you mentioned the obviously geographic expansions in that $10 to $100 million range in international markets and the rest of the world. I was curious if you’d flip that around a little bit and focus on the North America side of the product launch expansion that are particularly appealing maybe in a stressed situation and how is Gepco going?

Gregory B. Kenny

On India we have a view that we’ll be building products – we are selling products now heavily in India, just to be clear, principally from our Tai operations which has been trading in there for a long time as well as we’re bringing product from elsewhere in the region. We have a very expansive footprint today in Southeast Asia. We have a commercial organization on the ground, we’re selling product, we’re building a facility that would roughly be able to sell $80 to $100 million and could be expanded nicely and have a full range of products particularly around the industrial and medium voltage families.

We would expect that plant to be building first article around next summer. The facility is well underway. Things take a long time in India in terms of getting approvals and all that kind of thing. You may remember we’ve been pushing in India for about three years. We’ve now built a nice organization there and this plant will be really the first from my knowledge, the first of the global players to have a major facility on the ground wholly owned. Which I think again, around the kind of quality expectations and other things we have is important.

As we talked about earlier this $10 to $100 million, I was thinking again it could be acquisition price but I was thinking revenues of these businesses that we’re looking at. That’s not to say that we wouldn’t do something larger but right now most of them are bolt ons where we bring specifically knowledge, or we’re already selling in a given region but would like to have a facility on the ground to back fill that or back fill our distribution center. These are really regional bolt ons to things that we’re doing.

The US, I feel part of our success has been when people feel things go down forever of really seeing these kinds of changes that happens in this business and at the bottom of cycles it can be a very attractive time to engage as we did with BICC and many other businesses. So while the developed world is not our primary focus you did see us go acquire Gepco which rounded out a very important electronic cable profile in North America. In fact, some of those products of our electronics are now moving in to the rest of the world as we introduce those technologies and those products to the customers we have primarily through the Phelps Dodge acquisition.

We’re always looking for a great opportunity. Some assets, if they’re not earning any money can actually be trading at down to close to their cash costs or working capital which we’ve seen in a few instances. If you can get the business to survive and prosper they can be quiet handsome. But broadly I would say we’re building out using the technology and free cash from Western Europe and the US, Canada to move in to other places. But you’re right, that wouldn’t stop us from doing something that would be very attractive financially if we saw something like that.

Operator

Your next question comes from Richard Wesolowski – Sidoti & Company.

Richard Wesolowski – Sidoti & Company

Greg, coming out of the last cycle the volumes began to grow first and then you saw the benefit from operating leverage on profitability and then only later did you see the prices for your products rebound. Is that the general sequence we should expect over the next year or two?

Gregory B. Kenny

That’s what we’ve seen in the past. This is clearly a recession like none – occasionally, as the economists say it looks like the early 70s recession but I think generally this is far worse than anything we’ve seen. But, yes that’s been normally the pattern and when utilizations get in the 80s you see some pricing power. I would expect that that kind of cycle would replicate here. I don’t know, but I think.

I think that the difference might be with all the world’s attention and Europe is doing a lot of work around the need for high voltage transmission lines and with the kind of infrastructure as well as the China card, our recovery could look a bit different because there wasn’t a lot of talk around alternative energy, the grid, commodities, none of those things were running in the ’03 ’04 timeframe and all of those are remarkably strong. Copper is remarkable. So, the world may be thinking about these areas differently.

Of course, if you’re thinking about commodities differently and global populations in a different way, we could see the recovery look a bit different than the ’01 ’03. Although, the downs case in ’01 ’03 was relatively mild next to what we’ve seen.

Richard Wesolowski – Sidoti & Company

On the subject of your hallow pricing, I have an admittedly crude proxy that I look at there. It says to me that your pricing ex the metals is back to where you were about two years ago but still well above the depths of earlier this decade. Is that accurate?

Gregory B. Kenny

It is although I would say pricing is probably as tough or tougher than we had earlier in the decade. What the difference is, is we’ve continued to get better probably relative to many competitors in terms of our break even and our through put and making the product exactly perfectly every time without scrap, and waste, and change over times. I think our cost is in better shape but I don’t have your math in front of me but it sounds generally correct.

Richard Wesolowski – Sidoti & Company

Lastly, I’m not sure if you guys had mentioned your average aluminum cost for the quarter?

Gregory B. Kenny

Aluminum was running in April, May and June, it was $0.68, $0.70, $0.75 and then July it was $80, September was $0.92, October was -

Brian J. Robinson

It’s $0.87 for the quarter.

Operator

Your next question comes from Jeff Beach – Stifel Nicolaus.

Jeff Beach – Stifel Nicolaus

You’ve been consolidating operations or let’s say furloughing plants, cutting some people, can you give us a sense in the last couple of quarters how much cost you’re not calling out on the press release that you’re incurring trying to get your cost structure lower? Then, what might be included in this fourth quarter?

Gregory B. Kenny

This is sort of an ongoing discussion and each country is different in terms of how costs come out. Some of it is variable meaning if you’re not making it you don’t need the workforce. Obviously we’re always looking to do more with less but there are hundreds of people that have come out of fixed costs and we have taken that through the P&L. The cost this year is in the millions, of millions, of millions of dollars and if we don’t add it back which I and my senior team are intent on, we keep trying to run more with less, that would be cushion for next year in an environment that could possibly be skidding sideways with tough pricing. Again, we hope it lights up but we look at that as really some headroom for next year but we don’t want to get in the business of specifically calling out what’s out and it’s an ongoing process and then if we never change again how much falls to the bottom line. But, it’s millions and millions, it’s big numbers.

Jeff Beach – Stifel Nicolaus

The second question comes back to pricing versus costs, from the August 6th conference call through the end of the quarter in to the first week of October copper went sideways from that point and I thought it had probably given you some less of an impact or less headwind than you were anticipating shooting up right now. But, as you close the quarter and got in to the early part of the first few days of this quarter, was your pricing catching up with the July increase that you saw in copper? Was it lagging behind, was it more disappointing or maybe feel short of what you hoped? If let’s say copper holds here in the low $3 where it is now, can you recapture or recoup this current cost by let’s say the end of this quarter going in to next year?

Gregory B. Kenny

When we talked in August we had as a reference rather than an algorithm where current copper is and were also looking at the future market but we are planning in our views for copper to move one way or the other because we don’t know from today’s point and we certainly when we talked to you in August we would have not made a judgment as to whether we thought copper would accelerate in September or not. We simply looked at it as kind of a point in time.

We have announced a series of increases around the world to get that spike of metals that you talked about and you’re always looking for real price as well. Some of those are working and then of course we’ve now had another substantial step up and in a weak market the timing to get that and the adhesion around that is something that obviously we don’t control and is more difficult. We are attempting and will attempt to raise prices to offset the recent price increase and we’ll be doing that in 100 countries. That’s again, that’s for the business that isn’t formulaic as you know.

Jeff Beach – Stifel Nicolaus

What I was trying to get at from these two questions is when we look at lower fourth quarter earnings on roughly the same volume as in the third quarter, trying to judge is this coming from a greater impact of inventory reduction and unabsorbed planned overhead or is this coming from more of an increase from copper versus pricing than you even incurred in the third quarter?

Gregory B. Kenny

We’ve got a strong movement in copper upward and the markets are sloppy. We are making less than we are selling and December is an absolute wildcard as you know Jeff, and even November now with respect to customers what they’re ordering, what the end of the year looks like and as you know, it gets very tough to predict what happens in the holiday period. Broadly, it’s exactly as you described, it’s chasing copper, it’s even more reduction from the reduction that we already obtained in the third quarter and the assumption that pricing will invariably try – the market needs to recover these metals but it will happen, as we said it can go from one month to six months in our experience depending upon the market and what’s going on in supply and demand.

Operator

Your next question comes from Anthony Kure – Keybanc.

Anthony Kure – Keybanc

Just a quick question around the credit environment and what your customers might be saying as it relates to their ability to finance some larger projects. I think you talked about some projects coming to a close in the first part of the year and now as we go in to some new projects here I’m wondering if there’s been any material improvement over the last couple of months as related to your customers able to get any financing for some of these larger projects?

Gregory B. Kenny

We’re seeing some projects moving forward. I would say the broader pattern is deferrals meaning the work needs to go down but it’s on a hold and we sort of get stalled out as people reassess where they are and whether they can finance. Clearly, the larger companies or the governmental institutions have a different ability than some of the more leveraged endeavors. We’re watching probably as keenly as you are the Chicago Bridge & Irons, Foster Wheeler and alike.

I think there seems to be a little more stomach for risk coming back. We’ve got lots of projects. 2011 looks like a lot of people look towards that and you see, I would guess, our average project is pushed off probably by six months, kind of. Again, I’m talking about gross generalities but many projects are pushed off unless its mission critical. But, we’re starting to see some get released so I’m hopeful and encouraged but I’m not going to take it to the bank.

Operator

Your next question comes from Nate Kellogg – Next Generation Equity Research.

Nate Kellogg – Next Generation Equity Research

Just a couple of quick ones, if you guys can talk just a little bit about your cash balance obviously is a pretty sizeable now and you’re talking about deals and just a little bit maybe about where that cash is and how that may affect or hinder where you might do some deals or what not?

Brian J. Robinson

I would say the majority of the cash resides either in our European operations or in the rest of the world. Not to get too deep in to it much of the rest of the world is actually owned underneath our European organization from a legal entity structure. That lines up nicely with where we’re tilting our investment either organically or where we’re looking for acquisition opportunities. Then, turning the other way, I think we have some fairly efficient means to get cash back to the US but we continue to consider opportunities to enhance our opportunity as well as think about where the administration may head on that front. I think we’re well positioned. Our banking relationships globally are diverse so I think the cash balances and the facility line up nicely with where we are looking in the world.

Nate Kellogg – Next Generation Equity Research

Then just last question and I’ll hop back in the queue, just on the competitive side you guys have said that this is one of the toughest environments you’ve ever seen. I’m just curious if you guys have actually seen any of your competitors go under yet or whether that’s probably going to take a couple of quarters at this type of an environment to squeeze folks out?

Gregory B. Kenny

We see stress on especially the smaller companies. They had been liquidating their businesses through both lower volume in many markets and also lower metals versus the prior year. Now, they’re moving back up. We do see clearly competitors setting up large restructuring reserves and accounts but, we are getting calls with folks that a lot of them are simply saying we thought this market would grow forever and we could go public some day but this is a business that is a tough one and every fraction matters. Maybe we should be part of a global business that we have access to the best knowhow in 46 facilities which add up, as you add those fractions and some folks are with one or two plans in a region and there’s tough guys out there.

Some of this more from a view that this is going to be tougher than they thought, others simply not having the systems and the controls and access to capital. But, my judgment is it’s still a bit early for capacity to come out but there still is a fair amount of restructuring announced in our industry and we have actually seen it. But, there again, there really is no independent group that is tracking all that.

Operator

Your next question comes from Brett Levy – Jefferies & Company.

Brett Levy – Jefferies & Company

Most of my questions have been answered. Can you guys, [inaudible] housekeeping matters total availability is on your bank lines as of 9/30, where you think it will be roughly after the inventory reductions by the end of the year? Then, talk about any covenant issues that you guys might be close on?

Brian J. Robinson

From a facility perspective when you combine them the facilities globally are approaching $1 billion and when you put the cash on the balance sheet we think about the flexibility in the $1.2 to $1.3 billion type range. Of course, that will then improve with of course our free cash flow in the fourth quarter. I think without giving you the specific number, by the end of the year I would expect it to be marginally better.

From a covenant perspective, I think we are in great shape. Really, the asset based facility which we have here in the United States is very flexible. Covenants only come in to play to the extent that we reach a fairly low level of availability. Today, that facility is virtually undrawn so we’re in great shape there. On the public debt, there are really no covenants to speak of other than sort of in currents based type covenants for larger M&A deals. I think rolling all that together we feel very good about our capital structure and really there are no covenants that are really of any concern.

Brett Levy – Jefferies & Company

Then you guys talked about potentially accessing the capital markets but that you didn’t need to. Your bonds are now trading in the low sevens, the non-floating rate ones, is there a possibility that you would term out some of your maturities or you’re pretty comfortable where you are right now?

Brian J. Robinson

I would draw you back to our comments, we continue as we have done historically, continue to watch things closely, always stay in contact with those that are very close to these markets and I would leave it at that. The good news is we don’t have to do anything and we feel very good with where we’re at.

Operator

Your next question comes from [Kevin Sarnsey – Legend Merchant].

[Kevin Sarnsey – Legend Merchant]

The question has kind of been asked the whole time but I’d just like you to wrap it up for me if you could and try and quantify, when I look at the top line for the first quarter and the second quarter, obviously it’s been a little bit down but versus the first quarter actually in the third quarter it was up. You’ve been doing the inventory capacity utilization trying to get inventories under control but my question is with the decline in the gross margins could you quantify is that – obviously it’s a combination of the capacity utilization but also pricing versus cost. Is mix a part of that issue? And, looking to the fourth quarter, looking at the top line, it looks kind of flattish maybe a little bit down midpoint but the profits are definitely declining pretty good. Could you tell us what the biggest driver is there? Is it still pricing versus cost or is it utilization, or is mix a part of that issue?

Gregory B. Kenny

Kevin I would say real pricing has been getting tougher in the United States for a couple of years but it clearly has accelerated. The other is as you know, we over delivered versus our expectations in the first and second quarter in part because copper was going down and we were putting that through our cost of sales and we were as sticky as we can on price. Now, copper is going up and we’re trying to move it up so with these kinds of volatility which is far in excess of the 30 or 40 year history of this metal, these are huge numbers.

I would say pricing is difficult and in some markets it may be bottoming, it can hardly be worse meaning you would be selling it to my simple analogy of below the cash cost of the least efficient producer. Real pricing has gotten tougher but I think it’s been exacerbated by just absolutely wild movements in copper. We went from a $1.47 average in January, and again this is a company that has processed between 750 and a billion pounds of copper and we’re at $3.05, it has more than doubled since the January entry point.

[Kevin Sarnsey – Legend Merchant]

So when I’m hearing what you’re saying capacity utilization on a sequential basis probably hasn’t changed much so probably not that big a driver in declining gross margins?

Gregory B. Kenny

No, Kevin I would say our second half of the year we put far more – we have slowed our facilities down substantially from where they were in the first half.

[Kevin Sarnsey – Legend Merchant]

So Q2 to Q3 you had a big step down?

Gregory B. Kenny

Correct. We will step it down again in the fourth quarter.

[Kevin Sarnsey – Legend Merchant]

Does that mean that on the mix side that there’s been something positive? I’m just trying – because if it’s all about pricing and costs, overtime you guys do a good job on rectifying that although the demand environment may make it longer than normal. I’m just trying to get on a sequential basis, if it’s all about pricing and cost, okay you’re going to do what you need to do.

Gregory B. Kenny

We have not seen a mix shift and whenever you back off capacity utilization putting aside the volatility of metals which makes it harder to explain on the short cycle in terms of our results but we have seen unfortunately prices erode in many segments. This is about how much we’re actually producing in any given quarter and what the price level we’re seeing exacerbated by just an unbelievable movement in metals. But, there isn’t a fundamental mix shift going on in the company.

[Kevin Sarnsey – Legend Merchant]

Just quickly on the sequential change in revenue of about 4.5% decline, why did inventories only go down about 1.3%? Is there an accounting going on? I would have expected that to be probably even greater than then the 4.5%?

Brian J. Robinson

You’re talking from Q3 to Q4?

[Kevin Sarnsey – Legend Merchant]

No, Q2 to Q3 on the inventory. Unless, I inputted my number wrong. Sequential change, revenue declined 4.5%, inventory declined one something, is that right? 9.75 in Q2 to 9.62 in Q3?

Gregory B. Kenny

Inventory changes on the balance sheet wouldn’t reflect things like foreign currency exchange changes so you’d be better off kind of taking our number until say a cash flow statement comes out in the Q to verify that.

Brian J. Robinson

There’s a meaningful change for example in the [inaudible] so you have to really look at the cash piece of it.

Operator

You have no further questions.

Gregory B. Kenny

Thank you everyone for joining us this morning. That concludes our conference call. We’ll make a replay of this call available later today on our website and we appreciate your continued interest in General Cable. Have a good day.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: General Cable Corporation Q3 2009 Earnings Call Transcript

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