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General Cable Corporation (NYSE:BGC)

Q4 2009 Earnings Call

February 12, 2010 8:30 am ET

Executives

Michael Dickerson – President of Finance, Investor Relations

Gregory Kenny – President, Chief Executive Officer

Brian Robinson – Chief Financial Officer

Analysts

Richard Wesolowski – Sidoti & Co.

Matthew McCall – BB&T Capital Markets

Jeffrey Beach – Stifel & Nicolaus

Nat Kellogg – Next Generation

Anthony Kure – Keybanc Capital Markets

Brent Thielman – D.A. Davidson

Shawn Harrison – Longbow Research

Keith Johnson – Morgan Keegan

Stuart Bush – RBC Capital Markets

Michael Coleman – Stern, Agee & Leach

[Kevin Scarscani – Legend Merchant]

[Steve Gambuza – Longbow Capital]

Operator

I would like to welcome everyone to General Cable Corporation’s fourth quarter 2009 earnings conference call. (Operator Instructions)

Michael Dickerson

Good morning everyone and welcome to General Cable’s fourth quarter 2009 earnings conference call. I’m Michael Dickerson, President of Finance and 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 Siebert, our General Council.

Many of you will have already seen a copy of our press release last night. For those of you who have not, it is available on First Call and on our website at generalcable.com.

I want to call your attention to our 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 10-KA report and other periodic filings with the SEC provide further detail about the risk factors related to our business.

During the call we may refer to adjusted operating income and adjusted EBITDA which is defined as earnings before interest, taxes, depreciation, amortization, plant rationalizations, lower cost of market and rightful 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 reorganizational 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 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 discuss some further details about the fourth quarter. And finally, Greg will provide some comments on the company’s first quarter 2010 outlook and business trends, followed by a question and answer period.

Finally, 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 welcome to get back in the queue.

With that I will now turn the call over to Greg Kenny.

Gregory Kenny

Thank you Mike and good morning. Overall results for the fourth quarter were roughly in line with our expectations. Adjusted earnings per share were $0.24 which brings 2009 adjusted earnings per share to $2.81 for the year.

Revenues in the quarter were above our guided range as both copper and aluminum continued to run higher throughout the quarter. Volumes as measured by metal pounds sold in the fourth quarter were up slightly on a sequential basis from the third quarter, somewhat better than the volumes we expected for the quarter.

While overall results either beat or were in line with our guidance, at the operating unit level we experienced better results in the quarter in Venezuela and France and worse than expected conditions in the United States, particularly in the electric utility products.

During the fourth quarter, the company was able to generate an additional $178.9 million of cash flow from operations. This brings the total cash flow from operating activities to $544 million for the full year. To put this in perspective, this is nearly as much as we reported for the full years of 2006, 2007 and 2008 combined. It’s been a phenomenal year for cash generation as we focus on lowering our investment and working capital, particularly inventory.

Despite the fact that we are in the most difficult economic period since the depression, the company has maintained solid profitability, a strong balance sheet and we continue to look long term as we plan and invest.

The company has recently taken new actions both on the defensive side in response to ongoing weak market conditions and on the offensive side to improve our capacity to continue to expand our business around the world where we see additional product specific or geographic growth opportunities.

We discussed at the end of last quarter our intention to close two manufacturing facilities in Canada and extend maintenance and the holiday shut down schedules. We did those things during the fourth quarter as planned.

We went a step further in December and announced to the employees at our Energy Cable plant in Moosejaw, Saskatchewan, Canada that the plant would not be reopened following the shutdown. While this facility was highly efficient and performed exceptionally well, due to its small size there were limited opportunities to leverage these strengths from this geographically challenged location.

The costs associated with this action are minimal and the ongoing cost savings are also minimal due to the plants’ highly efficient fixed cost structure. The equipment will be relocated to take advantage of markets in the developing world.

Our focus on continuous cost reduction and lean thinking is a big part of our corporate culture and extends into our back office functions and management of working capital as well. Since the end of 2008, in order to balance production with end market demand and reduce operating expenses, the company has reduced its labor force by over 1,600 associates.

While much of this is direct labor, some of this reduction has been focused on selling and general and administrative and other fixed costs. The company has been absorbing the cost related to head count reductions through its P&L throughout the year.

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 a reduction of the SG&A line of the income statement over the last several quarters.

We were running about $95 million per quarter through 2008 and are currently running approximately $80 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.

Also in December, the company completed the exchange of a majority of its 1% convertible notes through 2012 for a new 4.5% convertible note due 2029. This exchange effectively pushes out our first and largest tranche of debt by 20 years, providing the company with added flexibility to continue to manage and expand its business around the world.

Our next longest tranche of debt does not come due for another three and one half years. Not only is the transaction modestly accretive to our fully diluted earnings per share in 2010 but by qualifying for certain tax benefits under the American Recovery and Reinvestment Act of 2009, the exchange provides meaningful economic cash tax benefits that the company will realize over time.

We continue to see opportunity around the world as smaller competitors are struggling in this environment of very weak end markets, relatively inefficient production and high and very volatile raw material costs. Our broad market and product growth and strong balance sheet are significant differentiators in this environment as is the ability to leverage earnings and best practices across 44 plants selling in over 100 countries.

We recently announced the acquisition of a wire cable business in South Africa. Over the last several years, General Cable has established itself as an important supplier of power cables in sub Saharan Africa.

In addition to this latest transaction, we hold a leading position in the OPEC nation of Angola. Also through our cable operations in Zambia, we are the number two producer of copper rod in sub Saharan Africa and we own a majority interest in the largest cable distributor in South Africa called National Cables.

We are actively evaluating other opportunities in many regions of the world focused primarily in Latin America, Africa and Southeast Asia, but also looking into the Middle East and Eastern Europe. For the most part, these opportunities are geographic expansion with revenues in the $10 million to $100 million range and include start ups, investments and acquisitions.

In addition to the recent acquisition in South Africa, the company has been building two Greenfield facilities; one in India and one in Peru. In India we are leveraging the local product specifications acquired in a separate Indian transaction in 2007 and expect to be able to produce approximately $100 million of low and medium voltage energy in industrial cables annually for the local market.

In Peru we are leveraging the existing market positions Phelps Dodge International has in the Peruvian market and expect to be able to produce approximately $50 million of low and medium voltage energy and construction cables annually for the local market. We expect these projects to be completed by the end of the third quarter 2010.

In 2009 the company completed the first phase of the transformation of our telecom facility in Tempa, Mexico into an industrial and energy facility for the Mexican market. We have won significant positions with distributors, contractors and utilities in a very weak local market given its proximity to the U.S.

In 2010 we will complete our product approvals and manufacturing expansion including our first North American high voltage line capable of manufacturing up to 220 KV cables to serve both the Mexican and U.S. markets. Mexico is currently as large a cable market as Canada with excellent prospects for long term growth.

The company is constantly evaluating make versus buy decision around the world. With the strength of our balance sheet, we are able to enter new markets in a variety of ways. Typically, our first choice is not to build but to acquire an existing local position.

A strong second option is to build a state of the art facility, utilizing surplus equipment from other company locations when practical and leveraging our material science and manufacturing expertise from around the world to quickly take a meaningful position in the local market.

For competitive reasons, we will not generally report on the progress of these until we are well into a specific project.

I’ll talk a bit about each of the geographic segments and the current environment before turning it the call over to Brian.

Broadly, conditions in each of our geographic segments have not changed materially from the last couple of quarters. The rest of the world, while weak and highly competitive, continues to perform relatively better than North America and most of Europe. Venezuela in particular has experienced significant growth in cable demand in the second half of the year which accelerated as we moved through the fourth quarter.

The power generation deficiency in the country and the need for improved grid reliability has led to increasing investment within Venezuela. With the recent devaluation of the Bolivar, we expect that the proceeds from international oil sales will result in increased availability of Bolivars which we expect will be used by the country to invest locally in infrastructure projects.

We have not modified our 2010 business plan for Venezuela as we expect improved volumes help mitigate the impact of the devalued currency.

Overall, I expect the rest of the world region to continue to provide significant opportunity and exhibit relatively stronger fundamentals long term.

North America continues to suffer from extremely weak end markets; electric and utility products in particular. North American electric utility spending is far worse than we have ever experienced including both pricing and volumes.

Cables for distribution applications were down 30% in 2009 compared to 2008 with the worst year over year performance occurring in the fourth quarter. In the second half of 2009 prices were falling sharply even for overhead transmission cable products that had been experiencing some strength in volumes.

I suspect that all electric utility cable product businesses in North America are now operating at break even or less.

Recently it has been widely reported what we’ve been telling investors for a couple of quarters now; that is following two years of energy usage declines, coupled with weak construction in a difficult regulatory environment, there is little reason to suspect an increase in electric utility spending on the distribution network in the short term.

Our transmission cable products in North America are starting off the year very weak with few actual project releases in the pipeline. We expect this to improve throughout the year, but as you know; this remains one of the most volatile businesses in our portfolio.

With such lofty goals for energy independence and green energy mandates by the states, it is often difficult to understand the wide disconnect between these goals and the actual investment to address these goals.

Green reinforcement, regional interconnections, and alternative energy access to the transmission infrastructure are all critical components of the investment cycle required to support energy independence and alternative energy mandates.

Recently, I and a few members of my executive team met with several U.S. Congressional Representatives and their staff to provide input on the many issues facing manufacturers in this country such as labor, taxes, growth of government, entitlement programs and unfunded liabilities.

I also took the opportunity to express our specific concerns around energy policy and specifically the transmission of electricity. For economic security and environmental reasons we support the drive to energy independence based on the use of solar, wind and nuclear energy along with the use of abundant U.S. natural gas resources.

However, renewable energy will have difficult rowing without support and most importantly, direction from the Federal Government for transmission lines to connect renewal energy sites to the population centers.

Aside from the electric utility market, there have been some signs of improvement elsewhere in North America. Exiting the fourth quarter, several of our early cycle North American product lines have been reporting book to bill ratios over one and announced price increases to gain some traction in the market.

Unit volume in cabling for local area networks, OEM and MRO applications has begun to stabilize. There is considerable progress yet to be made on this front however.

Overall, for North America, I expect difficult conditions for electric utility products to continue to overwhelm the beginning recovery in other parts of our North American businesses.

Europe also continues to weak. With the exception of France which is benefiting from government sponsored investment in electrical infrastructure, weakness across Europe is broad based and the Spanish market remains extremely poor. Even projects for offshore wind power are being delayed in Germany.

Markets in Europe seem to be continuing to follow the trajectory set by the U.S. which would suggest that we will see further erosion before we see true stabilization in Europe. There is reason for optimism however, as we look out over the next few years.

Similar to the transmission issues in the United States, which suffers from a lack of interconnection between the various regional electric grids, the European Union has embarked on ambitious plans to solve their interconnection issues between countries, which will require significant overhead and underground high voltage transmission cable investment.

Our businesses in Europe are well positioned for this investment cycle which should begin in 2011. We have also managed to increase exports from Spain to other countries.

Before I turn the call over to Brian, I want to acknowledge our employees in Altoona, Pennsylvania and Pierdras, Mexico who were recently named two of North America’s ten best manufacturing plants by Industry Week. We are very proud of them.

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

Brian Robinson

Thank you Greg. As Greg mentioned, conditions in much of the world continue to be weak. Volumes as measured by metal pounds sold before the impact of acquired businesses were down 7.3% compared to the fourth quarter of 2008 and up 20 basis points compared to the third quarter of 2009. These results are vastly improved from the 20.5% year over year reduction reported last quarter and are flattening out on a sequential basis.

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.

Rapid increases in copper and aluminum prices throughout the quarter have been difficult to capture as reflected in declining margins. However, early signs of price stability and several early cycle product lines in North America are encouraging.

During the fourth quarter, copper averaged $3.03 per pound compared to $1.75 for the fourth quarter of 2008, an increase of 73% and up 13% from the third quarter 2009 average of $2.67 per pound. In January, copper averaged $3.37, up another 11% from the fourth quarter average in just one month before recently backing off.

In part, the continuing and rapid increase in metal conductor prices this year have been more difficult to recover in this very low capacity utilization environment and have put additional pressure on earnings during the quarter.

Additionally, in a period of rising prices, the company’s LIFO accounting for metals, burdens on earnings relative to our major competitors are not on LIFO.

I will now discuss recent improvements to our capital structure and cash flows. As Greg mentioned, in December of 2009 the company issued $429.5 million of 4.5% convertible notes due 2029 in exchange for $464.4 million of its 1% convertible notes due 2012.

The interest rate on these new notes will reset to 2.25% after year 10. The exchange represented approximately 97.8% of the 2012 notes outstanding prior to the exchange. Approximately $10.6 million of the 2012 notes remain outstanding.

As a result of this exchange, cash interest expense will increase approximately $14.7 million annually. Also as a result of the bifurcation of the notes into their debt and equity components, equity increased approximately $148 million at the time of the note issuance and non cash accreted interest expense will decrease approximately $24 million in 2010.

Overall, this will result in a net increase in diluted GAAP earnings per share of approximately $0.13 in 2010.

Net debt was $25.2 million at the end of the fourth quarter 2009, a decreased of $339.2 million from the end of the third quarter of 2009. This decrease is partially due to the higher imputed equity value of the 2029 notes compared to the 2012 notes resulting principally from the longer dated nature of the 2029 notes.

The decrease in net debt is also a result of positive earnings coupled with reductions in working capital more than offsetting capital expenditures.

The company continues to maintain adequate liquidity to fund operations which could include increased working capital requirements as a result of higher metal costs, internal growth and continuing product and geographic expansion opportunities.

At the end of December, the company has almost $.5 billion in cash as well as just over $900 million of excess availability on credit lines across the globe.

During the fourth quarter, the company generated $178.9 million of cash flow from operating activities and $544 million for the full year of 2009. Part of this improvement reflects lower working capital levels as a result of declining end market demand for our products.

In the fourth quarter inventories were reduced another $130.7 million as the company continued to aggressively drive working capital efficiency in this low demand environment. Additionally, the liquidation of net accounts receivable related to the 25% decrease in average copper prices during the full year of 2009 compared to the full year of 2008 average and the 34% reduction in aluminum prices over that same period have contributed to strong cash flows as well.

Reported net interest expense in the fourth quarter of 2009 was $19.7 million and includes $9.4 million of non cash convertible debt interest expense. Net interest expense for the fourth quarter of 2009 before the non cash convertible debt interest expense charge was $10.3 million, down 40.8% compared to $17.4 million of net interest expense on the same basis in the fourth quarter last year.

This decrease is principally due to lower overall short term variable rate borrowings resulting from the company’s strong positive operating cash flows during the year.

Early in 2010 the Venezuelan government announced the devaluation of its currency and establishment of a two tier foreign exchange structure. The official exchange rate for non essential goods was adjusted from 2.15 Bolivars to each U.S. dollar to 4.3. We expect that our products will be classified as non essential.

The company previously indicated that we expect to record a one time pre tax charge in the first quarter of 2010 related primarily to the re-measurement of the local balance sheet on the date of the devaluation in a range of $40 million to $45 million. We are continuing to evaluate the overall impact of the devaluation. There is no impact to our 2009 results of operations or cash flows.

Capital spending in the fourth quarter was $33.3 million while depreciation and amortization was $28.1 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. The largest project, NSW is now largely behind us.

Spending is expected to slow considerably falling 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 and conversion costs.

For 2010, excluding the impact of any potential acquisitions or joint ventures, we are anticipating capital expenditures of $60 million to $80 million, well below anticipated depreciation and amortization of approximately $110 million.

One last item I wanted to discuss was a charge in the fourth quarter related to a change in Mexican tax rules which was enacted late in 2009. Essentially the law requires the company to retroactively adjust for certain tax benefits previously recognized under Mexican tax consolidation rules.

This change in the Mexican tax consolidation rules and the application of the U.S. tax accounting rules resulted in a one time charge to earnings of $6.5 million or $0.12 per share.

With those comments, I’ll turn the call back to Greg for some final remarks.

Gregory Kenny

As we move into 2010, conditions appear to be consistent with what we’ve been saying; that is, 2010 will likely be a bottoming year. Broadly our views on 2010 have not changed. We expect the developing economies we serve to perform relatively better than the developed economies of the world.

The pricing environment has become more difficult as we move through 2009 and is expected to remain difficult in 2010.

We also expect a return to somewhat normal seasonal demand patterns in 2010 as demand bottoms and a slow recovery begins. We expect revenues and earnings to be highest in the second and third quarters and lowest in the first and fourth.

We also expect cash flows to follow somewhat normal seasonal patterns with cash generation in the second half of the year higher than the first half of the year. These patterns could change depending upon the speed and trajectory of any economic recovery.

Because of the late cycle nature of the majority of our product mix, as we’ve always said, we expect the demand for many of our products will lag the general economy and more specifically construction, by six to 18 months. If the overall economy is actually entering a recovery, as many are suggesting, 2010 may be the period our developed economy businesses bottom.

We are hopeful that the stabilization we are seeing in some of our early cycle businesses in the U.S. such as the MRO, OEM and data communications is now the beginning of a recovery.

For the first quarter, the company expects to report earnings before items in the range of $0.05 to $0.15 per share while revenues are expected to be approximately $1.15 billion to $1.20 billion. The bulk of our operating earnings will come from the rest of the world segment which is experiencing sequential and year over year unit growth.

As the global economy recovers, we expect our industry to follow. We believe that the 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 long term drivers of growth for our products.

The company’s ongoing focus on operating excellence and continuous improvement are key enablers to realize these opportunities.

That concludes our prepared remarks. I will now turn the call back over to the operator who will assist us in taking your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Richard Wesolowski – Sidoti & Co.

Richard Wesolowski – Sidoti & Co.

Your comments excluded any real buoyant commentary around the large transmission markets globally and even the medium and low voltage markets in emerging economies which others shave cited as stronger. Can you talk about your competitive position in the utility sector, where it’s strongest, where others may have better position and where the balance may have changed during the recession?

Gregory Kenny

As you know we’re in both the underground high voltage business, the aerial high voltage transmission business and then the distribution business. We’re a leader in the U.S. and Canada and we have been seeing distribution demand very weak in the U.S. over the last several quarters as we’ve described part due to the unloading of the networks, in part in taking new investment decisions and getting a rate case.

The transmission business has been generally consistent or slightly up from historical levels, but extremely lumpy and I would say that the price competition in aerial transmission in the U.S. has been intense.

Spain has also seen weak demand for distribution cables. It’s been much stronger for distribution in France with the EDF spending money and the government has acted quickly. The big underground transmission projects, Europe there is a lot that’s pending and we believe will be released.

We’re bidding heavily on projects throughout Europe as my comments highlighted as they have sketched out a series of interconnections between countries in order to move power around. So the European market is probably better than the U.S. and Canadian market for distribution and we think transmission in Europe, which is primarily an underground market, though there is an aerial part of it will be better as well than the U.S.

Abroad, the markets are much healthier. You may have been asking that. We are very busy out of Thailand which as you know, services markets from Australia and New Zealand all the way to the Gulf area. That’s quite strong and that would be for underground transmission products. We’re also seeing strong demand from the local utility there.

Brazil is very, very strong with a whole series of projects. It’s primarily an aerial cable market, but very strong program that we are very busy in Brazil. We also I would say, anything in South America is also strong from a utility standpoint.

So the weakest are the U.S. and Canada and also southern Europe. There is probably less high voltage and extra high voltage projects right now globally as the Gulf was an area of strong investment and we’re seeing projects have a tendency to get kicked out a little bit and of course there is capacity that looks for work.

But broadly, that’s the high voltage underground. But broadly the U.S. is easily the weakest market at least for distribution and transmission is lumpy at best.

Richard Wesolowski – Sidoti & Co.

Do you suspect that any competitors of significant size have taken to actively hedging copper on a speculative basis on the hopes of getting a cost advantage?

Gregory Kenny

I have almost never seen that and we try to study the filings of our competitors to understand what they’re doing but I would be surprised if any competitor would go ahead and take a naked forward position because they would be putting a lot at risk and simply buy copper with an unknown demand and unknown pricing.

So I would say that all of them, the major public companies from where we sit, we don’t know for sure, are buying against known demand or known contracts. The independent or private companies, some of them could contemplate that. It’s a good way to lose your business, but I would say there are some independent or privately held companies that that is a possibility, but I’m relatively unaware of that.

Operator

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

Matthew McCall – BB&T Capital Markets

You gave a lot of detail about the North American market but you also talked about some of those early cycle businesses improving. Is the improvement solely being seen in North America? I know the mix is a little bit different in other segments but can you talk about the trends in some of the end markets in the rest of the world and in Europe specifically.

Gregory Kenny

I’m hesitant to take a trend line and extrapolate it but I would say our rest of the world business which is primarily in developing countries appears to be bottomed and on a unit basis, it’s intensely price competitive, but on a unit basis it seems to be actually moving up which is encouraging.

In Europe, I think Europe is behind the U.S. generally and yes, France has done a better job perhaps getting dollars into the grid. But I think Europe is weak and Eastern Europe is also weak which would help Western Europe. And Spain is far weaker than France.

I think that Europe is slightly behind the U.S. from a broad economic recovery. They never quite dipped down as far and they never accelerate out as quickly for structural reasons, but in Europe we are seeing a great slug of high voltage projects coming. The small undersea business for wind farms that we entered recently and oil and gas, there are projects. They push around a little bit.

They’re large projects, but I think Europe is generally behind the U.S. but probably has better fundamentals for the energy infrastructure than we do because we all seem to be able to get a policy together to make anything happen so these companies are relatively on their own, the utilities.

But the rest of the world is showing right now actually, we’ll have to see, but our guess is that their unit volume could be better than a year ago in the first quarter and could be better than the fourth quarter. Again, it’s not a break out but it’s an interesting trend line.

We were also pleased to see that overall unit volume in the fourth quarter was about even with third quarter which is atypical. So it’s early. I would say the tone of our team in the rest of the world is slightly more buoyant and when I talk to our data communications in the U.S. OEM and MRO again it’s hard to tell what’s in inventory, restocking versus sustaining, but those are our most forward indicating businesses, our harnesses and they are slightly more optimistic.

Again, we’re talking about relatively low levels of demand, but it may have stopped getting worse and may actually be slightly picking up.

Matthew McCall – BB&T Capital Markets

So the early cycle climate was pretty much focused on the U.S. market.

Gregory Kenny

Yes, the rest of the world didn’t cycle down as hard and I don’t view them as early or late cycle. They behaved somewhat differently, those developing countries, but I would add to the early cycle comment, if you’re studying developing economies, I would say the developing world has done relatively better and seems to be actually picking up.

We’ll have to see if it’s sustainable, but right now it feels better. So it’s really two parts.

Operator

Your next question comes from Jeffrey Beach – Stifel & Nicolaus.

Jeffrey Beach – Stifel & Nicolaus

The inventory reduction you took in the fourth quarter of $130 million, if I remember right, and maybe you revised this, but I thought you were looking at about $50 million is what I think you did in reduction in the third quarter and targeted $50 million in the fourth quarter, and maybe again that was revised, but where did this huge inventory reduction fall in terms of geographies and product lines if you can give us a little bit of color.

Gregory Kenny

It came down very hard across the board but I’ll let Brian take that one.

Brian Robinson

It was across the world. There is also as we amalgamated PDIC a little bit of a greater seasonal impact with their business because of the length of the holidays in the December period. So it was fairly even across the regions, maybe slightly higher in the rest of the world.

Jeffrey Beach – Stifel & Nicolaus

How or why did you accomplish such a large reduction? What was the thinking behind this? It was basically to do this you had to idle plants more than you thought and what was the thinking behind it?

Gregory Kenny

The biggest one was the U.S. utility business has been very weak and we are in some extended shutdowns now, and took a facility down. So we made a judgment that through our lean and through the fire power that we have, that we could handle the U.S. market and took a line down and we’re redeploying that in the developing world.

So feel we have plenty of headroom for the U.S. But the U.S. was weaker than we thought and it had been getting weak as we reported so we just said, let’s just take very long shutdowns and drive that down.

The developing world, again we extended shutdowns, but we just went after it hard. What we don’t know when we’re talking to you is our sales in the quarter, so December as you know is always a mixed bag and so we’re trying to judge the results of our actions versus the sell through and we had slightly better sell through and we took strong actions, and that combination produced an even greater result which clearly there is an economic penalty because you’re not absorbing that fixed cost in your inventory.

But as we said, we want to run the spin and when things pick up, we’ll feel the leverage strongly. But yes, that cost us money in the quarter.

Jeffrey Beach – Stifel & Nicolaus

How would you view your inventory situation in the first quarter? Has it pretty much hit bottom so that you’d look at flattish type inventories at the end of this quarter?

Gregory Kenny

That’s correct. If you remember, go back to the first quarter of last year, we had about $45 million to $50 million, but a lot of that was in North America where we were dealing with some other type issues.

I think the focus on the lean and right sizing the inventory for demand, our target would be to keep inventory flat to up slightly. Part of that would be somewhat of a normal trend as we head into the construction season.

Operator

Your next question comes from Nat Kellogg – Next Generation.

Nat Kellogg – Next Generation

Could you give a little more color, obviously you spent a lot of money and invested quite a bit in NSW and some of the capabilities there, any opportunities there on the horizon that you think are being opened up to you given the investment you’ve made over the last 12 months?

Gregory Kenny

We are currently doing projects there and we see just a tremendous amount of projects on the boards both for the deep water oil and gas as well as the wind side. Like the transmission business, these projects have to be funded and go, but we’re getting traction with the business. But I think our investment is done. We have the reference projects.

We also as you know have a submarine fiber optics undersea business there as well. So it’s been a new entry. We’re on course. I would say broadly there is a sag of, as these projects seem to have gotten delayed slightly.

Again, there are plenty of projects but you begin to focus on a couple and they need to get funded and some of this gets caught up on the global financial issues. But broadly, we feel great about what we have done and our equipment is running and we’re delivering and delivering correctly.

So that business is a new entry and we’ve been making product for about nine months and feel good about it. But it’s not big enough yet to materially change history, meaning it’s the undersea is in the $100 million plus range. It’s not hundreds of millions, and we’re only attacking part of that market, meaning that oil and gas, some of the island interconnections, short haul and the wind farm, they’re competitors who are much bigger in that business who have been in it for many, many years and do long haul work.

So we’re a new entrant. We’re also near our bigger competitors in submarine fiber optics, but right now, we like the investment.

Nat Kellogg – Next Generation

Could you give us a flavor for the jobs you’re bidding on, sort of the break out of private versus private money? I’m just trying to get a sense of how much of it depends on the government versus how much is privately funded.

Gregory Kenny

I think probably it’s something we should take offline. This is not a closed call so I don’t want to tip off what we’re doing. A lot of it is governmental. The undersea oil and gas is quasi governmental or private, but ticking of projects is sort of handing out battle plan to competitors.

Operator

Your next question comes from Anthony Kure – Keybanc Capital Markets.

Anthony Kure – Keybanc Capital Markets

Looking at the U.S. utility market, and obviously they’ve been under utilization of energy for the last couple of years as far as electricity goes, when you talk these guys now in 2010, are they expecting a third year in a row of electricity declines in usage?

Gregory Kenny

They seem to be up slightly or flat in their view. I don’t know whether that will trigger. These guys have gone pretty hard to cash and none of them seem to want to go before the Public Utility Commission and ask for a rate increase to go put more capacity and reinforce the capacity.

We are not planning on a materially better year than last year. It could even be weaker in distribution cables in the U.S.

Anthony Kure – Keybanc Capital Markets

As far as the news this morning about China raising their reserve requirements, would that actually have a positive impact for you? I know you only have, you’ve talked about $100 million or so of end demand in China, so from a demand perspective that wouldn’t really impact you. But am I thinking of things correctly if that pares down the marginal demand for copper, could that actually help you going forward?

Gregory Kenny

It’s an interesting though. China now is, some economists say it is 540% of the terminal market for copper. We believe we’re in the top three single terminal markets for copper. We haven’t understood copper pricing from a fundamental standpoint for a long time.

But you can see copper open down today ostensibly because China cools and then there’s been some early morning talk about India needing to cool down. It drives down copper prices and we have said over long periods we should make money on the value added, but in the near cycle, clearly on LIFO accounting we report whatever comes in. Whatever today’s price is what we charge our P&L this quarter.

I guess if the copper comes down we will have less working capital tied up and we would report lower cost of sales for that day or for that period.

Where we make money is where demand is high and we get real pricing. We’ve talked many times about the short term effects of copper volatility, but the environment where capacity utilization is up on our equipment and on the industry is when we have pricing power plus we have the absorption of fixed because we’re actually running our factories.

So net net, China is probably interesting, but not decisive. And you’re correct, we have two equity investments, minority investments in China and one small OEM business. So China itself for purposeful reasons is not a big part of the company.

We do also export product from France for the very high voltage cables into China which we’ve been a participant for many, many years, but broadly, we are relatively small in China and much bigger in other parts of the world.

Operator

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

Brent Thielman – D.A. Davidson

I wanted to get your perspective. Just assuming that costs were flat going forward which is obviously difficult to do these days, but how quickly do you think you can see your metal spreads expand as volumes stabilize and begin to grow again?

Gregory Kenny

The industry is running at a very low, we’re running our judgment, probably the U.S. is the simplest example. We think we’re running it 50% to 55% of demonstrated capacity and the average industrial company, companies that are more earlier cycle is maybe up in the higher 60’s.

So we’re a laggard as I said earlier, generally, not in every product, and we do get nice fixed absorption when we turn these factories on. Half our business as we said, has sort of a spot market or short cycle pricing which if you see utilization levels coming up and we use your example of flat copper and aluminum, but particularly copper, we would hope that you’d begin to see pricing as the utilization levels came up.

You don’t typically see real pricing power until they get higher into the 70’s and 80’s because there is lots of open capacity and eventually capacity gets shut down in some cases or unmanned. But I would hope for that business you’d start to see it affirming a real price in the scenario that you painted and eventually you’d start seeing firming spot pricing begin to affect contractual pricing.

So as we see the spot market get tighter than the longer cycle contracts which are typically one to three years, as they get renegotiated, you see some conviction around pushing those prices up over time. I think for half our business you’d start to see some firming of real price in this example you used.

Just to be clear, pricing is terrible so when you put aside metals which may exacerbate the problem, where under LIFO accounting you’re charging yourself high metals even though you may be selling something that you actually return four or five times a year.

But even putting aside the volatile and high metals, pricing globally is very weak. We’ve said many, many times that typically at the bottom of cycles and you hope you don’t have cycles in life, but you do. And maybe we’ve never seen one like this, but the cash cost of the least efficient producer sets the clearing price in some of these markets.

Brent Thielman – D.A. Davidson

Given what you are experiencing and what the industry is experiencing in this cycle and obviously the pressures that are out there, and you talked about some of the actions you’ve taken, but do you anticipate we’re going to see more closures across the industry, sort of permanent closures?

Gregory Kenny

We have taken plants down over time and we had redundant envelopes. Many of our competitors are running restructuring reserves and putting it through. Some of it means plants and then you’ve got a lot of the family owned or privately held companies around the world who may not be able to fund this.

But other than the recent acquisition of Southwire of AIW which is further consolidation in the U.S. wire and cable industry, and the failed merger, we do know many of our competitors have announced restructuring and are slimming their portfolio, but I don’t know of any massive structural change either merger or somewhat who’s taking a third of their capacity out.

But it seems there is higher cost of capacity is coming out and I think almost every cable maker seems to have a restructuring program including Draco and Beldin who all of you follow as well I think.

Operator

Your next question comes from Shawn Harrison – Longbow Research.

Shawn Harrison – Longbow Research

I wanted to dig in on some of the revenue changes by major product lines sequentially third quarter to fourth quarter, particularly the communications and construction markets. On a dollar basis there was a large sequential increase in both particularly when looking at the other businesses. Maybe you could describe what happened in those businesses on a sequential basis and what the carry forward thought is in terms of performance in the first quarter and the first half of the year.

Gregory Kenny

You’re talking about year over year?

Shawn Harrison – Longbow Research

I’m looking at a sequential basis. There were sharp dollar increases.

Gregory Kenny

You’ve got to remember is you’re looking at sequential revenue third quarter to fourth quarter by product family reported numbers, you’ve also got the influence of $2.67 copper in the third quarter going to $3.03 in the fourth quarter.

So there is a component of metal price on those sequential numbers that you need to consider. I think Brian and Greg were saying earlier, sequentially overall the business portfolio was up .2% in terms of real volumes for the third quarter to the fourth quarter.

Shawn Harrison – Longbow Research

So the $75 million movement within communications was mainly metal related and the $25 million to $26 million movement within construction the same thing. I should think of that as volume related.

Gregory Kenny

Communications has two pieces. They have the big telephone cables which are heavy copper content and then the data comm which is much less so and then industrial cables, construction cables are generally fairly metal intensive.

I would say industrial is sloppy and weak. Communications is feeling a little bit better particularly in the data comm area.

Shawn Harrison – Longbow Research

Is that because of upgrade spending just on Ethernet cabling or are you seeing data center demand come back?

Gregory Kenny

I think it’s a little bit more nibbling by the financial services companies who are really out of the business. There is a lot of hospital work and schools that seem to being done and the data centers I think have been fairly consistent. But we’re tracking everything from the semiconductors to some of the IT spend numbers as well as the guys who are in the front end of this.

So it’s feeling a bit better, but again, we’re talking about it’s stopped going down.

Shawn Harrison – Longbow Research

My follow up question has to do with the copper price assumptions in your guidance for the first quarter. Are you using the January rate, the rate here as of mid February? And against that, I know a number of price increases were announced late November, December, into January. I guess the take away from the call is while you’ve tried to announce price increase the market as you described is so sloppy it’s just not taking a lot of these price increases. Is that a correct way to view how these price increases are being taken by the market?

Gregory Kenny

I would say everyone’ probably got a problem but you get down to as you say, lots of open capacity. Financially, people have to get paid for the metals and paid for their assets but it is sloppy and I would say that at a 55% utilization kind of numbers, you just never know from project to project.

We can’t help that. We can simply attempt to get paid for what we do and we look generally out at copper around this level. We don’t know what it will be. It’s $3.05 today so in the back of our mind it was higher in January. The copper was significantly higher more in the $3.30 to $3.40 range.

But we’ll have to see, but you’re right. Under our accounting convention, we don’t know what the last six weeks price will be so we don’t know the cost of sales for that six weeks, but we when we think about that range we are generally reflecting current levels as in today levels.

Shawn Harrison – Longbow Research

Back to the point of pricing with the price increases you announced, if you were seeing those taken on as you quote new projects, so if they were being accepted into the market, do you think your margins would be back closer to acceptable levels or is the volume the biggest component?

Gregory Kenny

Volume is very broadly, and again our industry is not like the car industry where there is outside sources that look at capacity utilization. We’re broadly in the 55 or 60 range globally. We’ve been in the 90 range. Our sales in real terms are off more than $1 billion. $1 billion has a lot of absorption in that with your envelopes.

We’re always looking at can you combine envelopes. Each envelope has $2 million to $5 million of fixed costs associated with it. As you know it’s a very sensitive business, logistics sensitive.

You’d pick up if we got back to other levels where absorbing fixed, and I think we are many, many points away, of real pricing away from where these markets have been over time. So it’s a two headed problem. It’s unloaded facilities and it’s lack of price.

But broadly I think we have the right footprint. I believe these markets, part of our view is markets don’t go up or down forever and with our balance sheet and our geographic diversity we’ll do better than most through this. But I continue to believe strongly in the need for these products.

As financing settles down and some of the overhand is chewed up from a construction standpoint in some markets, so I like our hand and we’ve got a lot of leverage as we’ve demonstrated in the last cycle. Again, we may not see 2006, 2007 global liquidity available as it was at that time, but even with a different time to recovery it may be a more gentle recovery and maybe or maybe not it hits those kinds of levels.

We keep adding new geographies. We keep getting better and so I like our hand a lot and I think the leverage will be powerful on the upside. I think as these markets increased, we surprised investors by the power of the leverage of both absorption and price power, and we hope to do that again.

Shawn Harrison – Longbow Research

Modeling just on a non-GAAP basis what should be the interest expense for dollars and also the tax rate assumption for 2010.

Brian Robinson

On the interest expense I would point you toward maybe a couple million lower than the fourth quarter amount, in the $19 million type range and then maybe down a couple million mainly because as of the accretive nature of the convertible nature.

From a tax rate perspective, I would say model between the 30% and 33%. Again, it’s going to depend upon the mix of the income depending on where it comes in, whether it’s in the higher tax rate jurisdictions or whether it’s in the lower tax rate jurisdictions. But that’s what I would point you to.

The base I was using was actually on a GAAP basis, but if you use your non-GAAP basis you can deduct the same couple million number from that.

Operator

Your next question comes from Keith Johnson – Morgan Keegan.

Keith Johnson – Morgan Keegan

Could you give us an idea when you’re talking about your first quarter guidance what you’re thinking for operating rate standpoint, how to think about seasonality as we work through the first quarter?

Gregory Kenny

We have operating rates around the fourth quarter view. As I said, slightly better in the developed world and if we don’t have a double dip or recession, we would expect to see, we saw depending on the part of the business and part of the world, we saw unit volumes drop by 10% to 50% from say peak ’06 ’07 kinds of numbers.

But right now we think we’re in a slow recovery with very weak pricing and again construction is weak, but we’d expect the second and third quarters all things being equal to be better in terms of revenues and in terms of earnings than the first quarter. But again, we’re not giving a forecast but we would expect that pattern to come back.

For the last two years we’ve been basically draining, volumes have been dropping almost irrespective of the time of year in many of the markets simply because of the economic conditions.

The economy in late 2007 again, we felt it on somewhat of a delayed basis, but this has been going on for awhile.

Keith Johnson – Morgan Keegan

Is there a way to think about where your selling prices are for your products relative to the copper market? I guess in other words I’m trying to get to is 50% of your business is generally spot, would you say you’re eight weeks behind the copper market, two to three months? I guess it would depend on product line, but is there a broad way to think about that in today’s competitive environment?

Gregory Kenny

I would say pricing broadly is as bad as I’ve ever seen it. We have said in sort of a normal market that we have a three to six month delay in capturing increased metals and with the utilization where it is, again volatile metals will overwhelm any operating margin left in this business.

We don’t have a code to give you. I guess the metals volatility is extreme and it’s hard to say. We’re seeing $0.10 movement in a day. I wouldn’t have expected metals to average over $3.00 a pound in January. It’s shocking.

Keith Johnson – Morgan Keegan

You mentioned earlier on the call that you have absorbed a lot of the cost in the income statement from the operational changes and adjustments that you made through 2009. Is there a number that we could look at that may have run through the income statement this year?

Gregory Kenny

We’ve been hesitant to get into, we have not broken out the cost of letting go SG&A and the cost of shutting the Canadian plant and other things that we’ve done as we said earlier we hope in the SG&A some of it’s variable related to volume, some of it we’ll keep.

But we’ve always been driving cost out through the lean culture and as you see these markets come down we look everywhere we could and we’ll continue to do so. But I think we’ve said before, it’s in the tens of millions of cost and in some markets it’s very expensive to let direct or indirect labor go.

It’s a big deal but we’ve elected unlike a lot of companies to take it through the P&L and not outboard it.

Keith Johnson – Morgan Keegan

What is the non cash interest dollar amount after these exchanges are done? How much will that be each quarter?

Brian Robinson

The non cash would be about $0.10 per share a quarter.

Keith Johnson – Morgan Keegan

And that was used in the 31% or 32% tax rate?

Brian Robinson

That’s correct.

Operator

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

Stuart Bush – RBC Capital Markets

You mentioned that your utilization rates are running at about half capacity. Is there any way you can break that out by either segment or geography to give us a sense of where utilization rates or the plant usage is greater or less?

Gregory Kenny

I don’t think I want to do that. I’ll say generally I was speaking about the U.S. specifically, and as you know we’re always trying to get to optimum meaning there’s no waste, no scrap, no cycle time or down time. So our theoretical capacity we hope to be always improving but the U.S. is extremely weak.

Again, it’s not something we track in a way that would pass scrutiny of independent consultants, but the U.S. is in the 50’s. Spain is depending on the product line in the 40’s and 50’s, and then it gets better from there with probably the operating well up high would be Brazil, Thailand kinds of areas where we are very busy and very happy to be busy.

Stuart Bush – RBC Capital Markets

In those regions you are more able to get more price.

Gregory Kenny

I would say yes, Don’t forget depending on the product and depending upon the market, you have capacity banging around all over the place so if a market is weak say in the Gulf, they could show up with that capacity trying to sell it into India. Or in the same vein, the U.S. is very weak. Mexico has become very weak, so capacity bangs across looking for work, and Central America is close to Mexico.

So these markets don’t exist in many product lines simply onto themselves because capacity can travel.

Stuart Bush – RBC Capital Markets

The U.S. distribution power cable market has been weak for quite awhile now. Is demand below maintenance levels and if so, is there a way you quantify when or how much pent up demand we should see for utilities to just fix what’s being delayed at the moment?

Gregory Kenny

I was hoping you had that answer. We don’t know. We’ve had sort of the same thing only there’s been actually a substitution going on in telephone cable as to what is maintenance. Utility, clearly a different animal, but it’s down a lot. I have not seen a good model on what is maintenance.

We’re seeing demand. The interesting thing is demand was very stable in units for many, many years and we’re talking about even in the ’01 to ’03 cycle of utility spending for the distribution network, particularly medium voltage and it has fallen precipitously not quite by half for some of these products in ’09 versus the ’04 to ’08 averages.

So remarkably stable over time and then just almost something that you could hardly model. So I don’t know whether we’re at that maintenance level. We do get as you know storms and ice has an affect as well.

Operator

Your next question comes from Michael Coleman – Stern, Agee & Leach.

Michael Coleman – Stern, Agee & Leach

On a few questions back you talked about the interest expense coming down a couple million and I just want to understand from the first quarter guidance relative to what you did in the fourth quarter, what the biggest delta is regional in the first quarter relative to the fourth quarter given that interest expense is coming down a couple million dollars in your guidance down relative to what you realized in the fourth quarter.

Gregory Kenny

From the fourth quarter, the U.S. and Canada we expect slightly better performance than the fourth quarter and we also expect rest of the world to broadly be strengthening. Europe is weakening.

Brian Robinson

Let me clarify on the interest expense. The benefit of the convertible is a full GAAP number so that’s worth the $0.13. So there’s a cash, and in our prepared comments, the cash interest expense is actually increasing because of the convertible exchange. So I mis-spoke.

The benefit on a GAAP basis is about $0.13 per share or $0.03 to $0.04 a quarter. On a non-GAAP basis, interest expense actually goes up again because of the cash component being slightly higher.

So I think putting aside the interest on the public debt, our interest expense in other regions of the world, we would really expect to be relatively flattish the first quarter versus the fourth quarter again because I think we’re aiming to maintain inventory levels and retain our efficiency. So that’s what I would expect.

Gregory Kenny

Just to be clear on the first quarter, the greatest positive change is the U.S. and Canada. The rest of the world is hanging in there and Europe is worse than the fourth quarter. That’s Europe/North Africa, and that’s primarily Spain is the worsening. The rest of Europe, particularly France and North Africa are hanging in there.

Operator

Your next question comes from [Kevin Scarscani – Legend Merchant]

[Kevin Scarscani – Legend Merchant]

We talked a lot about pricing but you have mentioned a number of times pricing is terrible. Could you qualify that? Is pricing terrible versus your copper costs or is pricing just going down?

Gregory Kenny

The pricing is exacerbated by rising metal that on a short cycle we can’t recover fast enough and we report it under LIFO as we receive the metal material. But pricing is generally horrible and is as bad or worse than I’ve ever seen it.

[Kevin Scarscani – Legend Merchant]

Is that versus the metal costs or?

Gregory Kenny

If you stabilize metal, if you even look at this thing on an average cost basis, pricing is horrible. The rising metal and the way we do our accounting makes it worse, but even if you do it the way on an average cost basis, the pricing is terrible.

[Kevin Scarscani – Legend Merchant]

Is there any way to frame the pricing out there in the sense of you have projects that have been rebid. I assume that you kept prices the same. Hopefully you increased them or might have gone done and what your customers are saying to you. Obviously volume doesn’t really make them too happy about increasing prices but is it the customers or is it a customer in competition coming in and saying we’ll do it for a lower price?

Gregory Kenny

It’s some. If there’s an industrial project it has a tendency, again we could have a spec position or do something unique, but generally with less demand, these projects are brought out and tested to see who wants it at a level and while inherently I think everyone probably would love to see some pricing stability and getting paid for what you do, these markets are set through either bids for new contracts which might last a year or two or spot projects or just the daily shelf goods for a distributor, but it’s hard fought.

As I said many, many times, we’ve seen in down cycles the cash costs the least efficient producer sometimes is a clearing price. It’s unfortunate, and eventually they go out of business. But we have seen tremendous price degradation across the board.

We have begun to see some price stability in a couple of businesses but putting aside copper, it’s just horrendous.

Pricing, when you see it expresses an operating margin, your costs theoretically are going up and you’re not making very much unless you found a way to throw away a lot of, to close your factories or mothball it. But we have real price per units sold. I have higher manufacturing costs because I’m making less.

So it’s two problems; the real price per unit sold is very poor and with the utilization as low as it is, I’m under absorbing my fixed despite all the efforts to reduce fixed costs. We’re just not making as much product as we used to make and we could make much more with the same envelopes.

So when demand recovers, the first thing we’ll see is absorption of our fixed, and as utilization comes up, that absorption will generate a higher margin presumably under this model and eventually you’re getting real pricing per unit as the utilization levels move up through.

If I can make 10 points more of units, all things being equal, my operating margin will improve because I’ll absorb my fixed costs and lower my manufacturing costs which will be expressed in margin.

[Kevin Scarscani – Legend Merchant]

So volume solves it. On the stimulus and the credit out there, we’ve been hearing delays for awhile. My worry is that these delays start turning into cancellations. If there’s any way you could frame some of the things you’re seeing out there from nice to have projects to we’ve got to have these projects, that would helpful in a comfort level of when these things come back not if they come back.

Gregory Kenny

We said the projects that we actually have some forward visibility to would be some of the undersea projects which is a new business and then turnkey extra high voltage projects. Everything else is generally through a contractor or a distributor and contractor so we all have talked about looking at other people’s backlogs to get a surrogate because our backlog in our industrial business and our specialty business is tied to projects.

It could be a petrochemical plant, it could be anything. But we’re not, a piece of our business that’s measured in the hundreds of millions not billions. We’re not the prime on contracts. We’ll work to create spec and work with an Anixter or [Westor] or Graybar or [Rexell], but we are probably not a great measure for that.

Operator

Your next question comes from [Steve Gambuza – Longbow Capital]

[Steve Gambuza – Longbow Capital]

Your guidance for Q1 implies relatively flat sales and a modest decline in EBIT. I was wondering if you could comment on the distribution of that EBIT in the various segments relative to Q4. I noticed you had a fairly substantial operating loss in North America in your commentary. It was fairly conservative. Should we expect a similar kind of distribution of operating profit in Q1?

Gregory Kenny

To build on the earlier question I would say the rest of the world should contribute relatively more percentage wise. You should see a strong drop in European performance and an improvement in the U.S. to possibly moving through break even in the U.S.

Michael Dickerson

Thank you everyone for joining us this morning. That concludes our conference call. If anyone still had questions, please feel free to follow up directly with me later today. A reply of this call will be made available on our website. We appreciate your continued interest in General Cable.

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Source: General Cable Corporation Q4 2009 Earnings Call Transcript
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