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General Cable (NYSE:BGC)

Q3 2010 Earnings Conference Call

November 4, 2010 08:30 am ET

Executives

Len Texter – Manager, IR

Greg Kenny – President and CEO

Brian Robinson – EVP, CFO and Treasurer

Analysts

Shawn Harrison – Longbow Research

Stuart Bush – RBC Capital Markets

Jack Stimac – BB&T Capital Markets

Jeff Beach – Stifel Nicholaus

Brent Thielman – D. A. Davidson

Tony Kure – Keybanc

J. Keith Johnson – Morgan Keegan & Co.

Michael Coleman – Sterne Agee

Operator

Good morning. My name is Shaun, and I will be your conference facilitator. I would like to welcome everyone to General Cable Corporation's Third Quarter 2010 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. (Operator instructions) Thank you. General Cable, you may begin your conference.

Len Texter

Good morning, everyone, and welcome to General Cable's third quarter 2010 earnings conference call. I'm Len Texter, Manager, 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 Greg Lampert, our President and Chief Executive Officer of General Cable North America.

Many of you have seen a copy of our press release from last night. For those of you who have not, it is available on First Call and our website at generalcable.com. I want to call your attention to our Safe Harbor provisions 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-K reports 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 and other items. These non-GAAP company-defined measures are being provided because management believes these are useful in analyzing the operating performance and cash flow before the impact of various 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 provide some financial details about the third quarter. And finally, Greg will provide some comments on the company's fourth quarter 2010 outlook and business trends, followed by a question-and-answer period.

We would like to remind everyone that effective January 1, 2010, the company changed its method of valuing all of its inventories that historically used the last-in/first-out method to the average cost method. The company applied this change in accounting principle, retrospectively, to all prior comparative periods discussed here today.

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

Greg Kenny

Thank you, Len, and good morning. I'm very pleased to report a solid third quarter as demand patterns were better than expected across many parts of our business particularly in the rest of the world and North America segments where sequentially volume was up 16.8% and 8.5% respectively.

I have also encouraged by our expectations for the fourth quarter of 2010 were volumes anticipate to be up sequentially 5% to 8%. This sequentially improving volume would more than offset our normal seasonal demand patterns and that the fourth quarter volumes are typically below those on the third quarter. This fourth quarter result would also represent the first time in nearly two years that we will have reported volume improvement year-over-year in back to back quarters.

For the third quarter 2010, our reported revenues of $1.2 billion and adjusted earnings per share of $0.54 both of which were at the upper end of our expectations. These results include the impact of our planned seasonal reduction and inventory and a traditional summer holiday period in Europe partially offset by the benefit of foreign currency transaction gains in Venezuela, the benefit of cost reduction networks taken in Spain in the first half of the year as well as (accumulated) fact in benefit or our (inaudible) using (inaudible) manufacturing tools.

While demand patterns are encouraging, the frightened environment remains challenging as low levels of overall demand, well-capacity utilization rates in volatile and rising commodity prices persist. Despite the uncertainties surrounding the (inaudible) sustainability of the economic recovery in many developed countries, we are cautiously optimistic, the bottom is occurring in certain of our businesses as marketing conditions in North America improve the benefits of cost reduction efforts in Europe are realized and infrastructure spending in many emerging markets threatens. Also, while our capacity utilization rates remain at low levels, they have improved from the first half of this year and are currently in the range of 65% to 70% on average.

Brian will take you to the details of the financials in a bit. I thought I would spend some time talking about how I currently see our global business environment. Many of the positive trends we identified in the first half have continued into the third quarter particularly as it relates to the stabilization of demand for certain products in South America, Southeast Asia and the United States. We encourage while the ongoing investment and commitment to infrastructure development throughout our raw segment.

In Brazil, economic growth in the ongoing investment in the country’s infrastructure in which there have been billions of dollars of investments approved in additional power distribution and power generation projects continue to the strong phase. Also during the third quarter, all the necessary environmental permits were obtained where major Brazilian transmission project totaling more than 150 million which we are expected to begin shipping in the fourth quarter of this year as well as in 2011 and 2012.

In Chile, the need for infrastructure related projects continuous to gain momentum as the economy grows and the reconstruction effort accelerates.

In Thailand, the economy has resisted internal and external challenges as domestic markets have improved following political unrest experienced earlier this year and regional exports continue at a strong phase.

In the United States, there is a gradual improvement or stability occurring in many sectors of the economy but the ongoing mixed economic data has done little to alleviate the persistent uncertainty as to the rate and sustainability of recovery.

While overall demand for many of our products remains in a historically low levels, our North American factories are operating around 65% utilization which is an improvement from the first half of the year due principally to better than expected demand experienced during the third quarter. Demand for the company’s electric utility products increased primarily as a result of the release of a number of projects for the transmission grid and terrestrial wind farms as well as a slight uptick in demand from very low levels for medium distribution cables which in part maybe due to the increase in demand for electricity of nearly 7% experienced during the third quarter after nearly two years of declining energy usage.

While the increase is in demand for electricity and the company’s electric utility products are encouraging, we believe demand for the company’s electric utility products will continue to be available particularly transmission products as then regulatory feature of electric utility companies and alternative energy in (inaudible) remain uncertain.

In Europe, as the region shifts form fiscal stimulus to austerity market conditions are expected to remain challenging over the remainder of the year and into 2011. The company has reorganized a score of market structure in Europe based on this expectation and believes the restructure measure is taken in the first half of 2010 principally in Spain as well as delayed initiatives in prior years will benefit results in these businesses overtime as conditions improve in many of our end markets.

The European Union is committed to renewable energy as well as greater liability in country interconnections which represents a significant long-term opportunity for the company or continued to be planned.

During the third quarter, the company was awarded a major offshore wind farm contract in the Baltic Sea valued at €195 million. This contract represents a significant opportunity for the company and has been made possible through the integration of the functional capabilities of our European operations. Production is expected to start in 2011 followed by installation beginning in 2012.

Also during the third quarter, the company completed the acquisition of BICC Egypt which further the company’s geographic expansion into emerging markets by establishing a production in commercial base in one of the largest and fastest growing markets in the Mediterranean-North African region.

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

Brian Robinson

Thanks, Greg. Volume is measured by metal pounds sold increased 6.7% compared to the third quarter of 2009 and was up 7.3% as compared to the second quarter of 2010. Volumes in the third quarter were above our expectations. In order to (inaudible), volume was up 10.2% compared to the third quarter of 2009 and up 16.8% compared to the first quarter of 2010.

The broad based improvement and demand experienced during the third quarter was principally the result of higher than expected volume in Brazil, Chile and Thailand.

In Brazil, spending on infrastructure related projects and programs such as “lights for all” continued at a robust pace during the third quarter which resulted in better than expected demand for our low and medium voltage distribution cables.

In Chile, while the country continues to recover from the massive earthquake experienced earlier this year, industrial production and reconstruction efforts have gained some momentum ahead of expectations which will likely carry on into the fourth quarter this year and into 2011 and 2012.

In Thailand, demand was better than expected in the third quarter primarily due to improved domestic market conditions and stronger export into the neighboring countries throughout Southeast Asia as the political unrest experienced during the second quarter subsided.

In North America, volume was up 11.6% compared to the third quarter of 2009 and up 8.5% compared to the second quarter of 2010. Demand across most North American businesses was better than expected. (Any large utility business) volume increased 15.2% compared to the third quarter of 2009 and was up 13.8% compared to the second quarter of 2010 due to the release of a number of transmission grid and terrestrial wind farm projects as well as the incremental improvement in medium voltage distribution cables.

Excluding the impact of electric utility products, volume was up 7.7% in the third quarter of 2010 compared to the third quarter of 2009 and up 3.2% compared to the second quarter of 2010. Looking at the early cycle products specifically those for MRO, OEM, and networking applications, these products will have 1.4% in the third quarter of 2010 compared to the second quarter but were up 11.7% compared to the third quarter of 2009.

In Europe, volume was down 3.2% compared to the third quarter of 2009 and was down 5.6% as compared to the second quarter of 2010. While volume remains low in Europe, the decline in the third quarter of 2010 was less than expected primarily due to demand from medium and high-voltage products in France, medium-voltage submarine and especially products in Germany and to a lesser extent stabilizing conditions in Spain.

During the third quarter of 2010, COMEX copper averaged $3.30 per pound compared to $3.19 in the second quarter of 2010, an increase of 4% sequentially on average. While the sequential quarterly movements in average copper prices appears muted in 2010, copper continues to be volatile as prices within the third quarter of 2010 recorded a high of $3.68 per pound and a low of $2.90.

Operating income in the third quarter was $42.1 million or 3.5% of revenues compared to $59.8 million in the second quarter of 2010. This result is principally due to the impact of plants seasonal inventory reductions mainly in the North America and Europe and Mediterranean segments and the traditional summer holiday period in Europe. Partially offset by cost reduction efforts taken in the first half this year as well as the benefit of (inaudible) initiatives and other actions taken in prior years.

In addition, despite improved sequential volume as measured in metal pound sold in North America and (inaudible) in the third quarter of 2010, value added pricing remains weak primarily due to a historically low levels of overall demand in many of our end markets particularly in developed countries where capacity utilization rates continue to hover around 65%.

The challenge of pricing in this difficult operating environment was compounded during the third quarter of 2010 by the (inaudible) and rising price of copper which increased $0.78 per pound within the quarter.

During the third quarter of 2010, the company recorded other income of $7.7 million as compared to other expense of $3 million in the second quarter of 2010. Other income primarily consist of 17.1 million of foreign currency gains primarily due to currency transaction gains of $12 million in Venezuela as a result of buying copper at the official exchange rate for essential goods of 2.6 bolivars to the US dollar and $5.1 million of gains in other countries as currencies broadly appreciated relative to the US dollar during the quarter.

Partially offset (inaudible) these games were $8.5 million of market to market losses on derivative instruments as the associated hedge contracts to purchase aluminum were de-designated for accounting purposes in connection with the delay of a portion of the large Brazilian transmission projects. We expect to fully recover this losses as the project is completed which is now expected to be in late 2011 and then to 2012.

In Venezuela, the foreign currency exchange environment continues to be complex and challenging. As a result, all of the copper authorized at the official exchange rate for essential goods of 2.60 was purchased in the third quarter of 2010 in order to supply products over the remainder of the year and (inaudible) Venezuela’s energy shortage challenges. Therefore, we expect to report little to no transactional foreign currency gains or losses arising out of Venezuela in the fourth quarter which is reflected in our earnings expectation for the fourth quarter. The company is currently seeking authorization from the government for its next (inaudible) copper purchases at the official exchange rate for essential goods for 2011 production.

The company’s effective tax rate for the third quarter was 32.9% which was slightly better than expected due to the benefit of adjustments to tax contingencies resulting from (inaudible) to limitation expirations in tax audit resolutions. These benefits were partially offset by the establishment of evaluational allowances against certain deferred tax asset positions and a (inaudible) of our expected 4-year tax rate due to a change in our geographic mix of earnings. For 2010 and 2011, we expect a normalized effective tax rate for the year to be approximately 35%.

Net debt was $609.7 million at the end of the third quarter of 2010 at the increase of 25.5 million from the end of the second quarter of 2010. The decrease in net debt is the result of normal seasonal trends and to a lesser extent the impact on the net cash positions in Europe due to the appreciation of the Euro relative to the US dollar. The company continues to maintain adequate liquidity to fund operations which could include increased working capital requirements as a result of higher metal cost, internal growth and continuing product and geographic expansion opportunities.

At the end of the third quarter, the company had well over $1 billion of excess liquidity across the globe. During the third quarter, the company generated approximately $103 million of cash flow from operating activities which is related to a seasonal decrease in working capital of 44.5 primarily as a result of a planned reduction of inventory levels. We will continue to reduce our inventory quantities throughout the fourth quarter which should bring quantities at or near beginning of 2010 levels.

The cash flow benefit of the second half reduction and the inventory levels however is expected to be partly offset by the working capital investment needed to support higher fourth quarter revenues in the recently higher metal prices. Reported net interest expense in the third quarter of 2010 was $17.9 million which includes $4.9 million in non-cash convertible debt interest expense. Net interest expense excluding the non-cash convertible debt interest expense charge was $13 million for the second and third quarters of 2010.

Capital spending in the third quarter was $32.7 million while depreciation and amortization was $26.6 million. Our ongoing capital programs are monetarily 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 approximately $110 million which is just above the expected annual depreciation and amortization.

This (inaudible) includes spending to complaint development projects in Mexico, India, Peru, Brazil and South Africa as well as focused spending on a couple of projects to expand our product offering and specially products tied to natural resource extraction.

With these comments I will turn the call back to Greg for some final remarks. Greg?

Greg Kenny

Thanks, Brian. With early signs of stabilization and recovery in many of our markets our demand patterns are positively deviating from normal seasonal patterns. The second half of 2010 as compared to the first half of 2010 in terms of volume is expected to increase approximately 12% to 15% and is expected to increase approximately 9% to 10% compared to the second half of 2009.

I am cautiously optimistic that we are bottoming in many parts of our business despite excess industry capacity near historical demand laws weak competitive pricing in volatile commodity prices particularly copper, there are main questions about the sustainability and the recovery currently under way in the developed country economies of the world. I believe our geographic diversification and exposure to emerging markets which continue to outpace developed economies allows us to be patient with the recovery in developed economies which are demonstrating some areas of strength.

As I mentioned in the second quarter call, I firmly believe we have built a very strong and well-positioned company that will fully benefit from the next global expansion through our increased exposure to sophisticated product lines such as submarine communications and power cable, extra-high voltage energy cable and high end audio-video products as well as geographic expansion efforts in locations like Egypt, Peru, India, Mexico and South Africa.

As you know, the company’s operating leverage is significant as we have taken millions of dollars of cost over the last several years are getting synergies across the entire company and it (inaudible) down our factories rather than permanently (inaudible) in capacity which we estimate will allow us to capture 1 to 2 billion of revenue without adding much of any additional fixed cost.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Shawn Harrison with Longbow Research. Your line is open.

Shawn Harrison – Longbow Research

Hi good morning.

Greg Kenny

Hi, Shawn.

Shawn Harrison – Longbow Research

First question just has to do with the price of copper assumed in the guidance for the fourth quarter given the volatility we have seen of late, it was 3.30 a pound I believe you said for the third quarter. What is it in the fourth quarter?

Greg Kenny

In the fourth quarter Shawn it is basically at today’s levels. So I would call it 3.70, 3.75.

Shawn Harrison – Longbow Research

Okay. I guess to that, it sounds as if you are getting some price recovery but they are still a lag in terms of the 50% of the business that is not tied to contracts. If you just maybe elaborate on kind of the timing of price recovery, is it getting any better or is it still going to – what you saw on the summer time?

Greg Kenny

Clearly if we don’t get price recovery with these kind of movements, you can’t sustain it if operating margins are 5% and we have a copper move from June, July in the $3 range; to 3.31 in August; 3.51 in September average and today around 3.8, 3.75. We are pushing prices up in the distribution or short cycle market. We said that typically can take 3 to 6 months and tougher when there is open capacity. The magnitude is so big that we are pushing pricing up and then you hope competitors face the same economics which we believe they do. So we are pushing across the world but there is a lag effect Shawn.

Shawn Harrison – Longbow Research

Okay. And then two brief follow ups. With the recovery you are seeing to an extent North America in transmission demands, how does that look for early 2011? Because your commentary made it appear to that demand environment is still very volatile so you could see a pullback after some of these projects are released, so maybe just kind of the early 2011 viewpoint. Then within the guidance just what amount of FX you are including in terms of a contribution for the fourth quarter.

Greg Kenny

I will let Brian take the FX question. The transmission business as we said we have in the North America, the lowest demand we have ever seen in the first half of the year and some very high record demand in the second half of the year and that is really – these projects gets contemplated years ago. They have to get sighted and supported through their rate making process and we are not ready to call the second half of the year will sustain through the first – through next year. There is a lot of talk around transmissions we – North American Electric Liability Corporation just released a study on transmission line design and suggesting that somebody’s lines be derated or improved because – this is a sad question and other things. So there is a lot of talk around it, of course the energy bills are stalled in senate. So we still think its stuff that gets done when local and specific conditions are met and we think it will still be – well Europe is a little different case with a fairly coordinated effort around – a sustaining effort around alternative energy and grid interconnections. It will still be lumpy, but I think the U.S. is not out of the woods and I think it is simply been the release of projects that probably (inaudible) said should have been released. We would have expected them released earlier. So I wouldn’t trend off the second half per se but I guess there is still a fair number of projects our there being contemplated and it is just simply one when do they come. We have a fairly important share in the U.S or Canada of transmission overhead and of course have the capabilities around the underground which is sometimes the answer. You can’t get overhead sightings. Brian, do you want to talk about the FX?

Brian Robinson

Yes. On the FX side Shawn, we have basically little to nothing in the Q4 outlook for transactional for foreign currency (even loses) so every – we basically got the material that we need for production for the rest of the year in Venezuela and as we head into Q4 in our expectations we are basically expecting little – little to no transactional foreign currency.

Shawn Harrison – Longbow Research

Okay. Thank you very much for taking my questions.

Brian Robinson

You are welcome.

Operator

Your next question comes from the line of Stuart Bush with RBC Capital Market. Your line is open.

Stuart Bush – RBC Capital Markets

Yeah hi, good morning guys. It is a good volume quarter.

Greg Kenny

Thanks Stuart.

Stuart Bush – RBC Capital Markets

I want to dig in a little bit on this $12 million currency impact from the Venezuela stuff. It looks like that $0.15 in your non-GAAP numbers and I know you have a non-GAAP penalty back in Q1 on the same issue. As we look forward into 2011 if you do get approval from Venezuela to buy another tranche, will you go ahead and do that? So would you buy ahead so that we would see a similar gain in one of the quarters that might be unexpected or unable for us to estimate.

Greg Kenny

Stuart, it is part of the economics of doing business in Venezuela where obviously 50% of the cost of this cable is copper is world price and then they have specific issues with their own currencies. So we will continue to request to get this as early and as much as possible and have applications and now we would expect that we will get – things changes as well frequently but we would expect that it would be lumpy over next year and then on average we will get what we need to sell for that economy. But if we could get the whole thing in the first half of the year or the first quarter or we might not, so again it should be lumpy. We think of it as part of the economic equation a rather critical raw material which the Venezuelans view as strategic and therefore want it to be sold – (inaudible) you really can’t be in the business. So yes, expect to see probably some lumpiness and we will – if I can get the whole thing on January – well today if I can get the all the 2011 I will take it. I don’t think that we are going to get that, so we will probably see a balance of some release over the course of the year but it won’t be linear.

Stuart Bush – RBC Capital Markets

Okay. And can you talk about the percentage of assets and revenue contribution from Venezuela and we have seen some what looks like non-essential American businesses including the Owens Glass Company get a (ceased). Are there any heightened risks there from before you have seen changes in the government actions or is that really unknowable?

Greg Kenny

Venezuela by our definition is a very attractive market because there is 30 somewhat million people and its natural resources extracted which consumes cables there is lots of work that need to be done on the grid. I don’t have the precise number in front of me Stuart but it is more than 100 million in revenues and we are the largest player in the country and so sell to PDVSA and the utility so we are critical to the infrastructure of that country. I think there is always a chance that they could conclude that you are in a strategic business and that is ought to be part of the national industrial ownership. We really are at the component level and they have had a record of paying their value per assets and there has been some debates as to what those values are and the timing and completeness of payment but I would say that is always a risk but we continue to operate the company in an ongoing basis. We have been there for many, many years and are part of the national fabric. So we will have to see and it is part of – that is an extreme example of doing business in developing – in the developing world and it is a risk that we think we will manage through.

Stuart Bush – RBC Capital Markets

Great. Then if I piece together Greg what you said was an average utilization rate for about 65 to 70% for the company and then Brian mention it was 65% of the developing world. Give us a sense of how utilization rates look broadly in North America and Europe as of today.

Greg Kenny

Stuart, as you know strategically a lot of these factories face certain markets and it is freight and code sensitive so we have to get pretty well into what is it and where is it but broadly we are now quite busy in transmission and flexing back up is always a trick and what is sustaining demand We are quite busy in transmission. We probably have lots of open capacity in low voltage and the medium voltage and I would say the bulk of the U.S. business sort of kicks on at the 65 or 70% level but transmission is gotten busy because of the surge, spike in demand. But we would have capacity utilization in the U.S. ranging from in the 40s to few months sold out on average about 65%. The rest of the world: We will be quite busy out of Thailand and out of Chile now and Brazil and then in Europe. I would say that we are busy around the – busier around the high voltage area and that would be up in the 70s, that range. And then we continue to run it for the Spanish domestic market in the 50% utilization level which would be the low side of Europe.

Stuart Bush – RBC Capital Markets

Great. Thanks so much, guys.

Greg Kenny

Okay.

Operator

Your next question comes from the line of Matt McCall with BB&T Capital. Your line is open.

Jack Stimac – BB&T Capital Markets

Good morning guys this is actually Jack Stimac filling in for Matt.

Greg Kenny

Hi Jack.

Jack Stimac – BB&T Capital Markets

I guess if I could kind of follow up on the capacity utilization topic, you did mentions things improve during the quarter. Has it all been due to volume or has there been kind of capacity taken out of the system so far?

Greg Kenny

Unfortunately this is not the auto industry so we don’t really have independent data that really looks at what plants are working by the week. My judgment is you saw our competitors flex down in some areas and you can derate your capacity by just pulling shifts off as we do and then you can reopen it. In the U.S. (Alken) took a facility down out in the West Coast and then (inaudible) took a facility down in Canada I believe. Those are not large facility so the U.S. really didn’t see the surge in building capacity that some markets did and I would say there had been some modest – we took Saint Jerome down – I am sorry we took (inaudible) of Saskatchewan down and that again was a very small facility. We have always looked at, “can we do more with less” but I don’t think there has been some large movements here but there wasn’t really the – the U.S. market in Canada really didn’t have the boom and the investment. There were some investments but not a lot. There was a lot of capacity build in the gulf and I would say that that is a tough problem because demand is off there. There was a fair amount of capacity built 10 years ago in China but that has really remained pretty focused on the Chinese market. (inaudible) has been in a sort of restructuring as they have looked at their own (inaudible) and I think (darka) has done somewhat the same. This is part of the culture if you can get rid of the (inaudible) but there has not been large facility shutdown that I can call out clearly to say that made a big difference.

Jack Stimac – BB&T Capital Markets

Okay. If you think kind of overall capacity utilization around 65% with copper kind of headed towards 3.90 right about now. How much more capacity utilization or how high do you think capacity utilization needs to be before you guys are not being squeezed on margin from the higher copper prices.

Greg Kenny

It always takes time. Again we are in a copper market. For the last couple of year it has been extreme where we have 5 and $0.10 movements in a day and even more sometimes. We said that when the capitalization gets in the 80s you get a tighter cycle around. You announce a price increase today and it is accepted in a short time, a week or two hopefully. Now it is a little sloppier because of the open capacity but the movements are so profound that I think cable companies have gotten very good at looking at their replacement cost, their cost and inventory and are paying a lot of attention to the (inaudible) as has distribution. So we are not on LIFO any longer so we are selling from an average cost basis and are – we are selling something on average that we made over the last two months or something like that. So again average cost has a tendency to match closely with what we made something at and then the actual sales and what our competitors use and we move to. So that is a long way of saying we are trying to get a price now. It takes generally months to get all the metal movement and I would say that with average costs the effects are slightly more muted that LIFO because we do have this match between – when we made it which is two months ago when if copper were lower and then selling now. Just trying to get a price now you are not quite maybe as volatile as you might be under LIFO standpoint but if it will remains the economics of the business LIFO or average costs have remained the same whish is when metals are moving we are trying to get a price and it is easier when utilization are in the 80s or 90s and in the 60s but on the other hand the movement of copper is so profound that I think it has everybody’s attention.

Jack Stimac – BB&T Capital Markets

Okay. When I look at your guidance, you talked ate how the permits came through in Brazil and you expect some of that to ship in the fourth quarter. How much is that is baked into the guidance and if there are any other kind of areas of strength we should think about.

Greg Kenny

All right, Brian.

Brian Robinson

I would say the – this happy news that part of the project are shipping in the fourth quarter. That is, I would say a smaller part of the continuing volume improvement – continuing to forecast and expect strength in the North American transmission side as well as in broad based and the number of the businesses in North America. And then – and also broad based in the rest of the world. So putting aside the specific transmission projects we talked about there are other very positive things which happened at Brazil in third quarter around the continuing build out and wiring rural areas. So that also continues.

Greg Kenny

Europe I think is lagging slightly the U.S. stabilization. I think Europe is attempting to stabilize and we are helping ourselves a bit with the improvement in our undersea operations with some awards again. The bulk of that really shows up 9 to 12 months from now but that is a – we have a period where we didn’t have – projects delayed for our big undersea factory and them Spain which we don’t think is going to recover sharply. We have gone through a de-manning in taking the cost out. So Spain is moving sideways but we have a better cost there. And then we continue to work at Algeria, we just added Egypt. Both of them are feeling a bit better. And France has been relatively stable from a demand standpoint in part because of the effect of the industrial policy and it had not really peaked in the last boom. It has been fairly stable. Europe is probably slightly behind. We are getting traction in Mexico and again that market is close to the U.S. and has suffered with price and demand but that feels a bit better. And again Southeast Asia and I would say the (inaudible) in Brazil are a strength.

Jack Stimac – BB&T Capital Markets

Actually I lied; I have one quick follow up on a separate topic. You have the (Comsteel) take out and then you have the (inaudible) say that they have proposal to go private. I was wondering if you have any thoughts on that if that is the trend you expect to see continue and (inaudible).

Gregory B. Kenny

As you know also there is to add to the color that Draka is in midst discussion about their future and their larger share holder has gone ahead and agreed with Nexsan to be if certain positions are met to [Inaudible]. There support to the Nexsan acquisition of Draka. Draka’s number in the top 10 cable makers in the world and… we compete somewhat with [Inaudible] in the local area networking and obviously that a big portion [Inaudible] Corporation. [Inaudible] is really a supplier of components. You know I think there will be consolidation to business and we are constantly looking at opportunity around the world whether its green field, brown field or acquisition and I think as we said in prior calls we had a lot of the cable industry become their own banks as metal prices fell and volumes fell and now with high metal and volume stabilizing, you have to put cash back in this business. I think we will continue to see especially around the middle size companies question is that whether they want to continue on and stability and chief financing obviously bring them more interest talk to all sectors so I do not have prediction although than I think were probably in a point where we will see more consolidation because of the recovery. You have to be a very good operating company and I think you need to have synergies in order to get through period like this and it’s probably not the world of markets rising – strongly as I did say [Inaudible] and lots of availability on risk capital so you saw a lot of asset get built and now all of these assets are in tough bites which is we see of the business and we are well prepared for that but others may say we better to be part of something else so I suspect will see that and it is probably to be expected as capacity was built and now not as much capacity is being added and you will have some shake out.

Unidentified Analyst

Thanks for taking my questions

Operator

Your next question comes from the line of Jeff Beach with Stifel Nicholaus. Your line is open.

Jeff Beach – Stifel Nicholaus

Good morning Greg and Brian.

Unidentified Company Representative

Hi Jeff.

Jeff Beach – Stifel Nicholaus

Can you help me a little bit if you done the calculation on your Actual Inventory Reduction versus your plan? Can you help us a little bit with the change in inventories on constant metal bases second quarter to third quarter and what your plans is - constant metal basis in the fourth quarter?

Brian J. Robinson

Jeff we talked 90 days ago. We said we talked with you about $80 million of inventory out in Q3. We were little behind that from a quantity perspective so we probably did let say two thirds of that. Call it $50 million. And so as we look into the fourth quarter, we would expect to continue to target getting quantities out and our target would be to get back to where we were at beginning of 2010 but I think we were reaching an inflection point with respect to the working capital committed to support the volume coming back and then the rising metal prices. But for Q4, we are targeting to get a $120 million of inventory out at constant metal and of course if again assuming if metal raise for [Inaudible] some offset there. But again you can see the tremendous impact of the movements in both volume and pricing back to 2009 where we had $550 million of operating cash flow partly after the business was shrunk –

Gregory B. Kenny

And the business of, Jeff – is stronger than it did not fall the seasonal pattern meaning were parts of it did but was maybe less sharp decline the second half of the year and some of the business and then we had really around transmission globally. Greatly Brazil and US will pickup which is lots of pounds cause it is mostly aerial but generally the business is slightly stronger for a unit basis and we have much higher metals so we are not getting exactly the normal pattern of declining unit demand as was like a year and metals are up dramatically. Jeff from $3 in the midsummer to $3.80 today as you know we are processing something like 700 million pounds of copper.

Jeff Beach – Stifel Nicholaus

Okay. Just to discuss the third quarter margin – some of the regions I think were impacted more than other by this same inventory reduction but margin levels here in some of your markets were the lowest in the entire cycle and I guess my question is how much of this might be due to pricing and are there other factors? I am looking and just thinking that utilization are low at this point but are the industry conditions more competitive and worse now than they were say in the third and fourth quarters of 2009 and the copper movement started really in September so you went through a lot of the third quarter without a significant increase. It is not mostly prices or other issues here that cause the margin pressure in this quarter?

Gregory B. Kenny

Jeff a couple of things is you know half of the business is contractual. We said forever that the spot market sort of sets the contractual market and as contracts come open they can fall chasing down the spot market and then when the spot market starts up they contract market lags but follows up that back up. So part of your business is getting worse as contracts which are one or three years get written down and so we have that effect over time and then we begin to process to all over again. This capacity realization comes up you start seeing the stock market rise and then you start seeing new contracts written at firmer pricing and I would say were probably somewhere around that inflection point where we written down a lot of contracts spot market realization slightly coming up in the industry but we had real issues in September we were chasing copper as I said earlier. Jeff, July was three [Inaudible] June was 394 pounds average, July was 308, August was 331, September was 351 so we are chasing copper up and I think you know the math 20 cents a pound this are huge numbers as we processes 65 million or so pounds of copper in the third but I would say business condition are not worse nor is any – there are always stuff that we see from competitors and we said why they do that. We do not understand it but broadly it is more of the same so I think we are chasing the metals Jeff. We [Inaudible] contracts, we have lost hundreds of basis points of pricing and now as you see the utilization level in the pickup and metal are moving were trying to get metal and of course you always trying to get real margin.

Brian J. Robinson

Jeff a little more color on the inventory side in Q3. The majority of the inventory reduction where in north America and the Europe and Mediterranean as we were rotating to Q4 the majority of our target reduction will be in the rest of the world with further reduction in North America and Europe but now [Inaudible] towards the rest of the world.

Jeff Beach – Stifel Nicholaus

Where there any other factors beside Inventory reduction and your price cost [Inaudible] I guess impacting business in the third quarter

Gregory B. Kenny

That is really [Inaudible] question

Jeff Beach – Stifel Nicholaus

Sequentially the other thing to remembered as well summer holiday theory in the course of European Businesses. If you look at sequentially would created [Inaudible] Edwin from Q2 to Q3

Gregory B. Kenny

We have factories down in Europe Jeff and Europe’s August is almost not there as you know. As in the continent is in holiday

Jeff Beach – Stifel Nicholaus

Okay Thank you.

Operator

Your next question comes from line of Brent Thielman with D.A. Davidson. Your line is open.

Brent Thielman – D. A. Davidson

Hi good morning.

Unidentified Company Representative

Good morning

Brent Thielman – D. A. Davidson

Just a question I guess ROW more of the clarification but you saw 10% volume growth and only 2% metal adjusted metal sales if the doubt of there is mostly just current exchange?

Gregory B. Kenny

Current Exchange would be some of that but there will some element of mixed again business in ROW got a meaningful purchase which is on the aluminum side.

Brent Thielman – D. A. Davidson

Okay and then Gregg kind of within your [Inaudible] visibility certainly returning to the business and I guess it is too early to ask but it was heading towards the end of the year. Do you think these volume implying sorts of Q4 are sustainable in the Q1?

Gregory B. Kenny

The transmission side I think Brazil it seems to be a lot of that sorted out. The US transmission is always a question mark but generally we think running sideways to maybe up slightly and I would say broadly. I would expect a broadly similar environment with the exception that transmission in our project business can be [Inaudible] be.

Brent Thielman

Okay Fair enough thanks guys

Operator

Your next question comes from the line of Tony Kure with Keybanc. Your line is open

Tony Kure - Keybanc

Good morning guys couple quick question is kind of press release indicating better aluminum transmission demand in North America. Could you just talk about how big a piece are the aluminum or I guess differentiate between the aluminum transmission market versus the North American maybe the size of it.

Gregory B. Kenny

Transmission is roughly a third of the overall US utility business and so its measured in several hundred million on average – that is the aerial transmission and then of course there is big underground business that is mostly in Europe and in rest of the world but there is underground market in US but it’s much smaller and it more expensive cable but [Inaudible] again for general cable. The underground extra high voltage might be between zero and seventy five million a year depending on the year.

Tony Kure - Keybanc

Okay but is there – I guess I was just raise my interest with the fact that [Inaudible] aluminum transmission. Is there anything to that or I may reading into [Inaudible] aluminum versus copper from the transmission demand.

Gregory B. Kenny

Overhead in the high voltage cables in towers is aluminum it absorbed lots of metal pounds and that is product that used in say brazil or even Europe or the US and then underground it can aluminum or a copper depending upon the work that’s being done and that is very expensive cable and in the US is not so much transmission underground market though there are projects and we are currently doing and have done projects underground but it does not – a lot of the metal data when we say there are unit volume is up – if there is big transmission projects [Inaudible] that’s a lot of metal because there is heavy conductor and there are a lot of them but aerial is always aluminum, underground high voltage can be aluminum or copper.

Tony Kure - Keybanc

Okay thanks that is helpful and then we talked about transmission quite a bit and as you mentioned that third of US utility but you know I have heard a lot of company talking about non risk construction here in the US and maybe bottoming, maybe [Inaudible] in 2011 and then residential maybe potentially coming out of the mat so I guess from distribution stand point maybe you can comment on what your expectation are in North or more broadly across the world?

Gregory B. Kenny

We watch the architectural building – the FW Dodge Data year construct and we have said time and time again that two things that are enormous helpful as a driver for the business are resi and non-resi construction globally and you are right if not in the US. Some of the buildings are showing non-resi at probably stopping to decline and just beginning to slightly uptake is a forward indicator and housing may be bottoming. So if those things happen, that would impact positively our low-voltage utility business. Probably our medium-voltage business somewhat will would our (inaudible) chord business which is use in part for portable power and it would help similar business around the world if that in fact happens so construction recovering is a good thing.

Tony Kure - Keybanc

You think you start to see that at all maybe at the third quarter or maybe some of the positive impacts of the fourth quarter being (inaudible) or not yet?

Gregory B. Kenny

I do not think so. Do not forget that cables get cold 6 to 18 months behind a start.

Tony Kure - Keybanc

Okay. As a last question, I think there was a common differing growth rate – I just want to make sure I have the right number here. It was 12% to 15% and then a 9% to 15% growth. Could you just run through those numbers again really quick and that will be it for me?

Gregory B. Kenny

Brian is looking.

Tony Kure - Keybanc

Yeah, I think that was versus the first half and the second half of ‘09 or something like that.

Brian J. Robinson

Yes. Sequentially, so second half to the first half volume-wise we are talking about being up 16% and year-over-year we are saying 11%. So second half of ‘010 versus the second half of ’09, we are saying we are up 9% and the second half of this year is up 12% to 15% from the first half.

Tony Kure - Keybanc

Okay. Thank you.

Operator

Your next question comes from the line of Keith Johnson with Morgan Keegan. Your line is open.

J. Keith Johnson – Morgan Keegan & Co.

Good morning everyone. Thanks for taking my questions. I just have a couple of quick questions. Maybe first, could you give a little bit of color on the utility distribution network (inaudible) outside of the construction trance maybe just kind of getting back utility maintenance into that area, I guess a cutback or I guess the way I understand it they cutback as the recession hit and the electricity demand declined or are you seeing improving pattern (inaudible) on North America?

Gregory B. Kenny

The utility spent on medium-voltage cable which is sort of trunk to the tree is slightly better in the second half than the first half. At very low levels that is slightly better.

J. Keith Johnson – Morgan Keegan & Co.

Okay. But I guess maybe with that (inaudible) building momentum coming through the third quarter into fourth.

Gregory B. Kenny

I guess it is notable only that it stopped going down and actually slightly felt better but we would expect – again the fourth quarter as many of you who follow the company is always a bit (inaudible) with utilities in terms of the end of the year money and what they have and different budgetary matters. Our impression is that there should be a slight improvement in that business in the third and in the fourth quarter. Third we have seen it.

J. Keith Johnson – Morgan Keegan & Co.

Okay. When I looked at your revenue about product line and I am all looking at dollars so I cannot see metal pound and if I look at utility kind of year-over-year, even if we sell some good (inaudible) in the third quarter, it still looks like the dollars in the electric utility were down year-over-year based on the revenue about product lines. I did not know if there just something going on with the contracts and actual metal pounds were increasing in that safe.

Brian J. Robinson

Keith, I think it is (inaudible) floor because they are not metal adjusted but the – it is probably back to the mixed question around the aluminum and the copper.

J. Keith Johnson – Morgan Keegan & Co.

Okay. I got another question. When I look at your sequentially guidance of volumes, that at fourth quarter some pretty positive trends of volume comparisons on year-over-year basis for the fourth quarter based on your sequential guidance you gave us. Should we look at maybe Europe beginning to show a little bit of positive demand year-over-year on volumes in the fourth quarter? Or we are really looking at a lot of that falling back to the rest of the world and North America?

Gregory B. Kenny

Year-over-year Europe is the question in the fourth quarter? We would see it roughly flattish with 2009 to slightly down.

J. Keith Johnson – Morgan Keegan & Co.

Okay. And then about the quick comment you made earlier, I am trying to understand the influence of these transmission projects that you guys are now shipping on as it affects the metal pounds. That were saying in your guidance – I mean when we look at that fourth quarter year-over-year comparisons, it is going to be pretty (inaudible) metal pound (inaudible) – I mean is this a lot just into those utility transmission projects?

Gregory B. Kenny

Yeah. I would say that it is being driven - you are talking about now the fourth quarter versus the third quarter is that where we are?

J. Keith Johnson – Morgan Keegan & Co.

That is one way of looking at it, where the fourth quarter of 2010 versus the fourth quarter of 2009.

Gregory B. Kenny

I would say that primary drivers are transmission cable in the US and transmission in Brazil but we are seeing the Indian pact a bit better and the Southeast Asia operations a bit better and we have seen slightly given the seasonal decline I would say that our other businesses have declined somewhat less than we might seasonally expect with the exception of Europe which seems to be just a bit behind the US in the stabilization process. We are probably getting there as well.

Brian J. Robinson

Yeah. The big metal pounds improvements are driven by transmission but the other businesses feels slightly better than – North America is almost 18%. A lot of that is transmission but if you look at North America just simply versus the prior year, we would see electrical infrastructure part segment up versus 2009. We see portable power control running kind of sideways. Networking is slightly up. Telephone cable is a little hard to tell because sort of a declining product. Strongly up in North American electric utility and then generally moving sideways in other businesses from prior year.

J. Keith Johnson – Morgan Keegan & Co.

Okay. Thanks a lot for the color. Good luck.

Operator

Your next question comes from the line of Michael Coleman with Sterne Agee. Your line is open.

Michael Coleman – Sterne Agee

Good morning.

Gregory B. Kenny / Brian J. Robinson

Good morning Michael.

Michael Coleman – Sterne Agee

Kind of look at the inventory in terms of the build, do you had a build and a gain in the second quarter and some headwinds to bring you down in the third quarter and looks like in the fourth quarter to where you get the inventory flat on a year-over-year basis but your in-markets are not going backwards and if we just kind of see steady improvements in your in-markets, what kind of inventory build would you need in the first half of 2011versus the first half of 2010 or did we really kind of overbuild in the first half of 2010?

Gregory B. Kenny

Well, we always build in anticipation of the peak selling quarter which is the second quarter and I do not think we will see a change in that pattern. Again, we sort of taken a quarter a time from a forecasting standpoint externally but I would expect you would see some of the same pattern and we will have to see whether these volume levels persist with volume is exiting the year higher than the first half of the year. And that is a positive thing so we will constantly watch that and inspect on what kind of volume and where.

Michael Coleman – Sterne Agee

(inaudible) color to that as well. I would say in the second quarter, the first half build in 2010 as we said is somewhere but return to the seasonal patterns and in the second quarter it was a little (inaudible) by the volume being a little lower than we had expected. But it does gets harder to call 2011 when we now look at Q4 where the volume is actually nicely improved from where we thought it might be 90 days ago.

Gregory B. Kenny

And do not forget our third quarter which we would not have expected to be as strong as the second quarter on a unit basis was actually stronger than second quarter. So we thought the second quarter would be stronger than it was and then we thought the third quarter would be slightly weaker than it was. So again a little bit which one can be hopeful or is it which beginning to stabilize and rise a bit.

Michael Coleman – Sterne Agee

(inaudible) timing with respect to inventory build versus pull-through but pull-through is pretty good. I mean relative to expectations 90 days ago.

Gregory B. Kenny

Yeah. I would say it is better than – a lot of areas are similar but I would say transmission is stronger than we thought. US medium-voltage is slightly stronger than we thought and I would say that Brazil and Thailand and Chile are all strong.

Michael Coleman – Sterne Agee

Okay. I wanted to ask about the European grid inter –

Gregory B. Kenny

If inter-transmission, we do not carry that much in – (inaudible) actually go build that because we are looking at different design and it is (inaudible) as can be so very to try flex and build. And you are sort of looking against available hours.

Michael Coleman – Sterne Agee

Okay. If I could ask about the European Grid Interconnect project that are in (inaudible), I was wondering if you could describe what the size of some of these projects are or (inaudible) and whether when those projects would be expected to be delivered on – I realized you have not announce anything but I believe you are bidding on some of these stuffs.

Gregory B. Kenny

These grids are very complex. There is different technology that get debated but they are all in individual interconnection to be a$100 or $200 million kind of project but we will announce things that are new or different generally – when we win something that is strategic or different, we have a tendency to announce but we have not the habit of announcing every contract we win around the world. But again we more have the rule of something we either are working on, the submarine cable; high-voltage we thought was very noteworthy was also very big. But we will keep you informed to as what is developed. Again, those are very complex projects and there is a lot of timing issues around anything this complex and involves operations between governments etcetera.

Michael Coleman – Sterne Agee

Do you bid on those grid interconnect projects with a partner or is that something you do on your own?

Gregory B. Kenny

We have a choice of doing either because the projects are wealthy. Sometimes it is better to do it together because you may not have the capacity to satisfy the demand at the time so as you see in many project businesses different types around the world sometimes a consortium is used because no one player could actually deal with the demand if it is an all or nothing kind of thing. And sometimes you might bid on your own depending on the technology or the size of the project but it is (inaudible).

Michael Coleman – Sterne Agee

Okay. On this Voltaic project, if you were to win another project either offshore win or large grid interconnect, do you have the capacity to meet that kind of larger type project in the same timeframe that you are delivering in a Voltaic?

Gregory B. Kenny

Obviously, this call is listened to by a lot of people so I am not going to be specific but in these businesses you have to watch your capacity, utilization and project timing so it is a big model of what can you predictably when you have to deliver what it is you have to deliver but I do not want to get in to capacity. The industry is tight across the board. This is a huge project and an important one and with specific delivery time so the question with “Well do you want high-voltage cable tomorrow from us? Do you want it 3 months from now? Do you want it a year from now?” But again, I really do not want to take you through that because of the open nature of the call.

Michael Coleman – Sterne Agee

I understand. I appreciate your time. Thank you.

Gregory B. Kenny

Sure.

Operator

We have no further question in queue. I will turn the call back to our presenters.

Gregory B. Kenny

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

Operator

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

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