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General Cable (NYSE:BGC)

Q4 2010 Earnings Call

February 09, 2011 8:30 am ET

Executives

Gregory Kenny - Chief Executive Officer, President and Director

Len Texter - Manager, IR

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

Analysts

Shawn Harrison

Anthony Kure - KeyBanc Capital Markets Inc.

Stuart Bush - RBC Capital Markets

Jeffrey Beach - Stifel, Nicolaus & Co., Inc.

Steven O'Brien - JP Morgan Chase & Co

Matthew McCall - BB&T Capital Markets

Michael Coleman - Sterne Agee & Leach Inc.

Richard Wesolowski - Sidoti & Company, LLC

Operator

Good morning. My name is Simon, and I will be your conference facilitator today. I would like to welcome everyone to General Cable Corporation's Fourth Quarter 2010 Earnings Conference Call. [Operator Instructions] General Cable, you may begin your conference.

Len Texter

Good morning, everyone, and welcome to General Cable's Fourth 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 Bob Siverd, our General Counsel. Many of you have already seen a copy of our press release from 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 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 report and other periodic filings on file with the SEC provide further detail about the risk factors related to our business.

During this call, we may refer to adjusted operating income and adjusted EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization, plant rationalizations and other 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 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 of today's call will first be some discussion by Greg Kenny about our current business environment. Secondly, Brian Robinson will provide some financial details about the fourth quarter. And finally, Greg will provide some comments on the company's first quarter 2011 outlook and business trend, followed by some questions-and-answer period.

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

Gregory Kenny

Thanks, Len, and good morning. I'd like to start by saying that things do feel a bit better. I'm pleased to report a solid fourth quarter, as very strong transmission cable demand in the United States and Brazil, as well as a growing business in Mexico, offset normal seasonal volume declines in other product areas in North America and our Rest of the World segment.

In Europe, we experienced better-than-expected demand across the majority of our businesses, including our low- and medium-voltage products in France and a supply of offshore specialty cables manufactured in Germany. As a result, the company's fourth quarter results represent the first time in nearly two years that we have reported volume improvement year-over-year in back-to-back quarters. Similarly, the fourth quarter marks the third sequential quarterly improvement in volume. I'm encouraged by the improving demand trends in our businesses.

For the fourth quarter of 2002 (sic) [2010], we reported revenues of $1.36 billion and adjusted earnings per share of $0.75, both of which were above our expectations. These results include the impact of improved global volume trends, such as those noted above, and the benefit of cost reduction efforts, including both specific actions taken over the past two years as well as the cumulative effect of our years of lean manufacturing and SG&A improvement.

The fourth quarter results also reflect the benefit of the achievement of project milestones in our submarine energy cable business in addition to work performed under repair and maintenance agreement during the quarter on an existing wind farm in the North Sea. Also, the rapid and relatively linear $0.78 per pound escalation of copper costs during the quarter was mitigated by the impact of relieving lower average cost inventory through cost of sales, thereby allowing for a more consistent matching of sales and manufacturing expenses under the average cost accounting method. In short, our fourth quarter operating results were better than our expectations due to a strong finish to the year in North America, as well as in Europe and the Mediterranean, principally NSW.

In the fourth quarter, we reduced inventory levels, but fell a bit short of our expectation. We also benefited from various currencies strengthening around the world against the U.S. dollar and reported a lower effective tax rate than was expected. However, the overall pricing environment has not materially improved. Overall demand remains near historically low levels while record high and volatile commodity prices continue. Despite gradually improving over the course of the year, capacity utilization rates remain at low levels, currently in the range of 65% to 75%, about where we were in the third quarter.

Brian will take you through the details of the financials in a bit, so I thought I would spend some time talking about how I see our current global business environment. In ROW, there remains a great deal of opportunity as infrastructure spending in many emerging markets strengthens and GDP rates in aggregate are more than 2x that of the developed world.

In Brazil, under new leadership, early indicators suggest monetary and fiscal policy will continue to support strong economic growth. The economic environment remains upbeat on the prospect of further significant infrastructure programs measured in the billions of dollars for additional power generation and distribution projects as the country continues to build out.

In Venezuela, while spending on electrical infrastructure continues, we remain cautious as conditions remain challenging and unpredictable. In Mexico, we have a growing business that is nicely on track with respect to market position. We are encouraged by the ongoing strengths of the investment in electrical infrastructure, construction and mining in developing countries like Chile, Peru, Thailand and Zambia. We are also pleased with the progress of our Green Field project in India, which is expected to come online in the third quarter of 2011 as well as the completion of an equity investment in Pakistan Cables during the fourth quarter of 2010.

India and Pakistan represent long-term growth opportunities for the company, as these markets, combined, represent a population in excess of 1.2 billion and approximately 5% of global wire and cable consumption.

In North America, there are positive trends as it relates to the stabilization of demand for certain products. The late summer uncertainty surrounding the sustainability of the economic recovery in the United States has given way to the general consensus of a slow and gradual recovery, a far more encouraging sentiment than a return to recessionary conditions. With that said, there are, of course, sectors that remain weak and continue to lag the overall economic recovery, such as residential and non-residential construction, two primary drivers of our business.

Demand in the fourth quarter of 2010 increased primarily as a result of improved volume for the company's electric utility products, principally related to the release of a number of projects for the transmission grid as well as solid demand for medium-voltage distribution cables for terrestrial wind projects.

After two years of declining energy demand, electricity output rose approximately 3.7% during 2010. While the increases in demand for electricity and the company's electric utility products are encouraging, we believe demand for the company's transmission products will continue to be volatile. For example, in terms of volume attributable to transmission products, we shipped a record high in the second half of the year following a record low in the first half of 2010.

The regulatory future of electric utility companies remains uncertain and alternative energy remains influenced by relatively short-term incentives. Nevertheless, we are cautiously optimistic the bottom is occurring in meaningful parts of our business as market conditions in North America improve albeit at a slower pace than in previous recovery cycles.

In Europe, particularly in Southern Europe, the overall economic recovery is lagging other economies in the developed world, as sovereign debt concerns linger and unemployment rates remain high. While we expect market conditions to remain challenging throughout 2011, our integration of functional capabilities across our European operating units has generated solid momentum, allowing us to capture opportunities in submarine power, underground high-voltage and offshore specialty cables. We are well positioned for long-term growth opportunities in renewable energy, as well as great reliability in country interconnections throughout the region.

In North Africa, rapid population growth and the need for infrastructure investment, coupled with the region's energy generation potential, represent a long-term growth opportunity for the company despite the short-term uncertainty associated with the recent pro-democracy movement across the region.

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

Brian Robinson

Thanks, Greg. Volume as measured by metal pounds sold increased 12.8% compared to the fourth quarter of 2009 and was up 6.3% as compared to the third quarter of 2010. Overall volumes in the fourth quarter were in line with our range of expectations.

In ROW, volume was up 17.2% compared to the fourth quarter of 2009 and up 1.6% compared to the third quarter of 2010. The improvement in demand experienced during the fourth quarter was principally the result of higher volume in Brazil, Venezuela and Mexico, which more than offset normal seasonal demand trends experienced across the remaining businesses in ROW.

In Brazil, we benefitted from the first full quarter of shipments for a series of major Brazilian transmission projects totaling more than $150 million, which are expected to continue shipping through 2011 and 2012. Additionally, demand continues to be strong for our low- and medium-voltage distribution cables as spending on infrastructure-related projects and programs aimed at increasing access to electricity continue. In Venezuela, demand was strong due to higher spending on the electrical infrastructure despite the ongoing and unpredictable operating environment.

In Mexico, while the economic environment is heavily linked with that of the United States, we have made nice progress in a relatively short period of time as we continue to grow our business. As a reminder, we entered the Mexican market in 2009 via the transformation of our Tetla facility from a telecom plant serving the U.S. to an industrial energy facility focused on the Mexican market.

In North America, volume was up 18% compared to the fourth quarter of 2009 and up 2.4% compared to the third quarter of 2010. As expected, lower seasonal demand across most North American businesses was offset by demand for electric utility products, principally due to the release of a number of transmission grid projects as well as solid demand for medium-voltage distribution cables for terrestrial wind farm projects.

In the electric utility business, volume increased 18.1% compared to the fourth quarter of 2009, and it was up 11.7% compared to the third quarter of 2010. Excluding transmission products, volume was up 14.1% in the fourth quarter of 2010 compared to the fourth quarter of 2009 and down 8.8% compared to the third quarter of 2010 due to traditional seasonal demand patterns.

In Europe, volume was up 2.8% compared to the fourth quarter of 2009 and up 18% as compared to the third quarter of 2010. While we generally expect the fourth quarter to be stronger than the third quarter due to the traditional extended European summer holiday period, the sequential improvement in demand was better than expected due to a broad-based improvement across the majority of our businesses, including demand for our low- and medium-voltage products in France and the supply of offshore specialty cables manufactured in Germany. Volumes in terms of metal pounds sold during the third quarter of 2010 was the lowest we have seen in this region.

During the fourth quarter of 2010, COMEX copper averaged $3.93 per pound compared to $3.30 in the third quarter of 2010, an increase of 19% sequentially. While copper prices continue to be volatile, during the fourth quarter, copper ran up on a relatively linear basis, trading as low as $3.66 in early October and as high as $4.44 in late December. We believe this can accelerate the buying patterns of some distributors.

Operating income in the fourth quarter increased 50% or $21.1 million to $63.2 million compared to $42.1 million in the third quarter of 2010. This result is principally due to the impact of sequentially higher volume and the benefit of cost reduction efforts made over the last two years coupled with the achievement of project milestones associated with our submarine energy cable business.

While the rapid and relatively linear $0.78 per pound escalation of copper costs was mitigated as we relieved lower average cost of inventory through cost of sales during the fourth quarter of 2010, value added pricing remains weak. We believe there has been some stabilization in real pricing in some markets, but the competitive environment remains intense as the industry rises from historical low levels of demand and capacity utilization rates.

During the fourth quarter of 2010, the company recorded other income of $3.7 million as compared to adjusted other income of $16.2 million in the third quarter. Other income in the fourth quarter of 2010 was primarily attributable to the strengthening of various foreign currencies relative to the U.S. dollar. Adjusted other income for the third quarter adds back the mark-to-market losses of $8,500,000 as a result of the de-designation of derivative instruments associated with hedge contracts to purchase aluminum in connection with the delay of a portion of the large Brazilian transmission projects. The resulting sequential reduction in other income is mainly due to the third quarter currency transaction gains of $12 million in Venezuela as a result of buying copper at the exchange rates for essential goods of 2.6 bolivars to the U.S. dollar. We had no foreign currency gains or losses in Venezuela in the fourth quarter.

In Venezuela, the foreign currency exchange environment continues to be complex and challenging. In the fourth quarter, the Venezuelan government eliminated the two-tier currency regime, which had no impact on our financial results for the quarter. The change eliminated the official exchange rate for essential goods of 2.6 [bolivars], leaving one official exchange rate of 4.3 bolivars to the U.S. dollar. As a result, we expect to purchase copper at the official fixed exchange rate of 4.3 [bolivars] to the U.S. dollar, which is expected to result in little to no transactional foreign currency gains or losses in future periods.

The company's reported effective tax rate for the fourth quarter was 29%, which was better than expected due to the release of various foreign and state tax contingencies as a result of statute of limitations expirations as well as tax provision to return true ups. For 2011, we expect our reported effective tax rate for the year to be approximately 33%, which is expected to vary on a quarterly basis over the year, with the first quarter of 2011 effective tax rate forecast to be around 38%.

Net debt was $526.8 million at the end of the fourth quarter of 2010, a decrease of $82.9 million from the end of the third quarter. The decrease in net debt is a result of higher earnings and reductions in working capital due to normal seasonal trends. 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 the fourth quarter, the company had well over $1.3 billion of excess liquidity across the globe.

During the fourth quarter, the company generated approximately $118 million of cash flow from operating activities, which is related to a seasonal decrease in working capital of $68.2 million, primarily due to a planned reduction of inventory levels, mostly in the company's Rest of World segment. The cash flow benefit of the planned reduction in inventory levels was partly offset by the working capital investment needed to support higher fourth quarter volumes as well as higher metal prices.

Reported net interest expense in the fourth quarter of 2010 was $18.1 million, which includes $4.9 million of non-cash convertible debt interest expense. Net interest expense, excluding the non-cash convertible debt interest expense charge, was $13 million and $13.2 million for the third and fourth quarters of 2010, respectively.

Capital spending in the fourth quarter was $33.9 million while depreciation and amortization was $27.5 million. For the full year, capital spending was $116 million while depreciation and amortization was $105 million. Our ongoing capital programs are more narrowly focused on developing regions of the world and specialty products coupled with the ongoing global support of green initiatives and continuous improvement in the areas of safety, quality, material usage and conversion costs.

For 2011, excluding the impact of any potential acquisitions or joint ventures, we are anticipating capital expenditures in the range of $100 million to $120 million, with roughly half of that amount directed toward opportunities in the emerging markets as well as focused spending on the expansion of our product offering and capabilities in our specialty cables and submarine power cables businesses. Capital spending in our North America and Europe and Mediterranean segments is expected to be at or below annual depreciation and amortization.

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

Gregory Kenny

Thanks, Brian. We've experienced a significant upward momentum throughout the 2010 timeframe as demand has increased sequentially each quarter, positively deviating from normal seasonal patterns. The second half of 2010 as compared to the first half of 2010, in terms of volume, increased approximately 15%. It was up 10% compared to the second half of 2009.

I'm encouraged as this positive momentum is carrying into the first quarter of 2011 as volume is anticipated to increase 2%. This anticipated increase is driven principally by the ongoing investment in electrical infrastructure and construction spending in emerging markets and stabilizing to slightly improving conditions in many markets in North America.

In Europe, while there are early signs of stabilization in some markets, and we continue to generate momentum in our submarine energy cable business, the recovery in the region continues to lag our other two segments, particularly in Iberia. We continue to manage through excess industry capacity, weakened competitive pricing and volatile commodity prices, particularly copper. I believe our results in 2010 prove that years of lean initiatives, continuous improvement, product and geographic diversification, commitment to high quality standards and dedication to excellence have resulted in a sustainable operating model across our global network of 47 manufacturing facilities in 25 countries and selling into many more.

We have a meaningful exposure to developing economies, which are expected to grow more than 2x as fast as the developed world, in aggregate. Our one company operating philosophy has generated momentum in growth markets for our highly engineered product lines, such as submarine power cable, offshore oil and gas, specialty cables, industrial power control, terrestrial extra high voltage, and a high-end audio- and video-related products. We have taken out millions of dollars of costs over the last several years, are getting synergies across the entire company and have flexed out our factories rather than permanently idling capacity, which we estimate will allow us to capture an additional $1 billion to $2 billion in revenue without adding much, if any, additional fixed costs.

Our first quarter outlook assumes slower sequential results out of our NSW facility, which is a project-oriented business in a startup mode and remains one of our most volatile, as well as higher effective tax rate and de minimis foreign currency transaction gains and losses. We also anticipate further inventory reductions in the first quarter of 2011, as planned reductions in 2010 were less than expected. That concludes our prepared remarks.

I'll now turn the call back over to the operator who'll assist us in taking your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Rich Wesolowski with Sidoti.

Richard Wesolowski - Sidoti & Company, LLC

Greg, you mentioned value-added pricing remains tough, but now volume is going in the right direction. We saw some consolidation among your competitors. On the latter, would you expect the Draka deal itself would serve as the catalyst for price improvement in any of your markets, especially Europe?

Gregory Kenny

I don't know that it would encourage price improvement. Prysmian is a very well-organized company, and I think they have a good return on capital and highly disciplined. Draka has a lot of niches. There is a -- I think the combination is a good one. And the industry has been slowly consolidating and more and more of it is public. There is some overlap in Europe, and Prysmian has said they'll sort through that overlap and others over time. But in the end, we have to take care of business, our own business, and that's costs and product design. And we see some net added value pricing in some markets slightly improving and in other places, it's less disciplined. But I think, generally, as capacity utilization comes up, we generally, not always, have a better pricing stability. So I think the answer to that question is more tied to capacity utilization rather than just that combination itself.

Richard Wesolowski - Sidoti & Company, LLC

And secondly, I recognize each of General's quarters have their own puts and takes that need to be accounted for. But even so, you had exceptional operating leverage in the fourth quarter that is not reflected in the first quarter guidance. Even at the high end of guidance, you had flat operating income despite a 25%-plus increase in volume and sales. Is that copper? Is that conservatism or something else?

Gregory Kenny

Our unit sales to the first quarter are going up approximately 2% in our expectation versus the fourth quarter. So the big puts and takes are really, we haven't put any currency movement in this copper. We're assuming roll sideways at $4.55 a pound and we also are slowing down in some areas. The factories is we didn't get as much out, you know we’re -- return on capital employed is a major focus for us and continues to be. So if we can do more with less in terms of capital employed, we will. So we'll continue to balance that. We also have a percentage of completion accounting related to these large -- becoming now large submarine projects. So it depends on where you are in those projects. So our submarine business wiggles slightly over time, depending on how you're tracking and can hit milestones. But I would say that environment is, generally, into first quarter, I'm encouraged in a number of the Rest of the World markets. I see the U.S. putting aside transmission cable, which is lumpy, but the U.S. generally seems to be, and Canada, are trending up. And I think Europe is relatively stable at low levels, again, putting aside the submarine business, but I'm talking about the general European market.

Operator

Your next question comes from the line of Steve O'Brien with JPMorgan.

Steven O'Brien - JP Morgan Chase & Co

The metal pounds growth, 13% year-over-year, up from 7% in growth in the third quarter and guidance just north of 20% year-over-year growth in Q1, how does that pace of growth play out in 2011? And can we find some degree of confidence that General Cable recaptures some of that lost value add at some point in the future, contingent on and maybe a slow down in the inflationary price environment for metals?

Gregory Kenny

We don't, as you know, do give annual guidance, but I think things are stabilizing. And in some markets, this is all fragile, but in some markets that they seem to be continuing. We noticed, as we reported in earlier calls, that some of our leading indicator businesses in the U.S., they are MRO products. And the Carol Brand and OEM products seemed to have picked up some quarters ago. And I think we're seeing that the datacom area are all assuming to be trending up. The utility spending, which hit the lowest numbers we've ever seen in terms of core utility spending, seems to have bottomed in the fourth quarter, and we think will be up slightly -- the fourth quarter is actually, had improved a bit versus prior year, and we think that may begin to come off the bottom. And I think Latin America is in good shape in terms of demand and Southeast Asia. And Africa had slowed a bit but seems to be coming together. So I'm encouraged. I don't know that we're going to see, you were to await, cyclical, as we've described. In many markets, we need construction to start again. And you can see the non-resi curves in the U.S. with that down materially from where it's been. The resi obviously is at an extremely low number. So when those things start, it also drives utility demand in addition to the cables used on the job site. So we need that to happen. We need Spain to reform. But generally, it feels a bit better. And again, we had our -- a year ago at this time was tough as a late cyclical, we're usually a couple of quarters behind as things wind off in the rest of the economy. So we saw first quarter a year ago being a pretty tough bottom. But I feel better about it, but I don't think we're going to get into a discussion on a set point volume forecast for 2011. But it is better.

Richard Wesolowski - Sidoti & Company, LLC

And I guess medium or near-term maybe on the 2% metal volume growth in Q1, you touched on a little bit with some of the project, longer-term projects in North America kind of scoring revenue or scoring delivery. How should we think about the sort of the regional metal growth in Q1? And on that same topic, have you seen any uptick in business from some of the adverse weather that's been going on across the country?

Gregory Kenny

We've had tough winter, and it's been the same in Europe. And I would say the U.S. business, you get to metal pounds, it's a -- we also do as you know metal-adjusted sales, but aerial transmission cable is all metal and that can move things around. But when you take out our transmission business, which we think will be weaker in the first quarter than the fourth quarter but not nearly where it was the prior year, meaning, above that. But the U.S., Canadian business generally seemed to be up high single-digits, low double-digits versus the fourth quarter. It depends on the business. But it seems to be all, at least, trending positively versus the fourth quarter on a metal pounds basis when you exclude the transmission business. In Europe, it's sort of rolling sideways still. So Europe, I think, is still probably bottoming. I mean, I'm talking about just the overall activity. We had a stronger fourth quarter than we thought, as everything from year-end spending by utilities to perhaps distributors seeing that $0.75 run and wanted to make sure they had inventories because we think distributors continue to run lean. So Europe, I think, is a roll sideways in the first quarter of '11 versus fourth quarter '10. The U.S., excluding transmission, is up, call it high single-digits. And then in ROW, generally up. And I would say that's again up in the mid-single digits overall. But the U.S., I would expect to be actually down on a metal pounds basis because of the way the transmission shipments, which are -- the timing is always, they come in lumps. So I would say the U.S. and the metal pounds would be down slightly or even because of transmission. But the other indicators or the other businesses are actually offsetting the transmission being down, which is encouraging to me about the economy. Europe moving sideways to maybe slightly down, but probably about sideways and Rest of the World up mid-single digits.

Steven O'Brien - JP Morgan Chase & Co

One for Brian, maybe if I could, just last question here. The operating expenses unit been pretty flat for seven straight quarters. How are you going on the expense planned here going into 2011?

Brian Robinson

Yes, I would say the run rate is, as you suggest, Steven, is about right. Maybe it increases just slightly because there's a small element of the SG&A which is variable. But for the most part, it's fixed. And as you know, we run the company very tight, and we would expect to continue to do so. We don't expect that we'll need to add a lot of cost as we’ve said, to capture the opportunity.

Operator

Your next question comes from the line of Stuart Bush with RBC Capital Markets.

Stuart Bush - RBC Capital Markets

Wanted to have some comments from you on what your outlook is for the U.S. distribution electric business, obviously, were off historic lows in demand from last year. Do you subscribe to a thesis that utilities have lots of pent-up demand in that market? Or looking into 2011, should spending trends be more measured?

Gregory Kenny

Stuart, I think you're talking about the utility, power utility distribution markets. Is that right?

Stuart Bush - RBC Capital Markets

That's right.

Gregory Kenny

I think there is a bit of pent up, but it's -- we wouldn't subscribe to a big breakout. We have separately in sort of the same product is the medium-voltage wind. But when you get to just distribution products, it was up off the bottom, I would say, Stuart, probably 15% on a pounds basis, distribution in 2010 was up 10% or so from the bottom of '09. '09 was almost half of where it was in, say, 2004. But we're forecasting an improvement in 2011, but it's not getting back to -- it doesn't even get to the 2008 levels. So there's still a lot of upside. So there's a lot of debate around this and our early discussions with utilities are is there is sort of 3%, maybe 5% improvement in demand. But we're now seeing energy usage increase. So we'll have to see. We'd love to see the big snapback.

Stuart Bush - RBC Capital Markets

And Greg, you commented that you were cautious on Venezuela. Is that related to prospects of demand there or your ability to secure U.S. dollars to buy copper in the country at the official exchange rate?

Gregory Kenny

I'll talk about the country itself. I was thinking about, and Brian will comment on the dollar question, I was thinking about the country is benefiting by higher oil. There is a government involvement in most sectors of the economy. So they're really struggling with inflation and other things. We still, with the higher oil, they're enormously leveraged to that. But it's become a less, and happily so, less important part of our performance. We're always grateful when there's a strong demand there, but it's selling into a more normal pattern. And of course, you can read about the different discussions about what's working and what's not. But it's so oil dependent that not a lot of the other parts of the economy are working correctly right now. So they will fund projects. We'll benefit by those projects as we're the leader there. But it's not related to anything other than that. But Brian, do you want to comment on. . .

Brian Robinson

Yes. I would say that the comment was more about the geopolitical, as Greg said, Stuart. The ability to purchase dollars at the official rate, we believe that we'll be able to do that in 2011. So yes, it's more around the geopolitical situation.

Stuart Bush - RBC Capital Markets

And then, I think, Greg, you mentioned that Pakistan and India combined represent 5% of cable demand. What do you expect. . .

Gregory Kenny

Increasing, obviously, rapidly, quickly India.

Stuart Bush - RBC Capital Markets

And so now that you've got these plants starting in this increased relationship in Pakistan, what's your market share expected to be there once that's established? And also, if you can comment on any impact from your recent Egyptian acquisition, given what's going on there.

Gregory Kenny

You know our business well. Thank you for raising, I'll answer Egypt first. We are outside of the city of Cairo, and our Egyptian business, meaning, we're about 15 miles from the center, our business has been protected. We were -- I believe we started a shift yesterday and have been able to get to the banks and we need to pay workers. We have 150 or 160 people there. Its volume is in the $20 million to $25 million, and our capital employed is in the $15 million to $20 million kind of range. And our people are safe and our property has been protected, and we're starting up again. So this will take some time to sort out, if Egypt wasn't, we only owned it for a short time. And it's not a -- it wasn't a huge piece of our business last year. We are also in Algeria, which has also had some demonstrations where long-term falls on the region, and these things play out. And this clearly slowed down activity for a while, but it's something that we entered not for today but for down the road. So I continue to feel good about where we'll be down the road. Stuart, you were also -- please remind me of the first part of the question?

Stuart Bush - RBC Capital Markets

For Pakistan and India, what your share could be there in that growing market?

Gregory Kenny

India will run about $100 million in volume. We're in the startup mode. We'll start in the third quarter, and we're aimed mostly at utility and industrial specialty cables. We're in the north of India. And in Pakistan, it's a 25% investment in a public company. I'm going to turn it to Brian.

Brian Robinson

Remember in Pakistan, our investment is in what we believe to be the largest public wire and cable company in the country. And in India, as Greg said, our expectation is it'll be $100 million run rate that's entirely fragmented. So again, our market share is going to be pretty, I would offer relatively low as we go in, but we'll continue to grow and our expectations, we'll see the market and start to introduce more complex products as we grow. But again, a country, massive populations in India with obviously 40% of the population without access to electricity. So in Pakistan, 150 million people or thereabouts and it's obviously a very difficult place now, but it's a place we think that needs lots of electrical infrastructure investment.

Gregory Kenny

Stuart, our position in some of the specialty cables that we're building in India, this is a LEED facility. It's going to be environmentally state-of-the-art building. I've just toured it. It's up north of Chandigarh, above Delhi. It's fairly extraordinary that our team has been able to build that there. And what we're really doing with all the focus in India is saying we'll build the best products in the world there. And we think utilities will want that kind of spec in performance as well as -- the products are aimed at industrial applications as well. So this is going to be a serious facility that should run over $100 million when it's fully developed. I would guess, Stuart, it will take us a year or two to get there, but we feel really good about what we've built there.

Operator

Your next question comes from the line of Shawn Harrison with Longbow Research.

Shawn Harrison

Just a clarification maybe in terms of if you could maybe break out just what was the milestone payment in the fourth quarter and maybe the contribution to EBIT and maybe the kind of the timing of these incremental payments throughout 2011, so we can just kind of get it in the model.

Brian Robinson

Sure. Shawn, it's Brian. I would say, as we said, we're coming off a relatively low sort of global volumes and earnings. The impact of NSW being in the startup mode becomes an influence to the results, particularly in a region. So what order of magnitude, again, in order of magnitude, fourth quarter, the improvement in NSW was a couple things. We completed -- and we called out the large -- we're working on the Baltic Project, which we talked about, which was nearly a $300 million revenue project. But we also continue to operate and make product for medium-voltage projects. So really what we saw in Q4 was the completion of some manufacturing and so under of a medium-voltage project. And so what you see under the percentage of completion accounting is the recognition of a proportion of the revenue and the earnings. And we also, as we mentioned on the call, had some service work under a maintenance and repair agreement on a wind farm in the North Sea. So it's hard to give you a run rate for 2011. Our expectation is that we'll continue to be volatile. We had, as we said, one heck of a fourth -- we have a very strong fourth quarter and strong quarter in NSW. That was the meaningful part of the improvement.

Shawn Harrison

And then another clarification in terms of the guidance that says kind of using current, I guess, metals prices. Exactly what number are you using for copper and for aluminum, given the volatility even for the past week in the March quarter guidance?

Gregory Kenny

It's $4.55, at least it was when I sat down. Who knows what it is now? But we have in our mind, generally, in that $4.50 zip code. And if it runs $0.70 from now until the end of the quarter, it's another series of issues. And if it goes down $0.70, then given the pattern and the behavior and the movement into copper of ETFs and also, different volume behavior around the world, we're having a very hard time. We can see into cable demand, which is 65% of the end market, but the amount of interest around copper and the positions held or speculative positions has created enormous volatility. So we're looking at it in this range, but it could be $0.50 either direction for, at least based on, the fourth quarter or more.

Shawn Harrison

I guess maybe to some of your earlier comments on price recovery, I know General Cable, you can see it on your website, has pushed through a number of different price increases over the past 90 to 120-plus days. Is it that the competition is still pricing at cash, or are they just not putting through as large of a price increase as you're putting through? Or is it you're getting pushback from customers, or a combination of all those factors just within the pricing environment?

Gregory Kenny

You need to recover. We have aluminum that’s gone up in the quarter. So again, people forget that we sell hundreds of millions of pounds of aluminum, and that's moved up. And then also, we deal with copper, which has moved up dramatically. We also have petrochemicals, which are petroleum-based, that drives the price, and then steel, all of which are on the move. So increases, again, is us attempting to recover these materials. You also would love to recover some real price as it had degraded over time. But these are all -- then the markets get made and people make independent decisions. Our view is that people have relatively similar costs. I think our costs are great, but no one can survive copper moving $0.70 and still sell it as if it hadn't. You'll be out of business. So I think it relates to capacity utilization. But in general, these movements are so severe that you'll be out of business if you don't, at least, recover the materials. And then we look for, obviously, real pricing. But we're dealing with a $0.75 movement in a quarter. I mean these are, for a lot of my career, copper traded at $0.75 continually for year after year. And that's just the movement in the quarter. So we've never seen things like this. And I think it causes both customers to have -- they're looking at their own inventories and projects they think they're going to win. And then I think generally, most of the industry is on some form of average cost or FIFO. But people will move at different times, and they'll do it on their own and as they choose to, and as a result, I think things get better when utilization gets up. And utilization is better but not in that 80-plus zone where you get people having the scarce commodity, which is output or a scarcer commodity, meaning availability of product.

Shawn Harrison

Is it safe to say then where you're seeing the most difficulty with, I guess, competition is more on the infrastructure side versus utility? At least, transmission sounds good, distribution seems a little bit tougher, but on the infrastructure side, where maybe pricing is a little bit more, I guess, difficult than some other products.

Gregory Kenny

We're in 100 countries. And each country, we're selling many, many products. So it depends. And we have a big chunk of our business is really through distribution. And all of you, many of you, I'm sure, listen to some of our top customers, WESCO and Anixter, talk about, describe -- Grainger talking about their businesses. And I think each market can be different. Mexico is very tough because of both low demand there and low demand in the U.S. Spain has been tough. And then it moves from there, but it really depends on what market and what products and is really not a good rule of thumb. When transmission gets busy, then people don't have product. And you could easily achieve rapid changes in pricing if you haven't got delivery positions.

Operator

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

Matthew McCall - BB&T Capital Markets

So if we think for a second, maybe take out the price cost impact, I just want to understand the incremental margin opportunity as we look into FY '11 and maybe I don’t know if we're going to put numbers to it, but if we just talk about the opportunity to leverage fixed costs with volume. And then any type of commentary around potential cost takeout this year, if there are incremental efforts ongoing. But anything you can provide there would be helpful.

Gregory Kenny

Well, the first thing is that cost is -- we quietly work through this 30% global demand drop. We had to do even more things. But I would say cost out meaning more with less is part of the culture. I think anyone who reads Industry Week just saw our plant in Franklin has just been named among the top 10 manufacturing plants in the country. So this is a 10-year continuum. We call it different things around the world. It's all the same in the end, which is a war on waste and then maximizing your output and getting as much capacity as you can get out against nameplate, not against demonstrated and then scrap its waste as materials usage. We have a structure internally where each operating committee member directs and leads a group of folks that work around purchasing or manufacturing or technology transfer, global customers’ safety, and that all add up because we're getting a good look into best practices around the world. And so this is continuing. We have internal objectives to take cost out that's not purchase price, which we hope we are always looking to get and not volume, but simply more with less. That's making one foot of cable for less than you did the year before. And we think that's just sort of table stakes to be in this business. But we've been at it and at it for a long time. So we have tens of millions of costs out that we will attempt to get. And that's something that we use internal metrics against and don’t make a big deal of it outside because we have to go get it and we think it's just part of the culture. I don't see -- we're always looking at can you do things with less envelopes or different envelopes, or we've moved equipment around. But so I would say throughout the last decade, we've done things in that area preemptively when we saw opportunity, not just in response to a crisis and then took a lot of those charges right through the P&L over the last couple of years as we accelerated the cost out, particularly given the volume collapse in Spain and other places and restructuring in Europe, which can be expensive. I think you're putting your finger on the right spot is that the first point of leverage is if we can go run $1 billion of product, we have a net contribution. Even if you're selling it at today's prices, if the market continues to come back, those, it depends on the product and the region and everything else, but those net contribution margins are kind of 15 points or more. Even if you're just simply running your factories more, you're absorbing your fixed in the factories. So that's a big leverage point. And then lastly, if you can get a point a price on $5 billion or more in volume, that obviously adds up quickly as well. And if you can pull out costs internally through your lean, you begin to like that combination. And that's really what we worked toward.

Matthew McCall - BB&T Capital Markets

You mentioned a couple times inventory reduction, and your efforts in Q4, it sounds like you're going to continue in Q1. Are there expectations you could have -- is there going to be incremental pressure on the margin from that, or is it we're going to continue at the same pace and the margin pressure is going to be pretty consistent?

Gregory Kenny

Well, I'd love to be turning my inventory 365x and working with negative working capital, and that's really our objective. So where we can take it out, we'll do it. And of course, in those cases, you don't observe fixed in the inventory. But I'll let Brian talk about it specifically.

Brian Robinson

Just to dimension to Matt out here, when we talked 90 days ago or thereabouts, we thought we were targeting to take out about $120 million of inventory in Q4. And I estimate we took out about $75 million worth on a quantity basis. Now that gets masked when you look at the balance sheet because, of course, you have the inventory increasing because of the value under the average cost method. But anyway, so the shorter answer is we fell short of our Q4 goal. And so in Q1, we're continuing on a plan to continue to bring inventories down. And I think globally, we'll probably take out about, we're estimating about $25 million from a quantity perspective again in Q1.

Matthew McCall - BB&T Capital Markets

I guess the product line that surprised me the most was the construction improvement. Can you talk about where you're seeing that improvement, maybe types of projects, geographies? Just any more color on the construction product line specifically?

Gregory Kenny

The construction side, as we talked about, that's primarily to distribution. And it's a variety of cables. And we're seeing some strength in Latin America and but we all saw Oceana, Southeast Asia. Spain, I think, is trying to bottom at very low levels. And we also -- the U.S., while not in building wire per se, a lot of our products do rely on our levers of construction. But I would say the bulk of that strength is really coming from Rest of World.

Operator

Your next question comes from the line of Jeff beach with Stifel, Nicolaus.

Jeffrey Beach - Stifel, Nicolaus & Co., Inc.

My only questions revolve around copper versus your cable pricing. You talked about the fourth quarter about average cost mitigating the higher copper. You've got a first quarter guidance out there. Can you describe or quantify in some way how much you're being squeezed by higher copper and the lag in the market to recoup that through pricing? Can you give us some thoughts? And then I heard just in this wrap up about what's ahead that could improve your margins. You mentioned it would be nice, I guess, to get a 1% improvement in pricing over copper. Is this something that you think the markets could strengthen enough to allow over the course of the whole year?

Gregory Kenny

Jeff, as we said about average cost, it's a strong matching of when we likely built it to, and the price of that product, to the sale. So the product that we built three months ago is being sold today sort of or two months ago. We have a lot of -- the 75% changes in the quarter, I hardly know how to start in describing it because it's not quite unprecedented but it's close to it. What happens is you begin, as you see metal move, you announce price increases. They may or may not be followed because every competitor is going to make their own decisions. And they may be looking for volume and wait a week or two, or probably not forever with a $0.75 change. So we have a series of price increases. We have said historically that it takes us three to six months, generally, to get prices to improve. With $0.75 changes, again, it's a lot of rules are thrown out because it's so profound. But we will have announced multiple price increases as this thing continues to run. And then you begin to see what your backlog is coming in at; is there a reel? Are you recovering the metal and other costs? Are you getting any extra price because the industry is getting busier and supply demand is changing? But, Jeff, I would say that as utilization levels come up, we should expect some pricing power. We've had it in the past. That's not to say we will, but an economist would say you should. And the metal is hard to explain other than it's rolling at $4.55. And you can get in a whole separate discussion and listen to the minors in terms of when production comes on, and what does that do against demand, which is a long discussion. We’ve seen aluminum also run up hard to $1.12 a pound kind of numbers, which is up $0.15-ish from where it's been. And that's also an important thing for us. So, Jeff, I look at sort of think about net added value pricing, but it's really hard to tell you much with precision because the movements are so extreme that it's sort of you're needing multiple price increases and then getting adhesion because the movement was profound. So you're sort of rolling a bit sideways in this $4.50 to $4.60. So we'll see whether this gathers. But, yes, I would hope to recover the metals. We believe that you do recover the metals over time because you can't afford to run your business without them. We have certainly higher working capital, which we would wish to recover in the capital employed carrying costs. Just as we said before, if metals are up about $1, you're eating approximately $150 million of extra net working capital, which you have to go ahead and finance. So that's in the equation as well, Jeff. So I haven't answered the question other than to say, I think we will get real pricing over time as utilization comes up but certainly not guaranteed at all. So I think we should recover the metals because you can't operate your business if you don't. Many of our contracts have a formulated escalator or de-escalator, as you know, which are the ones that are longer-term kinds of agreements that we’ll collect, well, they basically pay what we pay. In the other half, that's not the case, which is primarily sales to distribution. But it could be lots of different sales.

Jeffrey Beach - Stifel, Nicolaus & Co., Inc.

The guidance, though, does look like there's going to be, I'm calling it, a copper squeeze on your margins in the first quarter that is a negative comparison with the fourth quarter where you're indicating you relatively matched your pricing with your costs because the average cost accounting. It looks like you're going to be squeezed somewhat in the first quarter. Is that part of your guidance?

Brian Robinson

Jeff, I think that's fair. Clearly, in the fourth quarter, we had some benefit from the average cost. We think we could have, as we mentioned, hard to -- we don't know with exact precision, but we had some potential distribution buy forward. And we talked a little bit before about the swing within NSW, which just to put some dimension on that, the sequential improvement in Q3 to Q4 in Europe, about 2/3 of that was in the NSW business. So as we turn the page to Q1, I think our estimation is that, yes, we would get less benefit than what we saw in Q4 on the average cost. As we said, the divisibility into distributed order patterns is difficult in this sort of volatile copper environment. And then we have NSW return to what we see as more of a normalized quarter as opposed to the strong quarter we had in Q4.

Gregory Kenny

Jeff, NSW, again, the bulk of the big projects are late this year or next year. So we have smaller projects. So that, as we said in prior calls, NSW's bigger year should be coming into the future. But we are winning important projects and starting them.

Operator

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

Anthony Kure - KeyBanc Capital Markets Inc.

Actually, this dovetails off of your last comment, Greg, I was just going to ask about that offshore wind project in the Baltic sea that was awarded to, I think that was announced late last year. Could you just talk about that impact? I mean, you alluded to it. And is that a sort of third quarter, fourth quarter 2011 event? And then. . .

Brian Robinson

Late '11, 2012, 2013. So what we're trying to do is, obviously, we have that -- we've entered the undersea submarine business. And we've just won our first high-voltage project. We've done some smaller medium-voltage projects. And then, of course, we have the undersea communications business. But we're in the startup mode in the submarine business, now moving into the higher voltage. But I'd expect those projects to really kick in late this year and next, and if the business is in a marginally profitable mode, we wish it were stronger at the current time.

Anthony Kure - KeyBanc Capital Markets Inc.

And I believe a magnitude of that at the announcement date was about $190 million. Is that right?

Brian Robinson

In euros, I think.

Gregory Kenny

The top line was just about $270 million, about EUR 195 million, I believe.

Anthony Kure - KeyBanc Capital Markets Inc.

And then related to that, profitability on those types of projects, how would that relate to, say, the corporate average?

Gregory Kenny

They should be some of the best work you can do because it has lots of knowledge and know-how and investment behind it. As we're in the startup mode, I would model it more at the corporate average or perhaps a bit better, but not -- we also want to get these jobs done and get them done correctly. And what we need to -- these are very complex things to go do and we need to just simply do it. But it should be better than the corporate average over time because of the capital and know-how employed in these businesses, which is -- and we think it's a growing business. So I would look at it as a better margin business, as we get more and more proficient and demonstrative.

Anthony Kure - KeyBanc Capital Markets Inc.

And just one more comment on resi and non-resi construction, especially here in the U.S. You see the ABIs improving. You see recent macro stuff that things are improving. You hear companies talking about different timelines as far as end of 2011, maybe 2012. Just like to get your opinion on the timing of that recovery, at least as what your thoughts might be on that perspective here in the U.S.

Gregory Kenny

We're looking at all the same things, EURs, houses, time on the market, we're watching the ABI data, we're looking at FW Dodge. We're what, 400,000; 500,000 units below replacement demand. So we're eating that EUR 1.5 million, EUR 1.7 million overhang through. And we're watching real mortgage rates and stuff. But I don't -- we're not planning on -- I think our view was kind of housing improves 100,000 or 150,000 units and non-resi continues to drift down in 2011. So the U.S. industrial activity is up, but construction is -- you have some diminishment of federal and state spending and offset perhaps by the beginning of this excess inventory. But we aren’t calling anything like a hockey stick in the U.S., nor planning on it.

Operator

Your next question comes from the line of Michael Coleman with Stern Agee.

Michael Coleman - Sterne Agee & Leach Inc.

You covered a lot. I wanted to kind of focus on your industrial electrical infrastructure in terms of the mining and the oil and gas or the offshore drilling piece of it with the locals. When you think about these businesses relative to kind of cyclical where they're at in both kind of volume and price relative to the last couple of years, we've talked about the utility and how it's gone from trough to peak or to very high levels on the transmission. How do these businesses compare from a cyclical perspective of where they're at today relative to where they've been and where you think they are likely to go?

Gregory Kenny

If they have cycled less and we've also expanded our offering in those areas with down well pump and continuous corrugated welded cables and we continue to bring that know-how into new markets worldwide, where we are selling other products. But I would say the specialty cable area, if you will, if you -- transit can be lumpy, but generally, the oil and gas has been strong, and it peaked in '08, but it didn't come down like the other businesses. And we keep getting better at it, and we do have quite a global business. So it's probably off 15% from its sort of peak kinds of numbers, but not some of the 30s and more that we saw in other markets and in part because oil is stayed at a healthy level. And some of the developments and gas, I think have been at the reinvestment rate, which is generally viewed as $70 to $80 a barrel, and it's been above that, not $130. But so I think there’s travel upside. Our package keeps getting stronger. We bring the know-how elsewhere, but it hasn't cycled as strongly down.

Michael Coleman - Sterne Agee & Leach Inc.

What about the mining side? In terms of expectations from mining CapEx over the next -- did your business track more with mining CapEx or is it more on MRO or in existing properties on replacement?

Gregory Kenny

It's both. And our mining business is measured in the hundreds of millions, but it, so it's an important business, but globally, it would follow both. And these cables get used on the site and worn out. There’s a lot of shortages in tires and other things in mining as miners rush to go back to work. So mining has been a relatively good business, and we're particularly good at it in Chile and now Peru and then, of course, we have a nice position in the U.S.

Michael Coleman - Sterne Agee & Leach Inc.

So has the pricing in these end markets held up?

Gregory Kenny

I would say better. What you have to be sensitive to, it’s never quite -- I wish things were simpler, but you may not have the spec name and other things, but if your, say, your medium-voltage demand is weak for utility cables, some of that equipment can come out and try to work in industrial products. So there's some fungibility around medium-voltage, so medium-voltage industrial may be less, down less than medium-voltage utility, but because capacity can do either kinds of work, they'll hunt for new demand. The same thing can happen on stranding capacity for transmission. So that is inter-operability, if you will.

Operator

And those are all the questions that we have in the queue at the moment. I turn the call back over to our presenters.

Len Texter

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

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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