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General Cable (NYSE:BGC)

Q1 2011 Earnings Call

May 03, 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

John C. Stimac

Brent Thielman - D.A. Davidson & Co.

Shawn Harrison

Steven Gambuzza - Longbow Capital

Anthony Kure - KeyBanc Capital Markets Inc.

Brett Levy - Jefferies & Company

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

Steven O'Brien - JP Morgan Chase & Co

Richard Wesolowski - Sidoti & Company, LLC

Operator

Good morning, my name is Michelle, and I will be your conference facilitator today. I would like to welcome everyone to the General Cable Corporation's First Quarter 2011 Earnings Conference Call. This conference call is being recorded at the request of General Cable. [Operator Instructions] Mr. Len Texter, Manager of Investor Relations, you may begin your conference.

Len Texter

Good morning, everyone, and welcome to General Cable's First Quarter 2011 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's 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 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 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 first quarter. And finally, Greg will provide some comments on the company's second quarter 2011 outlook and business trends, followed by a question-and-answer period.

With that, I'll turn the call over to Greg Kenny. Greg?

Gregory Kenny

Good morning, and thank you so much. I'm pleased to report a very strong start to the year, continuing to build on several quarters of positive momentum. For the first quarter of 2011, we reported revenues of $1.45 billion, which was consistent with management's expectation, and adjusted earnings per share of $0.79, which was well above our expectation. These results reflect the benefit of stronger-than-expected operating results in North America and ROW.

In North America, the magnitude of the improvement in a number of our end markets during the first quarter was more significant than anticipated. In ROW, we reported stronger operating results despite business conditions being somewhat uneven as the pace of economic recoveries across the numerous geographies vary and project releases fluctuate from period to period. In Europe, conditions continued to be difficult in terms of demand and price. Overall, our results reflect a firming price environment in North America, as well as the flexibility of our operations and the excellent work of our business teams globally to identify and rapidly respond to volatile end market demand.

Our operating results also benefited sequentially from the absorption of overhead costs in the inventory as quantities were increased primarily in anticipation of seasonal demand trends. The uneven demand patterns in ROW, as well as the general market weakness in Europe and the Mediterranean, discussed above, also contributed to the increase in inventory quantities during the period. Partially offsetting these better operating results were higher selling, general and administrative expenses as salary freezes were ended and incremental investments were made in global selling and engineering resources, as well as product technology. We also have brought online a number of new facilities. As they ramp up, we incur costs. In addition, our results in the first quarter included a benefit of unrealized gains on mark-to-market adjustments of foreign currency and commodity financial instruments, as well as a lower than expected effective tax rate. Brian will take you through the details of the financials in bit.

I thought I would spend some time talking now about how I see our current businesses globally. In North America, the first quarter was marked by strong demand for the company's electrical infrastructure and early-cycle products, each improving sequentially as compared to the fourth quarter by 21% and 17%, respectively. Versus the prior year, the company's electrical infrastructure products were up 40% and early-cycle products were up 12%. Investment in fossil fuel extraction was an important driver of growth during the first quarter as demand for our specialty cables, including those cables used in oil and gas as well as mining applications, was particularly strong. Additionally, the successful commercialization of 17 FREE, a line of halogen-free jacket designs for some of our data communication, fiber-optic and electronic cables. An LEED qualified design was also a meaningful driver of growth in the first quarter. Excluding transmission products, demand for the company's electric utility products was up 5% sequentially as compared to the fourth quarter, driven by demand for our low- and medium-voltage products used in the distribution grid. Nevertheless, demand for utility products remains quite weak by historic standards. In short, our results in the first quarter in North America reflected the impact of improved demand, higher capacity utilization rates and better pricing in several important product areas tied to industrial production and IT spending. In ROW, our first quarter results reflect the impact of stronger demand sequentially as compared to the fourth quarter in Central America, the Andean, Southeast Asian and African regions. In addition, we strengthened our market position and product range in Mexico, Colombia, Peru, Australia and South Africa. Overall, there remains a great deal of opportunity in ROW as GDP rates from many emerging markets in aggregate continue to outpace those of the developing world particularly in countries such as Brazil, Chile and Zambia as investment in electrical infrastructure, construction and mining continues, as well as communications infrastructure.

In Europe, putting aside our project business, our operating results generally move sideways sequentially when compared to the fourth quarter. The market conditions during the first quarter were difficult in terms of demand and price. We expect conditions to remain challenging throughout 2011 as excess industry capacity and the economic recovery in Europe remains fragile as monetary policy to address inflation, a strong Euro and sovereign austerity measures weigh heavily on growth prospects. However, we are benefiting from our new Pan-European organizational design that nicely leverages the talents of our associates and allows our Spanish operations to benefit from other market opportunities in the region. It is through the integration of our functional capabilities across our European operating units in the areas of sales and marketing, manufacturing, engineering and project management, that have enabled us to capture opportunities in submarine power, underground high voltage and offshore specialty cable markets and allowed us to continue to weather the generally difficult market conditions in the region. During the quarter, we started meaningful production on the EUR 195 million Baltic 2 Wind Farm submarine power cable project, which is expected to be manufactured in 2011 and 2012. We are also encouraged by the volume of terrestrial high-voltage and extra-high-voltage orders, which we have taken for production and delivery around the world over the next few years.

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

Brian Robinson

Thank, Greg. Volumes measured by metal pounds sold increased 22% compared to the first quarter of 2010 and was down 2% as compared to the fourth quarter of 2010. Volumes in the first quarter were slightly below our expectation, principally as a result of uneven demand in the company's ROW segment. Excluding the impact of transmission product shipments in North America, which are coming off of a record-high fourth quarter in terms of metal pounds shipped, global volume increased 20% compared to the first quarter of 2010 and was up 2% as compared to the fourth quarter of 2010. In North America, excluding transmission products, volume increased 16% compared to the first quarter of 2010 and was up 10% compared to the fourth quarter of 2010. This sequential improvement in volume was principally driven by strong demand for the company's electrical infrastructure and early-cycle products. Demand as measured in metal pounds sold for the company's electrical infrastructure products increased 40% compared to the first quarter of 2010 and was up 21% sequentially as compared to the fourth quarter of 2010. Key drivers of this growth during the quarter include demand for cables used in the industrial, oil and gas and mining sectors. In addition, volume in the company's early-cycle businesses, which include products for MRO, OEM and networking applications, increased 12% compared to the first quarter of 2010 and was up 17% sequentially when compared to the fourth quarter of 2010.

In ROW, volume was up 36% compared to the first quarter of 2010 and up 1% compared to the fourth quarter of 2010. The modest sequential improvement in volume principally reflects the uneven demand patterns experienced throughout the segment during the first quarter as infrastructure investment, construction activity and project releases vary. Sequentially as compared to the fourth quarter, demand strengthened in the Central American, South East Asian and African regions, as well as in the Andean countries of Peru and Colombia. Conversely, the company experienced softer demand during the first quarter in Chile, Venezuela and Mexico. Collectively, the lower-than-expected demand in these countries and in ROW overall, relates largely to temporary factors as construction, mining and utility projects are moved between reporting periods and government appropriations are authorized and infrastructure investment plans are advanced.

In Europe, volume was up 7% compared to the first quarter of 2010 and down 4% sequentially. The sequential decline was due to low-levels demand for our low- and medium-voltage products in France and Algeria and, to a lesser extent, the supply of offshore specialty cables manufactured in Germany, which experienced a relatively strong fourth quarter. During the first quarter of 2011, COMEX copper averaged $4.39 per pound compared to $3.93 in the fourth quarter of 2010, an increase of 12% sequentially. Copper prices continue to be volatile, reaching a quarterly high of $4.63 in February and a quarterly low of $4.13 in March. We believe this volatility may impact the buying patterns of some distributors. Operating income in the first quarter increased 16%, or $9.9 million, to $73.1 million compared to $63.2 million in the fourth quarter of 2010. The sequential increase in operating income is principally due to price firming on a range of products in North America as a result of stronger demand for the company's industrial, specialty and early cycle products. Similarly, uneven but better overall performance in our ROW segment contributed to the stronger results led by strength in Central America, Andean, South East Asia and African regions.

During the first quarter, overall results benefited from the absorption of overhead costs in the inventory as quantities were increased in anticipation of seasonal demand patterns. The uneven demand patterns in ROW, as well as the general market weakness in Europe and Mediterranean, also contributed to the increase in inventory quantities during the period, a bit above anticipated levels. Partially offsetting these better operating results were sequentially lower operating results in the Europe and Mediterranean region and higher selling, general and administrative expenses as salary freezes were ended in parts of the business and incremental investments were made in our global selling and engineering resources, as well as product technology.

During the first quarter of 2011, the company recorded other income of $7 million as compared to other income of $3.7million in the fourth quarter of 2010. The increase in other income is primarily due to unrealized gains on the market value of various foreign currency and commodity financial instruments, as well as the strengthening of various foreign currencies relative to the U.S. dollar. We expect other income to continue to be volatile given sharp movements in currency and commodity prices.

The company's effective tax rate for the first quarter was approximately 33%, which was better than expected, partly due to the impact of permanent tax differences on a higher level of pretax earnings. For 2011, we expect our effective tax rate for the year to be in a range of 30% to 33%, which is expected to vary on a quarterly basis over the year with the second quarter of 2011 effective tax rate forecasted to be slightly below 30%.

Net debt was $679.8 million at the end of the first quarter of 2011, an increase of $153 million from the end of the fourth quarter of 2010. The increase in net debt is principally the result of higher working capital requirements due to normal seasonal trends, as well as the impact of rising raw material cost inputs. 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 first quarter, the company had approximately $1.2 billion in excess liquidity across the globe. During the first quarter, the company used $105.6 million of cash flow from operating activities, principally related to a $176.8-million increase in inventory. This increase is primarily due to the impact of higher raw material cost inputs on our inventory balances, as well as increasing inventory quantities in anticipation of seasonal demand trends going into the second quarter, following the fourth quarter inventory quantity reduction. Also, the uneven demand patterns experienced in ROW and the general market weakness in Europe and Mediterranean contributed to the increase in inventory quantities in the first quarter of 2011. Reported net interest expense in the first quarter of 2011 was $22 million, which includes $5.1 million of non-cash convertible debt interest expense. That interest expense, excluding the non-cash convertible debt interest expense charge, was $16.9 million in the first quarter of 2011 compared to $13.2 million in the fourth quarter of 2010. This increase was principally the result of higher utilization of working capital credit facilities during the first quarter of 2011 in order to fund the seasonal increase of inventory and higher raw material cost inputs.

Capital spending in the first quarter, up $26.6 million, was just below depreciation and amortization of $28.7 million. For 2011, excluding the impact of any potential acquisitions or joint ventures, we are anticipating capital expenditures in the range of $110 million to $130 million, which is just above global depreciation and amortization, 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, as well as supporting our global lean initiatives and continuous improvement in the areas of safety, quality, material usage and conversion costs.

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

Gregory Kenny

In North America, while economic indicators have generally trended positive and the manufacturing sector strengthens, we remain a bit cautious due to a very weak construction sector, higher energy prices, stimulus withdrawal and volatile raw material costs, all of this coupled with fiscally weak state and local governments and a record federal budget deficit.

In the second quarter, we expect the normal seasonal improvement in demand from our utility customers while our other businesses in North America improve slightly after a strong first quarter. In Europe, we do not anticipate any significant improvement in overall demand patterns. It appears a 2-speed recovery may likely continue throughout 2011 as governments address budget shortfalls and weakening domestic demand in many countries while Germany, for example, is again growing nicely. The difficult overall regional end markets are exacerbated by conditions in Iberia, historically our largest European end market, where demand and pricing remain quite weak. In ROW, despite being uneven at times, demand should continue to improve as GDP rates remain healthy, infrastructure, construction and mining investment continues and industrial production advances.

In the second quarter, we expect volume improvement as projects are released and new investments made by the company continue to come online. Overall, despite stronger-than-expected demand during the first quarter in a number of our businesses in North America and certain regions in ROW, global demand trends, while positive, have not significantly changed or accelerated. We continue to manage through excess industry capacity in many of our end markets at highly competitive pricing.

Globally, capacity utilization rates remain at relatively low levels, about where we were in the second half of 2010 with some improvement in certain businesses in North America. At the same time, high and volatile commodity prices persist. Our second quarter outlook assumes current metal prices, improved volume of approximately 8%, mainly as a result of seasonal demand trends, an effective tax rate of just under 30% and no unrealized gains or losses on mark-to-market adjustments of financial instruments. We also anticipate flat to slightly lower inventory levels by the end of the second quarter.

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

Question-and-Answer Session

Operator

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

Richard Wesolowski - Sidoti & Company, LLC

I know you guys try to avoid generalizing about statistics across the company, but I was hoping you can give some perspective on the facility utilization today as compared to what you would expect in a strong economy, perhaps adding where you may be running flat out and where you will be lagging your own expectations?

Gregory Kenny

Rich, we really don't -- as you know, we don't really measure utilization in a precise way. We can run 5 days, and sometimes we'll run a sixth on bottleneck operations, or even a seventh, and sometimes we'll go continuously. But generally, I would say, without really the construction sector kicking in broadly -- that's residential and non-resi, and non-resi I'm thinking beyond simply industrial construction, we are not where we would be in a normal cycle. And I would say, we're generally in the low 70s in terms of what we could build globally.

Richard Wesolowski - Sidoti & Company, LLC

Okay, and then secondly, just going to the point on metals inflation, the effect on your balance sheet, do you think General has the potential to earn the sort of returns that you recorded in, say, 2006, 2007 on assets and invested capital if metals prices stay where they are or even rise? And if fuel prices stay where they or even rise?

Gregory Kenny

Richard, it is -- copper has moved up quite a bit, and we're processing about 700 million pounds of it. And we're seeing now that it's at $4.18 this morning. And you can put that into the overall usage and do some math and conclude that we do have a higher capital employ. We're working hard on the networking capital metric as a company. Some of the differences from prior period: We're not anticipating Iberia coming back the way it was, say, '06 and '07. But we do have a lot of new envelopes and new markets which have great potential. So I don't know, Rich. We've talked about the marginal contribution on incremental volume. And again, metal's arguably -- we've been wrong on this a fair amount but with the production costs, the $1.80, $1.90 a pound, it's surprising to see this trading at more than twice production costs. So I don't want to get into forward forecast but those are our levers. And I would say, we have more assets at the table in terms of opportunity, but I think Spain has deteriorated, and we do need a construction cycle to start again. But I think we can certainly set that in our scope, and we do have some businesses today that are at or above prior highs. Some markets in the U.S. are quite strong.

Operator

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

Shawn Harrison

I was hoping to just parse out a little bit more, the impact to EBIT during the March quarter from the sequential growth in inventory. Just how much of a contribution to the EBIT dollar expansion was it? And then within the inventory build itself, how much of that was actually metal pounds growth versus just copper or metal-related inflation?

Brian Robinson

Yes, Shawn, it's Brian here. Broadly when you look balance sheet to balance sheet, the inventory moved $210 million, $215 million in the first quarter. So putting aside the currency impact, as we said in the call, about $176-million increase in inventory in the first quarter. And this is to be helpful, it's a best guesstimate. I don't have perfect science, but I would say the price part of that increase is, call it, in the $90 million to $100 million-type range with then the balance being, say, on the volume side. And as a rule of thumb, as you know, we've historically thought about that -- when we get inventory -- when we're increasing inventory quantities, the absorption -- and again, I'd toggle some [ph] for a very global company, but the absorption is probably about a 10% to a 15% kind of benefit. So I think when I roll all that together, we increased inventory across the company in Q1, probably the 2 regions where it was least expected, or where we grew more as we noted in our comments, were in ROW and Europe and Med, for the reasons we noted around the uneven demand patterns and just general weakness in Europe and Med.

Shawn Harrison

Okay, and then the actual build ahead of volume was in North America per your commentary earlier, correct?

Gregory Kenny

Well, we always are immediately -- we have to think about how we flex our factories. And we have returned to a seasonal peakiness around the second quarter. So part of it is contemplating that. But also, we were -- frankly, the demand did not materialize as hard in Europe and in some markets in ROW as we had anticipated, which led to a little more build than we had wished. So we'll end up adjusting in the second quarter where we'll more or less produce at a flat level with the exit from the March timeframe and then cover that increased 8% demand off of inventory, which we built fundamentally during the first quarter. Again, you don't want to restaff factories. You want to flex them up with overtime. And you only go to a, say, 7-day schedule -- 24 hour, 7-day schedule if you see a permanent, elevated level of demand, which we see in a few areas but not across the board.

Shawn Harrison

Okay, that's more than fair. And then just a follow-up, the commentary on pricing is pretty positive news at least in North America. Is it a combination of just the demand environment getting better? Or are you seeing more of your peers get in line, understanding that the market needs to pass through price increases?

Gregory Kenny

I think we have generally felt that you always -- we've talked in the past about general trends of more of the industry's public and with people's financial systems being more precise, given the extreme volatility in raw material input costs -- and you need that to really manage the business -- I think, generally, as capacity utilization, as well as a need to -- which drives real pricing. And we've seen sharper utilization in our North American specialty cable, which is really tied to infrastructure OEM kinds of work. Our industrial products in the U.S. as well as MRO maintenance repair and stuff and product that's used actually in OEM production, say, harnesses or internal wiring. So anything tied to the industrial economy has picked up. And as that utilization picks up, it has the tendency to see price become a little stickier. The other areas -- utility is still way down in North America in terms of where it was historically, though it is coming off the bottom. So we have a ways to go in that market.

Operator

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

John C. Stimac

This is actually Jack Stimac filling in for Matt. I guess if I could follow up on that last question, it looks like in your guidance, you're kind of assuming a lower gross margin. Is that coming from some of the inventory build during higher copper prices working its way through? Or is it a mix issue? Or kind of what's driving that?

Brian Robinson

Yes, Jack, I think it's a number of things. Again, when you look at a very -- obviously, a very strong first quarter, beyond our expectations in North America. So yes, the guidance, as we move forward, reflects, as we noted, some caution around the forward look and some of the macroeconomic factors, as well as the -- in the first quarter, as we noted, we estimate we built, volume-wise, about $75 million to $85 million worth of inventories. So the better absorption we had there will not appear again in the second quarter. So that's really from an operating perspective. And then from a broader perspective, when you look at the EPS guidance, the first quarter of course has the mark-to-market gains on the currency and the commodities, which we forecast as flat. So that's essentially a $0.09 headwind. And then we get a little better on the tax rate by $0.03 or $0.04 or $0.05.

Gregory Kenny

Jack, I guess we have a lot of pieces moving around. I think things do feel better, and we -- I think in some segments in North America, I am hopeful that we'll keep the pricing power that I think we've begun to see as utilization came up. But I don't see the acceleration of demand in those earlier cycle businesses. They're at a much higher and stronger level than they were, but they're sort of rolling sideways in these businesses that we remarked had improved nicely in the first quarter versus fourth. So I think there's a firming. But again, as I said in the earlier question, with overall global capacity utilization somewhere in the 70s, there's capacity looking for work in a lot of the areas. And frankly, Europe is behind where the U.S. is. I am optimistic in a number of the ROW locations. And again, some of that is simply project releases, but some of those are stronger. So net-net, I think the inventory and sort of rolling sideways are the reasons that we're seeing the second quarter sort of roughly in line with the first.

John C. Stimac

Okay, do you think the Q1 gross margin is something you can get back to later in the year? Or is it just kind of -- I mean, assuming copper prices kind of stay flat -- because I mean, I think right now they are down, call it 2% sequentially from Q1, and I would assume that, that stays, that will kind of -- maybe give that a little boost. But is that kind of 11.05% range, is that something that you think you can get back to?

Gregory Kenny

Yes. Well, over time, I would hope we could -- again, at current metals, we have businesses that are surpassing that now and surpassing it handily. So I think it's -- as some of these markets continue to stabilize, as we begin to see construction come back, I would hope we would go by that without, again, getting into a forecast mode. As I said, we do have businesses there -- are much higher gross profit margins today, and that's our objective as well as, obviously, continue to take cost out through lean manufacturing, et cetera.

John C. Stimac

Okay, and one last question, kind of on SG&A for the quarter. I know you had said that some salaries had become -- that had been frozen, kind of came out of that. What kind of run rate should we think about for the rest of the year? And is there any kind of M&A built into that, that will kind of run out? And kind of, what kind of leverage do you think you can get with kind of -- what kind of run rate as a percentage of sales should we expect it to get back down to?

Gregory Kenny

One of the things we've been doing that make us a little harder, is we sort of have this balance that you always have, leading a company between short-term and thinking long-term. And clearly, some of the startups that we have done, where we've done greenfields and brownfields, you add costs, you begin to add volume to those facilities and then over time, hopefully, make that a handsome return, consistent with your other businesses. But as we bring those facilities up, we create a run rate that is slightly dilutive near term. Some measured in months or less, and some of them take a year or more to go make money. So we have a tendency to think about our core run rates. And then as you know, we've added a -- and brought online a facility in Peru, in South Africa. We're bringing one up in India. We're bringing one up and are fully commercial in Mexico, but these businesses typically add some cost ahead of the accretion, if you will, or net income. And we've got some other places in mind, again, relatively modest. But these new facilities typically are capable of $100 -- $50 million to $150 million in revenues. And there's lots of ins and outs. We did have our folks with salary freezes that went for 2 years, some cases 3 years, and we have begun to release that. But Brian, it's again is it -- the question is really core versus us continuing to bring up green and brownfields or acquire something.

Brian Robinson

And I think when you roll the model forward, there is also a couple of million dollar component, which is going to be currency. Remember, the weaker dollar was about 2/3 of our operations outside the U.S. There is some inflation of that line item just from the transition. But putting all that together, run rate I would guide you towards is probably $90 million to $95 million, reflecting all those factors.

Operator

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

Steven O'Brien - JP Morgan Chase & Co

The price increases in North America, I mean, if you just look at, crudely right, at revenue divided by metal pounds, I mean, the price is up substantially. Can you help us understand maybe how much of that is related to the mix of the cables? Clearly, you're selling more higher value cables in the first quarter versus the transmission cables from the first quarter. And then how much was from that pricing power?

Gregory Kenny

We have seen an improvement in our less copper-intensive products that, say, are different than transmission or even some of the heavy power cables that are larger-size distribution cables. So we are seeing that realization per pound improve, because these are sometimes 600V or 1kV or 5kV products. While they are materials-intensive, they have less copper in the cost of sales or less aluminum. We also have seen a nice pick up in our industrial harness business and our data cable business, which has less copper, in the data cable particularly. So that's all improving, and it's a rich mix from that analysis. What we have to think about as we think about quarter-to-quarter, we have copper, as we said, distributor behavior. Not all distributors but some can think about metal movements. Copper is back down by $0.20, so we're watching, again, some behaviors, as copper runs up. People are afraid of being short of product. And is it going to run up high? Right now, it's back down to $4.18 after being in the $4.35, $4.40 level. So we're always trying to think through that but generally, those product areas have remained relatively strong. But again, demand can fluctuate a little bit by copper movement and just purchase timing. But they are less metal intensive and therefore, you're seeing that gross margin per pound probably pick up on balance.

Steven O'Brien - JP Morgan Chase & Co

Okay, so I appreciate that color there, Greg, but maybe I could ask sort of an additional -- Is there -- as we move forward, and utility maybe seasonally picks up, how does that maybe -- how should we think of sort of price per pound here going forward in North America?

Gregory Kenny

Utility, we're going to sell more utility products in the second quarter because that's one of our more seasonal businesses. And we'll sell that primarily -- that material from inventory. And I haven't -- I think, thinking about different metrics on how to think about the business including price per pound is useful -- but I'm not prepared to give you guidance in a price-per-pound kind of format. Brian, do you want to comment?

Brian Robinson

No, I would agree with that. All things being equal, we'll have -- we would expect -- if some of this gets into the mix, because we'll expect on the utility side to have some more aluminum than what we've had in the copper. I think the other -- maybe the other observation I'd make, Steve, is as we -- if you look at sort of the run in copper, and while we're endeavoring to get prices quickly as possible, it was a fairly linear run for 6, 7, 8 months beginning sort of in July of last year. So maybe Q1 reflects some of that ultimately, that long run and ultimately, we were pushing, pushing, pushing, selling prices in the market. And we saw some of that hit in Q1. So I think there's a couple -- there's some mix going on and there's probably that continuously pushing price and maybe we -- and in the first quarter, as Greg said, copper leveled. It rose in January and in February but then somewhat leveled off and was volatile in range.

Steven O'Brien - JP Morgan Chase & Co

Okay, I appreciate that. And then, maybe -- I know you're not guiding on the next quarter and it's been challenging to forecast, but do you see any kind of normal seasonality? I think, Greg, you might have touched on expecting Q2 as the seasonal peak. Is that where you expect the business trend? And maybe, if I can wrap up a question there too on the Europe side and the outlook for Q2, the demand to be stable, how does Baltic 2 revenue start scoring as the year goes on?

Gregory Kenny

Baltic 2 comes in throughout the year and next year. Baltic 2 is a big award, but we win tens of millions of orders and hundreds of millions, nothing individually quite as big in land and submarine businesses. So we do have a larger percentage of completion business than we have had. I think we'll see a year that feels better than last year, that Europe -- again, North Africa, there is capacity there. North Africa, while we're making money there, there's capacity looking for work there. Spain is extraordinarily weak. So I think Europe, again, is the tale of Northern Europe being a bit strong in the south but with a strong euro and so much adjustment going on in a lot of these countries, I don't really expect Europe to fire up, I think we'll continue to see trends in the interconnection area, the submarine being attractive. But to really see Europe fire up, we need strong demand for construction and medium-voltage and low-voltage utility products also. So I think our second quarter feels like we are returning to some normal seasonality in the business. Things feel better. ROW, I think, has some explosiveness in it. And again, well, it does follow some of the seasonal patterns and holiday patterns. It does have a project piece of it as well in government releases. But I think second quarter probably will be our strongest. But again, we have seen in the past sometimes, when something gets started, we sometimes leave that departure or you start to see metals either run one way or the other and we know some customer behavior will wait around metals. As you remember in our fourth quarter, we said it was a bit stronger than we thought in part because, maybe, some customers are chasing rising metals right through the quarter. And again, we saw another rise of metals right through the -- from the fourth quarter to the first quarter. So look for the second quarter to be probably our strongest. And I think these projects in the submarine area will build nicely over the next 6 quarters but not enough to -- it will wiggle, but it won't be enough to turn Europe in of itself.

Steven O'Brien - JP Morgan Chase & Co

Great, thanks for that and understood. And just real quick, what's the price of copper assumed in the Q2 guidance?

Gregory Kenny

It's around the COMEX $4.20-ish kind of level.

Operator

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

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

Could you add some color on your geographies? In particular, you did refer to -- in Europe, Germany, strong; and Iberia, weak. Maybe talk about a couple of the other important countries? There wasn't really, I think, any commentary, or maybe I missed it, about Middle East. I'd love to hear what you see as the demand trends and if there's been any meaningful disruption? And then on North America, this very strong sequential increase outside of Transmission, I think -- what was it, electric utility infrastructure up over 20% in volume for fourth quarter to first quarter, what's happening in North America that caused that strength? If you'd just kind of go through some of the geographies, that would be useful.

Gregory Kenny

Sure. In Europe, we're most strongly leveraged to France and Iberia. We have some position in Germany and in Italy. But generally, we're overweighted, though that's changing in Iberia, which is the weakest of the markets. And we haven't seen any real positive improvement there. What we have done is we've really organized Europe now like we have the U.S. We're sort of a 1-company phase. Europe was built through a series acquisitions, so we're reaching, I think, on a more coordinated and decisive basis into other markets, and we have some very good manufacturing facilities in Spain and we've had some nice improvement and productivity, et cetera. So Europe, I think -- we are underweighed in Germany, which is probably the strongest market, but we are trading into Germany. But we need to build that position and some of the northern European countries where we have a nice position in Norway. But it's -- other than the exports out of Germany, and France has been relatively stable and didn't have a housing boom per se, it's really the weakest area in the world with Spain and Portugal being the weakest of any place other than U.S. Utility really hasn't changed. While it has come up off the bottom, it's still very, very low. I'm putting aside transmission, but utility, I think, we need increased energy usage, and we need construction starts to come. But it is -- it does seem to be bottoming and up modestly. The U.S., I think, weak dollar, and I think we're seeing, to the extent we have manufacturing assets in this country, they're busy. And there hasn't been a lot of new capacity added in the U.S. I think existing capacity, whether it's petrochemical or even oil and gas drilling, feels good. But again, we need shopping malls and office buildings and housing to really get the utility picked up by the strong synchronization. But these so-called early-cycle, or anything tied to industrial production, whether it be physical assets or the actual production itself, or MRO, has been surprisingly strong. And IT, we've picked up some position with a lot of new product development in that area, but the IT or Datacom area is also strong, which we think of is a fairly early-cycle decision. But moving into the second quarter, we really -- other than some of the timing on our projects out of Europe, which is the most project-intensive business, we're not seeing a broad breakout in Europe in terms of demand. We have seen -- obviously, we're in Egypt and also in Algeria. We worry about whether business will pause on future investments in those countries though generally, we've continued to bring our best practices around cost and other products into those areas. So I think we're helping ourselves. And they're profitable, not as profitable as we want, but we are watching to see how investors react to the changes in Europe and to uncertainty in the region. But they are positive. As you know, most of our business is fairly late cycle, and we're still doing projects that were started before the Arab spring. In the rest of the world, I feel very good about our Latin American position. A lot of natural resource leverage there, and we feel we have a lot of momentum and understanding in that market. So I feel very good about Latin America. Africa, Sub-Saharan Africa, I think, has been relatively weaker, but it seems to be improving somewhat. And then really our whole Southeast Asia is, I think, generally improving. And we've done a lot of good things in terms of leveraging the Phelps Dodge assets with existing General Cable assets to think through supply chain and other things. So again, not a breakout globally in a major way, but if you look at it versus where we were prior year, we're happily talking about 20% and 30% times of unit growth in many of the sectors with the exception of Europe.

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

The second question I have is about pricing over the last several months. Into the first quarter, you were coming into surging copper through January. And then copper goes sideways, but what I hear from a lot of cable companies is there's been broad price increases at least attempted. Can you talk about the breadth of your price increases and success at getting them to stick?

Gregory Kenny

Well, I think -- I touched on it earlier, I think we did get pricing power in a number of the North American businesses, and then we see a bit in the ROW area. But again, we're both trying to get real price as well as catch-up with metals and petrochemicals and steel and transportation. But I would say, there has been stronger pricing power happily than we had forecasted the first quarter in several of the North American segments, which are -- now, what we sort through is metal backing off somewhat and demand sort of rolling sideways in those areas. We hope the pricing stays. And return on capital and return on investment is how we think about the world.

Operator

Your next question comes from the line of Brent Thielman from D.A. Davidson & Co.

Gregory Kenny

[Technical Difficulty]

Brent Thielman - D.A. Davidson & Co.

Okay, sorry about that. On the Europe and North Africa segment, more of a clarification question from me, but you saw a 150 basis-point increase in margins and maybe some more modest volume growth. And given your commentary, it sounds like pricing is still challenging now. Can you just give me a sense of sort of what's driving that margin expansion in that segment?

Gregory Kenny

You're talking about Europe and North Africa margin expansion in this first quarter versus fourth?

Brent Thielman - D.A. Davidson & Co.

First quarter versus last year.

Brian Robinson

Last year was probably the depths of lots of the crisis, although we've moved sideways throughout a lot of the year. So a big part of it would be continuing to -- as we talked about -- we're organizing the regional operations. So getting some of those benefits. Remember, also, we took the actions in last year, take out the Spanish -- to take permanent cost out of the Spanish work force as well as to create some flexibility. So I think that's another -- so we're seeing -- we should be seeing some of those savings come through as we talked about at the time. We felt that was worth probably -- we said I think around $10 million a year. So I think it's -- you're right, it's better, but these are still pretty difficult -- this is still a pretty difficult operating region. We were taking headcount out through the P&L and, I think, finally called out specifically when we had a major -- even larger force reduction in the second or third quarter of last year in Europe. But business conditions in Iberia -- again, we are 12 months to 18 months in many areas, behind the investment construction cycle. Iberia is no better. Our cost position is better, and obviously, this is a test of wills as competitors have to finance their working capital and have to get through this. So eventually, you would expect to see restructuring in some of these markets as they continue through extreme pressure. And I think, also, we've been able to sell a lot of the Spanish capacity globally because they're very good at lots of specialty products, as well as we're opening up new markets. But generally, Europe doesn't feel a whole lot better than a year ago, though I think we're helping ourselves both through cost out, as well as having entered the submarine cable business and we're doing nicely and developing products around DC high-voltage land terrestrial systems, as well as winning our share of business around the world in high-voltage systems where we are using the Phelps Dodge assets, as well as the CLEC know-how to really offer one face to customers who want a turnkey system. And that's been a nice accelerant for us.

Operator

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

Anthony Kure - KeyBanc Capital Markets Inc.

Just a couple of quick questions. The volume's sequentially up in the ROW segment sequentially. And then, I'm just looking at the margins, down sequentially from that fourth quarter -- actually, they were up a little bit in the fourth quarter but down from, say, the earlier part of last year when you were sub $400 million in total revs but margin's much higher. Just trying to figure out what's going on there from a margin perspective?

Gregory Kenny

In the rest of the world?

Anthony Kure - KeyBanc Capital Markets Inc.

Yes.

Gregory Kenny

It depends in part what we're selling. So we're ramping through our major overhead transmission line build in Brazil, which is a good return on capital business. But a return on pounds can wiggle things around. Generally, the business mix, other than Brazil picking up -- because these transmission lines, which should, again, be EPS accretive but would hurt that kind of map because it's just sort of a business that's dramatically expanded. There's always wiggling, but there hasn't been a fundamental change in what we do besides that Brazilian buildout. And clearly, a major entry into Mexico and a startup in Peru, though we've been selling there, but we are selling -- we built a factory in Peru and have added an asset in South Africa. And we're in a start-up mode in India. [indiscernible] facility.

Anthony Kure - KeyBanc Capital Markets Inc.

Okay, and then just based on what the current copper price is -- you talked about the impact on the distributors, their buying patterns and sort of their sentiment going forward. What's the slight sequential decline in the second quarter? Would that imply that distributors are probably less -- have less of a sense of urgency now than they did, maybe relative to the first quarter?

Gregory Kenny

Yes, again, the best -- I should say, many distributors are focused on working capital terms, and they're doing things to get velocity up. We do see some that again, think about metals and with copper backing off, they don't have maybe the urgency to cover quarters that they may not have covered. But copper's off about $0.20, $0.25 a pound, and that's always wiggling through our business at a very short cycle. They can't do it for long but they can grow inventories or shrink them, depending on what they think. It has stabilized again in the last days around this $4.20 mark but it has been quite volatile, sometimes $0.05 to $0.07 a day. I think that's more at the noise level and again, with some distributors. But it's enough to make noise quarter-to-quarter for sure.

Anthony Kure - KeyBanc Capital Markets Inc.

Okay, and then just with the storms, the tornadoes and the tragedies in the southern U.S. this last month or so, last couple of weeks. Would that have any impact into the second quarter? Or what would -- if you were to have an impact, would that be more of a second half of '11 event?

Gregory Kenny

Well, they'll draw from their own inventory generally for emergency restoration. There may be some replenishment. Sadly, these storms come but they're usually maybe -- there may be $5 million or $10 million of demand that comes from it. Depends on what properties they're in, where they've gone, the relative inventory position. But again, it's important but not -- in a company that's doing $1.5 billion in revenues on the margin, it's something. But it's not enough to really change the quarter by a heavy or large amount.

Anthony Kure - KeyBanc Capital Markets Inc.

Okay, I was just trying to gauge the scale of something of that effect.

Gregory Kenny

We have things like that going on at all times. I mean, they're in a 20-year rebuild in Christchurch, New Zealand, which is where our factory is, because of the earthquake there. So yes. I mean, sadly, natural events do affect business, but we're big enough that it's sort of on the margin.

Operator

Your next question comes from the line of Brett Levy from Jefferies & Company.

Brett Levy - Jefferies & Company

Hey, you mentioned sort of a some higher cost due to ramping up of new facilities. From sort of the lowest point in the downturn to now, how many new facilities have you brought back up?

Gregory Kenny

Well, we haven't brought any factories that -- we didn't have anything that was mothballed, but we have had to expand our utilization and existing envelope. As you may remember, we closed one down in Canada. We converted a factory in Mexico from communications products to communications plus electrical products. We've constructed a few new facilities and markets that we were underweighted in and wanted to enter in a more profound way. But we haven't had any mothballed facilities that I can think of that have been brought back up so to speak.

Brett Levy - Jefferies & Company

All right, and then you referred quite a bit about sort of the substitution potential of aluminum for copper? It's mainly been stuff we've been hearing from the copper guys and the aluminum guys. In the applications, as you look across a spectrum, is there any opportunity to, I don't know, get a little bit of savings or enhance your margins by swapping copper for aluminum?

Gregory Kenny

Well, the business is heavily standards-driven. And in some countries, even in -- copper-covered aluminum could be a way that things are done. You can make a substitution over long periods of time. You need different connectors, and some people get focused on what's in their network. And the integrity of that is -- cable is maybe only 5% to 15% of a job cost because labor connectors, et cetera, would dwarf it. But we have seen some substitution where it's easy to do, say, in industrial power cables, where it's on a private network in a sense. And as long as it's approved, they can move easily between copper and aluminum. So I would say, you might see cable -- 4% or 5% of overall demand can maybe move back and forth. But for someone to re-engineer their network, as you know, copper has a narrower footprint, meaning it can carry more current on a cross section. So in cities, they're reluctant to go to aluminum because it takes more duct space up, and they don't have that type of premium. So net-net, I think it's a 4% or 5% kind of swing though we pay attention to it, and we do see it more swinging around our industrial product line where the specifier can move pretty easily.

Brett Levy - Jefferies & Company

And are you guys undertaking any initiative to sort of move any of your product lines more towards aluminum?

Gregory Kenny

No. We do both. As you know, we do about 300 million or 350 million pounds of aluminum a year and maybe around 750 million pounds of copper. And we get paid, as we've said, we think over a period of time on the value added beyond the metal. And so we are thinking about what's the right application for the customer, but it's fairly customer-specific, it's code-specific. We sell in 100 countries. There are multiple codes in each country depending on the product and the utility. So there is a concerted effort on our part to switch customers one way or the other. What we're doing the time on is breakthroughs in high-speed data cables or jacketing design or flexibility or cables that exceed standards that we can be paid for because of the work that those cables do. And that's where we spend our time. But really, we think a lot about metal forming and chemistry, but we aren't trying to overtly convert customers from one conductor to the other.

Operator

And your last question comes from the line of Steve Gambuzza from Longbow Capital.

Steven Gambuzza - Longbow Capital

Just a quick question clarifying Brian's remark on the absorption benefits from the inventory build of kind of a 10% to 15% rule of thumb? Would you apply that to just the volume piece or to the entire piece, including price and volume?

Brian Robinson

Yes, the reason we bifurcate is really -- the intention is to apply it against the volume as a surrogate of what's -- again, a rough surrogate of what's flowing through the facilities where as the price is something that obviously we can't do much about.

Steven Gambuzza - Longbow Capital

Okay, and it sounds like the -- so you had a roughly $90 million or $100 million volume build sequentially in the quarter, and that occurred kind of globally in North America because you wanted to build inventories and in the other regions because of some kind of lumpiness in the sales?

Brian Robinson

That's correct, but let me just clarify. My estimate was $90 million to $100 million on price. It was $75 million to $85 million on the volume side.

Steven Gambuzza - Longbow Capital

And then I think there was a question about kind of the seasonality in earnings, if you expect the normal seasonal pattern to emerge in earnings this year. And I just wanted to make sure I understood Greg's comment. It sounded as though if -- that was the expectation, but that one scenario you might see where that would not play out is if you just saw a continued strength in rest-of-world kind of driving an abnormal seasonal pattern. Was that a fair characterization of the remarks?

Gregory Kenny

Yes, you're right. I think the things that could change it are -- some of the projects in ROW can get hot and move, and that is probably an area of general strength, and I think, a source of positive surprise. The other thing that could change it is if you see copper move down dramatically or up dramatically. Again, you could look at all the cost curves, but if copper's cost is somewhere between $1.50 to $2 a pound, if it retreated down, you might have distributors wait to see where she bottoms. And if it ran up, we could actually -- I mean, if it ran hard in the third quarter from, say, $4.18 today to $6 a pound, you might have people begin to pull them in forward because it's taking off and they need to cover commitments they've made. So I think those are the things that could have the greatest effect on inventing the seasonality, which I think is returning to something more normalized.

Operator

And there are no further questions at this time. I turn the call back over to the presenters.

Len Texter

Thanks 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

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

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