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General Cable (NYSE:BGC)

Q2 2011 Earnings Call

August 02, 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

Brent Thielman - D.A. Davidson & Co.

Anthony Kure - KeyBanc Capital Markets Inc.

Brett Levy - Jefferies & Company

Joseph Wittine - Longbow Research LLC

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

Steven O'Brien - JP Morgan Chase & Co

Matthew McCall - BB&T Capital Markets

Daniel Goldberg - Bear Stearns

Richard Wesolowski - Sidoti & Company, LLC

Operator

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

Len Texter

Good morning, everyone, and welcome to General Cable's Second 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; Bob Siverd, our General Counsel; Greg Lampert, our President and Chief Executive Officer of General Cable North America; and Pat Gorman, our Vice President of General Cable North America Energy Market Strategy and Development.

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 our website at generalcable.com.

I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our press release. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our current Form 10-K report and other periodic filings on file with the SEC provide further details 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 the current business environment. Secondly, Brian Robinson will provide some financial details about the second quarter. And finally, Greg will provide some comments on the company's third quarter 2011 outlook and business trends, followed by a question-and-answer period.

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

Gregory Kenny

Thank you, Len, and good morning. I'm pleased and encouraged to report a solid second quarter, building on the strong momentum generated in the early part of the year. In the second quarter, we benefited from sequentially better operating results in North America and Rest of World. Results in our Europe and Mediterranean region were sequentially weaker and continue to lag our other businesses. Our results reflect the importance and positive impact of our long-term strategy centered on product and geographic diversity. Our fundamental long-term view of the business remains intact.

Our reported revenues of $1.53 billion were slightly below our earlier communication, principally as a result of sequentially flat global buying. Our reported adjusted earnings per share of $0.77 was within our range of expectation as better operating results in North America and ROW, help to offset the impact of $0.05 per share of foreign currency translation losses as well as a slightly higher than expected effective tax rate, which was equivalent to about $0.02 of earnings per share.

Our earlier indication assumed no foreign currency transaction gains or losses and an effective tax rate of just under 30%. Overall, we are encouraged by the momentum we continue to experience in our global business, as volume measured in metal pounds sold increased year-over-year for the fourth consecutive quarter. Equally encouraging are the contacts -- are the contracts we are recently awarded in our Project Systems business in Europe and the Mediterranean and the progress of our investments and strategic locations around the world in ROW.

Brian will take you through the details of the financials in a bit. I thought I would spend some time talking about how I currently see our global business environment. During the second quarter in North America, we benefited from seasonally higher demand in our Electric Utility and telecommunication businesses. In addition, we continue to benefit from stable demand and steady momentum on pricing for products tied to information technology, natural resource extraction and electrical infrastructure. Excluding transmission products, demand for the company's electric utility products in North America improved 4%, compared to the second quarter of 2010, and was up 11% sequentially as compared to the first quarter.

The sequential improvement in volume is principally due to seasonal demand for our low and medium voltage products used in the distribution grid. Our data communication team continues to be a source of strength as we leverage the successful commercialization of 17 FREE, a line of halogen-free jacket designs for certain of our data communication fiber optic and electronic cables.

Natural resource extraction remains an important driver of demand for our specialty cables, including those products used in mining and oil and gas applications.

In short, our results for the second quarter in North America reflect the impact of seasonally better results in our electric utility and telecommunication businesses, as well as stable demand and the carryover traction gain on pricing in several important product areas tied to IT spending and electrical infrastructures.

In ROW, our strategy of introducing a broader product range into developing markets helped to offset the impact of lower-than-expected volume across a number of countries. The uneven demand experienced during the second quarter is largely episodic, as the fundamental growth drivers remain solid, and GDP rates for many emerging markets continue to outpace those in the developed world.

Sequentially, our second quarter results reflect the impact of stronger demand in Venezuela, Brazil and Zambia. In Venezuela, the company benefited from higher spending on electrical infrastructure as the country works to reinforce a weak power grid.

In Brazil, our results reflect the aerial transmission shipments and the introduction of specialty products as the country continues to industrialize while at the same time preparing for the World Cup in 2014 and the Olympic Games in 2016.

In Zambia, our results reflect the shipment of aerial transmission products as the government invests in expanding its power grid. In addition, we strengthened our market position and product range in Colombia, Peru, Australia, South Africa and Mexico.

In Mexico, we recently qualified and supplied our first high-voltage cables. Our market penetration into Mexico continues ahead of expectation, and is supported by a state-of-the-art manufacturing facility with high-voltage capabilities ranging up to 225 kilovolts and a comprehensive line of products for electric utilities and contractors.

Overall, our results in ROW continue to demonstrate the non-linear nature of our business in the short-term, as construction, mining and utility products are moved between reporting periods, government appropriations are authorized and infrastructure investment plans are advanced.

In Europe, seasonally better operating results in France and sequentially higher contributions from our project systems business in Germany were more than offset by broader weakness throughout Europe, particularly in Iberia. Market conditions during the second quarter were difficult in terms of demand and price and are expected to remain challenging throughout the remainder of 2011. However, during the quarter, we were awarded 3 meaningful projects in our submarine power cables business that roughly EUR 150 million together. Our ability to win these projects is largely due to our pan-European organizational design, which leverages the manufacturing, engineering and project management expertise of our Spanish, French and German operations. We expect production and installation of these cables in 2012 and 2013.

We are pleased with the momentum we are seeing in our project systems business for both submarine power and terrestrial high and extra-high-voltage cables.

As many of you have seen in our press release issued on July 6, we received a statement of objections from the European Commission, communicating its preliminary view in regard to possible infringement of European competition law in the submarine and underground power cables businesses. The statement of objections issued to General Cable alleged that 2 affiliates in Europe engaged in violations of competition law for a limited period of time in the underground power cables business only. Historically, we have not been engaged in the high-voltage submarine power business and only recently entered the submarine power cables business in March 2009 through our subsidiary in Germany, which was acquired in 2007.

The company believes it has substantial defenses to the allegations contained in the statement of objections. However, if our defenses are not successful, the European Commission has significant discretion in assessing fines, and the statement of objections has only provided a limited guidance on how it could potentially assess fines on each of the named wiring cable companies alleged to have violated applicable competition laws. While we continue to incur legal and associated costs in this matter, we are unable at this time to estimate the range of losses, if any, that may result as an outcome of these proceedings. We have not been named as a party to any other cases or proceedings which have been brought by competition authorities in various countries against companies in the submarine and underground power cables businesses.

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

Brian Robinson

Thanks, Greg. Global volume as measured by metal pounds sold increased 12% compared to the second quarter of 2010 and was flat as compared to the first quarter of 2011. Sequentially, higher seasonal demand in North America was offset by lower volume in the company's ROW and Europe and Mediterranean segments.

In North America, volume increased 15% compared to the second quarter of 2010 and was up 6% compared to the first quarter of 2011. This sequential improvement in volume was principally driven by normal seasonal demand patterns for the company's electric utility and telecommunications products. Demand for the company's electrical infrastructure and networking products increased 16% compared to the second quarter of 2010 and was flat sequentially. The strong demand experienced in the first quarter for cables used in the industrial, oil and gas and mining sectors, as well as products used in networking applications stabilized during the second quarter.

In ROW, volume was up 16% compared to the second quarter of 2010 and was down 4% compared to the first quarter of 2011. In Southeast Asia, a sequential decline in volume of 11% was partly due to product mix as the company sold a mix of lower metal content products during the second quarter, relative to the metal intensive aluminum-based fair distribution in building wire products that shipped in the first quarter.

In addition, volume declined 10% sequentially in Central America and Mexico as electric utility customer orders were pushed into the third quarter and the business environment, particularly in Mexico, remains intensely competitive. Partially offsetting this weaker volume were better sequential results in Venezuela, Brazil and Zambia, where the company benefited from higher spending on electrical infrastructure and a shipment of aerial transmission cables. Overall, despite the lower-than-expected volume in the second quarter, year-over-year demand remains strong in ROW with volume up 16% compared to the second quarter of 2010 and up 25% over the first half of 2011 as compared to the first half of 2010.

In addition, the company continues to benefit from the diversification and expansion of its product offering in developing markets through the introduction of industrial specialty in data communication products. In Europe, volume was up 4% compared to the second quarter of 2010, and down 3% as compared to the first quarter of 2011. Seasonal demand for electric utility products in France and higher volume associated with our project business in Germany were more than offset by broader weakness throughout Europe, particularly Iberia.

During the second quarter of 2011, COMEX copper averaged $4.16 per pound compared to $4.39 in the first quarter of 2011, a decrease of 5% sequentially. Copper prices continue to be volatile, reaching a quarterly high of $4.50 in April and a quarterly low of $3.90 in May. Copper prices today are now back in the $4.40 to $4.50 range. This volatility may impact the buying patterns of some distributors.

Operating income in the second quarter increased 9% or $6.7 million to $79.8 million compared to $73.1 million in the first quarter of 2011. The increase in operating income was principally due to seasonally-better results in electric utility and telecommunication products as well as stable demand and steady momentum on pricing in North America for products tied to information technology, natural resource extraction and electrical infrastructure.

In ROW, strong results were principally driven by the strength of our businesses in Venezuela and Brazil. The company benefited from higher spending on electrical infrastructure in Venezuela and the shipment of aerial transmission cables and the introduction of specialty products in Brazil. Partially offsetting these improvements were lower operating results in Europe and Mediterranean and sequentially lower absorption of inventory overhead costs, as inventory quantities were generally flat as compared to the first quarter, excluding the impact of advanced purchase of copper in Venezuela.

During the second quarter of 2011, the company recorded other expense of $3.9 million as compared to other income of $7 million in the first quarter of 2011. Other expense in the second quarter is primarily due to foreign currency transaction losses, which resulted from changes in exchange rates in various countries in which the company operates. We expect other income expense to continue to be volatile given sharp movements in currency and commodity prices.

The company's effective tax rate for the second quarter was approximately 32%, which was higher than expected, partly due to the mix of income generated in higher-tax jurisdictions. For 2011, we expect our effective tax rate for the year to be in the range of 30% to 33%, which is expected to vary on a quarterly basis over the year, with the third quarter of 2011 effective tax rate forecast to be around 25%, primarily as a result of tax provision releases tied to statutes of limitations expirations.

Net debt was $679.8 million at the end of the second quarter of 2011, an increase of $17.3 million from the end of the first quarter. The sequential increase in net debt is principally the result of funding $39.7 million of copper purchases made during the second quarter of 2011 in Venezuela, as the company received authorization to import approximately 9 million pounds of copper that will be utilized in production over the second half of the year.

Net debt at the end of the second quarter remains elevated as compared to the end of the fourth quarter of 2010, due to higher working capital requirements as a result of normal seasonal demand trends and high raw material cost inputs. At current metal prices, we expect net debt to decline over the second half of the year, as working capital unwinds and inventory levels are reduced as a result of normal seasonal patterns. In the third quarter, we expect to reduce global inventory levels by $100 million or more. 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 second quarter, the company had approximately $1.2 billion of excess liquidity across the globe. The refinancing of our senior secured credit facility in the U.S. and Canada, announced last week, enhances our financial flexibility to fund our working capital requirements and capitalize on global development opportunities.

Reported net interest expense in the second quarter of 2011 was $21.6 million, which includes $5.1 million of non-cash convertible debt interest expense. Excluding the non-cash convertible debt interest expense charge, net interest expense of $16.5 million in the second quarter of 2011 was in line with the $16.9 million reported in the first quarter.

Capital spending in the second quarter of $28.9 million was in line with depreciation and amortization of $28.8 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. With those comments, I'll turn the call back to Greg for some final remarks. Greg?

Gregory Kenny

Thanks, Brian. Looking forward, in North America we expect lower seasonal demand from our utility and telecommunications customers, while other businesses in North America move sideways following the second quarter.

In Europe, we do not anticipate any significant improvements in overall demand patterns. The seasonal impact of the summer holiday calendar in Europe is expected to be partially offset by project-related activity and the excellent progress we are making in developing a regional business model with greater market coverage and an improved cost position.

In ROW, we expect volume to increase as construction and mining projects are released, aerial transmission products in Brazil are shipped and industrial production advances.

Overall, we are encouraged by the momentum we continue to experience in our global business, as volume during the second quarter increased year over year for the fourth consecutive quarter. Equally encouraging are the contracts recently won by our project systems business in Europe and the Mediterranean, and the progress of our investments in strategic locations around the world in ROW and North Africa.

We expect to continue to grow the global business over time, as we further broaden our product portfolio through the introduction of industrial specialty and data communications products into developing markets and recent investments made by the company continue to come online. 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 Jeff Beach of Stifel, Nicolaus.

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

You referred in some of your comments to shipment delays in the emerging markets, Rest of the World. Could you -- there was a shortfall there from your expectation. Could you give us some more color on that shortfall? And particularly, you have an estimate of how much dollars of shipments were delayed into the third quarter from the second quarter and why are project shipments delayed and -- I know why they are delayed here in the U.S., but why are they delayed in some of the emerging markets?

Gregory Kenny

The ROW business has a large piece of building infrastructure for the first time, including the aerial transmission business. And we've talked in the past about everything from permitting in Brazil as they go through the Amazon, et cetera. So the ROW business has a fair amount of project-intensiveness, and as you know, from your analysis of the U.S. market, the reasons are sometimes different, but governments and funding and permitting aren't necessarily linear. So we see a strong -- a stronger second -- third quarter versus the second, and that I think there are some push in there, it's millions of pounds, and it's occurring in Brazil. Thailand had some projects moved around. Chile a bit, but it's -- our sense of the developing world remains intact in terms of the optimism we feel about those markets. It's just that projects, the contractors and releases and deliveries. We think about this business over a year, not necessarily by quarterly cut-off. So sometimes we miss it, but we do see a third quarter in ROW that is stronger than we would have anticipated in part because of the pushover of projects. So if the ROW region could be up 15% to 20% from a tonnage basis from the second quarter, so I think that says it all.

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

Okay. As a follow-up question on the third quarter guidance, much higher volume and revenues hitting, you've got lower earnings, with almost all of these lower earnings on better volume coming from what looks to be a very large target to reduce inventories.

Gregory Kenny

You're exactly right, Jeff. As you know, we are interested in return on capital employed, and as we -- again we've had a strengthening in ROW, which we’ll need to go ahead and deliver, but generally the U.S. is coming back from an inventory standpoint. In Europe we had the U.S. factories closed for a week or 2 in July. And in Europe, as you know, there's a shutdown there in August. So that's driving that in part, and clearly, we lose some absorption where we don't run the factories, but we're looking at having exactly the right balance over time, and we built product in ROW that needs to get shipped, but that's the only area that really is accelerating substantially in the third quarter, which you would normally think is somewhat weaker than the second based on history from a demand standpoint.

Operator

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

Matthew McCall - BB&T Capital Markets

So I want to follow up on that last question. So are there other puts and takes? Is there any mix impact implied in the Q3 guidance on the gross margin line? I'm trying to understand the magnitude, I haven't done a quick math on the $100 million, but I'm trying to understand the magnitude of the impact on the expected gross margin from the inventory reduction and then what else may be driving it? My understanding is price cost is getting better. You're implying better volume. Obviously, that's offset there, but just walk me through on the other sources of impact.

Brian Robinson

Outside the principal impact, sequentially, is around the inventory reductions. So as we said, we're working towards $100 million or more, and then generally, we've said that, that's probably to the bottom line worth about 10% to 15% of that inventory number, meaning that sequentially, we'll have fixed costs, which will go directly to the P&L in the third quarter. So that's the biggest piece of it. There are other elements more in the mix side on the fringe around say aluminum shipments in Q3 in ROW, principally in Brazil and Venezuela, and I think Zambia. So it's mainly the inventory which on the fringe a little more around the mix.

Gregory Kenny

Our gross profit per pound in transmission, while it can be highly attractive from a return on capital employed, so as you know, that's heavy material content. So as those transmission projects are released, it could put some noise in your gross profit per pound kind of thinking.

Matthew McCall - BB&T Capital Markets

That's helpful. So if I just do that quick math using your guidance and the adoption of $100 million in inventory, it would take your inventory as a percent of sales next quarter down below 20%. You haven't been there a while. Is part of that just the seasonality and the impact therein with the plant closures? Or is this a level that you -- is it more of a level that you're trying to reach rather than the impact of the plant closures?

Gregory Kenny

I think we have focused hard on networking capital as a percentage of sales, and all that implies which is beyond the forecast, incoming orders as well as you can and velocity cycle time of the factories and then working seamlessly with your suppliers. So it's a large part of our thinking. Always has been, but I would say it's something that we have really concentrated on this year, and it's part of the metrics as we think about employee compensation from a bonus standpoint, a key part. We will -- in a normal economy, we will generally have to flex up in the second quarter, and we would expect to drain inventory through the second half of the year, but what I'd like to do is, this isn't a public target that we can reduce by some hundreds of basis points, our net working capital as a percentage of revenues throughout the cycle. We'll be happy here, and I think our shareholders will be as well.

Matthew McCall - BB&T Capital Markets

Okay. And I'll sneak one more in on SG&A. Last cycle I think -- last quarter I think you said somewhere in the $90 million to $95 million range, but that was on an 8% volume improvement. You came in at the high-end of that range despite flat volumes. So how should we look at that number going forward? Are there -- you spoke of many investments, they are ongoing. Are there investments that we should continue to bake in? And how should we talk or think about SG&A leverage in the back half of the year?

Gregory Kenny

I'll talk about the investment side, and I'll let Brian answer it more specifically. But we have continued to take capital and look long-term with it. So we are putting cost in front of earnings and revenues to some extent and continue to do so in India. So that big factory, which will have capacity making more than 100 million is coming up in terms of staffing, working with end-users, and that should be India, everything is complex, but we should be making prior in the fourth quarter toward the latter part of that. So that's a bit of a drag. We've also worked to build our position in Mexico, which again we've got an excellent traction. Mexico is ahead of India in terms of the project by many quarters. But I think we're getting great traction there. We're building in South Africa, and that's coming along. We're building in Peru, and that one is, that's just finished in just the last couple of months writing orders. So those are part of the issue. We were balancing return on capital short-term with return on capital and strategy long-term. So that's the dance we do. But Brian, do you want to speak specifically to the higher question of the higher end of our guidance around SG&A?

Brian Robinson

Yes. I'd say for the SG&A for the balance of the year, I think modeling or thinking about it is sort at $95 million level plus or minus a couple of million of dollars is fair. Again, there's lots of moving parts, as Greg said, many operations coming online, but that in my estimation, will be the right range.

Operator

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

Brent Thielman - D.A. Davidson & Co.

The seasonal decline in Q3 for utility in North America, is that both on the high voltage and low voltage side that you're expecting?

Gregory Kenny

Could you repeat the question, I didn't quite hear it.

Brent Thielman - D.A. Davidson & Co.

Is the seasonal decline in Q3 for utility in North America, is that both the high-voltage and low-voltage side?

Gregory Kenny

Yes. We have a transmission cable business that works sort of by projects, but the seasonal decline would generally be by the utilities themselves around low voltage and medium voltage because they have their peak construction season is probably April through June. So I would say that the bulk of it would be -- the decline would be around the utility distribution companies.

Brent Thielman - D.A. Davidson & Co.

Okay, got you. And then the construction segment didn't see the usual increase in revenues relative to Q1, and I think you've typically seen it in the past. Is that just due to some pull-forward in Q1 or something else? And do you see that sort of returning to normal seasonal patterns?

Brian Robinson

Are your referring to the global construction number?

Brent Thielman - D.A. Davidson & Co.

Yes, that's right.

Brian Robinson

What's influencing that, again I think, is more around remember when we peel the business apart by region? We got a larger mix of construction cables in ROW. So that's more tied in with some of the other trends that we've talked about with respect to the performance.

Gregory Kenny

A couple of things, one is on the transmission question, we see the third quarter in the U.S. and Canada off just from the second quarter, but then we think a nice improvement in the fourth quarter. Again, this is a lumpy business and had some of the same issues that Jeff raised earlier about our global transmission business, where it's project-driven. But transmission is somewhat stronger recently than it was, certainly in the first half of last year. With respect to the last call, we said that we had seen a slowing in terms of the rate of improvement with certain of our U.S. and Canadian businesses, and that we saw it moving sideways. And I would say that -- so it's up from where it was, but moving sideways, say from a strong first quarter, and I would say that's continuing where April was in the U.S., say non-utility, non-telephone businesses, which are really very seasonal. If you look at our industrial specialty communications, OEM, MRO businesses, those businesses were quite strong, fourth quarter of '10, first 4 months of this year, begin to move sideways in the May timeframe, that has stopped accelerating, and we're continuing to see that trend in July. So it's not backing down. It's sort of looking a little bit like June or perhaps slightly better in the U.S., which I think is somewhat encouraging.

Operator

Your next question comes from Shawn Harrison of Longbow Research.

Joseph Wittine - Longbow Research LLC

It's Joe Wittine, calling in for Shawn. My first question, I want to talk about Iberia. It seems to be kind of dragging along the bottom. Can you give volumes, metal pounds sold for Iberia? Any numbers on a quarter-over-quarter or year-over-year basis, just give us some idea of the magnitude.

Gregory Kenny

We don't want to report that out as these calls are open and competitors can listen. So we've said that the Iberian market from where it was say 2 to 3 years ago, say 3 is the domestic market is off about 50% from a volume standpoint and that we've -- we used our 4 factories -- well 5 factories in Iberia, one in Portugal, 4 in Spain, that about half of the output of those factories is going elsewhere now in the region. So Spain, we've made some very nice progress on working with the workers councils, on cost and flexibility continued to look to pull out costs everywhere we can, and as you may remember, we -- Europe has been built through acquisition over the last 5 years. And the one company design we have in the European, Mediterranean region, has really I think helped us get through the downturn in Iberia. It appears -- Iberia appears to be bouncing along kind of sideways at this point. We have some competitors that are weakened enough that they're having trouble with the working capital funding. So it's not worse, but it's in a very low level.

Joseph Wittine - Longbow Research LLC

Okay. And then shifting over to South America, I think you said you received an authorization to import some copper there. I guess my question is will you realize a favorable spread on any of those purchases as you convert that in the finished product in the back half of the year?

Brian Robinson

This is Brian. No, this is unlike what would happen in prior years where there was the multi-tiered exchange rate system in the country. So these purchases that the approvals were done at the current -- at the official rate [indiscernible]. So that's very -- again, that's very different than what we were talking about a year ago.

Operator

Your next question comes from Rich Wesolowski of Sidoti & Co.

Richard Wesolowski - Sidoti & Company, LLC

Your 3Q guidance implies volume of about 265 million to 270 million pounds. Whereas, at the peak of the last cycle, you posted a high of 293 million. Is that shortfall a valid? It maybe a rough representation of how far the volume needs to rise before the company regains it's typical measure of value-added pricing?

Gregory Kenny

No, I would say we have more capacity than we had in the last cycle. I think you're thinking back to what 2006 or '07, Rich?

Richard Wesolowski - Sidoti & Company, LLC

Actually, '08. It was after North America has fallen.

Gregory Kenny

The rate cycle -- cyclical, we were whining that U.S. started first, but other parts were still peeking. We've got more capacity now, Rich, but certainly we could use some increased utilization, particularly in the areas that would benefit a lot is that U.S. housing and construction starts, it will help our utility business where there's a lot of open capacity. The U.S. telecom cables has a lot of open capacity. European construction cables, particularly, have a fair amount of open capacity. But yes, we need construction to begin to come up, Rich, to pull on as construction will also drive utility spending as well. The areas that have been strongest with is datacom because I think we've helped ourselves in terms of some of the new innovation and some of the IT spend that we've seen, which is more of early cycle and a lot of the cables for oil and gas and industrial had been, they're not where they were in say 2006, but they're probably within 15% of that or 10% of that.

Richard Wesolowski - Sidoti & Company, LLC

Okay. Then secondly, there was an article out this morning in the Financial Times about building opposition to both onshore and offshore wind power in Europe. Really just reiterated before, but it begs the question as to the degree of confidence you have at these high-margin subs that you foresee in '12 and '13 will be released?

Gregory Kenny

These things are complex because you've got everything from the funding to, how does the power move? It often requires grand transmission where we were closer with these operators, these jobs do move around, and I would say that from a macroeconomic standpoint, while there's a lot of conviction around it, in Germany and the U.K., there is obviously debate. Power comes into the north part of Germany and needs to go south where the industrial base is. And again, this is really new business for a lot of folks, the wind farms. So it's a lot of learning. As we said ourselves, we're learning the craft and learning the business as we've entered it. So I think like any project, it has the same things as U.S. aerial transmission in some ways, though this one you get into somewhat more of a state subsidy question, how do you get paid? But it's a lot of stuff. We do have -- part of our mix is oil and gas cables in Europe, which are, we call umbilicals and specialty cables. So we have a fair amount of business that's really related to in the sea, deepwater drilling and also submarine telecommunications. So we only have 3 pieces of the submarine business. But Rich, I -- we're watching things move in and out in terms of funding, pushed out, contractor not available, whether. It's a constant jiggering, as well as obviously the learning curve. So I can't say with certainty that these things will go when projected and that's similar to a lot of the transmission businesses or turnkey project businesses that we have.

Richard Wesolowski - Sidoti & Company, LLC

Okay. And then just quickly, lastly, do the Baltic 2 and the 3 projects announced this quarter represent the lion's share of your submarine high-voltage backlog?

Gregory Kenny

Yes. I would say that we're -- they're not all high-voltage. Some are medium-voltage array cables. So 2 of the 3 that we announced are array cable. So if you think about an offshore wind park, there's medium voltage that connects, and the park operator can be different than the person bringing the power to the shore, so there's an array of medium-voltage cables interconnecting the turbines, which has been our primary thrust. And then we have taken some high-voltage jobs, which is actually taking, gathering all the power from the park. Maybe that's 50 or 100 turbines and bringing it to the shore, which is high-voltage and our first project in that area was basically Baltic 2. So there's high-voltage and medium-voltage. The bulk of our business has historically been medium voltage.

Operator

Your next question comes from Tony Kure of KeyBanc.

Anthony Kure - KeyBanc Capital Markets Inc.

Just want to get down into that $100 million of inventory drawdown. I just wanted to clarify. First of all, is it primarily in North America? I think you said it was, and then would it be primarily in the utility market in North America?

Brian Robinson

Tony, I would ballpark it and say that maybe the sort of magnitude maybe that's in ROW, and then the balance then split between North America and Europe. And I would say it's more broad-based in North America than anything.

Gregory Kenny

Not really projects, Tony, that are built and will release. So you build for these big turnkey transmission projects, and then they can move a month or sometimes 2. But we're anticipating that a lot of the stuff that we built over the second quarter goes out in the third quarter.

Anthony Kure - KeyBanc Capital Markets Inc.

Okay. So from under utilization or from a fixed cost utilization perspective and the impact on the margins, it should be relatively balanced across all 3 segments, is that a correct statement?

Gregory Kenny

Yes, more or less that's right, Tony. I think we're going to get some of the fringe around the some of the mix, but I think it's the right framework to think about.

Anthony Kure - KeyBanc Capital Markets Inc.

And then as far as the amount, the $100 million of inventory, do you think that will be complete in the third quarter or you may have to do some more in the fourth?

Brian Robinson

Tony, I would say, again we have in ROW, we've got a number of these projects which we believe will ship in Q3 and on top of that, we have our normal, let's call it turning point in the second half where we generally unwind the working capital. So my expectation would be there'll be -- we'll have some more beyond that, but as we see it today, I think the majority would be in the third quarter. Again into the fourth quarter, you have the holiday season around the world, and so we've got traditional shutdowns that go on for a number of weeks around Europe. But we typically have -- again absent some of these bigger, larger trends, we typically have a pretty reduction in Q3.

Anthony Kure - KeyBanc Capital Markets Inc.

Okay. I don't know if you can maybe quantify or give us some sort of magnitude of expenses that maybe associated with these European Commission defense. I mean is this something that is in your SG&A line in the second quarter and is going to continue here into the third and fourth? Can you just maybe give us some indication of what that might be costing you?

Gregory Kenny

It's just -- we hear our large corporations that we have legal as part of our SG&A, and it's not - I wouldn't call it out separately, Tony, as a unique expense. It pushes up the legal spending, but it's not material enough to call out.

Operator

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

Steven O'Brien - JP Morgan Chase & Co

Looking out here beyond September quarter, I know that you're guiding one quarter at a time, but it sounded like there might be some benefits to this December that make it perhaps seasonally stronger than other Septembers, maybe some of these countries, India, Mexico, Peru, South Africa coming online. I think, Greg, you mentioned North America high-voltage should, if I heard you right, should be stronger in December, bouncing back from September. So I guess just how do you think about seasonality in the very back half of this year?

Gregory Kenny

I don't -- there is some debate as to whether there's a double dip kind of with the manufacturing surveys out recently and of course we're watching architectural buildings and other things. So I think things have slowed, but my view on our business in the case is intact. And yes, I mentioned that North American transmission, we think could be stronger in the fourth quarter. We also continue to have strong project activity as well as we're -- some of our investments in South Africa, Peru, are coming on. Mexico is coming on. India I don't think will have a material effect in the fourth quarter. But I think there'll be a seasonal trend because we do close factories, and we always have that December as our end-of-the-year money by the utilities or not. But I feel good about the business. I don't think I'm ready to call an unusually stronger fourth quarter, but I'm not seeing anything that says that it's unwinding in terms of demand as some economists or analysts fear.

Steven O'Brien - JP Morgan Chase & Co

On the infrastructure business in North America, I mean I guess North America grew 6%. I just want to check in and see if that was -- I mean it's pretty close to the overall level of growth guidance you had from metal pounds in Q2. But was the infrastructure piece in keeping with your expectation going into the quarter? Was there any. . .

Gregory Kenny

We have a lot of ways, we think about the North -- you're talking about North America, right?

Steven O'Brien - JP Morgan Chase & Co

North America and the infrastructure, was there any vaguest sign of the economic weakness?

Gregory Kenny

I think there was sort of the industrial cables that we sell. There was a -- I think distributors were slightly richer in inventory and bled down a little bit. Again, we have the aberration of metals moving all over the lot, which we've said can impact behaviors. But it was weaker. If you think of our electrical infrastructure business in North America, it was weaker in the second quarter than the first quarter, but we think that's, again, it's somewhat smaller-project related, but I think we'll pick back up or at least stabilize. The MRO cables and OEM cables were basically the same March quarter, just on unit demand to the June quarter. And then of course, we have -- our data communications business is doing quite well. So I think there was a little bit of a swoon for electrical infrastructure projects in the second quarter as distributors rebalanced inventory. But it seems like it's coming back together and is not getting worse.

Steven O'Brien - JP Morgan Chase & Co

I think one more, just quickly. I think now there's 2 competitors, foreign competitors talking about building or at least one building and maybe one repurposing facilities in North America to address the utility market. How is General Cable looking at that? And perhaps it's a validation of the market, but perhaps it could mean pricing pressure in a year or 2.

Gregory Kenny

Yes, there has been a couple of announcements, first with an extra-high-voltage line, which says they feel good about buried transmission cables. And I'll talk about our response to all that. We have Nexans say they also feel good about extra high-voltage and high-voltage and are building, we intend to build a facility for that market again. Those are the -- a small market, but one that we think has growth attributes to it. And then lastly ABB announced an entry, again, on the high-voltage, extra-high-voltage land systems, which compete with transmission to some extent, but really solved special problems. So that's a pretty strong view. We also have LS Cables has announced entry into the area. So there's 4 of them that have all felt strongly about that. We have also felt strongly about it over time, and what we did is we built our facility in Mexico to be able to serve the market from well, really regionally, including the U.S. and Canada. So a tremendous cost position, state-of-the-art facility for products up to high voltage and this extra-high-voltage, we would bring it from our Thai facility or from French or Spanish facilities. So we like the way we're covering the market, and we didn't feel in our case that building an asset in the U.S. was merited. You always are concerned when people add capacity and why we see a growing market. That's a fair amount of interest in that high-voltage, extra-high-voltage underground niche. But I think we're going to have a great cost position and will do fine on that.

Operator

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

Brett Levy - Jefferies & Company

Hey guys, you're generating some free cash flow. Can you guys talk a little bit about what your plans are around your 2012 and 2013 maturities of your converts and also sort of what your target long-term debt-to-equity or debt -to-EBITDA ratios are. And I suppose the core areas. Is there a target credit rating that you'd like to sort of settle in at, whether it's high-single B or double B?

Brian Robinson

Yes, just to clarify a couple of things. The 2012 convertible maturities is about $10 million, just roughly remainder of what was exchanged back in 2009. So very manageable. And we -- and again just, if ever we had missed it, we refinanced our U.S. credit facility our ABL [asset backed loan] and we announced that last week. So that one is, we're obviously very encouraged to have that put in place now for another 5 years. So looking forward, the 2013s, as you know, we believe a very nice piece of our capital structure. I think we'll continue to -- assuming metals stay where they are or even come down, you're right, we would expect to generate free cash flow in the second half. We'll keep our options open. And I think with respect to the 2013s, we've obviously got some time there, and we'll continue to look at all the options. We are comfortable from our leverage or a rating perspective, I think, historically we've -- our bonds are probably traded a little above where we're actually rated. I would say we don't have a bright line test of where we want to be. We've been good stewards, I think, of our capital over time. I think when you go back 10 years, we've successfully delevered and executed the global strategy. We obviously increased our leverage in the last few years with the acquisition of PDIC, which again was a hugely -- a very large strategic deal for us. So I would say -- so I can't -- I wouldn't say that we have a target that says the ratio needs to be any fixed number. But I would say you are right. Absent sort of run-up, a further run-up in metal prices, we'll continue -- we would expect to generate cash, which will create some flexibility for us.

Brett Levy - Jefferies & Company

And you aim to delever a bit?

Gregory Kenny

You're back to strategic kind of calls. Again, I have a tendency also to look at the trailing EBITDA, to cash interest, and then I look at the number of markets and products we're in. So while we're highly focused as a wire and cable and partly of a turnkey systems business for the very high end of the product line, I will get that kind of coverage. We're always -- we're bit contrary, and so we're always -- when people don't like things, we get sometimes quite interested, because we see things inflow over time. But broadly, and we have got ahead and where we couldn't find in the developing world, where we couldn't find a good acquisition, we've actually got a brown or green field, which obviously take time to make accretive, but I think having a mix of that is important as you think about future value. The core business, we really don't need a lot of capital with the completion of the big turnkey capabilities as we're working through that in Northern Europe. And the U.S. is in very good shape from a capital standpoint. I continue to see absolute acquisition less than depreciation spending in 2/3 of our business and above depreciation in the developing part of the world. But I don't -- I have a tendency to look at my potential free cash flow or EBITDA versus cash interest. And then we look at what if copper rate were $6 a pound or $2 a pound, what does that mean, and also what if our volume flexes back? I think it was an earlier question on what would it be if you got back to '08 levels. And clearly, we need to fund $0.20 on the dollar approximately for incremental sales. So I have to keep that in mind as well.

Operator

Your next question comes from Dan Goldberg for RBC.

Daniel Goldberg - Bear Stearns

How much cash are you comfortable withholding on the balance sheet at any point in time? What was kind of your minimum comfort level for that?

Brian Robinson

Yes, we look at both the cash and the available facilities sort of on a global basis. We've got a nice, in terms of thinking of the, what's called the liquidity in the business. And in fact, back to one of the points that Greg made, the changes that we see in volume and the changes in metal prices can have a dramatic impact on our working capital. And so, I would say, again I can't give you a bright line test as we've talked about. We generally have been sort of $1 billion or more in terms of overall availability of which as you know about $400 million to $450 million of that is in cash itself. I think the other point I would add to the previous question in terms of just our ability to actually delever, the majority of our short-term debt that you see in our balance sheet in June is primarily working capital lines in the Rest of World. So to extent that you see, to the extent we go to the second half and unwind the working capital, I would expect that there's some opportunity there to reduce those lines. But again remember, as we then build into the first half of 2012, we may draw as we get back into the construction season next year.

Operator

There are no further questions at this time. I'll 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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