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General Cable (NYSE:BGC)

Q3 2011 Earnings Call

November 01, 2011 8:30 am ET

Executives

Gregory B. Kenny - Chief Executive Officer, President and Director

Len Texter - Manager, IR

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

Analysts

Steven J O'Brien - JP Morgan Chase & Co, Research Division

Gary Farber - CL King & Associates, Inc.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Jack C. Stimac - BB&T Capital Markets, Research Division

Jeffrey Matthews - RAM Partners, L.P.

Shawn M. Harrison - Longbow Research LLC

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Richard Wesolowski - Sidoti & Company, LLC

Operator

Good morning. My name is Rachel, and I will be your conference facilitator. I would like to welcome everyone to General Cable Corporation's Third Quarter 2011 Earnings Conference Call. This 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 Third Quarter 2011 Earnings Conference Call. I'm Len Texter, Manager of 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 Patrick 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 on our website at generalcable.com. Today's call will be accompanied by a slide presentation, also available on our website. If you have not downloaded a copy, we recommend that you do so as we will refer to the presentation throughout our prepared remarks today.

The format of today's call will first be an overview by Brian Robinson of our third quarter results. Secondly, Greg Kenny will provide comments on the company's fourth quarter 2011 outlook and business trends, followed by a question-and-answer period.

Before we get started, I wanted to call your attention to our Safe Harbor provision regarding forward-looking statements and company-defined non-GAAP financial measures as defined on Slide #2 as we may refer to adjusted operating income and adjusted EBITDA in today's call.

To begin, please turn to Slide #5, where we have included a reconciliation of our previously communicated outlook provided on August 1.

With that, I will turn the call over to Brian Robinson.

Brian J. Robinson

Thank you, Len. Good morning. Third quarter operating results were broadly in lined with the low end of our seasonally adjusted expectations in North America and ROW while Europe and Mediterranean lagged our expectations as market conditions remained challenging throughout the region. Overall, underlying demand in most markets remained stable and consistent with historical seasonal patterns despite the impact of declining metal prices, the decline of which accelerates in the final 15 days of the quarter, resulting in lower-than-expected volumes in ROW as some distributors and rod customers deferred purchases. The combination of a weak Europe and Mediterranean region and volatile metals at the end of the quarter negatively impacted net sales, metal pounds sold and seasonal inventory quantity reductions as compared to our earlier communication.

On the next slide, we reported adjusted earnings per share of $0.33, which exclude $0.10 per share of non-cash convertible debt interest expense and $0.16 of mark-to-market losses on derivative -- on financial derivatives accounted for as economic hedges. The company would have reported earnings per share of $0.69 in the third quarter after the impact of $0.23 per share of losses due to currency volatility and $0.13 per share as a result of the cumulative impact of the effective tax rate adjustment, which were not in our August 1 outlook. As you can see, the significant volatility experienced during the latter portion of the quarter had a pronounced impact on our results as we recorded other expense of $31.5 million: $12.9 million relate to mark-to-market losses on economic hedges and $18.6 million related to foreign currency transaction losses.

The impact of this currency and commodity volatility in part was a revision to our full year effective tax rate due to the revised full year earnings mix, which resulted in a cumulative year-to-date tax expense adjustment in the third quarter. For the fiscal month just ended last Friday, October 28, approximately $12 million of the $31.5 million of other expense has been recovered due to movements in metals and currencies since the end of the third quarter.

Turning to Slide #7. We charted the movement of copper and aluminum to illustrate the volatility experienced during the quarter. Copper prices declined sharply at the end of the third quarter to $3.15 per pound, a net drop of 30% from the quarterly high of $4.47 per pound established in July and a 20% decline over the final 15 days of the quarter. As you can see, aluminum prices followed a very similar trend, which is not inconsequential, particularly from a top line perspective as a mix of aluminum-based product shipments increases as our aerial transmission businesses in Brazil and North America continue to grow. Consistent with what we said in the past, we believe this extreme volatility affect the buying behavior of some distributors in the third quarter.

In addition, certain rod mill customers in ROW deferred purchases in the final days of the quarter, waiting for copper to settle. As of this fiscal month ended October 28, copper prices closed at $3.70 a pound, which represents an increase of 17% from the end of the third quarter.

On the next slide, currency volatility. As you know, the U.S. dollar strengthened against most major currencies throughout the third quarter. On Slide 8, we have charted the movements of the U.S. dollar relative to the Mexican peso, the Brazilian real and the euro to illustrate the rapid strengthening of the U.S. dollar, particularly at the end of the quarter. We recorded $18.6 million of foreign currency transaction losses during the quarter, of which about 2/3 relates to the strengthening of the U.S. dollar against the peso and real. The balance of the foreign currency transaction losses was spread among a number of other currency movements, not all of them relative to the U.S. dollar, of course, and none as individually significant to us as the movement of the U.S. dollar against the peso or the real. For example, we incurred losses due to the movement of the euro relative to the South African rand during the third quarter among others.

Historically, these movements have trended in a way that when coupled with our strategies to create natural hedges have offset majority of the exposures. However, given the complexities of our business, it is not possible to completely eliminate the exposure. And over the last few years, we have reported other income expense each quarter in the range of plus or minus $5 million, excluding the impact of Venezuela which is a special situation.

Since the financial crisis of 2008, our cumulative net benefit on foreign currency movements beginning with the fourth quarter of 2009 through the second quarter of 2011 has been about $14 million, excluding Venezuela. We believe over time, our natural hedging strategies, when supplemented with cost-effective financial instrument hedging strategies, will properly mitigate foreign currency exposures. Our financial derivative currency hedging programs in place offset about $8 million of additional currency losses during the third quarter.

On Slide #9, we provided comments explaining our third quarter results compared to the second quarter, with net sales for the second quarter presented on the metals adjusted basis.

The top line was slightly better on a sequential basis principally due to the increase in volume experienced during the quarter as a result of 15% volume growth in ROW, which more than offset typical seasonal declines in North America and ongoing weakness in Europe and Mediterranean.

Gross profit and operating income in the third quarter reflect seasonally lower results in North America, following a stronger second quarter in our Electric Utility and Telecommunications businesses, the impact of a planned seasonal reduction of inventory quantities globally and ongoing weakness in Iberia coupled with the summer holiday schedule in Europe.

Regarding the effective tax rate, the high percentage in the third quarter is an anomaly, principally due to the relatively lower pretax GAAP income of $8.7 million. This effective tax rate reflects the impact of the cumulative tax expense adjustment reported in the third quarter as our full year effective tax rate was increased due to the revised full year earnings mix. Our full year effective tax rate is expected to be in the range of 35%.

On Slide 10, we have summarized the components to reconcile Q2 adjusted EPS of $0.77 per share to Q3 adjusted EPS of $0.33. As we've discussed, the extreme currency and commodity volatility experienced during the quarter had a pronounced impact on our results, which when combined represented increased expense versus the second quarter of $0.34 per share. While lower operating income represents approximately $0.20 per share sequentially, this was generally consistent with seasonally adjusted expectations with the exception of Europe, where conditions continue to be difficult, particularly in Iberia.

On the next 3 slides -- on the next 3 pages, Slides 11, 12, and 13, we provide segment information for your reference. First, in ROW, we were pleased to see a broad-based increase in volume as the uneven order patterns experienced in the second quarter improved. Sources of strength in the third quarter include aerial transmission projects in Brazil, electrical infrastructure spending in Brazil and Venezuela, construction and mining activities in Chile and industrial projects in Thailand. Conversely, in Mozambique and Chile, we experienced at the end of the quarter rod shipment delays due to the rapid fall in copper prices.

Sequentially, third quarter operating income of $29.8 million reflects the ongoing strength of our businesses in Latin America, led by strong performances in Brazil and Venezuela, coupled with the impact of planned seasonal reductions of inventory.

In North America, sequentially lower volume was principally driven by normal seasonal declines for the company's Electric Utility and Telecommunications products. Demand remains stable for many of the company's electrical infrastructure products, including cable shoot [ph] in natural resource extraction, as well as networking and original equipment manufacturing applications.

Transmission project activity remains a source of positive momentum. As you know, aerial transmission has been volatile over time as we shipped record high volumes in the second half of 2010, following record low volumes in the first half of 2010.

Sequentially, third quarter operating income of $27.7 million reflects the seasonally lower results of the company's Electric Utility and Telecommunication businesses, following a strong result in the second quarter as well as the impact of a planned seasonal reduction of inventory quantities.

In Europe and Mediterranean, project-related activities in our submarine, power and terrestrial high-voltage and extra-high-voltage businesses were more than offset by the broader market weaknesses, particularly in the Mediterranean region. The company's backlog continued to build during the quarter for submarine and land-based high-voltage extra-high-voltage cable projects. We estimate this backlog for project deliveries through 2014 to be approximately $600 million.

Sequentially, third quarter operating income of $5.9 million reflects the ongoing weakness throughout the region coupled with the summer holiday schedule, as well as the impact of a planned seasonal reduction of inventory quantities.

Finally, moving to Slide 14, the July refinancing of our senior secured credit facility in the U.S. and Canada, which extends its maturity out to 2016, further enhances our capital structure and financial flexibility to fund our working capital requirements to capitalize on global opportunities. In addition, we have the financial flexibility to repurchase up to $125 million of General Cable stock as recently authorized by the Board of Directors. At the end of the third quarter, the company had approximately $1.2 billion of excess liquidity across the globe.

With those comments, I'll turn the call over to Greg for a recap of our Q4 expectations and business trends, which begins on Slide 16. Greg?

Gregory B. Kenny

Good morning. Overall, we continue to perform well in a very challenging environment. We expect fourth quarter global volumes to remain consistent with third quarter levels. Revenues of $1.4 billion to $1.45 billion as compared to Quarter 3 principally reflects the impact of lower metal prices and a greater mix of aluminum products. With further planned inventory reductions and the impact of selling higher average cost inventory into a lower current price environment, we expect resulting operating income earning -- resulting operating earnings in the range of $38 million to $50 million. We anticipate ending 2011 with solid growth of 9% in volume and an increase of 14% to 20% in operating earnings. For 2011, revenue should be in the range of $5.9 billion to $5.95 billion, with volume just over 1 billion metal pounds sold and operating earnings in the range of $254 million to $266 million. While volatile and uncertain at times, the overall global business remains on a positive trajectory.

Before we get to the Q&A, I thought we'd spend some time talking about how I currently see our global business environment. In Europe and the Mediterranean, market conditions for traditional construction and industrial cable products remain depressed. Our focus on submarine and terrestrial high- and extra-high-voltage transmission interconnection projects over the long term should continue to offset the impact of the broader market weakness. We also remain pleased about the progress we are making with our global regional model, driving an improved cost position.

We expect North America will continue to benefit from stable demand for products tied to information technology, natural resource extraction and electrical infrastructure. Momentum continues in the aerial transmission market as demand for aluminum products used to upgrade grid and tie in new sources of renewable generation remain strong. We also continue to see a positive outlook for our core specialty products given -- driven by sustained investment in the natural gas, oil and mining markets.

Our Data Communications segment remain strong as we leverage commercialization of our 17 free line for certain of our data communication in fiber optic cables.

Finally, industrial demand remains on track as end customer facility and project work has not shown signs of falling back.

In ROW, our strategy of introducing a broader range into developing markets continues to translate to new opportunities.

In Brazil, we are benefiting from strong aerial transmission demand and our focus on introducing products to address the robust construction, communication and industrial markets is paying off.

In Brazil's -- as Brazil's industrialization continues and construction activity for the World Cup in 2014 and the Olympic Games in 2016 accelerates, we expect to see continued growth opportunities. In addition, our strengthened market position and investments in Peru, Australia, South Africa and Mexico will allow us to capture opportunities for mining, construction and electrical infrastructure projects.

Finally, we're also pleased to report that our facility in India remains on schedule for year-end commissioning.

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

With the authorization by the Board of Directors to purchase up to 125 million of General Cable common stock and the overall strength of our balance sheet, we now have another option for deploying the capital at our disposal, in addition to capturing the numerous global opportunities we see.

We are encouraged by the momentum in our global business but are prudently monitoring mixed global economic indicators, weak levels of construction spending, volatile raw materials and lingering geo-political and sovereign debt concerns as an uneven global economy oscillates.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Steve O'Brien with JPMorgan.

Steven J O'Brien - JP Morgan Chase & Co, Research Division

I appreciate the detail in your commentary, Greg and Brian, but can you help me understand, maybe get a little more granular, on the sort of the step-down in operating income between Q3 and Q4? I mean, you cited some factors like the mix of aluminum transmission cable and the inventory drawdown and the selling at higher cost inventory. If you can help me understand if any of those are having a disproportionate effect? And then presumably, the inventory drawdown and the -- will reverse in calendar 2012. When do you expect if metals are stable, the higher cost inventory would be worked through?

Brian J. Robinson

Steve, it's Brian. When we look at the Q4 guidance, you're right, when you look at -- we've guided towards a sequentially flat volumes Q3 to Q4, which reflects our expectation that we'll have good shipments, or strong shipments of transmission cables in Brazil, for example, and in North America, which will offset some of the normal seasonality there. And then in Europe and Mediterranean, as we've mentioned, our expectation is that we will be increasing our activities on the submarine cable side. And then from an inventory sort of quantity reduction perspective and you can see in our slide presentation in the third quarter, we took out about $70 million from a quantity perspective, and we're estimating in Q4 to take out about $40 million to $50 million. So putting -- pooling all of that together, the biggest -- the largest impact to the sequential move from Q3 to Q4 in terms of the earnings would be into the selling the higher average cost inventory into what we call a lower sort of current environment. Again, that's the timing of -- and I said that I guess the single large impact to Q4 is we think about 2012, I would say it's really too early for us to have a view on any potential impact there. You can see -- we talked about a lot of this -- the volatile metals, the volatile currencies had obviously a meaningful impact on our reported numbers in terms of, say, the other expense in the quarter. But obviously, it also impacted some of the -- we believe some of the buying patterns we're having near the end of the quarter in ROW. So a lot -- and having instead, and in the last 2 days, you can see again the currency, particularly today and in this morning's headlines, you can see the commodities and the currencies returning to the volatility that we saw in late September.

Gregory B. Kenny

Steve, the copper was in the $4-plus range for most of 2011; that's $4 a pound and greater. And the average for October was $3.35 a pound; that's COMEX.

Steven J O'Brien - JP Morgan Chase & Co, Research Division

Okay. I mean is it...?

Gregory B. Kenny

I mean, the inventory in the $4-plus range, some of it is formulated pass-through, some of it is not and -- so we're selling inventory built in the $4-plus range into a market that on average in October was $3.35 a pound.

Steven J O'Brien - JP Morgan Chase & Co, Research Division

Got you. Greg and Brian, I mean, is it fair to say you're turning the inventory around 4x and that in the quarter, presuming the metals prices are stable, you have worked through this or is there more nuance than that?

Brian J. Robinson

I think, Steve, it's a little more nuance in that in the sense that the tail on a way, there was calculation, again, depending upon the level of purchases, et cetera, can -- tends to run a little bit longer than inventory turn. But again, when you -- taking a step back and you -- we're again focused on what we've described as that 50% of the business, where as we said historically and consistently over time is, for lack of a better word or term, priced every day.

Steven J O'Brien - JP Morgan Chase & Co, Research Division

Got you. And then just a real quick one here. On the tax rate, where does that go going forward? It looks like the fourth quarter rate will be a little bit higher than what we talked about, kind of being the long-term rate in the past. I mean, any viewpoint yet in terms of where that goes longer term?

Brian J. Robinson

Longer -- not with a high degree of precision, I would say we -- given some of the discrete items, we always had a viewpoint that -- or consistently had a viewpoint this year that the third quarter would be a lower rate and the fourth quarter would be -- would end up being somewhat higher rate. And you can see part of the reason for the increase to the full year tax rate is that our earnings mix is shifting towards higher rate jurisdictions. So I guess, it's a little early for '12 and '13 to say, but I guess maybe we've historically given the range of 30% to 33%. I guess we're doing our plans for next year. So right now, I'd say it's early but, I guess, it's sort of a maybe think about is in terms of the high end of that range.

Operator

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

Brett Levy

As you look at some of your weaker areas, have you started to consider cost-cutting measures? And then I have a follow-up with respect to sort of capital structure.

Gregory B. Kenny

Yes. We have -- throughout our time on the lean manufacturing journey, we're always trying to remove envelopes in half. We have taken through the P&L and then called out a large termination in Europe when we took a number of people out, particularly in Spain but we continue and will in the fourth quarter continue to pare down our workforce. In Europe, we are also concentrating on selling more products throughout the region. That -- Europe is the weakest and we've been on a-couple-of-year journey of pulling headcount out. These factories are fairly purpose built, and it's not as simple as -- we've said in the past, each envelope may have $4 million or $5 million of fixed costs, maybe $6 million or $7 million, depending on the size of it, but it's -- they're built around product lines and not interchangeable. So it's -- the footprint, and we'll always look at it is something that we are pretty well committed to filling in the region in Europe. But we do have a lot of folks out and continue to look at design -- cost design and throughput, scrap waste, all the things that we've traditionally done for the last 10 years. We've also pulled out a lot of costs in the developing regions when -- as these markets slow the rates of growth, et cetera, again, this is part of the journey, but we did have a 30% to 40% decline in volume from the 2006 high point to the 2009 low point. But we don't have a -- we have 48 factories around the world, and the product is heavy. It trades regionally and the factories are fairly purpose built. But if we come up with a way of getting more with less, that's what winning is about, so we'll keep on the lookout for that.

Brett Levy

Do you have a headcount reduction number since the decline?

Gregory B. Kenny

I think it's a couple of thousand, but I don't have it in front of me.

Brett Levy

Got it. And then in terms of the uses of your ABL cash, et cetera, would you or have you considered taking out some of the shorter maturity converts in the open market or even addressing the senior notes in the open market?

Brian J. Robinson

I would say, as you've seen in the release -- well, let me start, I guess, with the 2013 converts, as you know, the 7/8 of 1% cash interest rate. We've got a couple of years to maturity of those notes. And we -- as we've announced, we're -- we've implemented in terms of our capital alternatives. The board has authorized $125 million stock buyback program. So I guess from an order of priority, we would continue to -- our objective would be to maintain a bit the liquidity in the business. As you know, we can get moved around hard by working capital swings. We -- as we said in the prepared remarks, we continue to see both M&A and organic growth opportunities in the business so we have to balance that as well. And then, of course, as I've just mentioned, the repurchase of shares would also be an alternative. So the repurchase of debt would be somewhere further down the list in terms of things that we might consider.

Operator

Your next question comes from Shawn Harrison with Longbow Research.

Shawn M. Harrison - Longbow Research LLC

A few clarifications first before question. What is the spot price of -- or what is, excuse me, the price of copper and aluminum you're assuming within the guidance for the fourth quarter?

Gregory B. Kenny

$3.35 COMEX on copper and on aluminum was $1, what?

Brian J. Robinson

About $1.10.

Shawn M. Harrison - Longbow Research LLC

Okay. And then the other clarification was, I believe, Brian, you mentioned you've already covered some of the other income headwinds from the third calendar quarter, quarter to date here in the fourth quarter. Is that going to be run through the P&L on a non-GAAP basis, so we should include that in our earnings estimates for the fourth calendar quarter? I guess, what are you assuming in terms of a total recovery?

Brian J. Robinson

Yes, we -- well, as you know, Shawn, when -- part of the reason that we have, as you can see in our remarks changed the way we've given it at the guidance and given at the operating income level, is because of the variability and the difficulty to predict the impact. So what we're really seeing is of the $31.5 million that was in Q3, about $12 million, just in terms of market movements, came back through the end of last Friday. So in terms of Europe -- and again, as you know today and yesterday, the markets have been -- continue to be volatile. So I guess, in terms of your modeling -- there are a lot -- I guess, that's -- I offer that as -- you can see why it's difficult to give a guidance for these numbers. So where that goes for the full quarter, we'll have to see. Obviously, as we mentioned, besides just our -- the -- managing the volatility of the market and looking for our natural hedges, we also have financial instrument hedges in place as well.

Shawn M. Harrison - Longbow Research LLC

That's fair. And I guess the question I was hoping to ask was just more on the undersea business. You have a very large backlog right now. I think the comment was you would start to see some revenue contribution during the fourth calendar quarter. Maybe if you could describe that revenue contribution, as well as how that ramps into 2012 as well, kind of what should be a typical quarterly revenue run rate that we can model?

Gregory B. Kenny

We entered the submarine power cable business fairly recently. And it's the kind of thing where -- that probably, that submarine power cable facility can make $100 million to $150 million a year of product and without putting more investment in there. So again, it's not because of the percentage of completion accounting. It's not perfectly linear. But that's kind of the number on the submarine in terms of capability. That's putting aside submarine fiber optics and communications products, but that's really the deepwater oil and gas plus the power side of things. And in the terrestrial business, a couple hundred million but I don't know that I break that out.

Shawn M. Harrison - Longbow Research LLC

Okay. I guess the clarification on that then is the $600 million backlog mainly submarine or is that -- what is the mix?

Gregory B. Kenny

It's more submarine than terrestrial, probably estimating maybe 2/3 of it submarine and is multiyear.

Operator

Your next question comes from Rich Wesolowski with Sidoti and Company.

Richard Wesolowski - Sidoti & Company, LLC

Regarding the mark-to-market derivatives that were switched to economic hedges, are the contracts or underlying exposures being hedged scheduled to be worked off or otherwise recognized within the next quarter or 2 or will you potentially face this kind of at least GAAP earnings volatility indefinitely?

Brian J. Robinson

Yes, Richard, those are a little bit of both. In other words, these are typically tied to the large projects. And so -- and again, this goes back to the previous question around the currency, is that because we can -- which is why we've gone from a guidance perspective to an operating income basis. As we look forward and our project business grows, we -- that the -- basically, like we de-designate these hedges because we -- because the timing is not so much delays as much as the projects moving around and our difficulty then in achieving the precision of the delivery forecasts causes us to de-designate these hedges, which gives us this mark-to-market impact. So for example, the -- we talked about -- of the $31 million, $12.9 million of it was related to mark-to-markets, and about 1/2 of that $12 million recovery that I mentioned in October was on the mark-to-market side. So again, it's something that I will have to live with in volatile quarters. But you can see just in terms of what we incurred in Q3 and what came back in October, how this can get moved around.

Richard Wesolowski - Sidoti & Company, LLC

Right. But so long as the project business continues to grow, the potential for that exists?

Brian J. Robinson

That's correct. That's correct. And they are -- and it relates to these large projects that go out 6 months a year, 18 months there. They've got a long life to them.

Richard Wesolowski - Sidoti & Company, LLC

Okay. And then secondly, 2 of your bellwether competitors have chosen to take hefty charges in anticipation of the European Commission fund related to the undersea and the on-sore transmission market. Would you discuss why a similar move is inappropriate for BGC?

Gregory B. Kenny

Sure. We entered the submarine cable business in the last 2 years. This has been principally a submarine investigation but expanded into high-voltage, extra-high-voltage, so we're a peripheral player in the case. We're in a really quite a different position than some of the bellwether companies that you described. We filed our response to the EU statement of objections on October 28 and we continue to defend against all these claims. We also think and believe we have substantial legal defenses on these claims. So the next part is to go talk with the EU sometime next year.

Operator

Your next question comes from Jeff Beach with Stifel, Nicolaus.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Greg and Brian, 2 questions. The first one is on the third quarter volume. It looks like the volume was about 10 million pounds under your -- the midpoint of your guidance for the quarter. And I heard all your comments about a lot of weakness in Rest of World, but when I look at the volume that you reported, it looks like the big weakness was in North America. Could you go a little bit more into the shortfall against your expectations? And again, it looks like an awfully steep drop sequentially in North America. And I just wondered if there are some delayed shipments of -- delayed purchases by distributors in North America maybe as much as in Rest of World?

Gregory B. Kenny

North America, Jeff, has been quite in line. And again, we mentioned that it was accelerating year-over-year at a high rate through early part of the second quarter and then began to roll over sideways. We saw broadly very typical volume for the third quarter, which broadly would be less than the second quarter and then some of our earlier cycle business that actually stayed kind of at second quarter levels, the issue was really around timing and release of projects in Electric Utility in communications side, and that can be quite seasonal because of the second quarter peak there. But we continue -- again, our Electric Utility business is a long way from what it once was. But we did have seen the distribution part of the business actually increase slightly year-over-year, which is somewhat encouraging; again, down 30% from where it once was. Transmission can move things around. Wind farm projects can move things around. So I felt it was just marginally below where we thought it might, but it's -- it was almost de minimis and almost entirely related to the Electric Utility and slightly to the telephone cable business. The industrial specialty, data comm, harness business was right where we thought it might be and frankly encouraging.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

So if most of that 10 million pounds shortfall was in Rest of World, the volume would've been closer to 120 million pounds in the quarter rather than the 110 million, which is a record, but it could've been much stronger?

Gregory B. Kenny

Rest of World, the ROW volume -- again, we're talking about an anomaly where the third quarter is stronger than the second quarter in ROW and was the strongest in many quarters and a very strong year-over-year comp but yes, I would say, Jeff, 7 million, 8 million pounds got pushed around in ROW at the last week or 2. Again, we're in the rod business and that's pure metal that we formed and should fall in an OEM basis. So there was a bit of that and stuff is always happening in the hedges, but my broad takeaway is that volumes aren't bad. They, as a company in the U.S. which is sort of the bellwether, and Europe is -- we're beginning to see in the fourth quarter that the continued weakness in Europe in the construction segments is beginning to be offset -- we're more than offset by the turnkey businesses as it becomes -- the investments we made are coming online, beginning to show some income. And ROW, frankly, had a very good quarter. And then I look at -- where -- what is the ROW? So I begin to look into places like where we've been doing business for a long time, say, Central America or Philippines or Thailand, that we haven't entered with a new asset, or where we don't have this large transmission project in -- that we have in Brazil. And it's relatively stable. Again, the world is mushing sideways, but we've helped ourselves in the ROW area. But yes, Jeff, we were off in ROW from where we expected. We were just a snitch of week in North America principally tied to Electrical Utility. And Europe was weaker than we thought around the construction side. But of the 3, the U.S. was closest to what we had anticipated when we talked to you on August 1 with our last press release.

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

All right. And the second question is just looking at Rest of World and the drivers in 2011, you've talked about them. Is there any changes in the Rest of World drivers and markets going into 2012, and specifically your siding construction, is construction generally picking up in those markets?

Gregory B. Kenny

Jeff, I would say that ROW broadly, as we all know, is a not unique economic phenomenon from the rest of the world. We -- it is a bit better. It fell less and has recovered somewhat, but it's -- I would say I'm slightly encouraged but I'm not seeing a big turn back up in ROW. We can get into separate discussions around Chile mining or Brazil or how's time goal on oil and gas, but broadly, ROW is okay and is -- remains choppy. The currencies are all over the lot. But it's -- I'm not seeing things fall out of bed at any level but we are operating at relatively weak levels, the weakest being clearly Europe -- Southern Europe. And probably the area of strength has continued to be the U.S. and then selected ROW markets. We're watching China. We have 2 equity investments in there and we have a business that's starting up in India and a business that has achieved a fairly substantial position in Mexico, which has been a couple-year startup. So we've -- as well as we've entered in a stronger way South Africa and Peru. But net ROW, ROW seems okay and okay in the same way we described the U.S., which is relatively stable but not in an accelerative state, other than what we can do to help ourselves.

Operator

Your next question comes from Anthony Kure with KeyBanc.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

I just wanted to drill down a little bit more into the de-stocking into the fourth quarter. Obviously, you're going to be taking inventories down a little bit more as we move to the fourth quarter. But my question is, is this what you would consider a normal de-stocking for a typical fourth quarter in anticipation of a normal first quarter? Or is the first quarter maybe is what's implied by the de-stocking in the fourth quarter, a little bit of weaker volume expectation for the first quarter '12 ?

Gregory B. Kenny

This is a normal de-stocking. And as you know, we are generally in an inventory build position, going into sort of the peak selling months of May and June historically. We've had some anomalies over time, but generally those are the strongest. And then as you begin to bring in the Christmas vacation period, end of the year's period and closing plans, we generally have seen our first and second quarters as statistically weaker than our second and third. So our first and fourth are normally the weakest and we normally push cash out and reduce inventory right through the second half of the year.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Okay, thank you. And then as far as...?

Gregory B. Kenny

In timing, we're starting up hard and fast and we could see it, we might be thinking differently about that. So if we were back to 2005, '06, '07, there could be anomalies to this pattern. But right now, we're sort of seeing, frankly, more the same from a demand side, which isn't all that bad given the state of the world of uncertainty.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Okay, great. And then as far as the profit guidance for the fourth quarter, you mentioned some of the factors but I didn't hear mix as one of them. Would mix be a positive or negative or just sort of sideways from impact on your operating profit?

Gregory B. Kenny

We always think about the world on return on investment, so we do sell things like rod or sell transmission cable because it could be nicely accretive on return on investment. Because transmission is so heavy, this is aerial transmission, it can sometimes push the numbers around. So we talk often by pushing that out and thinking about the businesses that are -- have much less metal content. But it's not mix; it's basically -- in the fourth quarter, we will as a company sell something like more than 250 million pounds of metal. Copper will be in the 150 million pound range, and we've got to go sell it in a market that is okay. But the customers will be looking in some channels at current replacement costs and spot market pricing. And as I said, copper was hanging well over $4 for a while. So our biggest issue, as Brian says, is the movement, which is very unusual so far down so quickly, rather than gradually up or down, and that presents unique problems. But it's not a mix issue. It's really selling copper that -- the part of the copper business that isn't covered with formulaic escalators and de-escalators into a market that today is at $3.40 a pound and was in July the COMEX was $4.47. Again, we try to be sticky and we look at market pricing and at some markets, you see more discipline than others around that. But it is -- this kind of movement gets everybody looking at pricing because it's a big movement in a short period of time.

Anthony C. Kure - KeyBanc Capital Markets Inc., Research Division

Understood. And then just last question. I think you have a couple of facilities in Thailand. Any issues there with the flooding?

Gregory B. Kenny

Yes, we've been -- it's a great question. We've been very -- staying very close to that. And as you can see from the headlines, about 1/3 of the country is covered. We -- and the government wish -- the government sent everybody home for a number of days. We have sandbagged the facilities and, so far, we think we may have passed the tidal crest and we are dry though all around us is wet. So we'll go through -- in Thailand, we'll have both strong demand coming as people dry out and rebuild their network, whether it's an industrial park or utility, and you can have failures when stuff has been -- cable has been drenched. But we are operating. Our customers in many parts are underwater. Eventually, they'll dry out and we'll need cable. But Thailand on the margin is a question mark in terms of the performance of that unit, but I would say we've been blessed by having 2 dry facilities.

Operator

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

Jack C. Stimac - BB&T Capital Markets, Research Division

It's actually Jack Stimac filling in for Matt today. Most of my questions have been asked at this point, but I guess as a follow-up to that -- sort of looking at the Q4 guidance for the volume, you had talked about some of the orders had been pushed back, and I guess this is kind of a 2-part question: One, the volume guides being up a percent seems a little stronger than a normal seasonality. But how much of that is due to the orders that were pushed back in Q3, actually being executed in Q4? And then just kind of a follow-up, if it occur a price environment, give the copper close to the $3.50 and had gotten down to around $3 per pound, with everything that's going on in Europe [indiscernible] today, are we in an environment where people are expecting it to go lower and are still holding out on orders? Or is this kind of a pricing environment that encourages orders to just get there at market prices?

Brian J. Robinson

Again, a lot of our customers just have daily flow business to attend to. Big orders can be hardly contested. But we did have a pickup back off the floor last week from copper moving back to a $3.60 level. As you know, there's an unrest in the big free port McMoran mine, which is 2% or 3% of the world's supply in Indonesia, as well as there's a strike in Peru. Then -- and then the Chinese allegedly were back in. The copper thing is hard to call; copper has been off now. It will be off $0.20 in the last 2 days from where it was Friday. The -- again, not every distributor -- a lot of them just want to turn the inventory, but I'd like some stability, sure. And I think if we -- where we do see pauses is if it starts running down, people sort of wait to see where it's going to bottom. And if it starts running up, you begin to have folks come off the sidelines and want to cover bids, but we -- I guess, at this point, is we expect more volatility. We've thought about the quarter in terms of where copper was on average because we build it on average in October, which was $3.35 a pound. And to answer your first question, yes, generally, you'd expect the fourth quarter, historically, to be off from the quarter by 4%, 5%, 6% on a unit basis. We're actually slightly up. I would say that's pretty good activity in ROW, surprising hanging in North America and most business areas. The beginning of the submarine shipments and some pushover from stuff that was supposed to go the last week of September is showing up in October, which is probably 5 million, 6 million, 7 million pounds. So net-net, fourth quarter is slightly stronger even when you adjust for the slightly below our forecast but nevertheless a strong third quarter, some of that pushed over. But on balance, it feels okay where I sit today. In October, in North America, as I hoped [ph] that the incoming order rates on our main bellwether businesses, this is putting aside utility for a minute, the flow kinds of business that is tied to industrial activity and economic activity were surprisingly strong; meaning, they looked a lot like the September revenues, incoming order rates. And that's probably pretty good.

Jack C. Stimac - BB&T Capital Markets, Research Division

Okay, great. And then as far as the inventory reductions, I know you guys had talked about this in the last couple of quarters about bringing it down to $100 million plus. With -- assuming that normal seasonality plays out over the course of 2012, will inventory kind of be at your target levels after Q4 or will there be further potential inventory reductions ahead?

Gregory B. Kenny

We always hope we can run this with 1 day of inventory. I don't know that we'll get there, but part of winning is to keep getting better and how do you know what you know and how quickly can you change over your production. But we should have -- again, if the world stays flat to slightly up next year, we'll presumably have a normal seasonal pattern, and that would be -- we would be building inventory probably but not for sure the first half of next year with some reduction. But again, if we find chances to meet our customers' needs, to meet all the demand and do with half of the working capital or inventory, we're going to do it because, as I said, we're return-on-capital people, so we're constantly trying to get better with what we've got. And obviously, with metal volatility, you'd like to be selling today what you made yesterday, which would be our goal. It's probably an impossible goal but nevertheless where you'd like to be.

Operator

The next question comes from Gary Farber with CL King.

Gary Farber - CL King & Associates, Inc.

Can you just address what your assumption is for the competitive environment as you sort of go through this process of taking your inventory down in the fourth quarter and your inventory turns come through, what you think your competitors will be doing?

Gregory B. Kenny

We're -- we compete all over the world. There is excess supply in the -- in most markets. I would guess our competitors who have normal seasonality would be pulling inventory down as we would because -- unless they are seeing something very different than we're seeing, which I'd be surprised since we're in so many places. We do have -- with the industry overall, except for China down materially from its '07, '06 high point, there is excess capacity in these parts of the world. They have more excess capacity in the level of competition and varies in terms of how much excess capacity and the different strategies in place. So broadly, I would expect seasonally them to be pulling the inventory down unless they're in the Southern Hemisphere, in which case they would be moving toward their peak construction season.

Operator

Your next question comes from Jeff Matthews with RAM Partners.

Jeffrey Matthews - RAM Partners, L.P.

I just wondered if you could talk a little bit more about Europe and Iberia and what your outlook there might be over the next year or 2 versus what you might have been thinking a year or 2 ago when it looked like there might be a more normal recovery?

Gregory B. Kenny

Yes, I don't -- that's a great question. What we have, when you look at the overhang in Spain and the level of decline, the overhang of housing and non-resi stuff, I don't think we have looked at this and went hard after our costs in Spain, harder than we would have if we anticipated a normal recovery. We built Europe through acquisition and, of course, some of those European businesses like Silec, which we entered into the high -- extra-high-voltage business very late 2005 and then got into the submarine cable business a couple of years ago, were really global businesses. But I -- Europe is -- we're not expecting Spain to materially change nor Portugal from where it currently is in terms of housing and non-resi construction. What we are doing -- again, these facilities, our Spanish facilities, are 50 miles from France. I look at them as European facilities. So more than 1/2 of the capacity that were -- that we have in Iberia is actually being sold through the Gulf, through North Africa and through Europe, so it's really part of our European footprint. But I don't believe we're going to have a normal recovery in Iberia. We're not planning on one. And if we get one, it would be a benefit. What I'm trying to do through our sort of one-company organization in Europe is be sure that we're seeing every opportunity within 1,500 miles, 2,000 miles of those facilities. And again, we have a big asset in France and then a submarine cable business in Germany. We are significantly smaller in Europe than some of our competitors but strong and I think we'll have an important position in Central and Western Europe, as well as around the Mediterranean region. If I thought we could -- if I thought it was as easy as taking a facility down in Iberia, we would look at that, but these are fairly purpose-built facilities around certain product types and broadly without lots of -- without using lots of capital are not interchangeable. But they're lean and getting leaner, and Europe continues to benefit from the best practices we have as a company in purchasing, safety, manufacturing and on and on. So I think our bigger story in Europe will be really the -- I hope, the ongoing power of some of our turnkey and specialty products, as well as selling more industrial and construction products to a broader range of customers in the market.

Jeffrey Matthews - RAM Partners, L.P.

Got it. And can I also follow-up, Greg, and ask you about the 800 pound gorilla in the copper rooms in China and there's a lot of speculation about where they're at as far as the construction bubble and whether the bubble is bursting? Do you have any sense of what is really going on in terms of underlying demand out of China?

Gregory B. Kenny

We -- other than what you read, and I read the same, we do about 150 million a year there. We think we see copper being used in some ways as collateral. Their credit markets are being squeezed as an attempt to slow down the economy. They're squeezing nonstrategic industries as well. Our volumes are okay. Again, we're not big enough to -- we're only in a facility in the North, in the Yantai area, the peninsula area, and then down in the Hong Kong area, but I do think about and worry about China and their ability to manage a smooth landing there. And they are, as you point out, about 38% of the copper market, but they are often all in or all out. And getting into their consumption, which actually has declined this year, I think, of copper -- but again, it's part of the shadow banking system as well. So a complex question and one that is equally on my mind as Europe is, as I think about macro drivers of the world economy and potentially copper in our business.

Operator

At this time, there are no further questions. I would now like to turn it over to General Cable for any closing remarks.

Len Texter

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

Operator

Thank you, ladies and gentlemen, for your participation in today's conference call. You may now disconnect.

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