Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

General Cable Corp. (NYSE:BGC)

Q3 2007 Earnings Conference Call

November 1, 2007, 8:30 am ET


Michael Dickerson - VP, Finance and IR

Greg Kenny - President and CEO

Brian Robinson - CFO

Mathias Sandoval - EVP, CEO of Latin America and Middle East

Mike Andrews - EVP, President of North America Infrastructure and Technology Group


Jeff Beach - Stifel Nicolaus and Company, Inc.

Stuart Bush - RBC Capital Markets

Celeste Santangelo - Merrill Lynch

Will Stein - Credit Suisse

Lanette Donovan - MacKay Shields

Nate Kohlhoff - HVB Corporates

Rick Shobin - Analyst


Good morning. My name is Andrell, and I will be your conference facilitator. I would like to welcome everyone to the General Cable Corporation's Third Quarter 2007 Earnings Conference Call.

This conference call is being recorded at the request of General Cable. Should you have any objections, you may disconnect at this time. All participants have been placed on mute to prevent any background noise. There will be a question-and-answer period after the speakers' remarks. (Operator Instructions)

Thank you. General Cable, you may begin your conference.

Mike Dickerson

Good morning, everyone. Welcome to General Cable's third quarter 2007 earnings conference call. I'm Mike Dickerson, Vice President of Finance and Investor Relations at General Cable.

Joining me this morning are Greg Kenny, our President and Chief Executive Officer, and Brian Robinson, our Chief Financial Officer. Also joining us today by phone our Executive Vice Presidents, Bob Siverd, Mike Andrews, and Mathias Sandoval.

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, 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 on file with the SEC provides further detail with regard to 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 restructuring items.

This non-GAAP, company defined measures are being provided because management believes it is useful in analyzing the operating performance and cash flow before the effect of various reorganization and other charges.

A reconciliation of adjusted operating income and EBITDA to GAAP net income and some additional segment details will be available on the Investor Relations section of our website at later today.

The format for today's call will first be some discussion by Greg Kenny about the overall business environment and our performance for the third quarter. Secondly, Brian Robinson will discuss additional financial details for the third quarter. And finally, Greg will provide some comments on the fourth quarter outlook, followed by a question-and-answer period.

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

Greg Kenny

Thank you, Mike and good morning. Several years ago the company made a transformative decision to pursue investment in energy and infrastructure. Our first step in that strategy execution was the purchase of BICC.

That initial investment continues to provide shareholders with excellent returns and a way to invest behind the long-term investment thesis for increasing global energy demand and the required infrastructure.

More recently, the company made investments meant to provide additional growth in the coming years, specifically CLECs extra high voltage underground systems business and NSW's submarine fiber optic and power cable business.

I am pleased that these long-term investments have been improving faster than we originally estimated, aided by improving global markets for the underground transmission and submarine communication products, as well as the increasing global demand for renewable energy sources, specifically wind power and importantly for NSW offshore wind farms.

And yesterday, the company announced that we have completed another transformative event. That is the acquisition of Phelps Dodge International Corporation. This transaction will significantly expand our global footprint, accelerate our global expansion plans by many years and enhance General Cable's revenue and earnings growth due to PDIC's participation in faster growing developing economies.

And provide a platform for further acquisitions in developing regions of the world that are building infrastructure for the first time. There are also meaningful sales, marketing, manufacturing, purchasing and technical synergies between General Cable and PDIC, which we’ll harvest over the time as we operate as one company.

The company continues to enjoy strong demand for many of its products globally. In the third quarter, the company reported revenues of more than $1.1 billion, up nearly 21% from the prior year on a metal-adjusted basis. While not an ideal surrogate for demand due to the varying copper and aluminum content of our products, overall metal pounds sold were up 6.3% in the third quarter, compared to the prior year, up to $191.7 million pounds.

This includes both copper and aluminum. Acquired businesses, principally ECN, contributed 13.6 million pounds of metal sold. Before the impact of acquisitions, metal pounds sold were down 1.3%.

The slight decline in metal pounds sold is principally a result of declines in demand for copper-intensive telecommunications cables in North America, as well as lower demand for construction cables in Spain.

Telecommunications and construction cables tend to have a higher-than-average level of metal content as compared to the company's overall product range. The company's product range includes cables that have very little or no copper or aluminum content, such as undersea, networking, electronics and cables for wire harnesses and assemblies.

At the other end of the spectrum would be certain bare overhead utility cables, which have no outer jacketing materials, as well as telecommunications and residential and nonresidential construction cables, which have high copper content and relatively inexpensive jacketing materials. In North America, revenues increased 9.7% in the third quarter compared to 2006 on a metals-adjusted basis.

This topline improvement is net of nearly a 20% drop in metal-adjusted revenues for telecommunications products sold primarily to telephone operating companies. Without the impact of telecommunications products, North American metal-adjusted revenue grew at 16.1% in the third quarter of 2007 compared to 2006.

Operating margin has increased by 190 basis points to 8.7%. With the exception of telecommunications products, all North American businesses reported increased revenues and earnings during the third quarter of 2007 compared to the prior year.

The company has continued to benefit from its exposure to a wide range of strong end markets, including electric utility, alternative energy, electrical infrastructure, networking and electronics, that are more than offsetting continued telecommunications product declines and the impact of a weak housing market on certain utility cable product families.

The company is looking at realigning its telecommunications production capabilities, and as a consequence will examine various alternatives for our telecom Mexican facility, including the production of data communications cables. PDIC has continued to perform above its reported 2006 revenues and earnings in the third quarter of 2007. Because of this performance and the strength of the emerging markets that PDIC supplies, we've increased our accretion guidance for this business from a range of $0.20 to $0.30 to a range of $0.40 to $0.50 for 2008.

European electric utility and electric infrastructure markets broadly continue to remain robust with the exception of Spanish construction. Operating earnings in the company's European business grew by 35% to $36.8 million in the third quarter of 2007 compared to the prior year.

Operating margin was 7.5% in the third quarter, equal to the same period in 2006 on a metal-adjusted basis. Revenues were up 35% in the quarter on a metal-adjusted basis. Before the impact of acquired businesses and favorable changes in exchange rates, organic growth was 7.5% despite approximately a 20% decline in demand for cables used in residential construction in Spain.

The company has initiated growth strategies in its other European markets for these low-voltage products, including the European do-it-yourself markets. The company's European operations are realizing the benefit of businesses recently acquired. NSW was actively developing products for the submarine power and long-haul fiber optic communications markets, as CLEC's high voltage solid dielectric underground cable systems continue to gain momentum globally.

Both businesses are booking projects into the 2009 time frame. At ECN, we are nearing completion of an important technology transfer, which will allow ECN to manufacture the company's trapezoidal design for hardened steel corer overhead transmission cable.

This cable effectively provides about 75% more capacity compared to a similar-sized cable of a traditional design, perfect for the congested right-of-ways in Europe. Concurrent with the closure of the PDIC transaction, the company has announced several management changes effective November 1, 2007, which will align the company's management structure along geographic lines.

The company welcomes Mathias Sandoval to General Cable as Executive Vice President and Chief Executive Officer of our combined operations in Latin America, sub-Saharan Africa, and the Middle East and Asia-Pacific. This includes the historical General Cable Asia-Pacific and Central and South American businesses as well as Mexico.

Domingo Goenaga has been promoted to Executive Vice President and Chief Executive Officer of General Cable Europe and North Africa and will continue in his current capacity.

Gregory Lampert has been promoted to Executive Vice President and Group President of the North American Electrical and Communications Infrastructure Group. This business includes products supporting data, telephone, industrial power, assemblies, and electronic applications.

Mike Andrews has been promoted to Executive Vice President and Group President of the North American Energy Infrastructure and Technology Group. This business includes products supporting energy exploration, production, transmission and distribution applications.

Roddy Macdonald has been quoted to Executive Vice President of Global Sales and Business Development. In addition to leading our North American sales organization, Roddy will work with our business and sales leaders around the globe to align our commercial strategies and ensure that we present one face to global customers across all regions and businesses.

Over the last decade, the General Cable management team has successfully grown the company from a U.S. centric business focused on communications and construction cable to a truly global company with nearly two-thirds of its projected revenue generated outside of the United States and a product range and geographic diversity second to none.

I expect these leaders to be relentless in their drive for continuous improvement, to have a vision to identify new markets and business opportunities before they become popular, and have the strength and wisdom to profitably navigate the company into the future through any market condition.

I believe we have one of the most thoughtful and energetic management teams in the business and we can continue to leverage as we expand globally. Because of the changes in the management structure of the company and the related changes to how information will be consolidated, communicated and reviewed by me, we are reviewing our segment reporting going forward to ensure that we continue to comply with segment reporting disclosure standard.

While I do not know with certainty at this point what the outcome of this review will be. It is likely that with these management changes, the company's segment information will report on a geographic basis.

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

Brian Robinson

Thanks, Greg. With respect to the third quarter, I will first walk you through the significant items impacting the company's results for the quarter. Net sales of the company's global electric utility products were up 23% on a metal-adjusted basis from the third quarter of 2006, including approximately 8 percentage points of growth related to ECN, which was acquired late in the third quarter of 2006.

Operating earnings for the company's global electric utility businesses increased 38% to $40.4 million in the third quarter of 2007 versus 2006. As a percentage of metal-adjusted revenues, operating margins grew about 100 basis points to 9.2% in the third quarter of 2007.

The continuing strength of the company's global electric utility business, as well as favorable foreign exchange translation, more than offset the impact of declining residential construction demand on certain low voltage and small gauge sized medium voltage cable demand in the third quarter of 2007 in the United States.

Net sales of the company's global electrical infrastructure products were up 26% on a metals-adjusted basis from the third quarter of 2006, including approximately 5 points of growth related to the addition of NSW, which was acquired during the second quarter of 2007.

Operating earnings for the company's electrical infrastructure business increased 41% to $27.7 million in the third quarter of 2007 versus 2006. As a percentage of metal-adjusted revenue, operating margins grew about 80 basis points to 7.2% in the third quarter of 2007.

The increase in revenues and operating margin for the company's global electrical infrastructure businesses is primarily a result of increasing end-market demand specifically from mining, oil, gas and petrochemical cable products around the world, as well as certain specialty products for the marine and transit markets.

Partially offsetting this is a slowing construction market in Spain, which has resulted in some weakness for low-voltage products used in residential and nonresidential construction.

Demand for high-bandwidth networking cable continues to grow. Net sales for networking cables were up 36% in the third quarter of 2007 compared to 2006. This growth is due primarily to the addition of NSW's submarine communications business.

In addition to operational improvements, NSW is actively developing new products for the submarine fibre optic long-haul market, which is rebounding after several years of decline.

Additionally, North America experienced 8% organic revenue growth, resulting primarily from higher market prices and a continuing mix shift towards higher-end networking products, including Category 6 and 10 gigabit cables.

Operating margin in the networking segment has improved to 620 basis points to 8% in the third quarter of 2007 compared to 2006. Telecommunications cable volume continues to decline.

In the third quarter, revenues declined $18.6 million or approximately 20% on a metals-adjusted basis versus the prior year. As Greg mentioned earlier, we are evaluating the opportunity to modify the production mix in general cable's Mexican telecommunications products facility.

Despite the continuing expected year-over-year declines, the business has generated nearly $18 million of EBITDA for the first nine months of 2007, and is recapitalizing at a rate of less than one-third depreciation.

We will continue to look for ways to enhance our return on capital employed in this business. On a consolidated basis for the third quarter, the company reported operating earnings of $92.3 million, up $26.5 million compared to the third-quarter operating earnings of 2006 and an operating margin of 8.1%, which was up 110 basis points from an operating margin of 7% reported on a metals-adjusted basis in the third quarter of 2006.

Our net interest expense for the third quarter of 2007 was $5.1 million compared to $7.6 million of net expense in the same quarter last year.

The savings resulted from the issuance of the $355 million convertible notes at less than 1% coupon in November of 2006, which allowed us to pay off borrowings under our LIBOR rate-based revolving facility in the US as well as the $325 million high-yield bond issuance in March, which allowed us to call our $285 million high-yield bonds at a net interest savings of about 200 basis points.

Additional year-over-year net savings resulted from higher cash balances in the third quarter of 2007 compared to the third quarter of 2006. Included in the earnings results for the third quarter of 2007 was approximately $0.08 per share of tax benefits resulting from prior-year tax provision true-ups.

In addition, the 2007 estimated full-year effective tax rate has been reduced to 36% as a result of the increasing relative mix of income generated in lower tax rate countries and the impact of effective tax planning strategies.

Looking forward, we estimate a full-year effective tax rate in the range of 36% before the impact of the PDIC acquisition. We will provide further guidance on the 2008 tax rate and the impact from the PDIC acquisition when we report the fourth quarter of 2007.

With regard to the balance sheet, total debt for the Corporation was approximately $822 million at the end of the third quarter of 2007. Net debt at the end of the third quarter was $342 million. This is approximately $88 million less than the December 31, 2006 net debt balance of approximately $430 million, reflecting strong operating earnings, partially offset by investments in inventories, higher receivables from increasing revenues, capital expenditures, several acquisitions, and the bond tender premium and fees.

For the first nine months of 2007, the company has generated $152 million of net cash flows from operations, including nearly $106 million in the third quarter. In accordance with the lending-based calculation under our asset-based revolver, as of the end of the third quarter, we had approximately $240 million of available borrowing capacity in North America and undrawn credit facilities equivalent to approximately $86 million in Europe.

We also had about $480 million of cash on the balance sheet globally. On October 2, 2007, the company issued $475 million of 1% senior convertible notes due 2012. This offering was completed in order to partially fund the PDIC purchase price. Additionally, the company increased the size of its asset-based revolving loan to $400 million.

Pro forma for the PDIC transaction completed yesterday, the company maintains adequate liquidity to fund its working capital requirements, as well as other possible acquisition transactions, which includes cash on hand and excess availability on some North American ABL.

EBITDA was $106.5 million for the third quarter of 2007, resulting in $399.4 million of EBITDA for the trailing 12 months at a leverage ratio of 0.9 times on a net debt basis. Assuming the PDIC transaction closed in full as of the end of the third quarter of 2007, net debt to trailing EBITDA would result in a leverage ratio of only approximately 2.7 times without the benefit of PDIC's trailing EBITDA.

Capital spending in the third quarter was $28.2 million, while depreciation and amortization was $14.2 million. For the first nine months of 2007, the company has invested $73.9 million. This spending is over weighted internationally, specifically for the electrical infrastructure and electric utility markets.

The company's capital spending rate is approximately as we estimated with the exception of plans to expand in India. These plans have been briefly suspended as we evaluate the opportunity to leverage existing PDIC assets in the region to accomplish a more significant market position at less cost.

The company is continuing to invest in key areas such as global infrastructure and submarine power markets. Due to the planned delivery of equipment and maintenance schedules around the holidays, which are also used for capital installations we expect a higher capital expenditure in the fourth quarter between $50 million to $60 million.

Looking forward into 2008, we expect that the combination of general cable and PDIC will result in more efficient utilization of assets and therefore a lower required capital expenditure plan. We will provide 2008 capital expenditure guidance at the end of the year.

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

Greg Kenny

Let me touch briefly on our outlook for the fourth quarter of 2007. The company continues to benefit from strong global demand for many of our products. The North American Electric Reliability Corporation or NERC recently suggested that many regions in North America will fall below their target electricity capacity margins within the next two or three years.

Additionally, NERC suggested that planned transmission projects are significantly higher than projected a year ago. The company believes this assessment supports our view of a continuation of a long-term upgrade cycle for the aging transmission grid.

However, demand for low-voltage utility products in North America will likely continue to be weak as a result of continued new home construction weakness. As a result, we expect growth in the overall utility segment to moderate.

The company will be lowering production levels of certain utility products in the fourth quarter in an effort to better align its production and inventory mix with end-market demand, which will have the benefit of increasing operating cash flows.

While this will result in some short-term inefficiency in certain manufacturing facilities overall the company is expected to grow operating earnings by 20% or more in the fourth quarter compared to the prior year before the benefit of PDIC.

While releasing the fourth quarter without PDIC, reflected to be approximately 1.05 million and increase of 12% from the fourth quarter of 2006 on a metal adjusted basis.

In addition, PDIC will contribute approximately 220 million of revenues for the balance of the fourth quarter. For the fourth quarter the company expects report earnings per share of approximately $0.80 to $0.85, which include about $0.08 from the PDIC operations, which is inclusive of related financing impact and purchase accounting related expenses.

I will caution you, that the purchase accounting related adjustments are very early estimates at this point, which we expect to pull them up over the next couple of months. Looking forward, we are increasing our accretion guidance for 2008 related to the acquisition of PDIC from a range of $0.20 to $0.30 to a range of $0.40 to $0.50 per share due to the continuing strength of PDIC's end markets.

Because of the integration of our company’s as well as the movement of substantial assets from General Cable to the PDIC group of companies. This will be the last time we’ll provide separate guidance for PDIC.

That concludes our prepare remarks. And I now, turn the call back over the operator, who will assist us in taking your questions.

Question-And-Answer Session


(Operator Instructions) Your first question comes from the line of Jeff Beach.

Jeff Beach - Stifel Nicolaus and Company, Inc.

Yes. Good morning, Greg, and another great quarter.

Greg Kenny

Thanks, Jeff.

Jeff Beach - Stifel Nicolaus and Company, Inc.

I'd like you to -- I think there's a lot of interest among investors about the electric utility cables. You had another great quarter here with very strong growth. Can you talk a little bit, break down the geographies and talk a little bit more about the trends in Europe looking out into 2008 in general, the emerging countries whether you are seeing this very strong growth that’s, that Phelps Dodge is experiencing, is that going to continue?

And then in particular in North America where you are citing the weak demand for your low-voltage cables and I'd like to hear a little bit about what you think the overall trend in spending is, in particular what I'm hearing from contractors is that where there is weak demand for, at the very local level for residential housing, that many utilities are continuing to spend and just moving their spending plans up into medium-voltage and higher-voltage distribution. And I -- you've got inventory situation all that, but I'd just like to hear what you think the overall trend is in spite of this weakness? Thanks.

Greg Kenny

Well, it's strong, Jeff. You know, we -- and I think we have a tendency to look at the, if you look at, say the North American electric utility business, which is approximately a $900 million business, maybe 30% would be transmission-related cables, 45% might be medium-voltage and 25%, I may not have done the math right, is low-voltage which connects up the neighborhoods, etcetera.

And what we've experienced is a substantial decline in the low-voltage business because they are hooking up less neighborhoods because there's less neighborhoods being undertaken. You know, the US has had, we have seen some rotation with budget dollars to other places, but I would say that we've not yet seen a full offset with dollars being spent on the heavier-gauge cables.

But again, a lot of analysts write about transmission, which is the long-haul links which, while that the that business is project-driven, it is a business that we think and certainly you would surmise from FERC, is one that has a long-term investment cycle.

And then you move into the cities and the heavier-gauge medium-voltage cables as the cities reinforce and again, that generally is strong. And we've said that the low-voltage area, which is about 25% of our business maybe 30%, is weaker.

So that's the case in the US but our view on the overall investment pieces around infrastructure is a strong one. We happen to define it as everything from low-voltage to 700-plus kilovolts. So, we go from 1 to 5 kv, all the way up.

In Europe, you know, Spain and France have been heavily investing in the whole European continent in infrastructure. We have seen a very strong trend in the medium-voltage and high-voltage. We haven't really seen a housing impact in part, perhaps because housing grew so quickly in Spain, they are just -- they just have amount of work to do on the medium-voltage side to make sure they have enough headroom with all the people they put online.

But we've seen it in general stronger and really not exactly following the US in part, as you know, housing in France and -- Germany was very, very weak and has been weak. So Europe seems to be staying together including the low-voltage side. And again, we have a very big position on the high-voltage area with the ECN acquisition and certainly CLEC.

You know, really in a lot of where Phelps Dodge serves, housing really isn't yet, there's just mortgage markets being formed, in fact I think, in the last year Colombia began to have a market that actually allowed you to finance a house.

So in where Mathias operates, I would say it's the industrialization and bringing electricity, perhaps for the first time is far more important than necessarily a housing cycle which really per se doesn't exist as housing is such as is being built in many ways for the first time.

So Mathias is looking at very strong demand next year for his medium and higher-voltage cables. He's also benefiting with a high demand for infrastructure cables for industrial applications, oil, gas, petrochemical.

Europe is holding together nicely but you're right, Jeff. The US is and Canada is going to be well less than half our overall energy infrastructure business if you will, going forward given the acquisition of PDIC. So, we should be really thinking about this in geographic buckets.

But broadly the US has shown the weakest impact -- has had the most impact from housing and everything else seems to be strong globally because in fact housing has been less important in most markets with the possible exception of Spain, where it was so strong they just got, I believe years behind on the medium-voltage side of things.

We are aiming in nicely and as you know, we have a lot of different looks at the European market because of the acquisition activity we've done. So we feel good about those segments and we just continue to believe North America and the transmission will be strong and that the cities will continue to invest on basic infrastructure.

Jeff Beach - Stifel Nicolaus and Company, Inc.

All right. Thanks, that was a good review.

Greg Kenny

Thank you.


Your next question comes from the line of Stuart Bush.

Stuart Bush - RBC Capital Markets

Good morning Greg.

Greg Kenny

Good morning Stuart.

Stuart Bush - RBC Capital Markets

You guys, I just wanted to confirm what you said at end of the prepared comments. Did you say that for Q4 guidance, that PDIC impacts it by a positive $0.08?

Greg Kenny

Approximately, we also said -- Stuart, we are early in our purchase price accounting, and in fact, we've only begun to manage this company today but we're feeling good about their businesses and as you know, December is always a bit tricky with holidays et cetera.

But our broad sense is it's worth about $0.08, which include some purchase price accounting step-up estimates, as well as some purchase price accounting around how you look at inventory et cetera in doing this. So we feel good about that business, and they are looking like they are having a very good year this year.

Stuart Bush - RBC Capital Markets

So there are several one-time costs on that inventory step-up and financing costs that wouldn't be recurring, right?

Greg Kenny

Well, we will step-up assets and we don't know by how much, Stuart. But we've made an estimate of that. Then there is -- yes, there is some one-time charges around the step-up, the sale of existing inventory that was built prior to our acquisition, which is some cents.

Brian Robinson

Stuart, it's Brian. I would just emphasize that, as Greg said in the script, just caution around we are early and we've just tried to put some estimates to be helpful here. But we're very early and we need to pin down the work over the next couple of months.

Stuart Bush - RBC Capital Markets

Yes. I understand.

Greg Kenny

But their take-away is their business is running well and has continued a very positive trend.

Stuart Bush - RBC Capital Markets

I know you mentioned that the PDIC impact for 2008. You give more clarity on how it affects the tax rate, but directionally, would it likely drive the effective tax rate of the company below the 36%?

Greg Kenny

Stuart, yes. I think that's the right way to think about it.

Stuart Bush - RBC Capital Markets

Okay. Then on the transmission cable side, I know you guys are already currently running at high utilizations there and selling everything you guys make. How do you foresee that General Cable will capitalize on this macro trend increase in demand?

Will it primarily be pricing, or do you anticipate that the industry will need to add capacity at some point?

Greg Kenny

You know, Stuart, I expect everyone is trying to get more with less and debottleneck. As we think about transmission that goes all the way from underground and the high-voltage transmission, we think the transmission as 69 kV and above, maybe 132, so actually Phelps Dodge and that could be aerial or in the ground.

Phelps Dodge actually brings assets, both aerial transmission as well as underground. They have some superb assets in South America and Thailand, particularly. So we will look at our ability to use the capacity that they have, and we feel we can keep up with an expected growth rate that is certainly above the 3% GNP level.

We've talked about three to six and in some cases we've seen stronger than that. So I think we're there, and I think we will have more irons in the fire, so to speak, when we look at our ability to globally source these products within the system.

Stuart Bush - RBC Capital Markets

Okay, fantastic. And Lastly --

Greg Kenny

My job is not to miss opportunity, but I also want to avoid over capitalizing the business. So we want to keep it tight and we're trying to push prices every chance we get.

Stuart Bush - RBC Capital Markets

Right. The last question is, in regards to your comments about the telecom business in Mexico. I know you're talking about your options there. The business is profitable but it seems like it's a faster declining market. Do you think it's possible to find a buyer for that kind of business?

Greg Kenny

Well, you know, Stuart, I think I continue to believe this business is worth more to us than anybody else. It's at the core of the company, we're very good at it. I think -- as I said, it has declined at a higher rate than we anticipated but we also view that there will be some maintenance level, which we are probably rapidly approaching.

We are down to part of our Tetla, Mexico facility, focused on that as well -- and part of it. The other part is really service wire, and then about two-thirds of our Lawrenceburg facility. So our thinking is that we certainly have growing businesses throughout South and Central America and certainly in the data cable area, which is something that Phelps Dodge has not been in.

So, we are looking at ways to use that capacity, which we have not concluded how, but we are examining it and we want our investors to know that. So we would be down to one facility supporting that business if we go ahead and convert Tetla to other uses and that's part of one facility.

There is some latent capacity within Phelps Dodge to provide some product, if we need it as they have some lines that are sitting around the world, but it's a small part of the business. We could certainly support any demand spike from Phelps Dodge Zambia or Phelps Dodge Thailand or Phelps Dodge Chile where they keep a latent capacity for the local telephone company.

But again, that's only 3% or 4% of their business, as we've talked about. But I think well, Tetla is a superb facility and we'll continue to make sure we have enough headroom to meet any recovery in demand, but at the same point continue to pull cash out of the business as you can see by the reinvestment rate.

But it's a good business. We are extremely good at it and as I said, there's two players left in North America and I believe we will hit a point where it begins to flatten out and we probably are approaching that a little bit quicker than we had anticipated.

Stuart Bush - RBC Capital Markets

Great. Thanks a lot, guys.

Greg Kenny



Your next question comes from the line of Celeste Santangelo.

Celeste Santangelo - Merrill Lynch

Good morning.

Greg Kenny

Hi, Celeste.

Celeste Santangelo - Merrill Lynch

Hi. If you look at your expectation for sales and operating income for your core business in Q4, it looks sequentially like there's an operating margin drop of about 150 basis points or so. Can you quantify that drop, what's included in that?

Brian Robinson

I think, Celeste. It's Brian, a couple of thoughts -- I think. As we talked about in the last call, around some of the -- I will call it the seasonal nature of the business. And so we talked a little bit on the North American energy side, where we are actually adjusting some of our production loads in some of the product families where we've got lower demand.

So again, sequentially, I think you get to that impact, and then traditionally we'll have the shutdown period. So we've got some extended periods, particularly in Europe. We will have some in North America.

As we mentioned, some of the impact of that, we expect a little bit higher capital expenditure because a lot of that installation can go on during that shutdown period. So I think, all in all, that's really why you see, sequentially, the drop in the top line and then the ancillary impact on the operating profit line.

Celeste Santangelo - Merrill Lynch

Okay. So then, ex-ing out the production -- the pull-back on the production levels for the low voltage, what kind of levels do you expect it to return to after Q4?

Greg Kenny

I think, you know -- we've always thought about this as -- you know, because metals move around sometimes by $0.10 a day, we are now with PDIC. So that’s where we're processing somewhere around 1 billion pounds of copper a year and something in the 500 million or 600 million pounds of aluminum.

And I think it's more your return on value added, and I've been hesitant to get into -- to try to put stakes in the ground around operating margins. We've talked about, in the past, we have some that are low single digits now and we have some that are mid to high or double digits, and we are trying to push them all up.

But I think I wouldn't, you know we don't want to forecast beyond a quarter at a time, as we've talked about. 40% of our business is being priced toward cycle, maybe 45%. So, I think that would be not a way to think about it.

We do see some nice push with PDIC, with some of the growth there. You know it's -- I think the rate of increase -- we've been growing in the 40%, 50%, 60% kind of range. You know that -- I wouldn't project off of that necessarily. That would get you to huge numbers.

But we continue to drive cost out of the business. I like the opportunities around synergies; I like where we are with our data cable business. We've got our industrial business rolling nicely. So, and we get global selling opportunities. But I think, so that I'm not going to put a stake in the ground around operating margins. In part, I don't know what my cost inputs will be.

We also know petrochemicals are -- the oil prices are through the roof. That will impact petrochemical pricing, which is again something we have to pass through if in fact, they will go ask for more price, et cetera. So it's a complex equation.

Celeste Santangelo - Merrill Lynch

Okay. And then just looking at Q4, how much should we add to -- how should we think about SG&A, including PDIC?

Brian Robinson

I would think of PDIC as consistent with our rate push as a percent of revenue, so as to call it 6% to 7%.

Celeste Santangelo - Merrill Lynch

Okay, great. Thank you.


Your next question comes from the line of Will Stein.

Will Stein - Credit Suisse

Thank you. I'd like to address the guidance. I'm curious. Last quarter, consensus was over $1. You guys guided $0.85 to $0.90. You reiterated that guidance when you did the -- when you announced the PDIC deal and you come in at $1.11 or $1.08, if you take out, $1.03 if you take out the $0.08 tax benefit.

I'm just trying to understand. Did something happen at the end of the quarter to cause the earnings to be materially higher than this guidance level? What's going on with that and also, with the current quarter you're also guiding well below consensus, is this just material conservatism or is there something else going on that I don't understand?

Brian Robinson

Yes. Well, I think the, a couple of thoughts on the third quarter credits again, starting with the headline of $1.11 we talked about what we call the provision to return true-ups of about $0.08.

We also, we've talked about the effective tax rate change, which again, there's the relative mix of the earnings as well as some good, we think some good tax-planning strategy, so that was for the first six months probably worth about $0.04 in the quarter.

And so that gets you down below about $1 and then as we mentioned and we've told investors over time that to the extent on our LIFO accounting where we take out any quantities and have a benefit or a detriment we will call that out and that's about another $0.03.

So again, it goes back to the markets, which are looking at it in broad terms we talked about markets, which half of the business is priced every day and things are moving very quickly and I think those are really the big pieces that get you from that headline down to probably just above what we have guided towards.

Greg Kenny

Yes. I'd like to think of the tax as earned but you can't take it until you've done the returns and had them accepted, etcetera. So we think with this global mix of businesses and some of the lower tax rates in these countries that's something we will keep driving but we're just above that we guided $0.85 to $0.90 and we would be in the $0.90, $0.93 kind of range, depending on how you think about some of these things.

But we will always call out the LIFO gains or losses in this case, it's a small number but it's still $0.03 a share or something.

Will Stein - Credit Suisse

That’s fine. Okay. So in the coming quarter I understand that of course the purchase accounting rules force you to mark up the inventory that you are acquiring to market, right and you are accounting for it under the LIFO method, so you're going to have higher than normal cost, let's say.

How much is that going to hurt the quarter relative to if you were actually manufacturing that product and do you expect it to impact the company in future quarters?

Brian Robinson

Let me start at the end there, well and the, you know, it's truly an accounting piece of work I will call it rather than something that I think of really economically. So it's really that the inventory step-up is really a fourth-quarter phenomenon.

Having said that, we're not yet prepared to give you that number the reason being there's a lot of complexities that go into it. The valuation on the tangible assets and the intangibles are very much at an early stage and so we have tried to again be helpful to provide the guidance in our own mind knowing the range that we think these things are going to come out at, but we're just cautious not to get that granular yet.

Will Stein - Credit Suisse

Is the $0.08 contribution from PDIC in the fourth quarter as I recall back, that's what you said it would contribute that includes all the hits from these quasi one-time effects, is that right?

Brian Robinson

Right. Well, that’s includes those impacts; it includes an assumptions on the step-up, it includes the financing as well.

Greg Kenny

Yes. The step up as you know, won't be one-time. We just have to finish that work we made an assumption around that.

Will Stein - Credit Suisse


Greg Kenny

But there is a more one-time nature around the step-up of the inventory, as you said.

Will Stein - Credit Suisse

Right. So it sounds like you don't anticipate dipping into LIFO layers going forward beyond the fourth quarter?

Brian Robinson

Well, again, in the full fourth quarter in the base General Cable business, well, there may be further LIFO gains but again, that's not in the guidance and we will call that out and that's the principle that we operate under with the group. You know, the LIFO rules force us to take a view of sort of where we're at, at this point in time, which is why we've got the $0.03 in there now.

And as we said, although the utility business has got a fair element of which is aluminum-based there maybe more LIFO gains in the fourth quarter but in an amount, you know, not a large amount, probably the similar -- maybe up to a similar level of what we…

Greg Kenny

With PDIC, we're talking about both the step-up of the fixed assets as well as the elimination of absorption of inventory that was built prior to the acquisition that will be sold, say, in November or December, which is again, an accounting exercise and we don't know all of that yet, but we've had to make some estimates.

But I guess, broadly and again it's not over until it's over we saw with all of that PDIC producing $0.08 over this two-month period accretion and said that we saw them at better than we had initially looked as we've gotten deeper into the year and begun to take a look with Mathias and I will be with his team on Sunday and Monday of next week looking at the business plan and they feel good about their business.

Will Stein - Credit Suisse

Thank you. Just one more quick one. I'm wondering if you can give us a clue as to the PDIC margin in the September quarter. I know that you didn't own that business as of that time, but can you comment on what the stand-alone PDIC operating margin was in September?

Brian Robinson

Well, I would say it is similar to General Cable's margins. That's probably the best that we can…

Greg Kenny

Yes. We had taken them and stepped them up, etcetera. But as we said, when we were out on the road financing this, that they were similar to General Cable though probably higher if you take out their -- they have a big business which is a very useful asset they have, but they are and then lot of these developing countries.

They are backward integrated into melting cathode or even taking liquid quick molten aluminum and turning it into cable, and they sell their excess capacity out to other OEM producers.

So their core business projected for '07, when we were talking about this, was about $1.2 billion of wire and cable and $100 million to $200 million of sales of metal to OEMs, which have a lower margin.

But I would say, broadly speaking their business, and their cable business is good or better than what we are seeing. Then they have this raw piece sale of rod, which are very financially attractive but from a sheer margin look, slightly diluted.

Will Stein - Credit Suisse

Just so I understand it, and the reason I'm asking this of course is, for the last three years, I think they've had -- the last than three full years, they've had in the mid 6% operating margins, and then in Q2, they had a 12% number, as I recall. It sounds like that didn't repeat in the third quarter. Is that right?

Greg Kenny

Well, their strongest - operating margins that metals prices have been rising, and even if they were holding margins, they were getting a higher economic rent, if you will, because of the margin on higher metals.

Again, we think we make money on the value added, and you are pricing to constraints and everything else in this business. But they have -- there was also obviously Freeport -- purchase accounting and hedging policies and everything else.

Freeport owned this for a short time, so I don't want -- there's enough supplementing around that I don't know that it's useful to start comparing this by quarter, considering this multiple owners and a lot of different accounting that's tied to this.

But I would say, broadly, their second quarter is generally their strongest and they see a lot of good opportunity ahead and I think their business, operating margin-wise, their cable business is as strong or stronger than ours. That's not a guarantee of future performance, but that's just a statement in fact.

Will Stein - Credit Suisse

Thank you very much.


And you do have a follow up question from Jeff Beach

Jeff Beach - Stifel Nicolaus and Company, Inc.

Yes. Coming into the third quarter, you had talked about likely reducing some inventories, and there was a LIFO gain. Outside of that, can you quantify the inventory reductions and just talk generally about the negative impact of unabsorbed plant overhead on the operations? And then maybe just in general, what kind of inventory reductions are you looking for in the fourth quarter and were see a similar type drag from just this inventory issue?

Brian Robinson

Yes. Jeff, it's Brian. I would say, as we've said year-to-date from an overall perspective, we've generated about $150 million of operating cash flow. Broadly, from an inventory perspective, we've taken out about $20 million of inventory year-to-date.

So again, it continues to be a moving equation as we see the telecommunications demand comes down. Again, we reference the comment of, with respect to the energy business, in the fourth quarter.

I would expect -- again, this is just broadly in the base business -- I would suggest that inventory could be maybe another $25 million to $40 million that we might take out. But again, it's moving every day, but that's sort of a broad brush at that.

Jeff Beach - Stifel Nicolaus and Company, Inc.

All right. Just generally, then, in the third quarter, was there a negative impact from inventory drawdowns?

Brian Robinson

In the third quarter, actually inventory was up slightly.

Jeff Beach - Stifel Nicolaus and Company, Inc.


Brian Robinson

Yes. Again, that the LIFO concept is a year-to-date concept, essentially.

Jeff Beach - Stifel Nicolaus and Company, Inc.

Just looking ahead to next year, I know it's early right now, but are you typically going to see an inventory drawdown always in the fourth quarter because of the seasonality, or is this somewhat related to the weaker sales and low-voltage utility cables?

Greg Kenny

The fourth quarter is usually -- we have mode of plant shutdowns through the holidays, and certainly where Mathias operates in South America and Central America, there is a substantial holiday period culturally.

Whenever I'm trying to constantly match, increase my inventory velocity and if I could have zero working capital or zero inventory, I would. So, I'm always looking for a better opportunity if I get for example, we have trials going on with electrical distributors around e-Commerce replenishment, where we're looking into their inventories, etc.

If we can drive this by five times the turns, we will do it, Jeff but I, Broadly, we're going to continue slow down the telephone cable side of the business, which is in North America, and that we will continue to slow down the low-voltage utility. But anyplace that I can increase turns, I will, because my return on capital employed will improve.

So I'm not going to ever make inventory just for the sake of making inventory, unless I think that I'm placing a bet on demand that's not yet apparent but I'm going to make a judgment that I need to have it. As you know, there has been times when we've run right through when we haven't seen specific demand but we knew we had to go run through the slow period in anticipation of demand. That has worked successfully for us.

So we're doing that around the world and constantly, Jeff, but we will ease back. I believe we will have less inventory in the fourth quarter than the third quarter, which is both seasonal as well as purposeful.

Jeff Beach - Stifel Nicolaus and Company, Inc.

All right, thanks.

Greg Kenny

Okay. You are welcome.


At this time, I would like to remind everyone (Operator Instructions). Your next question comes the line of Rick Shobin.

Rick Shobin - Analyst

Hi guys.

Greg Kenny

Hi Rick.

Rick Shobin - Analyst

I understand you guys talk a little bit about or have talked a little bit about the potential transmission opportunity in the US on the large-scale projects, but I was wondering. I'm sure that will be very positive for you guys when it happens.

But I was wondering if you could talk more about the opportunity with regards to all the different wind stations that are getting built in remote locations and the new CCGTs that are going to start to get built over the next two to three years, and even some of the coal plants that are coming online as to how much, either from a revenue perspective or from a volume perspective, that could potentially benefit you guys.

And also, when you look at how people are going to start to build out nuclear plants and how much cable needs to be put in for those, and then also what the order cycle looks like as far as buying for a new plant.

Greg Kenny

Well you know, there isn't market research that says how big is cable for wind farms, but it's big. We are one of the leaders in the world we may be the leader. It's hundreds of millions, and it has been a quiet and happy story. It's mostly medium-voltage cable. I think you also know we bought NSW. One of the primary reasons was because of their undersea expertise and their ability to partially address that market.

We are investing to fully address that market because we see offshore wind farms as being a very good answer for a lot of countries in the world, particularly in northern Europe. And that has been a nice story of success for us. So it's hundreds of millions for us globally. It appears strong.

The coal-fired plants I'm forgetting because I'm not an expert, but I'm guessing there is $1 million to $4 million worth of cable in a new coal-fired plant and a nuclear plant may have sort of the same type of cable demand.

So it's interesting, it's important. We have some great partners. We've won a lot of those plants and plan to continue to win that. So we work with often distributor partners in tackling the entire bill of goods for those plants.

And again, as we've said in the past and will say again, with PDIC broadly speaking with companies -- 45% to 50% of our products go from anywhere to exploration, generation, production, transmission and distribution of energy. So we like that, and we are well organized to do that well globally.

Rick Shobin - Analyst

Okay, okay. I also have one more question. I understand PDIC has a big emerging-markets presence, and in speaking with companies like AES and Ashmore Energy and International Power, when they talk about the development of their emerging markets grid, some of their biggest growth drivers come from the distribution segment, but not distribution within city but distribution to rural areas where there isn't a current infrastructure to actually get the energy to where it's needed.

And what is the opportunity that you guys look at from that perspective, as well? And I mean, where do we stand in that part of the cycle?

Greg Kenny

Well, that's a great question. We've talked about Luz Para Todos, which is the program to bring lights to all in Brazil, as an example where we are one of the three most important manufacturers of energy cable in Brazil. You know, that always depends on government funding and conviction to do this but they continue to do this in cycles.

And again, to the earlier comments I'm made, we're talking about mortgage markets being written for the first time. We're talking about electricity coming to these places for the first time. You know, these are 1 kilovolt, sometimes 5 kilovolt products.

But Mathias, do you want to add anything on that I emphasis again. Mathias Sandoval, who is the Executive Vice President of General Cable and of course, is also President of PDIC.

Mathias Sandoval

Thank you, Greg. Yes. I would say that we continue to see a strong investment in product rectification, as you correctly mentioned not only in Brazil with the Luz Par Todos program but also with the Provincial Electricity Authority in Thailand, also some expansion in Africa both in South Africa and Zambia and clearly in the areas of the north part of South America and Central America.

We continue to see a very healthy and robust market for our rural electrification products, which are basically aluminum insulated that can go from 1 kilovolt, as Greg mentioned, all the way up to 35 kilovolts, depending on the size of the grid.

Greg Kenny

Just to remind our investors, PDIC would be number one in South and Central America and doing business up into Mexico with respect to energy products and they would be very strong, one of the leaders in Southeast Asia.

They are also in China, but a leader in really in Southeast Asia and then would be among the top three in sub-Saharan Africa. They are also trading heavily into the Middle East from a number of their facilities.

And again, to remind everybody they are trading into 45 countries from there roughly 11 manufacturing locations, maybe the best in the world at doing that.

Rick Shobin - Analyst

I apologize because I have one more question. I'm sorry, if I keep asking -- if I ask too many, but, given -- in life of what's happened in California with all of the California wildfires, I understand that there's a lot of issues with regards to distribution and transmission lines just up and down the coast.

I was wondering if you've started to see any sort of impact from that? When do you think that you may wind up seeing something?

Greg Kenny

Well, I guess halfway, Sempra Energy is a key partner of our San Diego Gas and Electric and happily they didn't lose -- it was primarily, the part that was with fire was underground and there wasn't that much network loss, which is a good thing.

But again, we have to be very responsive whenever there's an issue, whether it's a blackout in New York or other things as we have these alliance customers. There's a separate issue of really the power moving up and down the grid on the West Coast, which are -- there's many projects being discussed.

The governors came together. Mike Andrews, do you want to add anything to that?

Mike Andrews

Yes. Just that we work very closely with several customers on the West Coast and are in very close contact with them in terms of the impact of the wildfires as they get those wildfires under control and get an opportunity to go and assess the damage.

We are sending wildfires with both product and reserve products capacity to meet whenever needs they might have.

Rick Shobin - Analyst

Thank you, guys very much.

Greg Kenny

Yes. This is not something that -- well, the fire is won't change the economics of the business, which is I think a happy outcome. Meaning there's not that much damage.

And it really points to a lot of the utilities putting more expensive cables, underground cables in, as they are more resistant to obviously wind and weather-related stress or fires.

So that long-term trend to underground, the network, is a good thing.


Your next question comes from the line of Lanette Donovan.

Lanette Donovan - MacKay Shields

It's been answered. Thank you.


Your next question comes from the line of Nate Kohlhoff.

Nate Kohlhoff - HVB Corporates

Hi, guys. Just -- I'm sorry to keep pounding away on this sort of Q4 stuff, but I'm just trying to make sure I understand what you guys are saying.

The guidance that you guys have given us includes all the purchase accounting charges that you guys expect to take, but you're not sort of comfortable giving us a number for what those might be just because you are not exactly sure how they all are going to shake out.

Is that a correct way to look at it?

Brian Robinson

That's correct. That's right.

Greg Kenny

But, Nate, I think you can look, we did say that we thought with our estimates of purchase accounting, that, to the extent that you can look at PDIC, we've taken them up to a $0.40 or $0.50 accretion.

Nate Kohlhoff - HVB Corporates


Greg Kenny

And on a annual basis. And again, this is not a stationary target, but we're feeling really good about their business and very good with the quick integration that's occurring now, as we speak between our companies.

Nate Kohlhoff - HVB Corporates

Got you. And that really that accretion really -- that's obviously a 2008 type of time that we are looking?

Brian Robinson

Yes. Though, you know, if we -- it certainly they would be at $0.08, they would be in that zip code $0.08 for two months. Again, we closed last night, so we will have that business for November and December.

Nate Kohlhoff - HVB Corporates

Okay. All right, that's all I've got; I appreciate that. That's helpful. Thanks.


(Operator Instructions) At this time, there are no further questions. Are there any closing remarks?

Mike Dickerson

Well, thank you, everyone, for joining us this morning. That concludes our call. A replay of this call will be available on our web site later today. Everyone have a good day.


Thank you. Ladies and gentlemen, this does conclude today's General Cable Corporation third-quarter 2007 earnings conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!

Source: General Cable Corp. Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts