General Cable Corp. Q3 2007 Earnings Call Transcript

Nov. 1.07 | About: General Cable (BGC)

General Cable Corp. (NYSE:BGC)

Q3 2007 Earnings Conference Call

November 1, 2007, 8:30 am ET

Executives

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 AmericaInfrastructure and Technology Group

Analysts

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

Operator

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

This conference call is being recorded at the request ofGeneral 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 thirdquarter 2007 earnings conference call. I'm Mike Dickerson, Vice President ofFinance and Investor Relations at General Cable.

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

Many of you have already seen a copy of our press releasefrom last night. For those of you who have not, it is available on First Calland on our website, generalcable.com. I want to call your attention to our SafeHarbor provision for forward-looking statements that can be found at the end ofour press release.

The Safe Harbor provision identifies risk factors that maycause actual results to differ materially from the content of ourforward-looking statements. Our current Form 10-K report on file with the SECprovides further detail with regard to the risk factors related to ourbusiness.

During this call, we may refer to adjusted operating incomeand adjusted EBITDA, which is defined as earnings before interest, taxes,depreciation, amortization, plant rationalizations and other restructuringitems.

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

A reconciliation of adjusted operating income and EBITDA toGAAP net income and some additional segment details will be available on theInvestor Relations section of our website at generalcable.com later today.

The format for today's call will first be some discussion byGreg Kenny about the overall business environment and our performance for thethird quarter. Secondly, Brian Robinson will discuss additional financialdetails for the third quarter. And finally, Greg will provide some comments onthe 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 thecompany made a transformative decision to pursue investment in energy andinfrastructure. Our first step in that strategy execution was the purchase ofBICC.

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

More recently, the company made investments meant to provideadditional growth in the coming years, specifically CLECs extra high voltageunderground systems business and NSW's submarine fiber optic and power cablebusiness.

I am pleased that these long-term investments have beenimproving faster than we originally estimated, aided by improving globalmarkets 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 completedanother transformative event. That is the acquisition of Phelps DodgeInternational Corporation. This transaction will significantly expand ourglobal footprint, accelerate our global expansion plans by many years andenhance General Cable's revenue and earnings growth due to PDIC's participationin faster growing developing economies.

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

The company continues to enjoy strong demand for many of itsproducts globally. In the third quarter, the company reported revenues of morethan $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 aluminumcontent of our products, overall metal pounds sold were up 6.3% in the thirdquarter, 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 theimpact of acquisitions, metal pounds sold were down 1.3%.

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

Telecommunications and construction cables tend to have ahigher-than-average level of metal content as compared to the company's overallproduct range. The company's product range includes cables that have verylittle 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 bareoverhead utility cables, which have no outer jacketing materials, as well astelecommunications 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 2006on a metals-adjusted basis.

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

Operating margin has increased by 190 basis points to 8.7%.With the exception of telecommunications products, all North Americanbusinesses reported increased revenues and earnings during the third quarter of2007 compared to the prior year.

The company has continued to benefit from its exposure to awide range of strong end markets, including electric utility, alternativeenergy, electrical infrastructure, networking and electronics, that are morethan offsetting continued telecommunications product declines and the impact ofa weak housing market on certain utility cable product families.

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

European electric utility and electric infrastructuremarkets broadly continue to remain robust with the exception of Spanishconstruction. 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 thesame period in 2006 on a metal-adjusted basis. Revenues were up 35% in thequarter on a metal-adjusted basis. Before the impact of acquired businesses andfavorable changes in exchange rates, organic growth was 7.5% despiteapproximately a 20% decline in demand for cables used in residentialconstruction in Spain.

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

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

This cable effectively provides about 75% more capacitycompared to a similar-sized cable of a traditional design, perfect for thecongested right-of-ways in Europe. Concurrent with the closure of the PDICtransaction, the company has announced several management changes effectiveNovember 1, 2007, which will align the company's management structure alonggeographic lines.

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

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

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

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

Roddy Macdonald has been quoted to Executive Vice Presidentof Global Sales and Business Development. In addition to leading our NorthAmerican sales organization, Roddy will work with our business and salesleaders around the globe to align our commercial strategies and ensure that wepresent one face to global customers across all regions and businesses.

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

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

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

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

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

Brian Robinson

Thanks, Greg. With respect to the third quarter, I willfirst walk you through the significant items impacting the company's resultsfor the quarter. Net sales of the company's global electric utility productswere up 23% on a metal-adjusted basis from the third quarter of 2006, includingapproximately 8 percentage points of growth related to ECN, which was acquiredlate in the third quarter of 2006.

Operating earnings for the company's global electric utilitybusinesses increased 38% to $40.4 million in the third quarter of 2007 versus2006. As a percentage of metal-adjusted revenues, operating margins grew about100 basis points to 9.2% in the third quarter of 2007.

The continuing strength of the company's global electricutility business, as well as favorable foreign exchange translation, more thanoffset the impact of declining residential construction demand on certain lowvoltage and small gauge sized medium voltage cable demand in the third quarterof 2007 in the United States.

Net sales of the company's global electrical infrastructureproducts 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 electricalinfrastructure business increased 41% to $27.7 million in the third quarter of2007 versus 2006. As a percentage of metal-adjusted revenue, operating marginsgrew about 80 basis points to 7.2% in the third quarter of 2007.

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

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

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

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

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

Operating margin in the networking segment has improved to620 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 orapproximately 20% on a metals-adjusted basis versus the prior year. As Gregmentioned earlier, we are evaluating the opportunity to modify the productionmix in general cable's Mexican telecommunications products facility.

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

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

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

Additional year-over-year net savings resulted from highercash balances in the third quarter of 2007 compared to the third quarter of2006. Included in the earnings results for the third quarter of 2007 wasapproximately $0.08 per share of tax benefits resulting from prior-year taxprovision true-ups.

In addition, the 2007 estimated full-year effective tax ratehas been reduced to 36% as a result of the increasing relative mix of incomegenerated in lower tax rate countries and the impact of effective tax planningstrategies.

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

With regard to the balance sheet, total debt for theCorporation was approximately $822 million at the end of the third quarter of2007. Net debt at the end of the third quarter was $342 million. This isapproximately $88 million less than the December 31, 2006 net debt balance ofapproximately $430 million, reflecting strong operating earnings, partiallyoffset by investments in inventories, higher receivables from increasingrevenues, capital expenditures, several acquisitions, and the bond tender premiumand fees.

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

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

Pro forma for the PDIC transaction completed yesterday, thecompany maintains adequate liquidity to fund its working capital requirements,as well as other possible acquisition transactions, which includes cash on handand 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 leverageratio of 0.9 times on a net debt basis. Assuming the PDIC transaction closed infull as of the end of the third quarter of 2007, net debt to trailing EBITDAwould result in a leverage ratio of only approximately 2.7 times without thebenefit 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 ninemonths of 2007, the company has invested $73.9 million. This spending is overweighted internationally, specifically for the electrical infrastructure andelectric utility markets.

The company's capital spending rate is approximately as weestimated with the exception of plans to expand in India. These plans have beenbriefly suspended as we evaluate the opportunity to leverage existing PDICassets in the region to accomplish a more significant market position at lesscost.

The company is continuing to invest in key areas such asglobal infrastructure and submarine power markets. Due to the planned deliveryof equipment and maintenance schedules around the holidays, which are also usedfor capital installations we expect a higher capital expenditure in the fourthquarter between $50 million to $60 million.

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

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

Greg Kenny

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

Additionally, NERC suggested that planned transmissionprojects are significantly higher than projected a year ago. The companybelieves this assessment supports our view of a continuation of a long-termupgrade cycle for the aging transmission grid.

However, demand for low-voltage utility products in NorthAmerica will likely continue to be weak as a result of continued new homeconstruction weakness. As a result, we expect growth in the overall utilitysegment to moderate.

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

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

While releasing the fourth quarter without PDIC, reflectedto be approximately 1.05 million and increase of 12% from the fourth quarter of2006 on a metal adjusted basis.

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

I will caution you, that the purchase accounting relatedadjustments are very early estimates at this point, which we expect to pullthem up over the next couple of months. Looking forward, we are increasing ouraccretion 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 continuingstrength of PDIC's end markets.

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

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

Question-And-AnswerSession

Operator

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

Jeff Beach - StifelNicolaus 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 amonginvestors about the electric utility cables. You had another great quarter herewith very strong growth. Can you talk a little bit, break down the geographiesand talk a little bit more about the trends in Europe looking out into 2008 ingeneral, the emerging countries whether you are seeing this very strong growththat’s, that Phelps Dodge is experiencing, is that going to continue?

And then in particular in North America where you are citingthe weak demand for your low-voltage cables and I'd like to hear a little bitabout what you think the overall trend in spending is, in particular what I'mhearing from contractors is that where there is weak demand for, at the verylocal level for residential housing, that many utilities are continuing tospend and just moving their spending plans up into medium-voltage andhigher-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 thisweakness? Thanks.

Greg Kenny

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

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

But again, a lot of analysts write about transmission, whichis 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, isone that has a long-term investment cycle.

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

So that's the case in the US but our view on the overallinvestment pieces around infrastructure is a strong one. We happen to define itas 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 heavilyinvesting in the whole European continent in infrastructure. We have seen avery strong trend in the medium-voltage and high-voltage. We haven't reallyseen a housing impact in part, perhaps because housing grew so quickly inSpain, they are just -- they just have amount of work to do on themedium-voltage side to make sure they have enough headroom with all the peoplethey put online.

But we've seen it in general stronger and really not exactlyfollowing the US in part, as you know, housing in France and -- Germany wasvery, very weak and has been weak. So Europe seems to be staying togetherincluding the low-voltage side. And again, we have a very big position on thehigh-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 Ithink, in the last year Colombia began to have a market that actually allowedyou to finance a house.

So in where Mathias operates, I would say it's theindustrialization and bringing electricity, perhaps for the first time is farmore important than necessarily a housing cycle which really per se doesn'texist 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 forhis medium and higher-voltage cables. He's also benefiting with a high demandfor 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 energyinfrastructure business if you will, going forward given the acquisition ofPDIC. So, we should be really thinking about this in geographic buckets.

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

We are aiming in nicely and as you know, we have a lot ofdifferent looks at the European market because of the acquisition activitywe've done. So we feel good about those segments and we just continue tobelieve North America and the transmission will be strong and that the citieswill 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.

Operator

Your next question comes from the line of Stuart Bush.

Stuart Bush - RBCCapital Markets

Good morning Greg.

Greg Kenny

Good morning Stuart.

Stuart Bush - RBCCapital Markets

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

Greg Kenny

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

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

Stuart Bush - RBCCapital Markets

So there are several one-time costs on that inventorystep-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 someone-time charges around the step-up, the sale of existing inventory that wasbuilt prior to our acquisition, which is some cents.

Brian Robinson

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

Stuart Bush - RBCCapital Markets

Yes. I understand.

Greg Kenny

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

Stuart Bush - RBCCapital Markets

I know you mentioned that the PDIC impact for 2008. You givemore clarity on how it affects the tax rate, but directionally, would it likelydrive 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 - RBCCapital Markets

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

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

Greg Kenny

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

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

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

Stuart Bush - RBCCapital Markets

Okay, fantastic. And Lastly --

Greg Kenny

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

Stuart Bush - RBCCapital Markets

Right. The last question is, in regards to your commentsabout the telecom business in Mexico. I know you're talking about your optionsthere. The business is profitable but it seems like it's a faster decliningmarket. 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 thisbusiness is worth more to us than anybody else. It's at the core of thecompany, we're very good at it. I think -- as I said, it has declined at a higherrate than we anticipated but we also view that there will be some maintenancelevel, which we are probably rapidly approaching.

We are down to part of our Tetla, Mexico facility, focusedon that as well -- and part of it. The other part is really service wire, andthen about two-thirds of our Lawrenceburg facility. So our thinking is that wecertainly have growing businesses throughout South and Central America andcertainly in the data cable area, which is something that Phelps Dodge has notbeen in.

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

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

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

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

Stuart Bush - RBCCapital Markets

Great. Thanks a lot, guys.

Greg Kenny

Okay.

Operator

Your next question comes from the line of CelesteSantangelo.

Celeste Santangelo -Merrill Lynch

Good morning.

Greg Kenny

Hi, Celeste.

Celeste Santangelo -Merrill Lynch

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

Brian Robinson

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

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

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

Celeste Santangelo -Merrill Lynch

Okay. So then, ex-ing out the production -- the pull-back onthe production levels for the low voltage, what kind of levels do you expect itto 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 withPDIC. So that’s where we're processing somewhere around 1 billion pounds ofcopper a year and something in the 500 million or 600 million pounds ofaluminum.

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

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

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

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

We also know petrochemicals are -- the oil prices arethrough the roof. That will impact petrochemical pricing, which is againsomething 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 apercent of revenue, so as to call it 6% to 7%.

Celeste Santangelo -Merrill Lynch

Okay, great. Thank you.

Operator

Your next question comes from the line of Will Stein.

Will Stein - CreditSuisse

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. Youreiterated that guidance when you did the -- when you announced the PDIC dealand 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 theend of the quarter to cause the earnings to be materially higher than thisguidance level? What's going on with that and also, with the current quarteryou're also guiding well below consensus, is this just material conservatism oris there something else going on that I don't understand?

Brian Robinson

Yes. Well, I think the, a couple of thoughts on the thirdquarter credits again, starting with the headline of $1.11 we talked about whatwe 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, wethink some good tax-planning strategy, so that was for the first six monthsprobably worth about $0.04 in the quarter.

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

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

Greg Kenny

Yes. I'd like to think of the tax as earned but you can'ttake it until you've done the returns and had them accepted, etcetera. So wethink with this global mix of businesses and some of the lower tax rates inthese countries that's something we will keep driving but we're just above thatwe 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 thiscase, it's a small number but it's still $0.03 a share or something.

Will Stein - CreditSuisse

That’s fine. Okay. So in the coming quarter I understandthat of course the purchase accounting rules force you to mark up the inventorythat you are acquiring to market, right and you are accounting for it under theLIFO 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 ifyou were actually manufacturing that product and do you expect it to impact thecompany in future quarters?

Brian Robinson

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

Having said that, we're not yet prepared to give you thatnumber the reason being there's a lot of complexities that go into it. Thevaluation on the tangible assets and the intangibles are very much at an earlystage and so we have tried to again be helpful to provide the guidance in ourown 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 - CreditSuisse

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

Brian Robinson

Right. Well, that’s includes those impacts; it includes anassumptions 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 justhave to finish that work we made an assumption around that.

Will Stein - CreditSuisse

Okay.

Greg Kenny

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

Will Stein - CreditSuisse

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

Brian Robinson

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

And as we said, although the utility business has got a fairelement of which is aluminum-based there maybe more LIFO gains in the fourthquarter 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 fixedassets as well as the elimination of absorption of inventory that was builtprior to the acquisition that will be sold, say, in November or December, whichis again, an accounting exercise and we don't know all of that yet, but we'vehad to make some estimates.

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

Will Stein - CreditSuisse

Thank you. Just one more quick one. I'm wondering if you cangive us a clue as to the PDIC margin in the September quarter. I know that youdidn't own that business as of that time, but can you comment on what thestand-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 aswe said, when we were out on the road financing this, that they were similar toGeneral Cable though probably higher if you take out their -- they have a bigbusiness which is a very useful asset they have, but they are and then lot ofthese developing countries.

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

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

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

Will Stein - CreditSuisse

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

Greg Kenny

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

Again, we think we make money on the value added, and youare pricing to constraints and everything else in this business. But they have-- there was also obviously Freeport -- purchase accounting and hedgingpolicies 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 startcomparing this by quarter, considering this multiple owners and a lot ofdifferent accounting that's tied to this.

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

Will Stein - CreditSuisse

Thank you very much.

Operator

And you do have a follow up question from Jeff Beach

Jeff Beach - StifelNicolaus and Company, Inc.

Yes. Coming into the third quarter, you had talked aboutlikely reducing some inventories, and there was a LIFO gain. Outside of that,can you quantify the inventory reductions and just talk generally about thenegative impact of unabsorbed plant overhead on the operations? And then maybejust in general, what kind of inventory reductions are you looking for in thefourth 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 saidyear-to-date from an overall perspective, we've generated about $150 million ofoperating cash flow. Broadly, from an inventory perspective, we've taken outabout $20 million of inventory year-to-date.

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

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

Jeff Beach - StifelNicolaus and Company, Inc.

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

Brian Robinson

In the third quarter, actually inventory was up slightly.

Jeff Beach - StifelNicolaus and Company, Inc.

Okay.

Brian Robinson

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

Jeff Beach - StifelNicolaus and Company, Inc.

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

Greg Kenny

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

Whenever I'm trying to constantly match, increase myinventory 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-Commercereplenishment, 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 sideof the business, which is in North America, and that we will continue to slowdown 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 ofmaking inventory, unless I think that I'm placing a bet on demand that's notyet apparent but I'm going to make a judgment that I need to have it. As youknow, there has been times when we've run right through when we haven't seenspecific demand but we knew we had to go run through the slow period inanticipation 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 fourthquarter than the third quarter, which is both seasonal as well as purposeful.

Jeff Beach - StifelNicolaus and Company, Inc.

All right, thanks.

Greg Kenny

Okay. You are welcome.

Operator

At this time, I would like to remind everyone (OperatorInstructions). 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 talkeda little bit about the potential transmission opportunity in the US on thelarge-scale projects, but I was wondering. I'm sure that will be very positivefor you guys when it happens.

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

And also, when you look at how people are going to start tobuild out nuclear plants and how much cable needs to be put in for those, andthen 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 bigis cable for wind farms, but it's big. We are one of the leaders in the worldwe may be the leader. It's hundreds of millions, and it has been a quiet andhappy story. It's mostly medium-voltage cable. I think you also know we boughtNSW. One of the primary reasons was because of their undersea expertise andtheir ability to partially address that market.

We are investing to fully address that market because we seeoffshore wind farms as being a very good answer for a lot of countries in theworld, particularly in northern Europe. And that has been a nice story ofsuccess for us. So it's hundreds of millions for us globally. It appearsstrong.

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

So it's interesting, it's important. We have some greatpartners. We've won a lot of those plants and plan to continue to win that. Sowe work with often distributor partners in tackling the entire bill of goodsfor 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 fromanywhere to exploration, generation, production, transmission and distributionof 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 PDIChas a big emerging-markets presence, and in speaking with companies like AESand Ashmore Energy and International Power, when they talk about thedevelopment of their emerging markets grid, some of their biggest growthdrivers come from the distribution segment, but not distribution within citybut distribution to rural areas where there isn't a current infrastructure toactually get the energy to where it's needed.

And what is the opportunity that you guys look at from thatperspective, 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 ParaTodos, which is the program to bring lights to all in Brazil, as an examplewhere we are one of the three most important manufacturers of energy cable inBrazil. You know, that always depends on government funding and conviction todo this but they continue to do this in cycles.

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

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

Mathias Sandoval

Thank you, Greg. Yes. Iwould 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 programbut also with the Provincial Electricity Authority in Thailand, also someexpansion in Africa both in South Africa and Zambia and clearly in the areas ofthe north part of South America and Central America.

We continue to see a veryhealthy and robust market for our rural electrification products, which arebasically 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 ourinvestors, PDIC would be number one in South and Central America and doingbusiness up into Mexico with respect to energy products and they would be verystrong, one of the leaders in Southeast Asia.

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

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

Rick Shobin - Analyst

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

I was wondering if you've started to see any sort of impactfrom 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 ourSan 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 networkloss, which is a good thing.

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

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

Mike Andrews

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

We are sending wildfires with both product and reserveproducts 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'tchange the economics of the business, which is I think a happy outcome. Meaningthere's not that much damage.

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

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

Operator

Your next question comes from the line of Lanette Donovan.

Lanette Donovan -MacKay Shields

It's been answered. Thank you.

Operator

Your next question comes from the line of Nate Kohlhoff.

Nate Kohlhoff - HVBCorporates

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

The guidance that you guys have given us includes all thepurchase accounting charges that you guys expect to take, but you're not sortof comfortable giving us a number for what those might be just because you arenot 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 thoughtwith our estimates of purchase accounting, that, to the extent that you canlook at PDIC, we've taken them up to a $0.40 or $0.50 accretion.

Nate Kohlhoff - HVBCorporates

Right.

Greg Kenny

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

Nate Kohlhoff - HVBCorporates

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

Brian Robinson

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

Nate Kohlhoff - HVBCorporates

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

Operator

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

Mike Dickerson

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

Operator

Thank you. Ladies and gentlemen, this does conclude today'sGeneral Cable Corporation third-quarter 2007 earnings conference call. You maynow disconnect.

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