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Executives

Mike Dickerson - VP of Finance and IR

Greg Kenny - President and CEO

Brian Robinson - CFO

Analysts

Stuart Bush - RBC Capital Markets

William Stein - Credit Suisse

Jeff Beach - Stifel Nicolaus

Nat Kellogg - Next Generation

Brett Levy - Jefferies & Company

Steve Gambuzza - Longbow Capital

General Cable Corp. (BGC) Q1 2008 Earnings Call April 30, 2008 8:30 AM ET

Operator

I would like to welcome everyone to the General Cable Corporation's first quarter 2008 Earnings Call. (Operator Instructions)

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

Mike Dickerson

Thank you, Rachel. Good morning, everyone, and welcome to General Cable's first quarter 2008 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, Brian Robinson, our Chief Financial Officer, and Bob Siverd, our General Counsel.

Many of you have already seen a copy of our press release from last night. For those of you who have not, it is available on First Call, and on our web site at generalable.com.

I want to call your attention to our safe harbor provision for forward-looking statements that could be found at the end of our press release. 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. These non-GAAP company defined measures are being provided, because Management believes it is useful in analyzing the operating performance and cash flow, before the impact of various reorganization and other charges. A reconciliation of adjusted operating income and EBITDA to GAAP net income is available on the Investor Relations section of our website at generalcable.com

The format for today's call will first be some discussion by Greg Kenny about the overall business environment and each of our reported business segments for the first quarter. Secondly, Brian Robinson will discuss overall financial results for the first quarter. And finally, Greg will provide some comments on the company's second quarter 2008 outlook, followed by a question-and-answer period.

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

Greg Kenny

Thanks, Mike, and good morning. General Cable has gotten off to a strong start in 2008, earnings per share of nearly 20% from last year, despite economic turmoil in the United States. Clearly, those companies with strong international exposure are outperforming our US focused counterparts. With approximately 70% of General Cable's revenue base now outside in United States, I believe we are well positioned to continue to capture the infrastructure growth that is taking place around the world.

In the first quarter, Europe, North Africa, and the rest of the world outperformed their first quarter internal business plan. Improving performance in our European acquisitions helped to offset the impact of a weakened Spanish construction market.

Within the rest of the world, only the Oceana region lagged. Strong performance in certain product lines in North America could not offset weaker than expected electric and telecommunications utility spending.

On a consolidated basis, net sales for the first quarter of 2008 were $1,568.4 million, an increase of $460.5 million or 41.6% compared to the first quarter of 2007 on a metal adjusted basis.

First quarter 2008 operating income was $115.3 million, compared to operating income of $91.1 million in the first quarter of 2007, an increase of $24.2 million or 26.6%. Operating margin was 7.4% in the first quarter of 2008, a decrease of 80 basis points from the operating margin percentage of 8.2% in the first quarter of 2007 on a metal adjusted basis. And earnings per share for the first quarter was $1.21, well ahead of our guidance for the quarter of $1.05 or better than the prior year adjusted earnings of a $1.01.

In Europe, electric utility and electrical infrastructure markets remained strong, offsetting the impact of Spain’s weaker construction market. The company’s internal investments in Europe for submarine power cables, long-haul submarine fiber optic communications systems, high voltage underground cable systems, and products for the oil and gas industry continue as planned.

The company was recently awarded its first submarine wind farm project, as well as its first repeatered long-haul submarine fiber optic communications link. Combined, these projects will contribute over $70 million in revenues in the second half of 2008, and the first half of 2009.

The strength in the company's rest of the world segment is broad based. The rest of the world segment includes businesses with leading market positions in Central and South America, Sub-Saharan Africa, Oceana and the Pacific Islands, as well as positions in Southeast Asia, China and India. Revenue in this segment was up $432.4 million versus the prior year, principally related to the acquisition of PDIC, which is complete during the fourth quarter of 2007.

Continuing strength in developing regions of the world are being driven by high levels of constructions and mining activities, as well as programs to bring electricity further into the rural areas various of the countryside, such as Brazil's "Lights for All" program. Additionally demand is strong for infrastructure products in the Middle East and India, supplied from operations in Thailand.

Energy generation and transmission problems in Southern Africa have been well publicized in the last couple of months. Our business in Zambia was also affected by a major utility provider's decision to limit power in the region. This resulted in several weeks of lost production in certain product lines. The company is currently installing backup power generation on site that will effectively allow us to run at above three-fourths capacity in the event that power is not available in the future. We expect this investment will be complete by the end of the second quarter, and can prove to be a competitive advantage, as we expect this high growth region's power market to be under pressure for a long time.

In North America revenues decreased 9.9% in the first quarter, compared to 2007 on a metal adjusted basis. During the quarter demand for electrical infrastructure products, as well as networking, assemblies and infrastructure related specialty products remains strong.

Outside plant telecommunications cable demand continues to fundamentally decline, as previously discussed, exacerbated by weakening overall residential construction.

Utility cables supporting the US construction markets, specifically low voltage and small gauge sized medium voltage cable were down sharply as a result of the 37% decline in US residential construction starts, as recently published by the US Department of Commerce. These products did not begin, and that negatively affected the company's growth rates meaningfully until the third quarter of 2007. Demand for these products has improved sequentially in the first quarter of 2008, compared to the fourth quarter of 2007, and should improve sequentially again in the second quarter of 2008, due to the seasonal nature of construction spending in North America. We expect demand for these products to recover with the residential construction cycle in the United States.

Demand for infrastructure related utility products in North America remains strong overall, led by insulated underground products, supporting the backbone infrastructure upgrade and energy generation expansion.

Demand for bare overhead transmission cable products remains largely project-driven. The timing of these projects remains somewhat unpredictable, and therefore demand for cable is lumpy or not linear, due to siding, regulatory, and environmental issues that face the electric utilities.

However, sales of aerial transmission products were down more than expected during the first quarter. This year-over-year decline was partially a result of historically high volumes of product that went towards emergency restoration work in the Midwest after severe ice storms in the winter of 2007. We believe that volumes for major transmission projects will begin to pickup as the electric utilities work through regulatory siding and environmental issues. We continue to believe the long-term fundamentals for transmission cable in North America are strong.

Investment in the company's specialty products and technology organization that began in 2004 has resulted in multiple market opportunities. The company has focused new product development on products supporting infrastructure related markets, such as oil and gas, nuclear, mining and transit, and has made acquisitions over the last few years that further support these efforts, such as NSW. The company plans to continue to invest in technology and is actively identifying product designs and material science breakthroughs that can deployed across the global organization.

I’ll now turn the call over to Brian Robinson, who'll provide further details on our financial performance for the first quarter, Brain.

Brian Robinson

Thank you, Greg. With respect to the first quarter, I will first walk you through the significant items impacting the company's results for the quarter.

On a consolidated basis, net sales for the first quarter of 2008 were $1,568.4 million, an increase of $460.5 million or 41.6%, compared to the first quarter of 2007 on a metal adjusted basis. This growth was principally due to the company's exposure to global infrastructure markets, the acquisition of PDIC, as well as favorable foreign exchange translation.

Revenues from acquired businesses contributed $443.2 million in the first quarter. Without the benefit of revenues from acquired businesses, revenues would have increased 2% on a metal adjusted basis.

First quarter, 2008, operating income was $115.3 million, compared to operating income of $91.1 million in the first quarter of 2007, an increase of $24.2 million or 26.6%. the increase in operating earnings was principally from the addition of PDIC, $3.9 million in favorable lower-of-cost-or-market inventory adjustments, strong global markets for utility and infrastructure products, and the favorable impact of foreign exchange translation, particularly in the euro, partially offset by lower demand and pricing for certain utility products in North America.

Operating margin was 7.4% in the first quarter of 2008, a decrease of approximately 80 basis points from the operating margin percentage of 8.2% in the first quarter of 2007 on a metal adjusted basis. This decline was principally due to a reduction in the North American segment profitability, resulting from lower end-user demand, and pricing for certain utility products.

Our net interest expense for the first quarter of 2008 was $12.2 million, compared to $5.9 million of net expense in the same quarter last year. The increase resulted from the issuance of $475 million of convertible notes at a 1% coupon on October 2nd, 2007, and borrowings on the company's revolving ABL. This increase in interest expense was partially offset by the net interest rate benefit of $325 million high yields bonds issued in March of 2007, which allowed us to call our $285 million high yield bonds and a net interest savings of about 200 basis points.

With regard to income taxes, the company continues to maintain an effective tax rate below the US Statutory rate, due to the continuing effect of tax rate benefit from recent acquisitions as a result of the increased relative mix of income from lower rate jurisdictions. While the company will continue to look for opportunities to improve its effective tax rate overtime, for 2008, the company currently forecasts a full year 2008 effective tax rate of 34.5%.

Total debt for the corporation was approximately $1,503.1 million at the end of the first quarter of 2008. Net debt at the end of the first quarter was $1,236.4 million. This is up by about $163.3 million from the end of 2007, principally due to the investment and working capital that is typical in the first part of the calendar year, as the company enters the construction season and capital expenditures. More than offsetting the cash earnings.

EBITDA was $136.2 million for the first quarter of 2008, resulting in $466.6 million of EBITDA for the trailing 12 months at a leverage ratio of 2.6 times on a net debt basis. This calculation includes only 5 months of trailing EBITDA for PDIC and would result in a lower leverage ratio on a pro forma basis, assuming a full year PDIC performance.

Capital spending in the first quarter was $41.6 million, while depreciation and amortization was $23.4 million. For the year, the company expects to invest approximately $200 million. This spending is over weighted internationally, specifically for the electrical infrastructure and electric utility markets, as well as new investments for Submarine Power, and Submarine Fiber Optic Communication Systems.

Initially, we are moving forward with the Greenfield facility in India, combined with our existing business in India, General Cable plans to take a position as one of the leading wire and cable companies in the country.

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

Greg Kenny

Thanks Brian. General Cable continues to look for opportunities both from an internal investment standpoint and as well as by acquisition. As it relates to acquisition, we are continuing down the path of geographic diversification that began nearly 10 years ago.

The company now has market leading positions in Central and South America, important minority investments in China and the Philippines, and an outstanding business in Thailand, which is trailing into the Middle East and India. While I believe the company is the most geographically diversified wire and cable company in the world, there are many areas of the world, where we do not fully participate, specifically the Middle East, Northern Africa, Eastern Europe and many areas of Asia. We are also looking at further leveraging our strong position in the Americas.

Today, about 30% of the company’s production capacity in Spain is exported to other markets in Europe, Northern Africa and the Middle East. With our export experience from Spain, combined with Phelps Dodge International's operations in Thailand, we've got excellent visibility into the opportunities that these regions present. We are working diligently to invest smartly into these areas, with an emphasis on infrastructure products where we believe growth rates will far exceed that of Western Europe and North America.

As an investor, you should expect that we will continue to invest resources primarily in the developing countries of the world, whether through acquisition, partnership, greenfield or brownfield investments.

The company is clearly benefitting from the strategic investments to expand in the new products and geographies, more than offsetting the ongoing weakness in certain product lines in the developed economies. Despite the weakening US economy and rapidly rising copper prices, the company expects to report second quarter earnings per share of $1.20 to $1.30 compared to adjusted earnings per share of $1.07 in the second quarter of 2007, a double-digit percentage increase on revenues of approximately $1.7 billion to $1.8 billion.

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

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Mr. Stuart Bush with RBC Capital Markets.

Stuart Bush - RBC Capital Markets

Yeah. Good morning, guys. Congratulations on the quarter.

Greg Kenny

Thanks, Stuart

Stuart Bush - RBC Capital Markets

Greg, it seems that the timing of your PDIC acquisition, has given you a much more global footprint, couldn’t have been better timed?

Greg Kenny

I agree.

Stuart Bush - RBC Capital Markets

I have a couple of quick questions. You talked about the lumpiness in project driven element on the aerial transmission market. Can you talk about how decisions would be made if needed for capacity expansions? Do you do that in advance of orders in anticipation of volume demand or is there enough time, if needed, to add capacity after projects that have already been announced?

Greg Kenny

Stuart, that's a simultaneous equation, I think, for us. We like to be careful with our capital. We don't want to overcapitalize the company or the industry. We anticipate that demand will rise for the aerial transmission cables in North America, as well as in Europe and the rest of the world.

We have the ability and flexibility in North America to make these products. I think with Phelps Dodge, we have more work at the problem. So we can attack this now from multiple locations, depending upon what markets are running hot or cold. So I would say Phelps Dodge, not only was timing good for the company, but also it has brought a lot more manufacturing flexibility. Again, they are very low cost producer and they are very good at metals transformation.

So we are sitting on a pile of capacity, but we have flexibility, we have headroom, and we know what we will do if and when this thing begins to become sustained. Again, a lot of the forecast would say this could be twice as big or three times as big for longs period of time. But again these are, as you know, complex projects. But we have enough headroom to see this thing pickup materially, and still be able to manage it and again we have now multiple sites around the world that could be competitive into the US.

Stuart Bush - RBC Capital Markets

Sure, great. And you had mentioned that you were looking at options on your old telecom telephone copper cable business. Can you give us an update there?

Greg Kenny

Yeah. For reference, the North American telephone cable market has fallen dramatically over the last five, six, seven years. We have downsized our capacity as the industry has. We went from six competitors 10 years ago, to fundamentally two in the US and Canada and as well as a Mexican producer.

We will make other products with our facility in Mexico, including continuing to make service wire, which we have separated our minds from the exchange cable side. Exchange cable is being made at one facility, at Lawrenceburg, Kentucky, which consists about two-thirds of the output of that facility. We have plenty of headroom there. We also, because some of the markets overseas that Phelps Dodge has done business in. We have capacity there that could help if we wanted to.

We saw a surge or a comeback in demand, but that capacity is spread out in different markets really for the local telephone companies, where they depend on us for small amounts of cable. But broadly speaking, we have some backup capacity, but the primary asset has been downsized, and is two-thirds at Lawrenceburg, and our Mexican facility. We are in the process of adjusting that, so that we can make products for the Northern and Central and South American region. But we don't want to be more specific than that, Stuart.

Stuart Bush - RBC Capital Markets

Okay. And then just a couple of modeling questions for Brian, if I could. First of all, Brian, is there any way you can quantify the FX impact, specially from the acquisitions that you have done in Europe and from PDIC on the quarter, number one. Number two, can you give us what the inventory levels were in the quarter? I have noticed that you guys are publishing the balance sheet with the press release as you used to?

Brian Robinson

Sure. With respect to currency, Stuart, I can guide you for the overall company for the quarter, which on the top line is about $80 million and from an operating profit standpoint, it's about $7.5 million is the beneficial impact. And with respect to the balance sheet our 10-Q is due next week and we expect to file the balance sheet with that Q.

And I think you will see some inflation in the balance sheet, you obviously see inflation related to currency. On a cash basis, inventories in the quarter increased about $30 million. The vast majority of that, actually in the emerging markets, where we see the tremendous opportunity and partly the seasonal nature of building for them, as we said in the prepared remarks, building for the construction season.

Greg Kenny

In the developing world, particularly at Phelps Dodge, they have a very slow December, particularly in South and Central America, where there is extended holiday periods. So, even further than the developed world, those markets shutdown earlier and deeper. As a result, I would say, Phelps Dodge has a very well inventory level, which obviously is part of our rest of the world segment, our key part.

And so most of the inventory increase was at Phelps Dodge and in fact we've always had something in inventory increase in the first quarter as we get ready for the peak selling season of the second quarter. But we've seen it not increase, particularly in North America and Europe, as we watch this very closely. As we talked about, we have a variety of things going on in North America. So we're keeping a very sharp eye on those patterns.

Stuart Bush - RBC Capital Markets

Great. Thanks a lot guys. Congratulations.

Greg Kenny

Thank you.

Operator

Your next question comes from William Stein with Credit Suisse.

William Stein - Credit Suisse

Thanks. First also, couple of housekeeping questions, any chance you guys could disclose to us what the cash level was at the end of the quarter?

Greg Kenny

It was $267 million.

Brian Robinson

That's right.

William Stein - Credit Suisse

Okay. Also wondering, what your guidance assuming with regard to metal pricing during the quarter, the current quarter?

Greg Kenny

If we look at it as in approximately the flat and that's been the issue for us a little bit is, when we have attempts to look at it, we'll look at it from what we know at the time we're issuing the guidance and we don't make an assumption up or down in terms of metal movement. So, it's approximately 380 to 390 now in that range hang on the month and we would have used that.

The problem for us becomes in the first quarter and this is the difficulty of guidance is, it started the quarter at 303 and ended at 386. And as you know, we are pushing more than 200 million pounds through the company of copper alone, plus we saw aluminum inflation. So that's massive numbers moving around, as well as obviously petrochemicals, which are also inflating and to some extent steel. So this is complex for us, but we're using that 380 to 390 notionally and essentially flat lined for the remainder of the quarter.

William Stein - Credit Suisse

Okay, great. And one other question, I'm looking at the presentation on your website and there is a slide that shows, I'd assume, this is percent of cost where you go through metals, other materials and then labor and overhead. Can you talk a little bit about how you think about the margin expansion opportunities or the efficiency savings opportunities more on the metal side with regard to scrap etcetera, or more on the labor side from highlight your technology and throughput? Any comments around that, how you expected to impact margins over time would be very helpful?

Brian Robinson

Sure. As you know with our Lean remanufacturing history, which we've also taken to the back roofs, what we are trying to do is obviously do more with less, have first half yields be perfect against exactly the specification as the standards. Copper with this low, and then you take the machines speeds and multiply it by the theoretical main plate and say “what could this make if it never had change over never made scrap and never shut down?” and you work backwards from there. But, where we spend a lot of time is, and Phelps Dodge has brought some skills, between the developed world, developing world on the metals where we actually are able to make the rod, which is important in those places, whether there isn't a well-developed community of suppliers for copper and aluminum rod.

But you try in the end with the metal to make the conductor size exactly as the standard says, no more, no less. In the other material and compounds, we are constantly looking at other compounds that can improve performance. Overall we've actually in some cases integrated backward in the compounding as we've done in Europe and have done in the U.S. wherein Europe we are a leader in the zero halogen environmentally. Friendly compounds, which we hope will become a standard for all of Europe.

So there is a lot of opportunity in the material science, where we are comparing, we now have 45 factories around the world and we're continuing to compare best practices around materials design. And in fact in some cases, we are providing materials say out of the U.S. all over the place that we built in Minneapolis or up in New England or at Spain to other parts of the world.

The labor, we trying to go to a soft-directed labor, where there is no supervision. We are not there yet, but that's basically small work teams that are highly interchangeable and basically have no supervision. Then lastly on the overhead, the biggest opportunity for us there is really, a big of that is depreciation and then if you get into power, right on the depreciation side, I think Phelps Dodge has brought the ability for us to understand they were very good at setting up equipment. In some cases, designing their own and sourcing it well. So again, we are leveraging their best practices around how do you do more with less around capital.

So today, there is a lot of work going on through out the company where on the manufacturing side, there we have a team on safety which is our number one priority which we're seeing best practices being shared globally, another team around purchasing leveraging global know-how and relationships in purchasing, another on Lean and then of course the commercial coordination. So those are the main levers that we are using and again, that's something that we're continually on.

North America had a very strong offsetting, in part very weak volume in the first quarter. They did very well with their Lean projects and again Phelps Dodge has brought another view to Lean and that's a great mix for our people. So they worked together last week, for example, in Barcelona, exchanging views on that. So that's what we hope to do. We don't talk. We don't put for our investors. We don't put it outside objective in terms of continuous improvement, but we have strong internal objectives and we count on it. As we've said, we need to be the low cost producer in this business over time and that's our objective.

William Stein - Credit Suisse

Thank you.

Brian Robinson

Yeah.

Operator

Your next question comes from Jeff Beach with Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Yes, Good Morning Greg.

Greg Kenny

Hi, Jeff.

Jeff Beach - Stifel Nicolaus

In North America, can you expand a little bit on sales trends among the different cable markets you serve, specifically as you went through the January, February, March and then into April into the second quarter. Was the first quarter unusually weak, and you are going to see better business generally here, whereas North America is weak and you don't see that much of the rebound. Can you just talk about some of the businesses?

Greg Kenny

Yeah, absolutely an important business and a big one is electrical infrastructure, which would include our industrial products and specialty products, some of which are actually being exported. The fact that we have a strong internal objective to export more with the weak dollar in a lot of these specialty designs and now Phelps Dodge's distribution network were trying to put load on U.S. factories, which are increasingly competitive in the submarkets.

Again, these are heavy products that really move super-regionally, but we are actually seeing the ability to do more cross selling. But electrical infrastructure remained strong. We are not seeing it. We continue to do a great job as a company. As you remember, this is a business that was, say, four years ago was losing money. It is now very successful business with some great effort on and we break it into industrial and specialty, but together it's electrical infrastructure. But that's really trending strong and we are not seeing.

I would say, it's not accelerating whereas remaining at an elevated level. Portable power control would be our rubber cord for MRO applications, for temporary power and for OEM applications, as well as electronic cable, which is industrial automation sound security and it is a business that is we're very good at and it seems to be relatively stable with probably some improvement, which is more related to us with the electronic cable business where we continue to expand that product offering and getting some terrific traction there. But that business again much like North American, electrical infrastructure is trending similar to prior year or up a bit but in the same zip code.

And then, the big networking business, North American networking is the Datacomp side of the things and that. Again we're seeing some tremendous improvement in our business the way it's being executed. Our high-end cables getting some tremendous position in the market with specification position which is obviously some of the most valuable cables you can build, when you can build unique or cable that do work better than competitors designs.

So, we're seeing I think a tremendous move by General Cable broadly there in North America, but we've had the issue of that business doesn't adjust as quickly. We wish it would adjust more quickly upward, but it hasn't. But we believe we get to catch it in the second quarter where we had metals move up, as I said from 303 to 386. While this is not as metals intensive as some businesses, it has a lot of metal in it. But we have now seen some price increase and we'll recover that.

So the top line of the demand feels good. We're picking up position probably with specifying projects with our designs, but the profit performance is trying to catch prior year, principally because we have a rapidly accelerating metal and it's taken several months to see a price increase. North American Electric Utility is basically even with prior year when you look at the medium voltage cables and that's primarily because wind farms have augmented some slight weakness I would say at the utilities.

So overall medium voltage particularly the larger size seems to be consistent with prior year. As we've said now for over a year, if you are not building the housing development, not mean to run low voltage lines through that development. So we saw that business fall in the order year-over-year of probably 30%.

And then the transmission business which we feel which is the buried and aerial with most of that being aerial. Again in that business lot's of work to be done, not so many projects released in the first quarter. But to Stuart Bush's question earlier, we still see a lot of project work. We have the flexibility to not get, I think we have the capacity to not be blind sided or miss opportunities particularly with the Phelps Dodge.

But frankly that was off all 30% to 40% from prior year. But again I don't take one quarter as that can happen in a quarter with the transmission projects because their projects as suppose to sort out their slow demand. And we see that improving in the second quarter.

The transportation and industrial harnesses side has been very consistent. I'd look at that as a sort of broad indicator of U.S. industrial activity and I'd say again, we continue to book business there and it's looks it's a consistent with prior year or perhaps even pushing up a bit some weakness and quick on harnesses for the construction sector or equipment is used in the construction industry, but everything else seems to be strong. So again fairly stable at this point.

So net-net-net, the telecommunications cable business which we talked about down materially, that's the outside voice and data or exchange cable business in part, because the long-term decline that we talked about for years now and in part, if there's no reduced housing then this reduce need for copper cable, will they still chose to use copper cable to link those networks, link those homes, that's not being used. So the big language for us were anything that was linked to housing community formation plus the transmission cable business which I look at really quite separately as an anomaly.

Jeff Beach - Stifel Nicolaus

That was a great review. Now, refer on my follow-up question, among just in North America, among these different lines, have you been able to path it to announce and implement price increases fast enough as you gone into this second quarter that you won't see much of a lag or will you think in some of your product lines, you'll see a lag and being able to recruit copper and other cost in the second quarter and it's really looking out into the third quarter before you get a full catch up?

Greg Kenny

Well, materials, as you can see, as a earlier discussion our cost matter tremendously and we have been chasing copper though clearly some distributors were thin on inventory at the end of last year and had to buy and were concerned about our running market. But largely, I would say that as we talked about in the past it's been 30 to 120 days delay.

As we talked in the past as well when utilization backs down as it has in low voltage utility cables, you hope that people will continue to try to enjoy the margins that exist in that business and be disciplined about those increases. But again with utilization dropping, you get people making their own decisions sometimes, which can hurt your ability to recover pricing.

So I think as long as capacity utilization remain strong, we have generally seen these prices get passed in over time and I hope it happens on the low voltage utility, but that will be individual decision that individual competitors will take. But utilization has dropped in that low voltage utility area as well as on the transmission cable business and that often can trigger pricing behavior problems in the spot market.

Jeff Beach - Stifel Nicolaus

Okay. Does that mean then that the utility is the primary area where you might struggle in the second quarter to recoup your costs and a lot of these other markets you think you'll be okay in the second quarter?

Greg Kenny

Yeah. As you know Jeff, half of our business has a formulaic escalator or de-escalator and approximately half and those formulas work in a variety of ways, but they true up pretty well. We're always looking for more precise expressions of that inflation, whether it's tie to announcements from the petrochemical guys or Department of Commerce state etcetera, but you're trying to get as close for your customer a proxy to the best industries for those price changes.

I think the toughest areas where we've seen the utilization back down the hardest is on the low voltage utility area. And again, we will need to recover the raw material inflation there and we will attempt to recover it. But I would say that that will be more demanding, but that we hope successful.

Jeff Beach - Stifel Nicolaus

Okay. Thank you.

Greg Kenny

Yeah.

Operator

Your next question is from Nat Kellogg with Next Generation.

Nat Kellogg - Next Generation

Hi, guys. Nice quarter. Just a quick question, sort of SG&A. Typically, I think obviously you see a little bump up in the second and third quarters from first quarter, but it hasn't tended to be a big increase. Given that you guys have PDIC involved now, does that change any or we should sort of see seasonal fluctuations on that cost side pretty similar with PDIC (inaudible).

Greg Kenny

Yeah. I don't think it changes a lot. You can see year-over-year really the step up in the absolute dollars are really related to the acquisitions. They are little bit back to the currency impact. The acquisition was not a reduction in headcount and we really have been able to leverage both the assets that came with PDIC and General Cable assets. So I would expect, again as we said that that we will be in a range of 6% to 7%.

Nat Kellogg - Next Generation

Okay. That's helpful. And then just one other question, can you guys just give us a little more detail on sort of where CapEx budget for this year, where do you guys see the spending and a little bit sense of whether it's more focused on capacity utilization or plant consolidation or where sort of the priorities lie on the capital spending side, would be great?

Greg Kenny

We've talked about a bigger year than historically this year because of some very important projects that we've undertaken. As you may remember, we brought NSW and announced that we would be investing approximately EUR40 million in the heart of that that investment and bringing that capability to the undersea area power for wind farms and oil and gas. So that's a big chunk.

We continue to work through the Brownfield, Greenfield side of things that we talked about India and we've also done some further work in the materials compounding side, where we're integrating in to areas where we think we are getting a very high return and control our own destiny. On some of the specialty compounds worldwide, we've also de-bottleneck capacity against some of the infrastructure side of the things. But I don't want to go through project by project because obviously lots of people converse into this call, so I prefer to leave it there. But I'd say that you will see us.

My guess is next year we'll have these major projects done. You'll see spending come, I'd guess come down in the developed world where we are finishing some very high return projects and primarily you'll see a Greenfield, Brownfield or possibly acquired in a developing world and pushing that free cash there as we see cash good opportunity to invest. I think you've also seen us as patient investors over time that have worked hard on assets and I think have been successful on that strategy.

So I would say this will be peak year in the developed world and you'll see us rotate more into the developing world. And as I alluded to in the conference call, we're looking at things throughout the world now and some of them we work on for years, but we clearly have a view, if you look at copper demand, which is a surrogate perhaps for industrialization and things.

Copper demand continues to increase our utilization in the developing world. I don't think it will be linear either and certainly those economies to some extent are tied to the developed world, but we are seeing some terrific opportunity. Phelps Dodge has brought tremendous know-how linguistically, culturally etcetera in finding those kinds of opportunities that sometimes are not obvious.

Nat Kellogg - Next Generation

Okay, great. And then just last question, have you guys seen at all with the cost inflation, do you guys notice at all that anytime where, you actually have lost customers, not so much to competitors but guys just start to get priced out of the market because prices have gone to a point where projects get pushed out or delayed because you just thought the cost don't sort of match with where people had originally expected them to be?

Greg Kenny

Well, cable, there is lots of rules of thumb for cable in a construction project ranging from 10% to 30%. So labor is almost always the biggest piece of any work that's done than you typically have the connectors, etcetera. We don't know for sure but it's possible that the high cost of copper in exchange cable, the telephone cable, again we are talking about under 5% of our overall worldwide business.

Nat Kellogg - Next Generation

Right.

Greg Kenny

Is that Telco’s look at their models of copper versus fiber that could contribute to the decline. We don't know that but it's in there. We watch often the aluminum versus copper trade-off for industrial projects, where they can make those trades. And of course aluminum has come up to a $1.30, $1.40 a pound. But we've seen some substitution for copper to aluminum there.

But I wouldn't say that cable per say is changing things, but we did find buyers' utilities having spend their budget earlier than they anticipated. And then needed to go back and ask for more capital. So I think it is probably there, but I don't think it's pivotal, but we did see utilities run out of budget notionally in the second half of last year. I have to go ask for more or get it in a reduced basis. So, I think it matters.

Nat Kellogg - Next Generation

Okay, great. Well thanks for taking my question and then that's all I got today guys. Thanks very much.

Operator

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

Brett Levy - Jefferies & Company

Hey, guys. Most of my questions have been answered. Can you guys talk a little bit about the geographic attraction areas that you have at this point. Similarly, you've got operation in lot of high growth areas, but where are you looking next?

Greg Kenny

Again, because this can be an open call, we are going to avoid maybe answering it specifically. But we are seeing tremendous opportunity in lot of the Phelps Dodge footprint, where they are very good at operating and some times difficult places. And so, I would say everything from rounding out our position in Central and South America to, we are trading hundreds of million into the Middle East now. But I think we would like to find a way to be on the ground in that area or may be in the ground in multiple ways. In India, we think there is a room for a cable maker marking superb product in the full range and we have acquired a small asset there and will likely build behind it everything in India is complex. So, this is taking some time.

China, we have one wholly-owned facility and two minority investments. I think China you'll see has built on our OEM business primarily at this time. We love Southeast Asia. We have a crown jewel facility in Thailand. We also have a very fine position in Philippines with a partner where we have a minority position, but I think that whole Southeast Asia Rim outside of China and India is an area of great interest. We also have very strong market positions in the Australia, New Zealand and the Pacific Islands.

Africa, there is Sub-Saharan Africa, we're good at it. We are basically backed to the copper rod and we see opportunity again, difficult place. We are also looking in the east of Europe and into the former Soviet World, not broken up into many areas. And we have some view into that through our subsidiary at Germany, NSW that has been trading in there a long time.

So I think most people would agree that we'll see a rebuilding of the infrastructure in the developed world which we love our position in Western Europe and North America. We continue to see countries getting mortgage markets for the first time and all the cable designs that we have in the developed world as these countries industrialized will actually need those designs.

So I have been general because I don't want to go through our specific strategies, but I think this is where we'll spend our time and again Phelps Dodge was one of the great assets in the world in terms of actually acting as a unified culture in 11 countries and trading into 45 countries. So what we've said to investors is we'll build behind that knowledge and expertise.

Brett Levy - Jefferies & Company

All right. And then in terms of priorities, is de-levering up there as one of them and I guess the other (inaudible) have you guys given 2008 CapEx between growth and maintenance yet?

Greg Kenny

No, we've said in the past that maintenance CapEx again with Phelps Dodge is going to be a bigger number, but maintenance CapEx is probably in the $20 million to $40 million range a thing and how do you think about it. But that's sort of a broad rule of thumb. And we don't want to get specific again about our capital projects for competitive reasons.

Brett Levy - Jefferies & Company

And then on the de-levering front, is that a priority at this point?

Brian Robinson

Yeah. I'd say we will get some natural de-levering by having a full year benefit of the PDIC earnings and so. But again if you go back to our track record we've successfully de-levered and still execute on the strategy. Again not to say that as we continue to look at global opportunities if the right decisions M&A opportunities are there, we will act on them. But we are comfortable with where we are right on the leverage perspective.

Greg Kenny

Yeah. Our EBITDA to interest payment, those ratios are very strong and favorable so and we have intentionally to look at net debt as well. So we feel comfortable. We've been at higher leverage points and we are frugal people that like to run this thing tight. But we're opportunity driven rather than I'm not uncomfortable and again we have extraordinary geographic diversity. And if you think about it, we have three regions producing roughly or approximately, again it depends upon where you are in the cycle.

But three regions have roughly equivalent size and roughly equivalent operating earnings and these regions are big and complex. So as we continue to expand both product range and geography, you feel better and better and say focused on our knitting, you feel better and better about your ability to, your consistency continues to improve. As you know, we are historically very tied to the U.S, 10 years ago that was 95% of our revenue base around a couple of products. So we have come a long way.

Brett Levy - Jefferies & Company

Thanks very much guys.

Greg Kenny

Yeah.

Brian Robinson

You are welcome.

Operator

(Operator Instructions) Your next question is from Steve Gambuzza with Longbow Capital.

Steve Gambuzza - Longbow Capital

Good morning.

Greg Kenny

Good morning, Steve.

Steve Gambuzza - Longbow Capital

I was wondering if you could expand a little a little about the North American export opportunity, just may be something along the lines of how big, relative to '07 how much product you exported out or what markets, what export markets you are focused on or what product areas you see opportunity in?

Greg Kenny

Steve, again I don't really want to take it further down because it is possible for non-investors to listen to this call and I guess, we see, we have very good capabilities in data communications, that's global know-how, we are a very good electronic cable. But again exports, we are talking about in this instance exports from North America. We make a great range of industrial products, which again have a lot of unique applications and things.

So, without taking you through it I think, it's something we've got to go do and develop. We currently do export from the U.S. and we have always export from U.S., but I think it's something that, as you bring on the ground know-how, with Phelps Dodge, they can help guide those export efforts in a more material way. And in fact, you can put material on the ground and have it as part of, as we look at our global sourcing plan, I think people want quality products from General Cable, and in the logistics and supply chain are our business. So, you'll continue to see. Internally, we'll continue to integrate our 45 factories where it makes sense from the freight and tariff standpoints.

Steve Gambuzza - Longbow Capital

So I guess you've not seen based on the current strength internationally and the dollar weakness, you've not seen kind of a freight cost as obstacle that can't be overcome to drive the sales?

Greg Kenny

Well, this gets into very complex discussion. As you know a lot of the raw materials that go into cable or denominated dollars so you got, it had a tendency to, the copper has gone up as the dollar is weakened and petrochemicals are often dollar denominated so and those are the primary raw materials I think. So it's not as simple as we say, but I would say freight ranges from 2% to 6% depending on the freight root and the size globally and then tariffs can be between zero and 15%. Obviously 15% is a very big tariff. So we and Phelps Dodge are very good at looking at all that and laying it out.

And we begin to say certain countries or regions get more attracted than others, then you get to your relative cost positions of these facilities. But part of the synergies that we see in the Phelps Dodge is obviously a much stronger ability to move material in a variety of ways. Again we've always said this is in the [Maine] because of the tremendous ways and the working capital issues in the [Maine] has been a super-regional business, but we're continuing to look at that and see where we can stretch that notion.

Steve Gambuzza - Longbow Capital

Okay. That's very helpful. I guess on the telecom business, this business has been a decline for a number of quarters and in the meantime, General Cable has become a much larger enterprise to strategic acquisitions. So the drag from this business should get smaller and smaller as the business gets smaller and you've gotten larger. But now that you don't report the segment anymore, I was just wondering if you could give me a sense as to what the run rate is, where that was in the quarter? Or for the full year '07, what kind of the annual run rate in this end market is for you, so give me a sense of what is going forward?

Greg Kenny

In North America, for exchange cable it's probably in the 300 million kind of range.

Steve Gambuzza - Longbow Capital

Okay. And that's based on the run rate you are seeing in the first quarter?

Greg Kenny

I'm always headed in to do these kinds of things because this is a dynamic equation, but it's something in the 300 zip code or maybe slightly below.

Steve Gambuzza - Longbow Capital

Okay. And then finally just on North America, obviously you came off very tough comps in the first quarter of '07, which I'm sure you are aware of when you provide your outlook. Just curious how the business performed relative to expectations? It sounds like in your end market commentary you provided to Jeff, and most of the North American legacy product segments were performing stable at very high levels. Is it fair to say that business performed broadly in line with your expectations or how do things trend?

Greg Kenny

Yeah, I would say broadly in line with the exception that, I would say the transmission cable business of utility fewer projects got led. There are small projects, big projects, I would say that that was a bit weaker than we anticipated and again some of that is timing.

I would say the construction impact on utilities spending for low voltage cable was, they cut perhaps even the harder than we anticipated and the telephone cable demand was probably declined slightly more than we anticipated, which was at we anticipate decline, it was probably a stronger rate of decline.

Steve Gambuzza - Longbow Capital

Great. Thank you very much for the time.

Greg Kenny

You are welcome.

Operator

Your next question is from Jeff Beach with Stifel Nicolaus.

Jeff Beach - Stifel Nicolaus

Yeah. Greg as a follow-up, I heard on a couple of recent calls that one of the largest privately held cable companies in North America had rebuilt some equipment and had been coming into markets with a lot of volume and causing disruption in the markets that might continue for a while? Do you have any color I guess lower value added more commodity cables where you have seen this occurred here in recent months?

Greg Kenny

People are going to make their own decisions and that's why we have to be a low cost producer. But we have seen pressure on transmission projects and on low voltage utility and we've seen pressure on some of our contractual business from a competitor that seems to have business model of a mine that suits them. So in terms of how they run their business.

So without commenting on that beyond, this is what we deal with in this industry. We've only dealt with competitors which is why we have to keep getting better, why Phelps Dodge is so critical is people want to go to the wall, you go to the wall, will defend our position, our franchise. It's regrettable and lamentable when you sort of see this zero-sum game occurring, but we can play that harder and deeper than probably anyone in the world. So we'll respond when we have to respond.

Jeff Beach - Stifel Nicolaus

All right. Thank you.

Operator

We have no further questions.

Mike Dickerson

Well, thank you everyone for joining us this morning. That concludes our conference call. A replay of this call will be made available on our website later today. We appreciate your continued interest in General Cable.

Operator

You may now disconnect.

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Source: General Cable Corporation Q1 2008 Earnings Call Transcript
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