General Cable Corporation Q2 2008 Earnings Call Transcript

Jul.30.08 | About: General Cable (BGC)

General Cable Corporation (NYSE:BGC)

Q2 2008 Earnings Call Transcript

July 30, 2008 8:30 am ET

Executives

Mike Dickerson – VP, Finance, IR & Corporate Development

Greg Kenny – President & CEO

Brian Robinson – EVP, CFO & Treasurer

Analysts

Celeste Santangelo – Merrill Lynch

Michael Coleman – Sterne, Agee & Leach

Jeffrey Beach – Stifel Nicolaus & Company

Stuart Bush – RBC Capital Markets

Brent Thielman – D.A. Davidson

Nat Kellogg – Next Generation Equity Research

Brett Levy – Jefferies & Company

Operator

Good morning. My name is Brandi and I will be you conference facilitator. I would like to welcome everyone to General Cable Corporation's Second Quarter 2008 Earnings Call. This call is being recorded at the request of General Cable. Should you have any objections, you may disconnect at this time. All participants have been placed on mute to prevent any background noise. There will be question-and-answer period after the speakers’ remarks. (Operator instructions)

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

Mike Dickerson

Thank you, Brandi. Good morning, everyone, and welcome to General Cable's second quarter 2008 earnings conference call. I am 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 website at generalcable.com.

I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our press release. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our current Form 10-K report and other periodic filings on file with the SEC provide further detail about the risk factors related to our business.

During this call we may refer to adjusted operating income and adjusted EBITDA, which is defined as earnings before interest, taxes, depreciation, amortization, plant rationalizations, and other 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 the performance of each of our reported business segments for the second quarter. Secondly, Brian Robinson will discuss overall financial results for our second quarter. And finally, Greg will provide some comments on the Company's third quarter 2008 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. General Cable continues to deliver strong earnings growth in 2008, up 28% in the second quarter on an apples-to-apples basis. The trends we are experiencing today are very similar to those we have been discussing for a couple of quarters, that is weakness in the North American and Spanish markets, solid earnings growth in Europe driven by acquisitions and investment, and very strong activity in the developing regions of the world.

For the second quarter, this resulted in earnings per share of $1.37, which was ahead of both our guidance for the quarter of $1.20 to $1.30 per share, and the prior year adjusted earnings per share of $1.07. Earnings in the quarter were aided by a slightly lower than expected effective tax rate as well as stronger than expected markets in our Rest of World segment.

Our Rest of World segment continues to over deliver against internal expectations. Despite increasing raw material and energy costs, strong demand in developing regions allowed the Company to quickly recover these increases in the price of our products in the market.

High oil prices are leading to increased investment in Venezuela where the government recently announced an additional $10 billion plan to revitalize it power generation industry over the next six years.

In Ecuador, the Company will be supplying cable for a second wind farm to be built in the country following Phelps Dodge’s success in their first wind power station project in 2007.

In Chile, the government is estimating a doubling of the activity at the country’s seaports by 2020, requiring over $1 billion of additional infrastructure investment in these ports. These are just a few examples of the investments occurring in Latin America that are influencing our business. There are similar investments taking place in Africa, India, and South East Asia.

We continue to closely monitor the availability and cost of credit and governmental spending in the developing world. We remain optimistic about the balance of the year. Across Europe and North Africa, demand for infrastructure products supporting the transmission and distribution grid as well as oil and gas products remain strong. Specifically, high voltage and extra high voltage products continue to run at very high utilization levels, with demand coming from both the Middle East and Continental Europe. In hindsight, our investment in CLEC a few years ago was very timely.

This rich mix of products, combined with ongoing investments in new products and improvements in the operating results of the acquired businesses has allowed the Company to increase operating earnings in the segment by 16% year-over-year, more than offsetting the continuing decline in the Spanish construction market.

Our major investment in subsea power cable capacity is on target to be fully operational in the first quarter of next year, supported by a very healthy backlog. We have also invested in a submarine cable link joint venture, which will assure placement capacity in a very tight market.

In North America, despite steady growth in alternative energy opportunities such as wind, trends in the second quarter operating earnings mirror the first, that is, a significant decline in operating earnings versus a very strong prior year. On a year-over-year basis, North American demand, as measured by metal-adjusted revenue, decreased 2.7% in the second quarter while operating earnings were down $24.2 million.

The weakness in our North American end markets is primarily driven by the impact of declining new residential construction activity on utility cables, a continuing decline in copper telecommunications cable demand, and delays in transmission projects. In the second quarter, demand slowed more broadly and margins were pressured in the quarter compared to the prior year period across a broad spectrum of product lines in North America as a result of the weak economy and competitive environment as well as surging raw material and energy input costs.

We expect the third quarter to be more of the same with a somewhat easier comparison in the first quarter when the slowdown was first evident in 2007. Our expectations of long-term growth in investment towards the grid are unchanged and we have recently seen an uptick in project releases.

An example of the scale of work that needs to be done was announced a couple of weeks ago by the Public Utility Commission of Texas. The PUC approved nearly $5 billion of spending for new electric transmission lines to support major new investments in wind farm development, principally in West Texas. To put this in perspective, this is more than was spent just a few years ago annually in all the United States. Additionally, growth in alternative energy sources such as wind and solar will drive incremental spending in transmission lines to connect these sites to the grid.

These are important developments and support our thesis for a long-term investment cycle for transmission and distribution cable products in North America, where General Cable is a market leader.

Recognizing that many utilities lack sufficient technical resources and leveraging the worldwide reputation of CLEC cable in high voltage, and extra high voltage underground services, the Company has begun to build a comprehensive high voltage underground services capability in North America. In addition to installation, testing, and diagnostics, the Company is expanding the services provided to include failure restoration, standby link systems, and project management systems.

This is an excellent opportunity to build upon our global expertise and reputation and provide high value added services to many of our largest and most important customers in North America where service contracts have already been won.

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

Brian Robinson

Thanks, Greg. On a consolidated basis, net sales for the second quarter of 2008 were $1,742.8 million, an increase of $513.3 million, or 41.7% compared to the second 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, and favorable foreign exchange translation, all of which more than offset the 2.7% decrease in North American segment revenues. Revenues from acquired businesses contributed $478.7 million in the second quarter.

Second quarter 2008 operating income was $130.6 million, compared to an operating income of $103 million in the second quarter of 2007, an increase of $27.6 million, or 26.8%. The increase in operating earnings was principally a result of the addition of PDIC and strong global markets for energy and industrial infrastructure products, partially offsetting lower demand in pricing in North America.

Operating margin was 7.5% in the second quarter of 2008, a decrease of approximately 90 basis points from the operating margin percentage of 8.4% in the second quarter of 2007 on a metal-adjusted basis. This decline was principally due to the reduction in profitability of electric utility and communications cable products in North America. Remember as well, that PDIC has a substantial metal processing business with low margins but high return on capital. In the second quarter, $77 million of rod was sold to third parties on an OEM basis.

Our net interest expense for the second quarter of 2008 was $12.7 million compared to $6.7 million of net expense in the same quarter last year. The increase resulted principally from financing related to the acquisition of PDIC, which included the issuance of $475 million of convertible notes at 1% coupon on October 2, 2007, and borrowings on the Company’s revolving asset base facility.

Net interest expense in the quarter also increased due to interest on international lines of credit supporting operations in the Rest of World segment, and incremental borrowings in the Europe and North Africa segment related to the May 2008 acquisition of Enica Biskra. These increases were partially offset by a year-over-year reduction in interest rates on the Company’s $125 million floating rate senior notes.

With regard to income taxes, the Company continues to maintain an effective tax rate below the U.S. statutory rate due to the continuing effective tax rate from recent acquisitions as a result of the increased relative mix of income from lower rate jurisdictions. The Company is actively pursuing opportunities to improve its effective tax rate over time. For 2008, we have lowered our expected full year 2008 effective tax rate by 50 basis points to 34 percent.

Total debt for the Corporation was approximately $1,687.1 million at the end of the second quarter of 2008. Net debt at the end of the second quarter was $1,275.7 million. This is up by $39.3 million from the end of the first quarter of 2008, principally due to the acquisition of Enica Biskra during the quarter and capital expenditures, which combined, more than offset approximately $80 million of operating cash flows generated during the period. The company maintained adequate, ample liquidity around the world to meet our ongoing needs, an area of competitive strength in this environment.

EBITDA was $154.1 million for the second quarter of 2008, resulting in $503.9 million of EBITDA for the trailing 12 months and a leverage ratio of 2.5 times on a net debt basis. This calculation includes only eight months of trailing EBITDA for PDIC and would result in a lower leverage ratio on a pro forma basis assuming a full year of PDIC performance.

Capital spending in the second quarter was $51.4 million, while depreciation and amortization was $25 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 communications system, as well as a Greenfield facility in India, and conversion of our Mexican communications facility to electrical products. We expect to be building construction and infrastructure wiring cable in Mexico during the third quarter. This is a large, growing, and important market that has been under served by General Cable in the past.

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

Greg Kenny

Brian thanks. The growth we have achieved is a direct result of the continuing internal investments and new product development, acquisitions we have made over the last several years, and ongoing continuous improvement initiatives. The Company is generating about 70% of its revenues outside the United States with a high and growing portion of revenue generated in markets such as Latin America, the Middle East, Asia, and Africa.

The recent promotion of Gregory J. Lampert to President and Chief Executive Officer of North America will allow me to intensify my focus on global operating excellence, coordination, and growth. With the amount of acquisition activity over the last few years, the extreme volatility in metals prices, and reduction in the Company’s exposure to the telecommunications market, historically one of our most seasonal businesses, it’s easy to lose sight of the seasonal nature of the business.

I’d like to take just a minute to remind everybody of these patterns. Assuming relatively stable metal prices, there are really two seasonal patterns to the business, one for sales and earnings, and one of cash flow. Sales and earnings have historically tended to peak in the second quarter of the year and trail off for the balance of the year. This typically results in the second quarter being the highest sales and earnings quarter followed by the third quarter. The first and fourth quarters tend to be the lowest quarters of the year.

The peak of sales and earnings in the second quarter is driven by the higher level of industrial activity and construction, which occurs in the spring and early summer period, just prior to the vacation timeframe of mid-summer in the northern hemisphere.

Additionally, for the historical General Cable business, our plant shutdown periods are typically in the third and fourth quarters, which allow for scheduled maintenance as well as reducing output during the seasonally slower periods of the year. This results in some inefficiency, which is recorded in those periods. The addition of Phelps Dodge does not change this trend significantly. They are somewhat less impacted by the mid-summer vacations and planned slowdown seen elsewhere, however.

Cash flows are a bit different. Generally, the Company will use cash during the first part of the year as the Company builds inventory and invests in receivables through the summer peak. The Company will generally release cash during the second half of the year as inventories are reduced while demand comes down in the seasonally slower winter periods. Our balance sheet and cash flow statements, when filed in our second quarter Form 10-Q will reflect those trends.

The Company has continued to deliver significant year-over-year earnings improvement despite a challenging U.S. economic environment coupled with rapid inflation in the cost of raw materials and logistics. We expect to do so again in the third quarter of 2008. For the third quarter, the Company expects to report earnings per share in the range of $1.17 to $1.27, compared to adjusted earnings per share of $1.03 in the third quarter of 2007, an increase of 14% to 23% on revenues of approximately $1,675 million to $1,725 million.

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 the line of Celeste Santangelo with Merrill Lynch.

Celeste Santangelo – Merrill Lynch

Good morning.

Greg Kenny

Hi, good morning, Celeste.

Celeste Santangelo – Merrill Lynch

Hi. Greg, you talked about Rest of the World over delivering first expectation.

Greg Kenny

Yeah.

Celeste Santangelo – Merrill Lynch

Can you talk about the sustainability both from a sales standpoint and the margins you just reported in Q2?

Greg Kenny

Well, again, as you know, Celeste, and I think people who invest in this company realize that a good portion of our business maybe 40% or a bit more, is priced through distribution on a fairly short cycle, so pricing can change. But as I said in the conference call, we do watch knock-on effects of slowing mature economies and global liquidity, and you also know that we only take a forecast of a quarter at a time. I guess what I do want to say is we feel good about the type of activity we are seeing in the regions that Phelps Dodge serves and as you know Phelps Dodge now manages a number of the General Cable business. It’s interesting with high transportation costs, I am encouraged that we will see Central America and Mexico become perhaps more active as labor rates are not dissimilar from China and obviously the logistics cost are different. So I really like our hand in the Americas, where we are a leader and we are seeing strong governmental spending. Many countries are running positive surpluses, so very strong in Latin America. We have great opportunity in sub-Saharan Africa and things are coming together nicely as we have increased our holdings in the Philippines and have begun to pool together all our assets in that region from the Pacific islands through the Oceana then on into Thailand and India. And we are also in China, as you know. You can read about projects. We do a morning news flash around here, and there are pages of projects being announced daily around alternative energy infrastructure, particularly in the developing world, but also in the developed world. So, I feel real good about the market we see. As I said, pricing is set short cycle for a lots of our businesses, including the Phelps Dodge assets, but I am very encouraged.

Celeste Santangelo – Merrill Lynch

Okay. And then turning to subsea Q1, looks like you’ll be operational and you mentioned a healthy backlog. Is there any way to expand on projects you are seeing there?

Greg Kenny

Yeah, from time to time we announce significant ones that are either different than we have historically done. Again, we are in these businesses now, but in a modest way, and what we were doing was improving our ability to compete broadly in the product lines that would be offshore wind power to bring the wind turbines onto the shore, also short length power between islands and then lastly, the down well in the submarine area from the platform – production platform down the sea bed and then all the cables that support deepwater and mid level depth exploration. And when you look at all of that, we have north of $100 million backlog for that capacity and it’s growing. And we are seeing margins or pricing in that market as it get tight, begin to improve.

Celeste Santangelo – Merrill Lynch

Great. Thank you.

Greg Kenny

Yeah.

Operator

Your next question comes from the line of Michael Coleman with Sterne Agee.

Michael Coleman – Sterne, Agee & Leach

Can you hear me?

Greg Kenny

Yes.

Michael Coleman – Sterne, Agee & Leach

Okay. Just want to make sure. Your operating income in North America off 40%. In terms of taking restructuring or rationalizing capacity in North America, you haven’t announced that, what would cause you to do that? And since you haven’t announced that, presumably you see a path to improvement in North American, aside from easier comparisons in the back half of the year, what’s going to drive that improvement?

Greg Kenny

Well, Mike, the first quarter as you know was also down substantially. We had, in this quarter, we had copper rising throughout the quarter, so we are chasing that. We had also the tremendous effect of the other petrochemicals costs and seal and oil related cost, which every industrial company is coping with. So you’re chasing that through. And then you begin to see some open capacity in, say low voltage utility, in the industry and certainly in telephone cable. You may remember we did take down our telephone cable assets in Mexico and we announced today that we will be in the electrical cables market for a very important market, Mexico, that’s at least as big as Canada, and that we have relatively underserved. So we have, I think, been proactive in thinking through where our long-term trends are. We feel good about the transmission cable business. We feel good about the energy infrastructure investment over time. We are very busy with alternative energy like wind farm, the utilities remain soft relative to where they were, and we have seen the utility industry, electric utility industry in terms of capacity, go from sold out condition a year ago to obviously open capacity and sadly we see some breakage in price in some of the markets.

The industrial business continues to b be in MRO. Electronics, to date remains solid versus prior year, meaning more of the same. And then of course our telephone capacity today, which is where a lot of the metal decline is occurring, which is a very heavy metal intensive product. That business is now a portion of one facility. We have the right envelopes in North America. Our lean manufacturing culture and continuous improvements say we keep asking every question about waste and that goes all the way from the cost of benefits and how to improve that, to headcount, to combining jobs. But we have run this tight and I think we will see these markets – we have always said utility spend will be uneven and clearly the housing drop has an impact as well as some of the slowness in the non-resi side. But I feel good about the envelope and we are managing it very tightly and I wouldn’t say sitting here that I have a “rationalization” plan in mind. Our capacity utilization has dropped and we have seen some pricing drop, but we have the right envelopes for this market. We will continue to always look at can we get better and how, but I expect that this is a question of just continuing to do what we do, invest in improvement and look for ways to keep getting better, but I don’t have a magic bullet on this issue.

Michael Coleman – Sterne, Agee & Leach

Okay. And I think you may have referenced this in the press release in terms of the structured dynamics being different in Europe, which would lead to Europe not following North America in terms of the path that North America has taken.

Greg Kenny

Well, I don’t remember the structured dynamics but I have said is that we have done a number of acquisitions in Europe, which are in some very interesting market segments like the high voltage, and extra high voltage, which is CLEC’s strength and with also the NSW, which is an undersea capability that is obviously tied to things that some times transcend the economy because they are critical to all the things that you read about in terms of green power, or energy independence, et cetera. In Europe, we are also very good at industrial and specialized cables, as we are in North America. But I think we have invested in Europe smartly into acquisitions as well as the correct kind of capacity. We have seen CLEC’s operating margins improve dramatically. We are very excited about the capabilities of ECN, and we think they will be contributing significantly next year. I was just in Algeria, which is also part of Europe and that market is a part of our European team. And we are going to do I believe very well there and that’s now in the family and there is a lot of shared learning. So you know there is a rich mix of industrial and energy products in Europe that continue to expand in terms of margin and demand. And that has been able to offset the weakness in Spanish construction, which is down dramatically as I am sure you have read and we are the number one player in Spain for Spanish construction. Happily, we are also in France, Portugal, Germany, and Beneloux and lots of other places. But as a Company in Europe, Spain is an issue and our European performance is held back by that but has actually has improved year-over-year because of all the things I just described. But the mix in Europe is very rich around high voltage, extra high voltage, and highly specialized products, which is tied a lot of it the whole energy infrastructure, alternative energy world.

Michael Coleman – Sterne, Agee & Leach

Okay. Just one quick question and I will yield. In the first quarter you’ve mentioned that you’d exported 30% of your production capacity from Spain to the Middle East and other parts of Europe. Did that increase in the second quarter--?

Greg Kenny

I think I was trying to estimate. Spain, obviously has long been an exporter allover the world of products, particularly the specialized products. I don’t have the transcript written in front of me, but in the second quarter what I was suggesting is Spanish construction products have markets elsewhere in Europe, and we have logistics and supply chains elsewhere in Europe. So, we are able to direct some of that output into other places. But more broadly, the product made in Spain across all the product families, much of it goes elsewhere, but I don’t remember the 30% comment.

Michael Coleman – Sterne, Agee & Leach

Okay.

Greg Kenny

Or the context per se, but Spain is a heavy exporter all over the world. And we have four facilities in Spain.

Michael Coleman – Sterne, Agee & Leach

Thank you.

Greg Kenny

Yeah.

Operator

Your next question comes from the line of Jeff Beach with Stifel Nicolaus.

Jeffrey Beach – Stifel Nicolaus & Company

I’d like to have you just discuss North America a little bit more. Could you try to compartmentalize your North American sales into a couple of groups and describe about how much of the sales were in deep declines, how much of the sales are kind of sluggish, and how much of the sales are growing, and just comment on a couple of those markets? I know you mentioned industrial MRO, but can you describe particularly how much of the markets are really weak right now?

Greg Kenny

Yeah, and I think Jeff I am sure you’ve listened to Anixter and WESCO and others who are key channel partners for us. And of course the other part of this is obviously price and your ability to recover. As you know, we have said when copper was rising, we are generally chasing that rise in the marketplace, which gets tougher obviously if there is lots of open capacity. We wish not, but that’ often the case. But broadly our electrical infrastructure business, which is really for industrial and specialized cables for lots of applications that are linked to OEMs and industrials seems to be relatively stable, which is consistent with what others I think are reporting and we are obviously trying to increase exports in those areas using the Phelps Dodge distribution network and other means. Portable power and control, which is the Carol Brand, which is electronics and cord, which is used in OEM, sometimes used in job sites, and is used in factories, seems to be again relatively stable, a little sloppy, but which probably is some of the job site business. But it’s hanging in there and again we have done a great job with that. So those are sort of rolling over from prior years, probably over generalizing, but look something like that.

Networking, which is the data communications areas, is actually strong from a demand standpoint. It lagged in getting prices up, meaning the industry was slow to respond. I think they are now responding in raising prices because our data communications cost inputs were going up substantially. And that business, it seems to take a very long time to see price improvement. So that business is actually strong, but has lacked some price recovery or cost recovery.

Telecommunications is the telephone cable business, and that’s where a lot of the issue is. That has fallen again by a fair amount, Jeff. Copper pounds in the second quarter fell from close to 17 million to just over to about 12.5 million pounds. And I would say share positions are relatively stable. So, that really ties to slowdown in the utility spend, particularly as there is less developments to bring up and of course the longstanding discussion around alternative capacity on fiber optics. But we have been selling our plant down, driving inventory out of that business, and I would say that we have been very successful in pulling capital out of that business. We are down to a bit more than half a plant in a business that I think should be in a slow decline eventually reaching some plateau, probably help that housing recovers. But we have been really cutting production and pouring cash out of there, which has probably hurt the financial results even more since there was less absorption but it was the correct thing to do from a business standpoint.

North American electric utility, we are starting to see transmission projects release. The volumes are really being helped a lot by wind farm, which is offsetting weaker utility spending. Utility is obviously versus four years ago are probably paying twice as much for their cable, which is eating budget because of the cost of the raw materials, copper, aluminum, and the petrochemicals. So the utilities have a much bigger spend they face for cable and then of course they don’t have the housing for the low voltage. But I would say we are seeing some light at the end of the tunnel on the transmission side. But utility spending per se is weak. Unfortunately the price discipline has not been as good as we would wish it would be. But we are seeing good demand for alternative energy applications and seeing some hope around the transmission product project release side. So, I see this as probably moving sideways from here or maybe a bit of an improvement from where we are now. But it’s moving approximately sideways at this point with the weakness in utilities and strength of the alternative energy side and transmission just poking its head back up.

The industrial harness and transportation harness business, which is really tied a lot to our other OEM businesses, is approximately stable and similar year-over-year. So net-net, the big drop was really a softening in the North American electric utility business. In terms of price and demand, we are seeing some hopeful signs in some places and then there is telecommunications where we pulled lots of inventory out and we have seen demand relatively weak. The numbers I gave you on pounds sold is actually the sales side of this. So, it’s down materially. I think we have got ourselves, our assets promptly configured there and I am hopefully to see some rebound over time. But right now we keep pulling assets out of there and maintain our market position.

Jeffrey Beach – Stifel Nicolaus & Company

All right. That was really helpful. Now, if you turn over on North America and just give some additional description like that on the profit side. I calculated here North American operating profits down $24 million with sales only down $18 million, which says that there is lots going on that are headwinds. What I hope you could describe here a little bit is; first I think you are pulling inventories down, we don’t have a balance sheet here, but can you talk about inventories in North America and how just the inventories by themselves reductions are impacting your results. And talk a little bit more about the pricing environment and looking ahead here, are you going to reach parity in many of your products over the next quarter or two?

Greg Kenny

You bet. I thought I was being helpful, Jeff, in the last comment. You are now asking for data that I am not going to get into individual product team break-puts. But I will say just on the answer to the first question, most of the breakage in profits in North America versus prior year occurred in the electric utility business, which has been both price and volume. And the telecommunication business, which is down dramatically, impacted even more than the volume fall by reduction in inventory. We also pulled inventory out of electric utility and as you know when we slow these factories down obviously you lose a fair amount of absorption. But I would say our businesses look a lot like prior year. Networking was also down versus prior year, materially in operating income and as I said that was relative to our ability to raise prices in an increasing copper and petrochemicals environment. I think we are getting some price relief now, but the bulk of our problem has been in telecommunications and electric utility and then the rest of it relative noise.

Brian, will you talk a little bit about the inventory side?

Brian Robinson

Yes. Jeff, I would say on the inventory side, again remembering back to the seasonality from an overall Company standpoint, you will see an increase in inventories in the second quarter, which again is as you would expect. Within that as it relates to North America in the second quarter, we took out about $30 million of inventory, about two-thirds of that, again in broad rule of thumb, about two-thirds of that in the electric utility, and about a third of that in the telecommunication business. So, I think we are minding the working capital as we manage the market conditions.

Jeffrey Beach – Stifel Nicolaus & Company

And just as a final comment, is that inventory reduction going to continue ahead here through the third quarter, through the entire second half, just some thoughts there?

Brian Robinson

Yeah, sure, Jeff. I think you can think of it in the same order of magnitude in the second half. So, that’s our internal goal and how that falls between Q3 and Q4, its maybe split 50/50. But again that is very consistent with our historical patterns, and we would expect the same in the second half.

Jeffrey Beach – Stifel Nicolaus & Company

All right. Thank you.

Operator

Your next question comes from the line of Stuart Bush with RBC Capital Market.

Stuart Bush – RBC Capital Markets

Hi, good morning, Greg. Given this continuing weakness in housing in North America and the low voltage business, can you just talk about if you are positioning your capacity and your resources assuming a longer structural shift of lower demand or are you viewing this more as a shallow cyclical pull back?

Greg Kenny

Interest question. The capacity, as you know, Stuart, is not fungible, and we made a judgment that telephone cable would not come back. And for a variety of reasons was going to get to a replacement maintenance level over the next three years. So that’s what put that to the side. If housing starts stay way down, the industry is probably long low voltage capacity for utilities, which is a third of our business, and you’d have to think through how and where you make that. Right now you drop some lines, you also could look at obviously investing to convert that capacity to areas that you think maybe going the opposite direction. The bulk of our business is really tied to the whole energy infrastructure, then followed by industrial, followed probably by non-resi , which links to communications, data communications, and a few other things. So, I don’t see the housing as an unfortunate thing. I think you may be hinting they are going to stay down for a while. I think it’s really back to how we run the low voltage business, but it again, it always has an impact on everything. But it has a secondary impact on a lot of our businesses.

Stuart Bush – RBC Capital Markets

Okay. Well I guess and a more broad question. Can you discuss how and to what extent any of the financial crisis going on may impact some of these larger infrastructure projects and opportunities you are seeing out there?

Greg Kenny

Yes, Stuart, we tried through every means, which is broadly the same sources you have, unless we are tied to a specific project, to see whether these things are getting financed. As I said, we do a morning news blast around here and then we track these projects. I would say in North America, there are less projects in the industrial side than maybe we saw a year ago, but there are still projects. We watch everything from coal, the generation side of things, to public and private funds. But you are really then in a war room where you are looking at every project and seeing where they are. Some of these projects obviously come to us through distribution and then of course we are also looking at was it funded by the government, on what basis, and are they running positive surpluses, and will they finish this. But you do see if you’ll look at the Financial Times, you’ll see lots of projects talked about and occasionally you see one that gets pulled for financing. But I don’t think I have a formula that is any different than yours.

Brian Robinson

I think at the end of the long term, the thesis remains the same. I think there is also, for example in Spain where you see the government stepping in and doing some spending, which may in the end pick up--

Greg Kenny

Yeah, they jumped in on housing for low-income housing. They are trying to step up their infrastructure spend, so you are seeing fiscal tools being used by government in many cases. But, again, we are selling in 100 countries, Stuart, so I am not trying to frustrate you, but it’s a long discussion, and I don’t think we have anything other than talking to our channel partners, tracking individual products. But some get kicked out, but that happened a year ago as well. You could be waiting for everything from sighting to rate relief. A lot of the stuff in the U.S. around energy gets back into sighting and rate relief, who is going to pay for it.

Stuart Bush – RBC Capital Markets

Sure. Okay great. And we recently saw some comments out of one of your global competitors that they expect operating margins for your industry to peak in 2009-2010 suggesting that on a blended global basis that emerging market growth seems strong enough to offset some of this industrialized market softness at least for the near term. Would you agree with that characterization of what they are seeing?

Greg Kenny

Well you know, makes sense, it’s more heavily weighted to Europe and they have a bigger high voltage, extra high voltage business than we do and a bigger submarine business. So we are not exact matches. We are stronger in some markets, and they are in others. But, Stuart, I feel good, as I said earlier, about what we are seeing in the developing world. I would never claim to say it’s de-linked or operate separately in competitive behavior. If the things slow down in the developed world, some times they try to look for volume elsewhere. So you’ve got all that mix. Nexans reports operating margins broadly on a historical copper basis, meaning their reference approximately 2003 copper. So so they are using margins they are using in the cost of sales, something like a dollar copper, or something like that, $1.30, I forgot. But I feel good about our international hand. We seep opportunity everywhere, and the synergies with Phelps Dodge are great, but I am not going to get in the business of calling macroeconomics. We make bets everyday and I would say we have so many looks at different economies. And economies can respond very differently in these circumstances behaviorally depending upon what’s going in that country. So we see a whole series of micro economies around our industry and then a whole series of separate competitive behaviors. But I read what Nexans says and they broadly have the same thesis we do, which is that the developing world is spending money like crazy on infrastructure. Some of that will slow down inherently if you see a slow down in developed world, but you are still talking about good rates of growth. And the developed world is overlaying structure as they get money to do it and as they get permission to do it. I love what all the governments are coming out with today about green or being energy independent. In 10 years, these are huge cabling requirements. If you take Al Gore’s 10-year independence plan, we’ll be very busy if that’s ever agreed to and implemented.

Stuart Bush – RBC Capital Markets

Sure. Sure. All right. So, last question is we have seen you continue to make some small tuck-in acquisitions in some of these emerging markets. What else is out there that you guys really see as a good opportunity where you think you could grow some of your position more? What are you looking ahead to in an area that you would look to bolster your global position?

Greg Kenny

Well, you know, Stuart, I have said in prior calls, Phelps Dodge is very good at running both – getting paid and operating in difficult environments. They are very good at metallurgy and raw materials supply through these many rod mills that they do. They have extraordinary understanding of both joint ventures and economies. So they were part of Phelps Dodge, the mining company, for 55 years who were for most of the time not highly encouraged to build out the franchise that they had. So, they have year’s worth of ideas, and know-how. Oftentimes opportunities, that others don’t see or be somewhat fearful to tackle where you need specialized expertise. We are working on singles and doubles around the world. We are very patient. We walk away from someone that doesn’t feel right. My guess is that the industry broadly, when you talk about larger companies, probably want to continue to consolidate and we will watch that when we see good opportunity. I think our acquisition record probably speaks for itself in terms of we don’t get them all right, but I think we have been patient and good stewards of our shareholders’ money and clearly over 10 years have taken the company from a North American focus around a couple of products to one of the three leaders in the world in this business, and certainly the most diverse by product and by geography. So, we are going to keep on doing that, Stuart, and I would say we will see big opportunities, be out there, but again I think we’ll be patient around those and will continue to see lots of very nice build-outs in the order of the kinds of things we have just announced over the last quarter. So, stay tuned but we are optimistic about the kinds of things out there and opportunities and we are working on a lot of things.

Stuart Bush – RBC Capital Markets

Okay, great. Thanks a lot, Greg.

Greg Kenny

Okay, Stuart.

Operator

Your next question comes from the line of Brent Thielman with D.A. Davidson.

Brent Thielman - D.A. Davidson

Good morning and thank you for taking my questions.

Greg Kenny

Sure.

Brent Thielman - D.A. Davidson

Just looking at SG&A as a percentage in the quarter, I think it was lower than what we have seen over the last several quarters. Was there anything in particular that contributed or should we be thinking about any run rate going forward?

Brian Robinson

No, I think it’s slightly down sequentially as a percentage of revenue. But I think it’s as we said in the past, you can expect a range in that 5% to 6%--

Greg Kenny

With metals at this general—

Brian Robinson

Yeah.

Greg Kenny

We have argued that metals are broadly a passthrough, so if metals are big, your SG&A as a percentage of your revenues could get smaller. So I look at absolute dollars and that kind of thing. You have some variable cost that tied to sales commissions and other things. So it’s not as simple as what I just said, but—

Brian Robinson

But I think that also reflects our efforts in turn we are very focused on the area, particularly given what we are seeing in the markets in the mature parts of the world.

Brent Thielman - D.A. Davidson

Okay. That’s helpful. Thank you. And I guess looking at metals prices; I mean can you provide sort of any visibility, what you are hearing from suppliers in terms of where metals prices are going?

Greg Kenny

You know I have always been sort of a fundamentalist on this and you look at supply and demand and what we know is clearly with the construction slowdown in North America and which eats a lot of copper because those products are primarily copper, you see demand down in North America by probably 10% to 20%. But again the developing world continues to expand. We grew in the developing world in low-double digits versus prior year. So, you have that mix with the developed world being offset by this developing world growth, and then of course you have a physical tightness in the LME. So, again I don't think we are in the business of making a call, but we don't take speculative positions. What we try to do is cover, if we have a firm price, as you know, we will try to fix that metal at that price. But it's -- I never guessed it would over $4. So, I'm the wrong guy, probably.

Brent Thielman - D.A. Davidson

Okay, okay. And I guess last question, another cable supplier talked about opportunities in sort of underground low and medium voltage cable productswith utilities in Europe. Is that something you have the capacity to address in the region or something you would look at or any thoughts on that market opportunity?

Greg Kenny

You are talking about underground low and medium?

Brent Thielman - D.A. Davidson

That's right.

Greg Kenny

Yeah, we are a leader. We would be probably number three in Europe in that business and number one in North America. And we are also a leader in that business in many of the places ins many countries and regions in South America and Asia as well. So, we are in the business. The business has been stronger in Europe than it has been in North America.

Brent Thielman - D.A. Davidson

Right.

Greg Kenny

And very strong in the developing world. But a lot of the products say for heavy gauge medium voltage cable today goes to wind farms. It could also go to a utility.

Brent Thielman - D.A. Davidson

Okay.

Greg Kenny

But I think may be that competitor was referencing a decent European market for those products.

Brent Thielman - D.A. Davidson

Yes.

Greg Kenny

Which is in fact the case.

Brent Thielman - D.A. Davidson

Okay. Thank you very much.

Greg Kenny

You bet.

Operator

Your next question comes from the line of Nat Kellogg with Next Generation.

Nat Kellogg – Next Generation Equity Research

Hi guys. I guess this is sort of followup to those two questions but I just, on the SG&A, I guess not only on a percentage of revenue but obviously it ticked down despite the fact that this is a more robust quarter for you guys. And that seemed a little bit of surprise. I guess what you are saying though there isn’t anything particular we should read into that. I mean it’s not like there was some continued cost that you guys were able to ring out of the business or anything?

Brian Robinson

That's right. And the tick down I don't think is significantly large. Again, the majority of that bucket are more on the fixed side as opposed to the variable side.

Nat Kellogg – Next Generation Equity Research

Okay. That’s great.

Brian Robinson

Again I think it more reflects a conscience, focused effort around spending.

Nat Kellogg – Next Generation Equity Research

Okay. No that's great. And then I know --

Greg Kenny

We are always looking to combine jobs or you need to do the work and you eliminate the work which is really an outgrowth of this lean environment that’ gone on since six, seven, eight years ago. So, I think we expect people to come to work and run hard and we hope to continue to eliminate work that's wasteful. And I think you just see it in our numbers but we are watching every nickel as a company but that's been our culture anyway.

Nat Kellogg – Next Generation Equity Research

Okay. And then I know it's sort of been a while since we talked about metal prices going down and I think it's probably too early to say that that's definitely going to happen. But Greg, you pointed at supply and demand out there and then we've seen a little bit of release in the month of July thus far. I'm just wondering if you guys could talk a little bit about sort of how you might expect results to be affected? If you saw sort of gradually declining sort of copper, aluminum. I assume that that would be mile positive. And then I guess really particularly talk about may be what you might expect to see as far as how quickly you guys asked to cut price once copper falls I mean is it every $0.10, every $0.20, just a little more color and that would be helpful. I realize its a little speculative but obviously always good to be prepared?

Greg Kenny

This depends on the market. Some markets you have few distributors who have a great interest in maintaining franchise price for products. In other markets there are many distributors. And as I said there's a street price being established, short cycle by short cycle I mean daily, weekly, monthly for a lot of our business. Again if you take away that, if copper were falling its because of global demand is coming out. I mean copper wire cable is 65% of the end market approximately for copper. So, they have global demand saying stable, copper easing backward. That's usually a pretty good thing, if it's going gradually. If it goes quickly, then you almost have a price/ask. But half our business has formulaic escalators and de-escalators for approximately half our business. Anyway so if some customers don’t ask, and they just see the lower cost because it's part of the aluminum or copper formula. Again we had the copper, aluminum which is big part, we do 600 million pounds or more of aluminum, may be 700 million pounds. That was up dramatically in the second half, and of course copper moved up $0.20 or $0.30 a pound from the first quarter, second quarter. So, we are chasing not only the average in the first quarter for copper was $3.53, the second quarter is $3.80. So, we were chasing metals so if it rolls back gently and demand stays stable, that's usually a good thing. We calculate just broadly, if copper ever broke $1, you are pushing $100 million to $150 million of working capital out of the business. On that sort of long, if you could get a year-over-year change in copper with that magnitude, it's very good form working capital standpoint.

Nat Kellogg – Next Generation Equity Research

Right. And I guess this is last question. What do you guys consider gradual?

Greg Kenny

All I would say $0.05 to $0.10 a quarter difference. The rules for gradual have changed as the market varies. Cooper has been relatively quiet lately, but we saw $0.10 to $0.20 changes in a day for a while as you know. That's certainly not gradual. But a slow listing backward that may be is $0.10 to $0.15 a pound month-over-month or say $0.05 to $0.10 a pound is interesting.

Nat Kellogg – Next Generation Equity Research

Okay, okay. All right then --

Greg Kenny

We really haven't seen that on a sustained basis. We've seen this thing sort of yo-yo around, as you know we hit a new high. We hit a high in the summer of '06, and then popped into it again more recently in the over $4 range. And now it has been easing backward and now it has to take back up again. Copper historically had the tendency to be tighter in the second quarter because people were busy for the reasons I said earlier, but again a lot of that's been thrown out the window.

Nat Kellogg – Next Generation Equity Research

Right. Absolutely. All right, well, congrats for another pretty nice quarter guys. Obviously keep the uptick work and look forward to talking to next quarter.

Greg Kenny

Thank you.

Operator

(Operator instructions) Your next question comes from the line of Brett Levy with Jefferies & Company.

Brett Levy – Jefferies & Company

Hi, guys. This is just a big picture question. As you guys look for you next acquisitions, is there a region, I mean my senses is international? And then also upstream, downstream, competitors? Is there any thematic strategy with respect to the next place to go to look for acquisitions?

Greg Kenny

As we think about this, it's the wire and cable industry today's copper prices something like $150 billion business worldwide. Some of those markets we don't serve as directly but it still more than $100 billion served market, and we are running at say $6 billion to $7 billion in revenues in that range. So, there's plenty of opportunity. We have a team that thinks about what's happening around end markets and that was how NSW in essence came to be, where we said this is going to get hot and there's very few people in the world who can do it. And NSW concluded that we were a perfect partner for them and we for they, and that came together. And that really came from that kind of thinking. So, we are thinking about markets such as solar and other things and what are the implications for cable use and why. We are also looking at geographies that we are good at, and can build through. And I would say we've been somewhat contrarian in our look. So, if we see something in the developed world that's priced correctly and we could unbolt three or four points at cost. We would do it if we think we can make some money for our shareholders' and a good return. So, I think the developing world is our major look but again we can be driven by product or by outright opportunity where we bring overwhelming synergies or scale to a Company, and others have oversold it or have lost interest it. So, I think we are open but generally we are focused on wire and cable, and we do a fair amount of services in that area in the high voltage and extra high voltage not many utilities have the expertise in part because they haven't been busy in those areas for years. Now it's a busy area, and we've actually been able to really offer not only the cable and the connectors, but really a lot of intellectual capital around that, which we discussed briefly today. So, I think wire and cable and again we have an assemblies business that often is good for OEM customers where just the cable will complete the product with connectors and do some engineering around that. And that's another little piece of our value-added portfolio. But I think about wire and cable which is a big opportunity relatively unconsolidated and look at us primarily focused on the developing world, but as contrarians with lot to scale open to go in the other direction if we see something that is very good. France, a lot of people said at the time, why would you invest in France, that's been a very good investment for us because it bought technology, products, global reach as well as the French have been reconductoring and it's been a great place to participate in the European reconductoring that’s been going on. So, that's a good example of what sort of looking at the contrarian way.

Brett Levy – Jefferies & Company

Thanks very much.

Greg Kenny

You bet.

Operator

Your next question comes from the line of Steven Gambuzza with Longbow Capital

Steven Gambuzza – Longbow Capital

Good morning.

Greg Kenny

Good morning, Steven.

Steven Gambuzza – Longbow Capital

A question about Europe. As you think about you competitive positioning there and the products you offer just the competitive dynamics in that marketplace. It sounds like business conditions there continue to be strong. You spent some time talking about the strong end markets you are facing there, and the results certainly reflect that. I'm just curious though, is there a fundamental difference between the competitive dynamics that exist in Europe versus the United States such that we could have some confidence that as end markets in Europe soften the way end markets have in the United States that the profitability of the European franchise might be a little that more durable than that of the North American franchise?

Greg Kenny

Yes. I would say European distribution is broadly more consolidated. I think the largest US distributor has, again depends on the products etcetera, but broadly the US distribution is relatively unconsolidated in say electrical products. And there seems to be less interest in the distributors to hold franchise position. Again you get to many markets in the world,, there are few channels to market and I would say those channels are much more interested in maintaining franchise position. But competitive dynamics are what they are, Europe can sometimes be a zerosum game but there is always an attacker who can come from products from Eastern Europe or others. So, I would say other than relative consolidation among distribution there are fundamentally differences, I would say the Spanish market from a pricing standpoint has held up better than some of the US markets. And that probably gets to some of the consolidation that occurs in distribution. But Europe is still a tale of two cities, construction cables in Spain are very weak, and that's been more than offset by the performance of our acquisitions as well as all the specialty in energy cables coming out of Spain to markets throughout Europe and worldwide.

Steven Gambuzza – Longbow Capital

Thanks. That's helpful. And then just reflecting on some of the comments explaining that the margin trends you've experienced in North America, it sounds like that the issues that were stated were weakness in telecom and low-voltage cables, as well as rising input costs being behind on copper and aluminum. And I guess I just wanted to make sure I understood -- I thought that the low-voltage utility cables as well as the outside plant cables were generally priced with metal adjusters, so that you wouldn't necessarily be behind on materials on those products. Is that correct?

Greg Kenny

It depends, a lot of the low-voltage is priced, as you may remember about our utility business is priced into a spot market or distribution market, and maybe 20%, 25% of our telephone cable business. So, you are looking at pricing trends. But yes, it means for metals and petrochemicals, there will be a formulaic like escalator or de-escalate, and for steel and transportation in some cases. But those are a question of weak spot market pricing for low-voltage and reduced demand, which causes you to sell less, and run your factories with less absorption.

Steven Gambuzza – Longbow Capital

Okay. So, it's more of a competitive dynamic as opposed to just the inability to re-price the product for the market?

Greg Kenny

Yes. You didn't mention which I think mentioned earlier, the networking cables. Again very little of that is formulaic. It's priced into a market. But it sometimes takes months for the market to recognize raw material input changes and then get a new price list out. And then of course that price has to hold. So, our networking business despite strong volume was actually down year over year in profits because of, in part chasing raw material costs.

Steven Gambuzza – Longbow Capital

Okay. Thank you very much.

Greg Kenny

It hit the business a bit differently. But broadly half of our business has escalators and de-escalators, which work fairly closely to the changes and that's always perfect

Steven Gambuzza – Longbow Capital

Thank you.

Greg Kenny

Yes.

Operator

At this time, there are no further questions. I would turn the call back to Mr. Dickerson for closing remarks.

Mike Dickerson

Thank you Brandi, and thanks everyone for joining us this morning. For those of you that are interested Greg, Brian and I will be available throughout the day to take your follow-up calls. That concludes our conference call today. A replay of the call will be available on website later today. We appreciate your continued interest in General Cable.

Operator

This concludes today's General Cable Corporation's second quarter 2008 earnings conference call. You may now disconnect.

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