General Cable Management Discusses Q3 2012 Results - Earnings Call Transcript

Oct.30.12 | About: General Cable (BGC)

General Cable (NYSE:BGC)

Q3 2012 Earnings Call

October 30, 2012 8:30 am ET

Executives

Len Texter

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

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

Analysts

Shawn M. Harrison - Longbow Research LLC

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

Brent Thielman - D.A. Davidson & Co., Research Division

Matthew Schon McCall - BB&T Capital Markets, Research Division

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Operator

Good morning. My name is Jonathan, and I will be your conference facilitator. I would like to welcome everyone to General Cable Corporation's Third Quarter 2012 Earnings Conference Call. This conference call is being recorded at the request of General Cable. Should you have any objections, you may disconnect at this time.

[Operator Instructions] Thank you. General Cable, you may begin your conference.

Len Texter

Good morning, everyone, and welcome to General Cable's Third Quarter 2012 Earnings Conference Call. I'm Len Texter, Manager, 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.

Today's call will be accompanied by a presentation, also available on our website. If you have not downloaded a copy, we recommend that you do so as we will refer to the presentation throughout our prepared remarks today.

The format of today's call will first be an overview by Brian Robinson of our third quarter. Secondly, Greg Kenny will provide comments on the company's fourth quarter 2012 outlook and an early view on 2013, followed by a question-and-answer period. Before we get started, I wanted to call your attention to our Safe Harbor provision regarding forward-looking statements and company-defined non-GAAP financial measures as defined on Slide #2, as we may refer to adjusted operating income and adjusted EBITDA in our call today.

To begin, please turn to Slide #5 where we have included a reconciliation of our previously communicated outlook provided on July 31. As you can see on Slide 5, we have excluded the impact of the Alcan Cable North America acquisition for ease of comparison.

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

Brian J. Robinson

Thank you, Len, good morning. We are pleased to report adjusted operating income exceeded our guidance range for the third quarter, and adjusted EPS was within our range of expectations. In ROW, we reported better-than-expected operating results due to strong pre-election spending on housing and electrical infrastructure in Venezuela, ongoing reconstruction efforts in Thailand and construction activity in the Philippines. Our businesses in North America and Europe generally performed as expected, despite the increasingly more challenging macro environment and the slowing industrial market in the U.S.

As you can see on Slide 5, other than the effective tax rate, metal pounds sold, net sales and inventory quantity movements were generally consistent with our expectations for the third quarter. The company recorded $6.1 million or $0.12 per share of additional tax expense in the third quarter, as the company's full year estimated effective tax rate was increased due to the expected full year earnings mix. As a result, the company recorded in the third quarter a catch-up adjustment for the first half of 2012 of $2.6 million or $0.05 per share of additional tax expense.

In addition, the 45.9% effective tax rate in the third quarter also includes other incremental discrete tax items of approximately $3.5 million or $0.07 per share. As a result, the full year effective tax rate is expected to be around 36%, up from our previously communicated range of 30% to 33%.

Turning to the individual segments. First in ROW, demand improvement was driven by construction activity and electrical infrastructure investment in Latin America, particularly in Venezuela, where spending ahead of the presidential election was robust. Additionally, ongoing reconstruction efforts in Thailand and healthy construction activity in the Philippines continued to drive demand for our products.

Also, order rates for rod mill OEM customers and electrical distributors normalized as metal prices settled and began to rise over the latter part of the third quarter. As a result, third quarter adjusted operating income increased to $36.8 million ahead of management's expectations.

In North America, volume was consistent with expectations across most business units in North America as seasonal demand patterns in the company's utility businesses, following a strong second quarter coupled with an industrial slowdown, broadly reduced demand for wire and cable products during the third quarter of 2012.

Demand for electrical infrastructure products, including industrial and specialty cables, particularly those used in natural resource extraction and transit applications, remained relatively stable year-over-year. Third quarter operating income of $26.8 million reflects the seasonally lower results in many of our businesses in North America following the strong performance of the company's telephone and electric utility business in the second quarter.

In Europe and Mediterranean, increased submarine and land-based turnkey project activity was more than offset by the very weak domestic demand environment in Spain, coupled with seasonal demand patterns including the August summer holiday period throughout much of Europe. In addition, the second quarter of 2012 reflected relatively strong demand for medium voltage cables in France and aluminum-based electric utility products in the Mediterranean. The company's backlog was around $650 million for submarine and land-based turnkey cable projects at the end of the third quarter, as the company continues to capture new projects in both submarine and land.

Other income for the third quarter of $9.7 million reflects the impact of $10.6 million of mark-to-market accounting gains on economic hedges, which are used to manage currency and commodity risk on our project businesses globally and $900,000 of transactional currency losses. Given the numerous currencies in which we transact business around the world, we are pleased with the effectiveness of our hedging program as we continue to report foreign currency transactional gains and losses consistent with local norms during the quarter.

Before moving on to the next slide, as you've seen in our press release last night, the company has identified certain inventory-related accounting errors in 2 facilities located in Brazil and a third facility located in South Africa within the company's Rest of World segment, where the operating units were erroneously computing cost of sales over the course of several years, resulting in an understatement of cost of goods sold and an overstatement of ending inventory. All 3 locations were utilizing the same system and related process which, with respect to working process and finished goods, incorrectly computed cost of sales.

In addition, because the erroneous process was in place at one of the Brazilian facilities prior to the company's acquisition of Phelps Dodge International Corporation, or PDIC, in 2007, the company overstated inventory in its allocation of the purchase price among assets acquired, resulting in an understatement of goodwill. As a result of these errors and the related impact on its historical financial statements, the company concluded that it should restate its consolidated financial statements for the fiscal years 2009 through 2011, the interim period during those years and the financial statements for the periods ended March 30, 2012 and June 29, 2012.

Due to the ongoing process of preparing revised financial statements for these prior periods, the company has provided only selected financial data in its press release and this presentation. For additional information, please refer to the Form 8-K filed with the SEC yesterday.

On Slide 6, we have provided additional information on the Alcan Cable North American business and the related impact on our North American segment. As you can see, Alcan Cable North America further enhances our Electric Utility product offering and brings us new opportunities in construction cables where U.S. housing data continues to show signs of improvement.

On a pro forma unit volume basis, our North America segment becomes approximately 2/3 aluminum, which is a meaningful mix shift as it was previously 2/3 copper. Aluminum-based solutions are approximately 2/3 as electrically efficient as copper at approximately 1/3 the cost per pound. Overall, our integration plans are advancing quickly as we are already realizing synergies and continue to identify more opportunities.

Finally, moving to Slide 7, while in a period of transition at the end of the third quarter, our credit profile remains strong with the financial flexibility to fund our working capital requirements and capitalize on global opportunities. On September 25, the company issued $600 million of 5.75% senior notes due in 2022.

Subsequent to the third quarter, the company continued the balance sheet transition by calling all of the outstanding $200 million of 7.125% senior fixed rate notes due in 2017 on October 12, and retiring all of its outstanding $11 million of 1% senior convertible notes due in 2012 on October 15.

In addition, the company may tender for all of the outstanding $355 million convertible notes due in 2013 or retain a portion of the proceeds to repay the 2013 convertible notes at maturity. In the interim, part of the proceeds from the issuance have been used to reduce the ABL borrowings to 0.

Lastly, we are pleased to announce that the Board of Directors renewed the company's share repurchase program to repurchase up to $125 million of General Cable's common shares over the next 12 months. We will utilize this buyback ability in the context of economic conditions, as well as within prevailing market price of the common stock of the company, regulatory requirements and alternative capital investment opportunities. The company will not make any repurchases under the stock repurchase program before the restatement of the company's financial statements, noted earlier, is complete. Under the previous and just expired authorization, we repurchased $63.7 million or about 5% of the company's common shares over the past 12 months.

With those comments, I'll turn the call over to Greg for a recap of our fourth quarter expectations and full year business trends, which are summarized on Slides 9 through 14. Greg?

Gregory B. Kenny

Thank you, Brian, and good morning, everyone. We certainly hope that all of you and your families are safe in the Northeast. We're now just seeing sleet and snow hitting Northern Kentucky.

Including acquisitions, revenues for the fourth quarter of 2012 are expected to be in the range of $1.62 billion to $1.67 billion on volume improvement of 15% to 18% sequentially. Volume in our base business, excluding acquisitions, is expected to be flat to slightly down sequentially. Including acquisitions, adjusted operating income is expected to be in the range of $55 million to $65 million, and adjusted earnings per share are expected to be in the range of $0.40 to $0.50 per share.

The fourth quarter outlook reflects normal seasonal trends that are expected to be further burdened by the ongoing economic uncertainty in Europe, recessionary conditions in Iberia and a slow recovery in the U.S., coupled with a weakening industrial market. OEM, industrial and IT project spending in North America has stalled and has -- and generally declined recently. Additionally, wind applications have slowed considerably as tax incentives are set to expire at the end of the year.

Also, we are managing through a number of scheduling changes in our offshore project business, which is effectively moving production and installation into 2013 and 2014. Unfortunately, such changes are typical as the industry balances equipment capacity issues, weather and platform readiness.

Despite these delays, the undersea business performed well in the third quarter and we are pleased with our continued momentum as we have secured several new contracts. Generally, we expect these trends to be partially offset by construction activities in Central and South America and ongoing rebuilding efforts in Thailand. In addition, the acquisition of Alcan Cable North America is expected to contribute meaningfully in the fourth quarter as step-up purchase accounting adjustments are largely behind us.

As summarized on Slide 13, we reaffirm our full year volume guidance on our base business, which is expected to grow in the low single digits year-over-year. However, we've lowered our range of expectations for adjusted operating income, narrowing the range to $260 million to $270 million for 2012, which includes acquisitions.

Also, we have narrowed our previously communicated guidance with respect to operating cash flows. As you know, movements in metal prices and demand volatility can have a material impact on our working capital requirements and operating cash flows.

Our capital spending for 2012 is now expected to be just above depreciation, as work on our greenfield projects nears completion, including the enhancement of our submarine installation capabilities.

As summarized on Slide 14, conditions in the early part of 2013 are expected to be very similar to 2012. As we have communicated for a number of quarters, we continue to expect a slow recovery in important end markets as there remains a great deal of uncertainty around growth prospects globally. We also expect a very weak Iberian market and a weakened U.S. industrial market.

One of the biggest long-term drivers of our business, construction, remains relatively flat in most major markets with the exception of the U.S. which is showing some signs of improvement specifically in the U.S. housing market.

On balance, while our visibility remains limited, we expect pockets of relative strength in cable demand types and North American aerial transmission projects, oil and gas extraction and electrical infrastructure, mining and construction in emerging markets.

We also remain focused on driving costs out of the business, integrating recent acquisitions and capturing synergies and capitalizing on the various opportunities around the world, including the approximately $1 billion of incremental revenue potential from recent acquisitions and greenfield investments. Over a cycle, these opportunities are expected to generate operating margins consistent with historical company averages or perhaps even better.

We're off to a fast start, executing on our integration plans for Alcan Cable North America and Procables. We're making excellent progress in realizing manufacturing, logistics and purchasing synergies. We're equally encouraged as the sharing of best practices has generated a number of other opportunities in the area of inventory management and safety, among others. We continue to anticipate closing Alcan Cable China before year end, and Prestolite is expected to close in the next 30 days or perhaps sooner.

Prestolite has been in business for over 100 years. The majority of its cables and assemblies are either proprietary products or have a print position on customer platform. They operate a major wire-making facility in Arkansas, as well as a harness assembly facility in Mexico. Engineering and business development is based in the Detroit area. They primarily serve the North American market, serving transportation OEMs, tier 1 wire harness manufacturers and distribution customers.

Prestolite's margins have been similar to General Cable's over the last several years, and General Cable will pay a multiple generally consistent with other previously completed transactions. We plan to fund the acquisition with cash. Prestolite's performance has improved in 2012, driven in part by strengthening transportation end markets, new platforms, customers and products, as well as cabling and systems density on modern vehicles.

Transportation OEMs are implementing alternative materials, including those operating in higher operating temperatures, electric or hybrid pulsion technologies, enhanced communication systems and interconnectivity of vehicle management systems.

As a result, the complexity and volume of wire and cable products consumed in new vehicles is expected to continue to increase. Coupled with our existing global operations, including the acquisition of Delphia earlier this year in Brazil, this acquisition enhances our ability to support the needs of our multinational OEM customers in this rapidly evolving and growing market. With more than $170 million of potential annual revenue and significant selling, manufacturing and purchasing synergies, Prestolite is expected to be accretive in the first full year of operation.

Greg Ulewicz, currently President and CEO of Prestolite, will assume a leadership position in General Cable, aimed at rapidly leveraging new channels, customers and know-how.

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 Shawn Harrison with Longbow Research.

Shawn M. Harrison - Longbow Research LLC

Well just, I guess, first on Alcan North America, if I could get a little bit more detail in terms of just where you think the EBIT margin profile is currently. I know where it was historically, but where is it in the fourth quarter? Where do you think you can get that to as you move throughout 2013, if you still see strength in kind of their core markets?

Gregory B. Kenny

Yes. Shawn, the -- I would say that we've got a great start on the synergies which are extensive. There's synergies in both directions, tremendous know-how within Alcan itself. They invented, in many ways, aluminum, cable and forming, and their Stabiloy brand is one of the best in the world and most widely known. I would expect, because of the synergies and, frankly, a -- the cables that they make that serve the construction market is quite strong, that we'd expect them to be around the corporate average, in that zip code of operating margin in the fourth quarter. And that would basically be on the strength of the construction segment, which would be above that. The utility is not as strong as that and then they also, very strategically, make OEM products, mechanical rod and strip, which is aluminum transformation, which, again, that's been a business that has some capacity limitations globally into North America, so we're very happy about that strategically. So all in all, it's a business that is in North America in the $600 plus million revenue range and because of the strong industrial synergies, we expect we've got to go ahead and do it, as you know there, a lot of their business are priced short cycle as well. But we would expect our current thinking that they would be already operating at our operating margins, with significant upside remaining and we will challenge ourselves hard internally.

Shawn M. Harrison - Longbow Research LLC

Okay, and, I guess, for the fourth quarter, what is the volume contribution solely from Alcan? I know it was 20 million pounds last quarter?

Gregory B. Kenny

You'd expect it to be somewhere around 145 --

Brian J. Robinson

Yes, so it'd be about 70 million aluminum pounds approximately, Shawn, for Q4.

Shawn M. Harrison - Longbow Research LLC

Got you. And then just as a follow-up, it was a nice slide in the back in terms of just the greenfield facilities coming online. How should we expect the profitability of those facilities is, yes, for '13? I'm guessing, you start off at a lower level and get toward the corporate average, but can you get there sometime during '13?

Gregory B. Kenny

Yes. Look, I would say, Shawn, we -- these greenfields, which are time-consuming and resource-consuming take time as you would expect and I would not -- well, one, is our internal goal would be to exceed the corporate average because of some of the potential in these businesses or, in the case of Germany, the capital involved as well as the know-how, but I would not -- I think just looking at them, Mexico we've been at it. We've got a good revenue base. We have more capacity and we would expect, as we get better at making products as well as the Mexican market begins to recover, that over the course of next year, the business has been improving, but it's not yet accretive. I'm hopeful that we would hit it next year, but I would not forecast Mexico to yet be at the corporate average. Brazil, which has a lot of the specialty products which is part of our corporate strategy, so Datacom, control cables, medium voltage cables, all for the Brazilian industrial communications market, that's quite busy. And I would expect that, that one could approach, sort of the second half of the year, some corporate averages. But again, none of this is easy as you're introducing new products with global teams. India is a -- I'll recheck [ph], would not be at the corporate average, we're still getting specified. India is very slow, again, enormous potential, but that one I would say would be dilutive this year coming, in 2013. Peru is -- should be approaching the corporate average. South Africa, coming -- in South Africa, we have a very small business that makes cable in Durban and then a larger business that's taking product from all over the world in Johannesburg. So in South Africa, the greenfield is this small manufacturing operation. I would say it wouldn't be there yet, but getting there. And Germany is nonperforming yet. We're winning projects, we're delivering projects. The projects move, as you can see, the complexity in North shore, North Sea, but that one, we should be able to contribute next year and the year after. So net-net, I wouldn't put it -- them all at the corporate average yet and the reason I ranged it from 150 to 300, is it takes time to win new customers and win market acceptance, but the potential, which we've worked hard over the last years, is significant and we're setting stretch objectives for ourselves. We're just early in the 2013 planning, so I'm giving you really topside judgment as we haven't come back through all the plans and worked them hard and resourced them, but broadly, I would look for it to be better than last -- than 2012, but maybe, collectively, not yet at the average in 2013.

Shawn M. Harrison - Longbow Research LLC

Okay. That's so -- that's very helpful.

Gregory B. Kenny

Yes, the other thing I wanted to mention on the Alcan question was, is within the utility, obviously, there's a very -- we think of utility as both distribution cables and transmission. So within the utility, there's a big chunk of transmission, probably 1/2 of the utility revenues within Alcan, and then there's a large distribution cable business as well.

Operator

Your next question comes from the line of Tony Kure with KeyBanc.

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

Just along the same lines, in the 2013 early look. You talked about -- sort of give us some color on how you expect things by region: low growth in North America; deteriorating Europe; and then I think you said pockets of strength in ROW. I guess, what would that imply from an organic growth rate for the base business if we exclude the acquisitions and the greenfield? But what would be sort of your gauge of organic growth in the base business?

Gregory B. Kenny

Yes, Tony, we really haven't completed all that work. I continue to see ROW as having a lot of opportunity. As you know, we're very strong as a company in the Americas, which has been relatively stronger. The U.S., we'll watch the wind piece, which is a piece of our business and we have seen an industrial slowdown, which I think has been widely reported. We're also seeing a slowdown in communications. I think it's a pause around election and it's become -- and the fiscal cliff. So people talk themselves into holding because demand is relatively CapEx, so no one needs to spend now and I think you get that circular flow where there's a wait. So I would look for the U.S. to start opening up early next year no matter who wins, but I think we've talked ourselves into caution industrially. The -- Europe, it's -- we watch it closely. We think Spain has stepped down further. We continue to help ourselves in other markets, but Europe is in -- is several years behind the U.S. So we're -- other than our project business, which continues to get some stretch, Europe looks like more of the same, but fragile. The U.S., I think the utility spending will pick up because as you build houses, you need to take possibly telephone lines, drop lines, as well as certainly electrical power to those homes plus cable is consumed on the job site. And in some cases, we make cables that go into the home itself. So I think the U.S. story is a bit mixed, with the construction starting to move up and then the overhang with houses in the market coming down. Latin America feels good and we've been quite good in parts of Southeast Asia. So net-net, Tony, I'm thinking Europe, more of the same, with a little bit of downside risk; the U.S. a slow start in some segments, but housing will help carry broadly; and then Rest of World, generally somewhat better as you can see. In our fourth quarter, we expect Rest of World to relatively outperform from an operating margin standpoint and from a growth standpoint. Brian, do you want to add anything?

Brian J. Robinson

No, I think that's -- yes, so I think in terms of just putting hard numbers on that, we're not prepared to do that yet for -- as we think about 2013.

Gregory B. Kenny

Look, for our -- we'll update this with our -- we'll give a stronger view when we next report our quarterly earnings in the fourth quarter and sharpen that view for you.

Shawn M. Harrison - Longbow Research LLC

Okay, I guess, just to finalize that point, I guess, I mean, would it be fair to say you expect some growth on your base business organically?

Gregory B. Kenny

Yes, I would say, Tony, we certainly -- we see the potential with the things we help ourselves with, or looking at the best we can see in the markets, but yes, I would expect some growth, but it's premature to be more specific than that. We certainly see opportunity, but obviously, we've got to go do it and we're making a judgment on what world we're going to see 3 and 6 months from now.

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

Great and I appreciate that's helpful color. And then on the fourth quarter outlook, you indicated some scheduling changes in the turnkey and land-based projects. And I think, Greg, you alluded to that -- those push-outs. So do those normally push several quarters out? I think you actually mentioned 2014 also, but then you're sort of back filling that with new orders. So would those push-outs hit and the ones that did occur, would they hit in the first half of 2013 or could you maybe talk about the timing around those?

Gregory B. Kenny

Yes, again, this is primarily submarine, somewhat less so land. The land is complex. The land is not -- it's better known science and there's a more robust supply of product. With the submarine side, 2 major factors: one is the converters and the platforms, the manufacturers are at supply constraints. So they're oversold, there's -- in some -- for some critical products. We also have weather, most of this work is in the Baltic and North Sea and that more or less stops in November with some maybe windows, narrow windows in the winter, but then starts again in the spring. So if you missed the fall, you're kicked into the spring, but I would say the -- as you've been probably reading, there's everything from German discussions on what to do with the power, how to get it down south where they need it, who pays for it, does it show up in the utility bills? There's risk sharing between the wind park operators and the utilities who have to take that wind park power to the shore and move it down. So the Germans are figuring that out. There is an enormous amount of work that continues to be out there, but I think they're sorting through a little bit their own public policy and energy policy issues, as well as there's a shortage broadly of supply. So if there's not a platform, we can't hook it up and people don't want to leave the cable in the water generally if they can avoid it, not connected. So we're part of a very complex supply chain and it moves around which we continue to deal with, Tony, but we haven't seen stuff go away. It's just sorting through it and the Germans seem to remain committed to win and, of course, you're seeing that in other markets including the U.S.

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

Okay. And then just couple of housekeeping items. If you could quantify the purchase accounting impact in the third quarter and then what the expectation is maybe on the early read, if you can, for a tax rate in 2013?

Brian J. Robinson

Yes, I would -- I guess, Tony, on the purchase accounting, I guess you maybe squared the earlier question around our expected profitability of the Alcan business with synergies, which is about the corporate average. And as we said in the third quarter, the business, after purchase accounting, contributed basically a de minimis amount. So -- and as we said, the business was worth about -- I think about $50 million of revenue in the third quarter. On the tax rate, I'd say it's too -- it's a little early to say. I would say we will face some natural upward pressure just simply because of the addition of some businesses which are more biased towards the U.S. and Canadian markets. So again, I would say we'll -- I would expect it will migrate, let's say beyond that, somewhere in that 33% to 36% area, but we'll give more specific guidance when -- again, when we've firmed everything up here and over the next few weeks, in sort of weeks/months.

Operator

[Operator Instructions] Your next question comes from the line of Brent Thielman with D.A. Davidson.

Brent Thielman - D.A. Davidson & Co., Research Division

Yes, on the Alcan acquisition, what percentage of that revenue stream is sort of selling on a short-cycle basis versus contractual arrangements?

Gregory B. Kenny

Yes, well, within Alcan, so it's a -- call it a $600-plus million business in U.S. and Canada, in Mexico and then there's a 100-plus in China approximately. Within the -- we haven't closed on China yet, but in the U.S., there's probably 1/3 of it is priced short cycle. It's priced against to distribution, for [ph] jobs related to construction in the U.S., both commercial, industrial and residential. And then within utility, which is about 1/2 the business, that business has both 1 to more than 1-year contracts, say 1 to 3, plus then you're bidding also in there. There's bids against specific transmission projects or even sales to distributors, but I would say the utility, this is an educated guess, is probably 1/2 contractual and 1/2 kind of a bid market but for much bigger projects and that would be primarily tied to transmission, but also to distribution in part. And then there's a OEM business principally mechanical rod, electrical rod and strip, all aluminum and most of that is contractual and that's, oh, perhaps 20% of the business or so and we're calling that rod. When we report it, it's really products sold on an annual or multiyear contract to customers.

Brent Thielman - D.A. Davidson & Co., Research Division

And then on the Rest of World segment, operating margins were as high as I think we'd seen in quite some time. Is that mostly mix related and sort of how should we think about that going forward?

Gregory B. Kenny

Well, we've had -- in the Rest of the World, we're seeing improvements in Thailand. I think in Chile, we continue to see a introducing new products to Brazil and while some of the transmission work in Brazil is in a pause, they are -- we are strongly building capability against the -- against all the constructions going on around the World Cup, Olympics, et cetera and just Brazil generally. Central America remains good. Philippines, as I said, and Thailand have performed well. Venezuela was quite strong and it again is an interesting place. So it fits us nicely from a young population natural resource. Obviously, it's a complex place, but that has been quite strong, particularly prior to the election, which Chavez won, but they went through a strong series of projects for housing for people and they're deep into a reconductoring of the country because obviously their electrical grid is not strong. So Venezuela has been a very strong participant. We're very excited, of course, about Procables in Colombia, which we think is going to be a terrific market, which we closed October 1. So broadly, Rest of World, our challenge is to just keep driving through the greenfields and acquisitions and keep improving them, but we're in good markets and they've generally fared better than certainly some of the developed world.

Brent Thielman - D.A. Davidson & Co., Research Division

Great. And just trying to getting my head wrapped around the guidance for Q4, the higher sequential revenues and volumes you're looking for. I guess, is there something specific such as the inventory reductions that leads you to guide to the lower sequential profit, or would you say it's more reflective of just some of the uncertainties and volatility in the market right now?

Gregory B. Kenny

Well, we're being -- as we think about it, our core business is actually weakened from what we had anticipated in the -- as we thought about the year some months ago. So we've seen the U.S. weaken specifically, particularly around communications cables, IT spending, industrial spending. We've also seen a pause of U.S. distribution generally that they've become cautious. So we're pulling down inventory quite hard, which is obviously, that you don't absorb that inventory into your cost and we're essentially unloading the factory. So hopefully, we'll have a nice start back next year, but right now, we are cautious as our customers are cautious. We've also seen Europe see some step-down further in Spain in terms of demand. Pricing is not good in much of Europe and we've seen a push out of our -- of some of the contracts for delivery that we thought, under a percentage of completion, we would deliver in the fourth quarter and that -- some of that's been pushed out. So the net of all that is, on the business, excluding Alcan and Procables, we've seen a $10 million to $15 million step down in our expectations around operating income. We've also seen copper run down from the $3.70 level down to -- down more than $0.20. So the markets are unsettled and our customers, some of the distributors are cautious, particularly in the U.S. and I would say Europe generally. So that has gotten tougher than it appeared some months ago and we just want to be sure we have the right inventory profile, and -- but we've seen generally the U.S. reduce from its expectations over the last couple of months as we're getting feedback from our customers and incoming orders and we've seen Europe, primarily in Spain and North Sea, deviate. The rest of Europe, Spain -- or France is more or less on plan and North Africa, we also manage Portuguese-speaking Africa from Portugal and Angola, that region is steady and decent. So net-net, we're down in the base business, but we expect a very fast start from Alcan and a good ramp up with Procables, which are partially offsetting that step-down.

Brent Thielman - D.A. Davidson & Co., Research Division

Okay. If I could sneak one more in, sort of bigger picture, how are you feeling about your current sort of portfolio mix of copper and aluminum? Is it your preference to get a little bit more exposure to aluminum, or do you feel like you're kind of where you want to be right now?

Gregory B. Kenny

Aluminum is interesting when you have these ratios of copper to aluminum cost. We are -- aluminum is a smaller piece of the overall global market. So its natural position is less than our mix. We have seen it do well in certain areas. Again, aluminum is less dense than copper. It's 1/2 the weight for the same connectivity, but requires a 60% larger cross section. When you get through all the math, it is very attractive where local specs allow, or it's the decision of the, say, industrial end-user, but it's very effective in some areas. You would not put aluminum, say, in crowded ducts in cities. It's not approved, say for U.S. construction cable inside a building because of connector issues that's used in other markets. But broadly, we had been a little -- broadly, 1/3 of our historical business has been aluminum over time. We -- if you look at it from a macro standpoint, aluminum is probably, in part because of the high copper cost over the last, say, 5 years, has probably picked up share against copper for certain applications. And with Alcan, we really get the guys who figured out how to sell aluminum over a huge part of history, and, in some respects, invented that business. So hugely complementary to our aluminum positions elsewhere in the world, and I don't have a specific goal to have more aluminum than copper. What we want to do is have the right products for our customers, but we have noticed on the margin a swing over to aluminum for those applications where it's the users' choice. Specifications for the utilities usually are slower to change or even National Electric Code, so each country is different. But I'm very, very satisfied with our profile, and we already have an enormous exchange between Alcan technical and manufacturing experts, with experts in the rest of the world where aluminum is used extensively. We have a major aluminum facility in Algeria and in Spain. And, again, the U.S., we had an enormous aluminum position in the U.S. We just didn't have all the know-how that Alcan has. So very, very complementary and I like our hand and we can move into markets as we choose with the know-how that we currently have in-house, which is high.

Operator

Your next question comes from the line of Matt McCall with BB&T Capital Markets.

Matthew Schon McCall - BB&T Capital Markets, Research Division

So I want to hit the guidance, understand the profitability outlook a little bit more. But maybe first, when you talk about Alcan and I think you said profitability, the operating margin should eventually reach the company average. I'm assuming most of the -- well, 2 parts to the question. Does the mix cost of goods versus SG&A look similar to the overall business? And then, and maybe you said it, but where does more of the opportunity lie as you move forward?

Gregory B. Kenny

Yes, a great question. The rod and strip business is interesting. It is strategically interesting because melting capacity in the rod has generally gotten tight. As you know, in many markets, we are vertically integrated into the either copper, melting or rod business or the aluminum where there isn't domestic supply. Alcan came with a facility in Canada that does that. We have other supply relationships that we value. They have directed some of that facility into doing other things such as mechanical rod for OEM applications, and also, they have a strip business. That business is -- I would not expect inherently -- the return of capital will be just fine. From an operating margin standpoint, it's -- the value added is -- well, again, if there's no supply, then there's a lot of value added, but broadly, I would not expect that to be -- other than a high return business, it should be more like our raw -- our other raw business over time, meaning low to mid- single-digit operating margins. The building wire business is priced short cycle. It's a very important business in the U.S. There are people who are in the business, but they're very good at it. They actually engineer and design and point out the advantages of their solutions. That one, I would say has a lot of potential, particularly as the U.S. housing recovers and I would expect -- and it is performing strongly for us and that one, again, will be tied to the construction cycle, but I think we're beginning of an up-cycle and I think that could be accretive from a margin standpoint to what we do. But again, we don't have 5-year contracts in that business; we're pricing to the market. The utility is a mixture of existing customer relationships that have contracts from 1 to 3 years. "Contracts" is the wrong word. It's pricing agreements and then you're bidding against the transmission business as well where they're a leader, we were not and that transmission business has picked up substantially over the last 5 years from where it was on the whole reconductoring of America. So broadly, we would have internal objectives to -- we talk our about business over a cycle, if this cycle -- if we're correct about the recovering U.S. construction cycle and about a reconductoring of the U.S., I would hope Alcan would be nicely accretive both from an EPS standpoint and perhaps even from a margin standpoint as we are heading back out of the trough. The China operation is selling directly to end users. It is profitable. There are Chinese competitors we've established. We don't own that business yet, but Alcan has established itself as a reference and has sort of invented that business in China, but China can change quickly. But for us, it's very interesting because it represents 100 direct salesmen, so we can bring other products in including those made by our minority ventures where we have a position in 2 other facilities in China. So China, we expect to contribute, but it is -- we expect more competition, but we think we can do more things in China with other General Cable products. So net-net, internally, we have high expectations for Alcan over a cycle. There's some very high synergies. There's some very interesting strategic applications of their rod mill and their know-how. So we're not capping the opportunity and, in fact, this company, in the last cycle, say '06, '07, '08, was extremely profitable.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. And then on the comments about construction, are you specifically talking, Greg, about the residential side? I know you've had some positive things to say there. I'm just curious about what you're seeing on the non-res side as well?

Gregory B. Kenny

The non-resi is sort of -- we watched the National Electrical Manufacturer's Association, the economist, Don Leavens, does a nice job. They've been pretty good on this. They see housing resi, which is a driver of our construction cable business in Alcan, picking up, but it's not the majority part of the business. It still depends upon selling aluminum into the commercial and industrial side and that is -- it's sort of is floundering, meaning it's sort of more of the same. It's relatively flat and I think you can see the FW Dodge data and that kind of thing. They're -- we see the government slowing down, manufacturing has slowed down, commercial is sort of picking up slightly, hospital, health care is slightly picking up. I'm just looking at the different attributes of the model. They take apart colleague street [ph] communication, but net-net, I'm not suggesting that in that segment, we're seeing a turnaround. It seems to be pushing sideways with -- but we are able to sell the product, Stabiloy, against competitive products and they've been doing that successfully in a flattish non-resi overall market, which, obviously, impacts all of General Cable because our products are used early cycle and late cycle.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Right, got it. And, Brian, maybe this is for you. Just again, on the Q4 guidance and just trying to understand this a little bit. I just looked at a bridge and you did about $35 million operating income in Q4 of last year. And I think you called out $20 million in price cost, $7 million from Thailand. I'm assuming -- well, we'll just start from a base there. You add those to the $35 million and you're getting to about $62 million, so toward the high end of the range. I think you said volume is flat. Price cost, Greg, I think you referenced copper volume $3.50 to -- or $3.70 to $3.50. Talked about some inventory reduction and you talked about the addition of some Alcan profitability. I'm just trying to bridge that gap there, trying to see why you wouldn't see your expected profit a little bit higher. I feel like there's enough puts to go with the takes to see that number a little higher. I'm just trying to connect those dots.

Brian J. Robinson

Sure, Matt, I'll be somewhat reserved in terms of specificity around the prior years because of where we are, as we mentioned, in the restatement process. But I guess what I would say, the -- you're correct in the sense that in the fourth quarter of last year, we had that meaningful headwind from that -- from the falling -- the impact of the drastic fall in copper prices near the end of the third quarter, which hurt our profitability. But I guess, and I would really reinforce the broad trends that Greg mentioned, I think the European business in the fourth quarter, as we mentioned, the project push-outs, obviously, hurt the profitability and the continuing very weak and somewhat worsening conditions in Iberia hurt the European profitability. And I think and the other piece of that then would be the North American businesses as we said on the industrial space and some of the IT sort of related products. So I mean I would say those -- whether it's -- just from both a trend perspective and current trends and versus the prior year, those are really the greatest -- the largest pieces.

Matthew Schon McCall - BB&T Capital Markets, Research Division

So is there -- I think you said, organically, volume would be flat to down slightly. So is there some kind of mix impact that I'm missing there? Because it sounds like -- I hear what you're saying on those trends, but overall, it sounds like your volume's going to be flattish. So what am I missing from a volume perspective? I hear those trends that sounds like they're offsets.

Brian J. Robinson

Yes, you have that and then you have, as we said, we're expecting to take out more inventories. So we took out about $30 million in the third quarter, which we think we'll double that in the fourth quarter. I think the other important part of the mix, as we mentioned in the Rest of World segment, we had a very good quarter in the Venezuelan business and that will step down. We expect that that will step down in the fourth quarter. So that can -- that's also, as we move sequentially, a headwind in terms of the operating results. In fact, if you look at what we are getting sequentially, we believe we're getting better in other markets in around [ph] Chile, the Philippines and Thailand specifically.

Matthew Schon McCall - BB&T Capital Markets, Research Division

Okay. And I think you said at this point, it looks like $60 million will take care of the -- any inventory issues based on the trends you're seeing today.

Brian J. Robinson

Yes, I don't know that I would say issues. I mean, I think it's just -- partly, it's our -- somewhat of our normal -- it's part of our normal seasonal reduction, as well as some reaction to just our sense that some of the businesses are slowing.

Gregory B. Kenny

Distributors are cautious so we can see they're thinking about their year end, they can flex around inventory replenishment points. Each distributor's different, but there is caution. I don't yet think the U.S. is headed into a recession, but there's a great deal of caution around this quarter. Obviously, Europe has become a drag and people are worried about China. But broadly, I just see it backing up through where there is caution flags, we want to be right. And December is always a tricky month because you have everything from plant shutdowns to holidays to end of the year, either people with budget or without budget or in caution. So those aren't excuses, but I think in this environment, it makes particular sense to just be cautious. So we're watching inventory closely. We may not be right in terms of what we do, but it's our best look.

Operator

Your next question comes from the line of Noelle Dilts with Stifel, Nicolaus.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

So just going back to Matt's question just previously. I think he was kind of trying to get at you do say volume next quarter is expected to be flat to down sequentially on an organic basis. So I just want to make sure you're talking about, I understand on the negative side, project push-outs, worsening conditions in Europe, a weaker U.S., some slowdown on these -- in the Brazilian transmission projects. So what are the offsets there in terms of where are you seeing growth? Is it this -- is this what you mentioned Chile, Philippines and Thailand growth that offsets some of those weaker markets to get to flat to slightly down sequential revenues?

Gregory B. Kenny

You're talking about sequentially now?

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Sequential, you were talking -- you said unit volumes, so metal pounds sold, I'm sorry, you said would be flat to slightly down sequentially in the fourth quarter. So I'm just trying to get at some of the positives. If you're seeing these negatives, which I understand, where's the offset coming from?

Brian J. Robinson

Sure, sure. The last part of that, you're correct that it's really in some of these markets in Chile, the Philippines. Thailand continues to be a very good story in terms of the turnaround this year. As we said, the North American transmission is also a very good, very positive impact as we continue to move throughout the year. I don't know that I would add much to that, Noelle.

Gregory B. Kenny

Yes, well, we just -- we would see Chile stepping up, as Brian said; Central America, picking up in the fourth quarter; the -- Thailand, again, we have to go ahead and do this, but Thailand picking up. We see Venezuela stepping down, but Venezuela has some great -- continues to have great potential, it's just they went through a very busy period and perhaps, we'll be pleasantly surprised. We would see the -- a bit of a pickup in certain of the U.S. segments, especially around perhaps specialty, but generally the U.S. is slowing down, especially cable is picking up from a profit standpoint. But broadly, the U.S. is coming down other than we see our OEM business sort of hanging in, which is -- again, it's more of the not at a significant level. Alcan is going to contribute nicely in Europe. It's sort of the kind of general step down in most of the businesses, particularly around Spain. And we're pulling inventory out. We have some projects push-out. So I would say most of the strength is really around Rest of World segments, as well as some parts of the Europe and U.S. in the fourth quarter versus the third.

Noelle C. Dilts - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. I have a couple of questions on Iberia. In the past, I think you've expressed confidence that you could achieve profitability there in spite of some of the weakness that you were seeing. So a few questions. One, were you profitable in that region in the third quarter. Second, given the deterioration in the Spanish domestic market, is this still something you think you can achieve? And then, can you just give us an update on the run rate of sales that are remaining in Spain at this point?

Brian J. Robinson

I would say from a profitability standpoint again, as we've talked over the last couple of years, it continues to -- the business can be very volatile depending upon the trends in the country. I would say the business contributed. It continues to contribute and contributed in the third quarter. In the fourth quarter, I would say given the trends, it feels a little like it did last year, where you have the end markets softening and the business slowing. So I think we'll be back to sort of a breakeven to potentially sort of dilutive just for the quarter. Longer-term, as we said, the majority of what we're making there, about 70% we're now exporting or sending on to other countries to go into higher-voltage products. But we're closely -- the domestic market is obviously, hugely depressed, still down maybe half of what it once was. We've taken, on a permanent basis and in round numbers, $40 million of cost out of the business and we'll continue to watch very closely the operations on the ground and what we might do if -- it's hard to see, but what we might do if it gets materially worse.

Gregory B. Kenny

But, Noelle, it's -- they're about, oh, around $125 million a quarter or something like that and in there is a lot of exports out of Spain, so that's what's reported in exiting those facilities and it's -- the pricing is Spain is down in some segments more than 50% say around construction. We've introduced a whole bunch of 0 halogen cables for the European market. We're selling oil and gas cables hard from Spain and, of course, we're also in Portugal, which is a smaller business, but they're all operating, flirting around -- if you take out the redundancy cost for the terminations and downsizing, it's been flirting around negative -- 0 operating margin kind of thing, Noelle, maybe slightly negative, sometimes slightly positive, depending on the season. That's despite all the cost we've taken out. It's -- again, there is -- the Spanish domestic market is a fraction of itself, with almost no utility spending, almost no construction spending and then, of course, we're now dependent on selling primarily outside the Spanish market. We continue to also just watch our customers and the consolidation that goes on there. And we've seen a lot of stress among other suppliers. So it's a live equation. We think we have the right envelopes. We think we can be profitable. Obviously, we're doing better than a lot of industrial companies in Spain or even Europe generally who could be loss-making, but we're constantly trying to pull cost out -- than some are.

Operator

There are no further questions at this time. I'll turn the call back over to the presenters.

Len Texter

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

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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