General Cable Corporation (BGC)

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General Cable (BGC)

Q4 2011 Earnings Call

February 09, 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

Jeffrey L. Beach - Stifel, Nicolaus & Co., Inc., Research Division

Matthew S. McCall - BB&T Capital Markets, Research Division

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

Shawn M. Harrison - Longbow Research LLC

Richard Wesolowski - Sidoti & Company, LLC

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

Steven J O'Brien - JP Morgan Chase & Co, Research Division

Brett Levy - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good morning. My name is Tracy, and I will be your conference facilitator. I would like to welcome everyone to General Cable Corporation's Fourth Quarter 2011 Earnings Conference Call. This conference call is being recorded at the request of General Cable. [Operator Instructions] General Cable, you may begin your conference.

Len Texter

Good morning, everyone, and welcome to General Cable's Fourth Quarter 2011 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's available on First Call and on our website at generalcable.com. Today's call will be accompanied by a slide 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 fourth quarter and 2011 full year results. Secondly, Greg Kenny will provide comments on the company's first quarter 2011 outlook and business trends followed by a question-and-answer period.

Before we get started, I wanted to call your attention to our Safe Harbor provisions 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 today's call.

To begin, please turn to Slide #5, where we have included a reconciliation of our previously-communicated outlook provided on November 1. With that, I will turn the call over to Brian Robinson.

Brian J. Robinson

Thank you, Len. Good morning. Fourth quarter operating results were above our expectations in North America, as product pricing held up better than anticipated in many of our businesses despite the significant decrease in copper prices experienced near the end of the third quarter.

In Rest of World, excluding the impact of the severe it flooding in Thailand, which reduced the operating income by $6.5 million, our operating results were generally in line with expectation. In Europe, however, the further weakening of Iberian end markets and Spain severance-related costs of $3 million more than offset strong submarine and land-based high-voltage and extra-high voltage project-related production activities during the quarter.

Overall, underlying demand in most markets remained stable and consistent with historical seasonal demand patterns. The combination of further weakening of Iberian end markets and severe flooding in Thailand negatively impacted our unit volume, resulting in lower-than-expected net sales, operating income and seasonal inventory quantity reductions as compared to our earlier communication.

Putting aside our forward purchase of metals in Algeria and Venezuela of approximately $35 million, our inventory quantity levels were relatively flat from Q3 to Q4. The timing of raw material inventory purchases in these markets is heavily influenced by currency and metals availability. As a result, from time to time, we make sizable forward purchases of raw material inventory when we believe the circumstances warrant such action, as was the case in the fourth quarter.

Heading into the fourth quarter. We estimated the impact of selling substantially higher average cost inventory into a lower metal price environment at about $15 million of operating income impact. We estimate the actual impact was closer to $20 million, principally in Iberia, as a result of the very weak economic environment.

On Slide #6, we have provided comments explaining our fourth quarter results compared to the third quarter with net sales for Q3 presented on a metals adjusted basis. The top line was lower principally due to the sequential increase in unit volume of 4% experienced during the quarter. Gross profit and operating income in the fourth quarter reflects the impact of selling substantially higher average cost inventory into a lower metal price environment. Further weakening of Iberian end markets, Spain severance charges of $3 million and the impact of severe flooding in Thailand, which reduced operating income by $6.5 million.

Other expense for the fourth quarter of $3.3 million reflects the net impact of $5.1 million of transactional currency gains, which were more than offset by a $8.4 million of accounting losses on economic hedges, which are used to manage currency and commodity risk on our project businesses globally.

This level of transactional currency gains is more consistent with historical norms, given the numerous currencies in which we transact business around the world. The third quarter transactional currency losses were higher than normal due principally to the rapid and significant weakening of the Brazilian real and Mexican peso near the end of Q3.

On the next slide, we charted the movement of copper and aluminum to demonstrate the significant volatility experienced over the previous 2 quarters. Copper prices declined sharply at the end of the third quarter to $3.15 per pound before bottoming at $3.05 per pound early in the fourth quarter.

After this step-down, copper prices is averaged $3.41 in the fourth quarter as compared to $4.07 in the third quarter. As you can see, aluminum prices followed the downward trend as well, which is not inconsequential, particularly from a top line perspective, as the mix of aluminum-based products shipments increased as a result of growth in our aerial transmission businesses in North America and Brazil. As a result of this growth in aerial transmission, we saw our historical mix of metal pounds sold, shift from about 1/3 aluminum to around 40% aluminum over the second half of 2011. This range of about 1/3 to 40% is indicative of what we expect going forward given the volatility inherent in our metal-intensive project-oriented aerial transmission business.

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