USG Corporation (USG)

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USG Corporation (USG)

Q2 2010 Earnings Conference Call

July 22, 2010, 11:00 AM ET

Executives

Brian Moore - Director, Investor Relations

Bill Foote - Chairman, CEO

Jim Metcalf - President, COO

Rick Fleming - Executive Vice President, CFO

Analysts

Dan Oppenheim - Credit Suisse

Michael Rehaut - JPMorgan

Joshua Pollard - Goldman Sachs

Jim Barrett - CL King & Associates

Trey Grooms - Stephens Inc

Dennis McGill - Zelman & Associates

Garik Shmois - Longbow Research

Jack Kasprzak - BB&T Capital Markets

Kathryn Thompson - Thompson Research Group

Mark Weintraub - Buckingham Research Group

[John Shane - Shane & Company]

Todd Vencil - Davenport

Presentation

Operator

Welcome to the USG Corporation's second quarter 2010 earnings conference call. My name is [John] and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session.

Please note that this conference is being recorded. I will now turn the call over to Mr. Brian Moore. Mr. Moore, you may begin.

Brian Moore

Good morning and welcome to USG Corporation's second quarter 2010 earnings conference call and live webcast. We will be using a slide presentation in conjunction with our call today. It is available by going to the investor information section of our website, www.usg.com, and clicking on the link to the webcast.

Before we proceed let me remind you that certain statements in this conference call may be forward-looking statements under Securities laws. These statements are made on the basis of management's current views and assumptions about business, market and other conditions and management undertakes no obligation to update these statements.

The statements are also subject to a number of factors including those listed at the end of today's press release and actual results may be different from our current expectations.

With me today to discuss our results and our outlook are Bill Foote, USG's Chairman and CEO, Jim Metcalf, President and COO and Rick Fleming, Executive Vice President and CFO.

First, they will comment on market conditions and the outlook for our businesses. Jim will follow with comments on how our operating units are performing. Rick Fleming will conclude with some additional comments on our results and discuss how we're managing our balance sheet and liquidity. We will then open up the call for questions and conclude with a few comments from Bill.

Also present for the Q&A portion of the call will be Rick Lowes, Senior Vice President Finance. We would like to ensure that everyone has an opportunity to ask questions, so when we get to the Q&A session callers are asked to limit themselves to one question and one follow-up. Bill?

Bill Foote

Thank you, Brian, and good morning to all of you. Thanks for joining us on this call. As always, we appreciate your interest in USG. I'd like to start with a brief review of market conditions in the second quarter and then discuss our operating performance which was significantly better than the first quarter of the year.

The improvement is evident in the operating loss which declined to $25 million from $82 million in the prior quarter due to our continued focus on margin improvement and operating efficiency.

Turning to the market conditions, we've always expected that the recovery in the US and abroad would be uneven with improvements followed by retractions in some regions rebounding more rapidly than others.

Most of the second quarter economic indicators that are relevant to our business support that viewpoint of the unevenness of the recovery. For example, annualized housing [construction] the second quarter ranged from a high of $660,000 in April to a low of $549,000 in June. The average for the quarter was a little over $600,000. The second number quarters were certainly affected by the expiration of the government homeowner's tax credit.

Regardless, by historical standards those are all very weak demand numbers but on average they're better than the numbers we experienced last year. Year-to-date we're a little over $600,000 compared to last year's levels in the mid $500,000s.

The outlook for the residential repair and remodel segment, which is our biggest segment for wallboard, remains positive. We are projecting the segment to grow about 3%, which is a little less than other forecasters but we agree that the outlook for residential R&R is positive.

The consensus on the non-res market suggests it has not found a bottom yet but that the rate of decline has slowed. A recovery isn't expected until next year.

In general, our international markets are in recovery. While much of Europe is struggling with the credit crisis other emerging markets are the key markets like [China recovery]. Most notably for USG Mexico is steady and Canada has been improving nicely this year.

So as you can see, it's a mixed bag. Domestically new residential construction is weak but better than last year. Repair and remodel activity is expected to grow. Non-res construction is declining but at a slow rate. Some of our international markets are rebounding more quickly than others.

Turning to results, overall we didn't get any help in the form of stronger demand for our products during the quarter but our operating loss was substantially less in the quarter than the first. It's still a loss and any loss is unacceptable to us but our strategies are producing improved results.

We succeeded in cutting operating loss to $25 million in the second quarter from $82 million in the first. After adjusting for restructuring and impairment charges and income from a litigation settlement in the fourth quarter last year, our adjustment operating loss improved $18 million from $70 million in the first and $77 million in the fourth quarter of last year.

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