USG Corporation (USG)

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USG (USG)

Q3 2012 Earnings Call

October 18, 2012 11:00 am ET

Executives

Ken Banas

James S. Metcalf - Chairman, Chief Executive Officer and President

Matthew F. Hilzinger - Chief Financial Officer and Executive Vice President

Analysts

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Trey Grooms - Stephens Inc., Research Division

Mark A. Weintraub - The Buckingham Research Group Incorporated

Mike Wood - Macquarie Research

Garik S. Shmois - Longbow Research LLC

Neil Frohnapple - Northcoast Research

John F. Kasprzak - BB&T Capital Markets, Research Division

Kathryn I. Thompson - Thompson Research Group, LLC.

Dennis McGill - Zelman & Associates, Research Division

James Barrett - CL King & Associates, Inc., Research Division

Peter Lisnic - Robert W. Baird & Co. Incorporated, Research Division

Desi DiPierro - RBC Capital Markets, LLC, Research Division

Seth Yeager - Jefferies & Company, Inc., Research Division

Presentation

Operator

Welcome to the USG Corporation Third Quarter 2012 Earnings Conference Call. My name is Tricia, and I will be your operator for today's call. [Operator Instructions] Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Ken Banas. Please go ahead.

Ken Banas

Thank you. Good morning, and welcome to USG Corporation's third quarter 2012 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 of our 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 the press release, and actual results may be different from our current expectations.

With me today to discuss our results and our outlook are Jim Metcalf, Chairman, President and Chief Executive Officer; and Matt Hilzinger, Executive Vice President and Chief Financial Officer. Jim will provide a general overview of the quarter, plus additional insight into some of our businesses. Matt will review the financial results for the quarter and the business segments. We will then open the call for questions and conclude with a few comments from Jim. [Operator Instructions] Jim?

James S. Metcalf

Thank you, Ken, and good morning. Thank you for joining us, and we appreciate your interest in USG. I'm looking forward to sharing our observations on the quarter with you today, as well as some initial thoughts that we have on 2013. In the third quarter, we continued our positive results from the first half of the year with yet another quarter of positive operating profit. We achieved the highest operating profit since 2007, our best quarter in the last 5 years. We achieved high levels of customer satisfaction and delivered industry-leading products in a safe manner. Despite demand in the U.S. well below historical levels, we are making strides toward our primary objective of positive net income.

We do believe we are in the early stages of a recovery in our core markets. With that said, the path back to our historical norms is likely to be choppy. We are pleased with the progress in our business, and I'm optimistic about the future. Demand for new residential is getting stronger as you saw in the numbers yesterday, but we continue to experience some weakness in our commercial markets, in fact -- in principally our Worldwide Ceilings business and L&W Supply.

We are committed to continue to lower USG's breakeven. We are not waiting for the markets to fully recover. As you've heard us say before, we are creating our own recovery. We've taken out nearly $0.5 billion in cost, and we will continue to weed the business so we can feed our growth. These actions are allowing us to make targeted investments in growth areas and lower our breakeven. We are implementing break-even initiatives to accomplish this objective, and we are currently making some small investments there. This will occur over the next few quarters to complete the implementation of an expanded shared services organization for HR, information technology, finance and supply chain and outsource some of our back office functions. And these actions will further reduce our cost as the market recovers.

Now I'd like to turn to our business units. In our North America Gypsum segment, our U.S. pricing strategy that eliminated job quotes and established a single wallboard price for the year continues to be very successful. Wallboard volume increased 14% year-on-year in the third quarter, and price was flat in the quarter. The 1.2 billion square feet of wallboard we shipped in the quarter was the highest since the same quarter in 2009. We plan to continue this pricing policy in 2013. We will have a price increase on January 1, and we'll begin communicating that increase to our customers later this quarter.

We did experience some wallboard cost pressures in the quarter due to slight raw material inflation and some planned infrastructure spending. We were aware of this possibility. When we implemented our policy of a single price for the year, we're satisfied that the incremental profitability from our price improvement has more than offset this inflation.

Our focus on our other core products continues to produce solid results. Joint Treatment profit was up over $3 million from the third quarter of 2011 and showed improvement from last quarter as well. We also had positive contributions from our shipping business, Gypsum Transportation Limited, or GTL. GTL's profitability improved by $8 million compared to last year as we redeployed our ships to transport iron ore.

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