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Q4 2006 USG Earnings Conference Call - Final
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| Copyright: | CCBN, Inc. and FDCH e-Media, Inc. | | Source: | FD (FAIR DISCLOSURE) WIRE | | Wordcount: | 8475 |
OPERATOR: Good morning, ladies and gentlemen, and welcome to the USG
Corporation fourth-quarter 2006 earnings conference 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 would now like to turn the call over
to Mr. James Bencomo, Director of Investor Relations and Pension
Investments. Mr. Bencomo, you may begin.
JAMES BENCOMO, DIRECTOR IR, USG CORPORATION: Good morning and welcome
to USG Corporation's fourth-quarter 2006 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, 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 contain 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. 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.
Speaking of actual results, today, USG Corporation reported
fourth-quarter 2006 net sales of $1.29 billion and net earnings of
$100 million. Diluted earnings per share were $1.11. For all of 2006,
USG achieved record net sales of $5.8 billion. Net earnings totaled
$288 million or $4.33 per diluted share. Full-year net earnings were
reduced by about one-half due to the net effects of interest expenses
and asbestos reserve adjustments associated with USG's exit from
bankruptcy in June. Further details are available in this morning's
press release.
With me today to discuss these results and our outlook are Bill
Foote, USG's Chairman and CEO; Rick Fleming, Executive Vice President
and CFO. First Bill will comment on USG's performance this past
quarter and year, and our business outlook; followed by Rick, who
will discuss the operating highlights in our core businesses and our
consolidated financial results including capital spending, cash, and
debt management.
Following our prepared remarks, we will open up the call for
questions and then provide a few concluding comments. Joining Bill
and Rick for the Q&A will be Stan Ferguson, Executive Vice
President and General Counsel; and Rick Lowes, Vice President and
Controller. Callers are asked to limit themselves to one question
until all callers have had an opportunity to ask a question. Our goal
is to be completed within an hour, so let's get started. Bill?
BILL FOOTE, CHAIRMAN, CEO, USG CORPORATION: Thank you, Jim; and good
morning to all of you. We appreciate your interest in the Company and
spending time with us this morning. As most of you know, we have not
been doing these calls for about five years. During that time we were
resolving our asbestos liabilities in Chapter 11. Had we been doing
the calls, there would have been a lot of great things to share with
you.
We grew sales and operating profits to record levels in all three of
our core businesses -- the North American Gypsum, Worldwide Ceilings,
and Building Products Distribution. Each of these businesses grew
stronger as we implemented strategies to build upon the strong
franchises they have in their respective markets.
Perhaps most significantly, in 2006 we completed what we regard as
the most successful asbestos restructuring ever. Our shareholders
retained their equity. Our creditors are paid in full. Our legacy
asbestos liability was permanently resolved. And we emerged with the
balance sheet and financial flexibility of an investment-grade
company.
We have accomplished a great deal in the past five years, and our
strong performance in 2006 validates the strategies that we have been
pursuing to grow the value at USG over time. Yet 2006 was also a year
of transition in our markets.
The immediate effects of the changing landscape were most evident in
our fourth-quarter results. Sales declined 3% versus 2005's strong
fourth quarter. Operating profit excluding the effect of the asbestos
charge in 2005 declined 34%.
Let me brief you on how those changes are affecting each of our three
businesses, beginning with North American Gypsum. The biggest part of
this business is gypsum wallboard, where we are the leader. To
understand the wallboard market, you need to understand the supply
and demand picture. We have positioned USG to do well in the market
wherever we are in the cycle. For example, many of you are familiar
with our strategic decision to make significant investments in the
late 1990s in new, modern low-cost wallboard capacity. As a result,
we were very well positioned to capture the growth and achieve
outstanding operating results over the past several years when the
strong market allowed us to fully utilize the capacity and profitably
serve our customers.
Today, we face different circumstances. But we are confident that our
strategy will create value even as the market has retreated from the
recent record levels. Let me share some background on the market for
you.
Housing starts, a major source of demand for our products and
services, undertook a rapid and dramatic decline in the second half
of 2006. Starts fell from a run rate of nearly 2 million units a year
at the beginning of the year to about 1.6 million at the end of the
year, a 20% drop. Each downturn is unique, and a distinctive feature
of the downturn that began in 2006 has been the speed with which
adjustments have been made by both homebuilders and drywall dealers
to keep inventories under control. For us, that has meant a rapid
contraction in wallboard demand.
Let me illustrate. Industry wallboard shipments were up 6% in the
first six months of 2006 year-to-year. They were down 17% in the last
six months year-to-year. Up 6 in the front, first half; down 17 in
the second half.
As a result, industry operating rates went from about 100% at
mid-year to less than 80% at the end of the year; and wallboard
pricing began to decline as operating rates fell below 90%, the level
where prices typically begin to erode.
During 2007, we expect USG and industry wallboard volumes to be below
last year's levels, and we foresee a further pullback in selling
prices. The combination will have a significant negative impact on
our North American Gypsum profits compared to the record-setting
performance of recent years.
We are responding aggressively to the changing market. We are
matching our capacity to current demand levels. To date, we have
taken out more than 2 billion square feet of capacity by laying off
shifts and reducing work weeks at higher-cost facilities. In
addition, we have permanently closed two older, high-cost lines, one
in Florida and one in Southern California, eliminating an additional
400 million square feet of capacity. As conditions warrant, we will
do more. But the surplus capacity is an industrywide problem.
We have been in markets like this before. I can assure you will be
nimble in adjusting our plants' operating rates to minimize delivery
cost while insuring outstanding customer service. As tough as
downturns can be, they are opportunities to strengthen our
competitive position. And we will.
Now let's move on to our distribution business, L&W Supply. It is
the largest specialty dealer of its kind in the country. Last year,
sales approached $2.5 billion. It operates 220 locations in 36
states. Generally speaking, about one-half of L&W's sales are
wallboard, and the other half are other building materials such as
metal studs and insulation. Wallboard sales and profitability at
L&W are being negatively impacted by the decline in new housing.
Continued weakness in housing may cause that unfavorable trend to
continue.
On the other hand, much of the non-wallboard products are sold by
L&W into the commercial market where demand is showing favorable
trends and margins are healthy.
Ceilings is our third business, and here we have a strong number one
or two position in all of our product markets. The commercial
construction market, which drives demand in our ceilings business,
has shown little growth over the past five years. We saw signs of
improvement in 2006 and we were able to achieve price improvement and
increased profitability in all of our major product lines.
We believe that the trends in this business are positive. As we work
to offset various cost pressures, we expect further profit
improvement in 2007.
Now let me step back and talk about the bigger picture. USG is much
more than just wallboard, but that business can cast a big shadow. We
know that the weakness in the housing market and excess wallboard
capacity is going to have a significant negative impact on earnings
this year. We believe that we can both manage through it and position
the Company for accelerated growth in the future.
We see lots of opportunities to grow USG over the longer term. The
demographics in our key markets are very positive for both new
housing and nonresidential construction. The aging housing stock
means continued growth and repair and remodeling.
Softness in the market can create opportunities to make selective
acquisitions to grow our building products distribution business,
L&W. Our deal flow is strong, and we may find excellent
opportunities to expand this business. We will continue to invest in
new, low-cost wallboard manufacturing capacity to maintain our cost
and service leadership. We did it in the last decade, and we will do
it again.
At the same time, in addition to adjusting and working our
manufacturing costs down, we are assessing administrative costs and
capital spending plans to ensure that we are well positioned for both
today's challenging market conditions as well as tomorrow's growth
opportunities.
Lastly, we are completing a number of initiatives that enhance
operational excellence, such as our Oracle-based ERP system and
supply chain optimization products.
Cyclical ups and downs are certainly not new to us. USG has a
100-year history of success and leadership in all types of markets.
We have a plan for all seasons that will get us through this cycle
and position us for the inevitable recovery on the other side.
With that as background I would like to now turn it over to Rick
Fleming, our CFO, and he will comment on the results last year.
RICK FLEMING, EVP, CFO, USG CORPORATION: Thanks, Bill. As Jim
mentioned, I will update you on the fourth-quarter financial results,
performance of our core businesses, and the key operating factors
behind that performance.
Fourth-quarter 2006 net sales were $1.29 billion, down 3% from the
fourth quarter of 2005 net sales level of $1.34 billion. Operating
profit was $153 million, but not really comparable with last year's
fourth quarter, which was a loss of $2.9 billion due to a $3.1
billion asbestos charge related to the resolution of USG's
bankruptcy.
Fourth-quarter 2006 net earnings were $100 million versus a net loss
of $1.8 billion in last year's fourth quarter due to the asbestos
charge that I mentioned.
Turning to EPS, average diluted earnings per share was $1.11 for the
fourth quarter based on average diluted shares outstanding of 90.1
million. These results are not directly comparable to last year's
fourth-quarter EPS, which was a loss of $30.92 per share.
Now let's look at the performance of our three core businesses. North
American Gypsum, our largest business segment, had fourth-quarter net
sales of $804 million, down 6% from the fourth quarter of 2005.
Operating profit of $139 million was not directly comparable to an
operating loss of $2.9 billion in last year's fourth quarter. The
2005 loss included the $3.1 billion asbestos charge.
U.S. Gypsum, the major operating unit within North American Gypsum,
had fourth-quarter sales of $702 million, operating profit was $119
million. The previous year's fourth quarter was a loss due to the
asbestos charge.
Now I will briefly cover the key operating factors behind these
results. Starting with wallboard shipments, fourth quarter's
SHEETROCK brand gypsum board shipments of 2.3 billion square feet
were 18% below last year's fourth quarter. Our plants ran at only 79%
of capacity for the quarter compared with an estimated industry rate
of 81%. SHEETROCK brand gypsum wallboard prices continued to decline
from the peak levels realized in third quarter of this year, as we
transitioned from allocation for free supply. Fourth-quarter 2006
prices averaged $181.75 per 1,000 square feet compared with $155.38
for the fourth quarter of last year. Due to softness in demand,
prices fell during the course of the quarter.
Gypsum board costs were up significantly versus the fourth quarter of
last year. The increase reflects the impact of higher costs for
energy and raw materials and lower production volumes. Operating
inefficiencies were incurred as we dropped operating rates from 90%
in the third quarter to 79% in the fourth quarter, as we balanced
production with lower demand levels.
The gypsum unit of Canada-based CGC reported fourth-quarter net sales
of $79 million and operating profit of $7 million. Sales were down 7%
while operating profit dropped 53% versus the fourth quarter of last
year. Sales and profits fell despite higher wallboard prices because
of lower wallboard volumes and higher production costs.
USG's Worldwide Ceilings business reported fourth-quarter 2006 net
sales of $180 million, up 1% over the fourth quarter of 2005.
Operating profit of $13 million was down $2 million compared to the
fourth quarter of last year.
USG's domestic ceiling business, USG Interiors, had fourth-quarter
sales of $119 million, down 4% compared to last year, while operating
profit of $11 million was the same level attained in the prior year's
fourth quarter. Sales declined due to lower shipments of DONN brand
ceiling grid, [and Ortone] brand ceiling tile, with the drop
primarily attributable to reduced sales into the retail channel.
USG's International ceiling operation saw fourth-quarter sales rise
14% largely due to higher grid sales in Europe. There was a breakeven
level of operating profit in the fourth quarter of 2006 compared with
a profit of $1 million in the previous year's fourth quarter. Our
ceilings business in Canada saw a $2 million decline in sales and a
$1 million decline in operating profit versus the fourth quarter of
last year.
L&W Supply, our Building Products Distribution business, reported
record fourth-quarter sales of $551 million, up 2% over last year,
while operating profit of $39 million was down 9% versus last year.
The rise in sales reflects the increase in sales of complementary
building products such as ceilings, metal studs, insulation, and
joint compound, and higher selling prices for wallboard, largely
offset by a sharp drop in wallboard volume. For the fourth quarter,
complementary product sales were up 7% while wallboard shipments fell
18% reflecting the fall off in new home construction.
During 2006 L&W made several strategic acquisitions that expanded
its presence both geographically and in the ceilings distribution
business. It also established several new locations on its own. In
total it added 28 locations last year and now operates 220 stores in
36 states. It continues to look for opportunities to grow profitably
through both acquisitions and greenfield startups.
In terms of the outlook for the rest of the year, as Bill mentioned,
we see our markets transitioning during 2007. New housing makes up
about one-half of the demand for wallboard; and last year, housing
starts were down 13% from 2005. But 2006's total of 1.8 million units
reflected a 2 million unit run rate in the first six months and then
just over 1.6 million units in the last six months.
Earlier this month, the blue-chip consensus forecast for 2007 housing
starts came in at 1.53 million units. That is 7% below the second
half of 2006 and 26% below 2005. While we see modest single digit
growth in recurring modeling and nonresidential construction in 2007,
overall demand levels for wallboard will probably decline by about 7
to 8% this year compared to 2006. That means pricing will be under
pressure.
We are well on our way to adjusting operations at our network of 34
wallboard production lines across North America. We have temporarily
curtailed more than 2 billion square feet of capacity by reducing
shifts and days of operations at higher-cost plants. Earlier this
month, we also closed an additional 400 million square feet of
capacity by permanently shutting down high-cost production lines in
Florida and Southern California. We will consider additional steps as
needed to keep our capacity in line with demand. We expect to see the
cost benefits from these moves as the year progresses.
U.S. market fundamentals still support a healthy future level of
housing activity. The Harvard Joint Center for Housing Studies
recently predicted that as many as 20 million units of new housing
will be needed over the next decade. There's also a growing need for
all types of nonresidential building, such as schools and offices, as
well as care for the country's aging housing stock. So the long-time
market long-term market fundamentals remain solid.
On the gypsum board capacity side there is currently significant
excess capacity industrywide. We expect to (inaudible) add about 1.5
billion square feet of additional capacity in 2007 as several new
plants come on-stream late this year, with more announced to come in
2008. As mentioned previously, we expect to see downward pressure on
industry utilization rates and gypsum board prices during the rest of
the year until industry capacity is balanced with demand.
Now turning to some additional financial highlights of our
consolidated results. Selling, general, and administrative expense,
or SG&A, totaled $114 million in the fourth quarter, an increase
of $26 million or 30% from a year ago due to higher levels of
expenses related primarily to compensation and benefits, costs
associated with the move to less costly corporate offices in March of
this year, and expenses in connection with marketing programs and
growth initiatives. As a percent of net sales, SG&A was 8.8%
compared with 6.6% for the fourth quarter of 2005. For the full year,
SG&A was 7.2% of net sales.
Interest expense for the fourth quarter was $60 million, up $15
million from the fourth quarter of 2005 due to increased debt levels
following our emergence from Chapter 11. After fully funding our
asbestos trust, the run rate for our annual interest expense is about
$150 million per year. This will be reduced to a level of about $83
million after receipt of our tax refund, which is expected by
midyear.
The tax rate on earnings was 37.1% for the fourth quarter of 2006.
Our tax rate for all of 2006 is about 39.5% and was at the high end
of historical levels primarily due to the nondeductibility of certain
bankruptcy costs and an IRS settlement. We would anticipate a lower
tax rate for 2007, closer to about 38%, depending on the mix of
worldwide income.
Regarding our cash and debt situation, our cash balance of December
31 was $571 million compared with $1.6 billion on December 31, 2005.
The 12/31/06 balance reflected our funding of payments due under our
plan of reorganization. All asbestos personal injury claim payments
due under our plan of reorganization are now completely behind us.
Total debt was $2.5 million as of December 31, compared with $239
million on September 30, 2006.
Changes in our debt structure since the end of September included
increases in borrowings of $700 million on the term portion of our
credit facility, and $1.065 billion on the tax bridge note portion of
the facility. We also issued $500 million of senior unsecured notes
during the fourth quarter.
These borrowings plus cash on hand were used to fund a final $3.05
billion payment to our asbestos trust on December 21. We expect the
borrowing under the tax bridge note to be repaid later this year,
upon receipt of the tax refund.
As of December 31, 2006, the unused borrowing capacity under our
credit facility totaled $564 million. When combined with cash on
hand, total liquidity available to USG was more than $1.1 billion.
This substantial liquidity level provides us with the financial
flexibility to deal with these challenging times.
Regarding capital spending for 2006 and 2007, capital expenditures
excluding acquisitions totaled $156 million in the fourth quarter
compared to $73 million in the same quarter last year. For all of
2006, CapEx totaled $393 million compared to $198 million in 2005. In
addition, $128 million was spent in acquisitions in all of 2006
compared to $29 million in 2005.
The increased level of spending on CapEx last year reflects funding
for a number of strategic investments including two new wallboard
plants in the U.S. that will help sustain USG's competitive
leadership and ability to grow with our customers.
CapEx in 2007 excluding acquisitions is expected to be similar to
2006 levels. Acquisitions have been focused on growing our successful
Building Products Distribution business, L&W Supply. The expected
soft market conditions may provide attractive investment
opportunities. As stated in our third-quarter 10-Q, the timing and
size of opportunities is uncertain; but acquisitions requiring 300 to
$400 million could be consummated in 2007. There can, of course, be
no assurance that any of these acquisitions will be consummated.
Now we will be happy to answer any questions you may have.
OPERATOR: (OPERATOR INSTRUCTIONS) Jim Barrett from C. L. King &
Associates.
JIM BARRETT, ANALYST, C. L. KING & ASSOCIATES: Bill, can you talk a
little bit about the rest of the industry? Although we got scattered
reports of slowdowns in new production, how do you characterize to
what degree the rest of the industry is adjusting to this downturn?
You certainly made it clear how USG has adjusted. Can you talk about
the rest of the group?
BILL FOOTE: In broad terms, Jim -- and Rick may have a comment -- the
people that we are competing with today have been in this business a
while. We have seen no new entrants. My information is limited to
public announcements, but I think that they are seeing obviously the
same pressures we are seeing; and I would expect as they understand
or they share the same beliefs we do about this year and possibly '08
that they will adjust accordingly.
I think that we got on it very quickly. Actually, our cutbacks have
come in two waves. One, in early October and the second the first of
January. We compete everywhere, so we've got pretty good information.
But I think as I said, their public announcements are the best thing
to rely on; but these folks have been around and I would expect that
they will adjust appropriately.
JIM BARRETT: Okay. Okay.
OPERATOR: David MacGregor from Longbow Research.
DAVID MACGREGOR, ANALYST, LONGBOW RESEARCH: I guess in your prepared
remarks you had talked about industry capacity being up about 1.5
billion square feet in 2007. You had also at a different point in the
discussion made note that you had two new plants coming up and
running. I guess I am interested in what percentage of the 1.5
billion square feet would be USG. Then just what are your general
plans for new capacity as a Company over the next couple of years?
What is the impact on CapEx?
BILL FOOTE: This is Bill. Of the new capacity coming on this year, we
are about 300 million feet of the 1.5 billion. Our investor relations
department can provide you more information on that.
We have another plant that will come online next year. As I said,
strategically, the plants we built in the -- well, let me step back.
We see real growth in this business over time, notwithstanding the
current downturn; and our cost position is extraordinarily important
to us.
All of the investments we have made in the past and the two that are
under way do two things. One is they provide an incremental capacity
to serve the growth; and two, in markets like this, allow us to
dramatically reduce our marginal costs.
So we are always looking for opportunities, and we will invest
accordingly. There has been a great deal of work that has gone on
over the last five years, and we will stick to our plans, adjusting
timing as we see fit based on the opportunities and the market
conditions.
DAVID MACGREGOR: You talked about the cost reductions being a
priority as you look at investing in new capacity. What is the spread
today between the cost per 1,000 square feet between, say, the
highest-cost players in the game and the lowest-cost players,
excluding outliers? But just generally speaking.
BILL FOOTE: Yes, we don't comment on our costs, but there is quite a
range in them. I can tell you that the capacity that we have taken
down is all high-cost. The two that we have closed were at the high
end of the cost curve. Today we are running our low-cost capacity --
we are running as I said, just below 80%. We are running our low-cost
capacity around 90%, the low-cost capacity around 60%.
DAVID MACGREGOR: Okay, you can't comment on the industry cost curve
just in general? Not so much your particular capacity but that of the
overall industry, in terms of the difference between high-cost and
low-cost?
BILL FOOTE: Rick, would you like to --?
RICK FLEMING: Well, I would just say, we have said this in the past,
that a high-cost plant in the industry is probably about twice as
much cost as a low-cost plant. If that is what you are looking for.
DAVID MACGREGOR: That's helpful. Thank you very much.
OPERATOR: Craig Peckham from Jefferies & Company.
CRAIG PECKHAM, ANALYST, JEFFERIES & CO.: I wanted to talk a little
bit about pricing. I wondered if you could give us a snapshot for how
pricing in the gypsum wallboard business looked at the end of the
quarter; and perhaps how it's been tracking so far in January? And
maybe contrast that to what you are seeing out of the rest of the
marketplace?
RICK FLEMING: This is Rick Fleming. We did share with you what the
quarterly average price was of $181.75. We don't actually disclose
our end of quarter prices. We have obviously given you a sense that
we expect prices to continue to soften during the course of 2007. But
that is really the extent of what we're going to be covering in terms
of our guidance in that area.
CRAIG PECKHAM: Okay. So maybe I can use my one-question quota towards
another one then. I wonder, you mentioned in the press release that
higher energy costs were one of the factors that were impacting
margins; though the price of natural gas is down considerably in the
fourth quarter of '06 compared to the fourth quarter of '05. I
imagine hedging has something to do with the dynamic there. Can you
get us up to speed a bit on when you may be starting to see the
benefit of lower natural gas prices?
RICK FLEMING: Sure, I would be happy to share with you our hedging
program. As you know, we have had one in place for a long, long time.
We do dollar cost average and buy really on dips. But we always try
to be basically dealing with a rolling 12-month hedge. As a result,
what we're really doing with the program is taking out of the
equation the volatility of natural gas prices, which as you know can
be 180 to 200% over time. So it's a highly volatile commodity and a
significant input in our cost structure.
We enter the year at about a 76% hedge rate. At the end of the year,
our mark-to-market, which will be disclosed in our 10-K, is -$28
million due to the seasonal drop in gas prices. Having said all that,
recent mark-to-markets are much less because gas has actually gone up
in the month of January.
So the purpose once again is to take volatility out of the situation.
We're not, today, having the benefits of the lower spot gas prices.
But we think over time we have locked in a cost that is appropriate,
given our cost structure. I hope that is helpful.
CRAIG PECKHAM: Thanks, Rick.
OPERATOR: [Mark Shoal] from [Deshaw].
MARK SHOAL, ANALYST, [DESHAW]: Given the Company's strong competitive
position and favorable long-term outlook, can you share your thinking
on the possibility of using some of your cash to buy back stock?
Thanks.
BILL FOOTE: Thank you, Mark, and we are aware of your interest in
that subject. You know, we have been very focused on shareholders
over the last five years. We are also sensitive to the agencies and
our debt stakeholders, and our opportunities to reinvest. It is a
balancing act.
We are very mindful of your interest and we appreciate it, and as
things evolve we just have to keep balancing the various uses of
cash. But we are sensitive to the desire of some for share buybacks
and dividends. We are also well aware of our coverage ratios. Lastly,
we want to invest because we see some terrific opportunities to
invest. We will continue to keep all that in the front of our mind as
we make our decisions.
MARK SHOAL: Thank you.
OPERATOR: [John Lynch] from Lynch Research.
JOHN LYNCH, ANALYST, [LYNCH] RESEARCH: Good to have you back. A
couple of things and they are not new questions. The freight that you
tuck in there, how do you handle freight in that 181? Do you include
part of it, all of it?
The second part would be, relative year to year, what has been the
change in freight charges?
RICK FLEMING: Well, I will answer the first part of the question;
then Rick Lowes, our Controller, will talk about the general trends
in freight costs. But when we quote the price of $181.75, it is a
realized price for the Company. So that basically is what we get
after all costs.
JOHN LYNCH: Okay, so your freight is already tucked in there?
RICK FLEMING: Rick will talk about the trends. Obviously with gas
prices having gone up there has been some pressure on freight, but
that has abated. Rick?
RICK LOWES, VP, CONTROLLER, USG CORPORATION: Yes, it is Rick Lowes,
the Controller speaking. There was some pressure earlier in the year
with freight, (indiscernible) gas price. But oil came down too, and
that is more indicative of our freight costs (inaudible) drop in oil.
So right now we're taking advantage of that. We anticipate that going
forward, so we're actually seeing some drop in our freight cost. But
as Rick says, our [selling] price is net of freight.
JOHN LYNCH: Is there any way that you -- I mean, you can hedge your
raw material costs and your ongoing operating figures. Is there
anything you can do to influence your freight costs?
RICK FLEMING: Certainly we can work very closely with our carriers in
partnership to reduce our freight costs and try to have a way to
effectively make them more efficient. Obviously when they come to a
plant, if they are able to load quickly and get out that is a cost
savings to them if we have our operation set up to facilitate that.
They have savings and we would expect those to be shared with us. So
we work very hard to manage that freight cost.
There is little opportunity to actually hedge the gas that they use,
although we certainly have in the past worked hard to make sure that
is we are efficient in our routing and our delivery system.
OPERATOR: Robert Ryan from Banc of America.
ROBERT RYAN, ANALYST, BANC OF AMERICA: Your current tax assets on the
balance sheet at the end of the third quarter, between the deferred
tax, current assets, and the income tax receivable, net balance was
$1.52 billion; and now I see the fourth-quarter balance sheet it is
$1.27 billion. Could you help me fill in the gap in terms of what tax
attributes were realized during the fourth quarter? What might have
been a revision to your estimated recoverability of those accounts?
And then, what you are seeing in terms of the timing and the amount
for the ultimate tax refund related to the asbestos contribution?
RICK FLEMING: Right, the income tax receivable as you noted at
12/31/06 is $1.102 billion. We think the federal refund component of
that, as I mentioned in my remarks, is $1.065 billion. During the
fourth quarter, we did realize, in terms of effectively trading that
receivable, a substantial tax attribute by the funding of the
asbestos trust.
So as you probably surmised from my comment, we actually funded both
the payment due at year end plus the payment that would have been due
six months in the future under our asbestos resolution. We put $3.05
billion into the asbestos trust, thus, if you will, creating that tax
carryback of $1.065 billion.
As to timing, we would anticipate that we would get that refund about
the middle of 2007. Obviously, we have to go through the schedule
with the IRS, but we feel comfortable that that will likely be the
time frame in the middle of the year. Then it will be subject to
joint committee review, which we are going to ask to have done on an
expedited basis, hopefully concluded by year-end.
ROBERT RYAN: Okay, so the total tax, current tax attributes have
declined $250 million in the fourth quarter. I don't know if some of
that was reallocated into the long-term assets, or some of that was
actually converted into cash in the form of a tax refund in the
fourth quarter.
RICK FLEMING: No, nothing was converted into cash. There would have
been substantial sort of geography on the tax area. I would point out
we have had no payments of taxes in 2006.
ROBERT RYAN: Okay, okay. All right. Thank you very much.
OPERATOR: [Bob Thompson] from Advantus Capital.
BOB THOMPSON, ANALYST, ADVANTUS CAPITAL: Do you have any estimates of
the CapEx and SG&A for '07, CapEx excluding acquisitions?
RICK FLEMING: Yes, I'm sorry if I wasn't clear in my remarks on that.
We expect '07 CapEx to be similar to '06 excluding acquisitions.
BOB THOMPSON: Okay, then how about SG&A? Similar as well?
RICK FLEMING: SG&A will be similar as well. But we did point out
that we have had some unusual costs in the fourth quarter, for
example, that would not repeat, such as the adoption of 123(R) and
the initial entries for that; as well as the move to our less-costly
office space; and last but not least some wrap-up of bankruptcy fees.
But on balance I would say a similar level going into the year.
BOB THOMPSON: Okay. One last question, regarding acquisitions, would
you keep in mind the rating agencies? I mean, the goal of being
investment-grade relative to acquisitions?
RICK FLEMING: Yes, it is our capital structure philosophy to have an
investment-grade profile. As we look at acquisition opportunities of
the magnitude that I suggested, 300 to $400 million, we would clearly
explore all financing options as appropriate with an investment-grade
balance sheet.
BOB THOMPSON: Great, thank you very much.
OPERATOR: [Anton Kowalski] from [Canyon] Capital.
ANTON KOWALSKI, ANALYST, [CANYON] CAPITAL: I am wondering, is the tax
refund going to be used all for debt paydown? Have you guys decided
what the use of that is?
RICK FLEMING: Yes, the tax refund actually under our debt agreements
will be applied against the tax bridge note. So when we funded the
asbestos trust, we actually borrowed the refund in a tax bridge
facility, $1.065 billion. Upon receipt of the refund, we simply pay
that off.
ANTON KOWALSKI: Okay. Also, one other question. The CapEx for the new
plant is going to be higher? I guess it is higher this year. Do you
plan on 2007 being about the same amount? Are the plants going to be
done by 2007, or should we expect that to continue into '08?
RICK FLEMING: The spending for particularly the Washingtonville plant
does go into '08. I don't have and I would not be able to give you a
forecast for 2008 CapEx right now. But the Norfolk plant will be
completed in 2007.
OPERATOR: Jim Barrett from C. L. King and Associates.
JIM BARRETT: Bill, I just wanted to follow up on pricing. I
understand you can't give end of the quarter pricing, but I was
surprised at how healthy your pricing was on average in the quarter,
given the 17% decline in wallboard shipments. Can you comment as why
pricing went down as gently as it did on average in the quarter?
BILL FOOTE: Well, I've got to be careful, Jim, for the same reasons I
was careful on the last question, which is our competitors'
announcements as well. I would say that we were quick to adjust. We
have been very focused on serving our customers and maintaining our
position with our customers.
You know, we were able to sustain reasonably attractive pricing in
the quarter, although the direction, as Rick indicated, is south. We
will continue to manage price and volume based on the opportunity
that is out there. You know, unfortunately the fundamentals are such
that there is weakness underneath us, but we will persevere.
JIM BARRETT: Okay, thanks again.
OPERATOR: Michael Gasner from Buckingham Research.
MICHAEL GASNER, ANALYST, BUCKINGHAM RESEARCH: Can you just talk about
your outlook for your non-wallboard products within the gypsum
segment for next year? Specifically how you think volume and price
may play out with those products.
BILL FOOTE: Yes, this is Bill. We, beyond the three core businesses,
wallboard, L&W and our ceilings business, have some terrific
businesses. Our joint treatment business and our higher performance
substrates such as DUROCK and FIBEROCK, those businesses have enjoyed
good growth year-to-year with strong and improving margins.
Now indeed, some of those, particularly joint treatment where we are
a significant player, are going to be buffeted by the same forces as
wallboard, so there are some pressures on them. But a lot of those
products go into repair and renovation. So while we are seeing
softening in the new construction side of our business, repair and
remodel we still see positive growth this year and the commercial
market is strong. So on a relative basis, those businesses we
wouldn't think would be as adversely affected.
Longer term, we see terrific continuing growth opportunities in
those. For those who have heard us talk in conferences, we're looking
to accelerate our growth, and our so-called performance surfaces
business, which is joint treatment plaster, and performance
substrates business, which is DUROCK and FIBEROCK, on a longer-term
basis are very attractive. So they are going to help buoy earnings.
The only caveat I didn't say is what I said in my speech, which is
wallboard casts a shadow, but one that we are shortening as we
continue to diversify our sources of profitability.
MICHAEL GASNER: Very helpful. Thank you.
OPERATOR: David MacGregor from Longbow Research.
DAVID MACGREGOR: Yes, just a couple follow-ups. On that last question
you had talked about repair and model and commercial still looking
pretty good. What are you using as your growth expectations for
demand from those two sectors in 2007?
BILL FOOTE: On the commercial side, you know, it's been widely
reported that it's up sort of mid single digits. You know there is a
lot of commercial space built. We're not seeing quite the same
growth, but it is well above what it's been the last five years,
which has been down to flat.
So I would say in the 2 to 4% range on commercial, that we would be
seeing; the actual rates may be slightly higher because there's other
forms of construction going on, infrastructure and whatnot that don't
use ceiling tile.
Repair and renovation, you know, it follows existing home sales, and
those have been strong, [or] those two are in transition. It has been
as high as 5, 6%. We are again down in the moderate single or the
lower single digits; so I would say 2% is a good number to work with.
DAVID MACGREGOR: Okay, that's helpful. Thank you. Then on the pricing
question, can you talk a little bit about what you are seeing in
terms of regional premiums, say, in the Northeast over the western
part of the country? Are we expecting those premiums to shrink as
more synthetic gypsum starts to come into play?
BILL FOOTE: Yes, I can't comment on regional pricing, but let me just
clarify with respect to syn-gyp. Prices are a function of demand, and
the value we provide in the marketplace. Syn-gyp eliminates a barrier
in our business and allows new entrants, particularly in the Eastern
third. Yours is an astute question.
But that is coming on in chunks over time. We will see syn-gyp based
board capacity coming on late this year, next year. As that new
lower-cost capacity comes in, it could affect market level pricing,
but the premiums we enjoy are a function of the value we provide, and
we will always work to get paid as much as we can for our products.
DAVID MACGREGOR: Okay, that's helpful, too. Thanks. Then just last
question, we talked earlier about the fact that sales really slowed
in the second half of '06. So obviously we're going to be banging up
again some negative comps here for a while. But can you talk about
wallboard shipments on an average daily shipping basis, and what
you're seeing in terms of daily ships now versus say a week ago or a
month ago? Just generally do you get the sense that we're stabilizing
here?
BILL FOOTE: You know, what I can say is if you look
quarter-to-quarter, we were sold out in the first two quarters; the
softening started in the third and was clearly there by the fourth.
We were down -- we are running around 80%, so just take that delta
and apply it to the daily rates.
You know, the winter is a hard time to forecast. I have said widely
that we're in a period of uncertainty; and I don't think we're going
to know exactly where things will be until the spring.
DAVID MACGREGOR: Thanks very much and good luck.
OPERATOR: Ryan Watson from Stanfield Capital.
RYAN WATSON, ANALYST, STANFIELD CAPITAL: You spoke about the interest
savings that you're going to -- your pro forma interest savings in
'07 from the tax refunds. What is the actual number? I thought you
had guided for 875 in refunds on a previous call or a previous
presentation.
RICK FLEMING: No, the actual federal refund would be approximately
$1.1 billion. The number I used was $1.65 billion. (multiple
speakers)
RYAN WATSON: Will that all come this year?
RICK FLEMING: Yes, we anticipate getting it by the middle of the
year. When we pay down that tax bridge note, obviously we will save
the interest after that. So while that has been borrowed the run rate
for the interest is about $150 million annually. Once that note has
been paid down with the refund, the run rate for the interest will be
$83 million annually.
RYAN WATSON: Okay. Then you won't have any further refunds in '08; is
that correct?
RICK FLEMING: No, but we won't be a taxpayer in '08 either. Excuse
me; in '07 we won't be a taxpayer. As we get into '08, we will start
to be a taxpayer.
RYAN WATSON: Okay. Then generally when you look at housing starts,
how do those serve as a leading, or do they serve as a leading
indicator for your sales? I guess I am just trying to establish the
lag time.
RICK FLEMING: Sure, it's about 90 days for wallboard shipments.
RYAN WATSON: Great. Thank you.
RICK FLEMING: We suggest people look at the raw starts, not the
annualized number, when they look at that relationship.
OPERATOR: [Jeffrey Detheberg] from [K.B.] Advisers.
JEFFREY DETHEBERG, ANALYST, [K.B.] ADVISORS: Could you comment
briefly on the status of remaining property damage litigation and
what reserves you currently have, if you can comment on the latter?
BILL FOOTE: You take us back to the past. The story in a nutshell is
there is not much left. I will let Stan tell you.
STAN FERGUSON, SVP, GENERAL COUNSEL, USG CORPORATION: This is Stan
Ferguson. We have resolved all of our asbestos property damage cases
through the bankruptcy, and we have paid almost all of them. We have
a couple where we are going to pay the money shortly; and one where
we are going to pay the money by agreement with the claimant over
three or four years.
But we really resolved all the cases of any significance. There was
one homeowner claim we did not settle with. He has not filed a
lawsuit since we have been out of bankruptcy, so we don't regard that
as significant.
In terms of the remaining payments, I think it is probably in the
neighborhood of $30 million. But it's all reserved at this point on
our financial statements. It is just a matter of when we transfer the
cash.
JEFFREY DETHEBERG: Thank you. If I may, a follow-up on the interest
question. You have given us a number for your going-forward post
federal tax refund interest expense. You are carrying the better part
of $600 million in cash. Are you netting out any expected interest
income? Or could we expect some interest income to offset the
interest expense?
RICK FLEMING: That is a very good question. No, I was not netting out
any interest income. I was simply giving what will appear as the
interest expense (multiple speakers) So there would be an offset, you
are correct.
OPERATOR: Craig Peckham from Jefferies & Company.
CRAIG PECKHAM: I wanted to follow up on the acquisitions in L&W.
By my math it looks about $54 million was used on acquisitions in the
fourth quarter. Could you give us a sense for how many acquisitions
were made and how many locations were added?
RICK FLEMING: That is a very good number. It was about $55 million,
and that is for all interiors, which was identified on our
third-quarter 10-Q as a substantial distribution opportunity in the
southeastern part of the United States, primarily devoted towards
ceilings; and eight locations domestically.
JAMES BENCOMO: Operator, let's take one more call. We are just about
to 12 PM Eastern.
OPERATOR: At this moment, we don't show further questions.
JAMES BENCOMO: Okay, well, that's great. I think that concludes our
questions then. Bill, do you have any concluding comments?
BILL FOOTE: Thanks, Jim. As you heard, we are very proud of what we
accomplished in 2006 both from an operating standpoint and putting
asbestos behind us. We've got some challenges in 2007, ones we have
experienced in the past; and we are ready.
We are bigger, we are more diversified than we have been in the past.
L&W plays an ever more prominent role in the Company. Our
competitive position has never been stronger. And we have new
investments that will allow us to further extend our leadership.
The long-term prospects for our Company are terrific. With the return
of more favorable fundamentals, I can assure you that we will
outperform. Importantly, in the near term, we will stay very focused
on our customers. We will stay very focused on our cost position. We
will manage our cash wisely, and we have got the financial
flexibility to do so.
Ups and downs are part of our 100-year history. Here we go again. But
we have got a plan for all seasons, a plan for success, and that is
what my team and I are focused on. We really appreciate your support
and interest, and we will talk to you next quarter.
JAMES BENCOMO: Thank you, Bill, and thank all of you for joining us.
If you have further questions you may call me directly at
312-606-4125. There is also a taped replay of this call that will be
available in just a few hours by dialing 888-843-8996 and entering
the pass code 16827655. There will also be an archived replay on our
website. Thank you.
OPERATOR: Thank you, ladies and gentlemen, this concludes your
teleconference. Thank you for participating. You may now disconnect.
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