Curb Your Enthusiasm: USG Earnings and Conference Call Notes

July 23rd, 2009 by

James Cullen

If you needed something to temper the bullishness that’s gripped the markets, here it is… wallboard maker USG reported second quarter earnings yesterday. From the conference call:

Looking ahead at the remainder of 2009 and into next year, we are not expecting much improvement in our markets. More specifically, we are planning for low levels of residential construction, though some stabilization seems on the horizon, a continuing slowdown in repair and remodel and a fairly significant drop in new non-residential construction.

The new residential construction market has fallen so far that there’s really not much more room for further declines. The market appears to be stabilizing and the June starts figure of 582,000 is somewhat encouraging, but there’s no evidence yet of a meaningful rebound.

Looking down 2009, stability in the new residential and repair and remodel markets will be a welcome relief. The major area of concern right now is non-residential construction. It declined on the second quarter and is likely to continue declining for the next several quarters.
-USG CEO Bill Foote

With USG’s last earnings report, I noted that unit pricing for wallboard was still improving, despite falling demand and a huge amount of excess capacity in the industry. While giving kudos to USG for being able to raise prices, it was a puzzling phenomenon and one that wasn’t sustainable. This quarter, the amazing levitating pricing power came to a halt, and slipped back half a percent, to $120.79/msqft. While far from huge, it snaps a string of four consecutive quarters where average realized price rose, although the streak of consecutive quarters with declining shipments hit five.

USG is also carefully monitoring their liquidity after having to accept $400 million in new capital at a high interest rate and on heavily dilutive (35% or so) terms. CapEx is forecast to be $50 million annually over the next two years, an extremely low figure relative to earlier spending. There’s been too much building in the wallboard industry, USG included, and their plants are on the newer side – this shouldn’t be a problem, but it is an indicator that they don’t expect a material improvement in cash results and are being extremely cautious. Various non-strategic asset sales were also discussed, with the hope of raising an extra $50 to $100 million.

Another exchange of note: commercial demand is expected to be down 20% to 25% year-over-year, but are there pockets of residential real estate that are less bad?

I’m sure it won’t come to any surprise Florida, Arizona, Nevada are still under extreme demand pressure, and the outlook is a pretty tough market. The inner mountain area is a good area. The Midwest area is still fairly solid and pockets in the Northeast.
-USG COO Jim Metcalf

To conclude, a few updated charts relating to various data on USG’s operations and stock performance. First, wallboard prices, the stock price, and the historical price-to-sales (P/S) – even if things look grim, the P/S multiple has been steadily improving, and that’s not because sales are going up.

On to quarterly financial results – again, management deserves credit for controlling what can be controlled. End user markets are terrible, but losses have narrowed and the cost structure is such that a $400 million drop in comparable quarter revenue didn’t move the needle on operating loss.

Finally, a chart of wallboard volumes and how shipment rates have changed. The year-over-year decline was the worst seen at any point in this cycle, and the quarter-over-quarter numbers were marginally worse than last time as well.