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USG Corp. (NYSE:USG)

Q3 FY08 Earnings Call

October 28, 2008, 11:00 AM ET

Executives

James R. Bencomo - Director of IR and Pension Investments

William C. Foote - Chairman and CEO

James S. Metcalf - President and COO

Richard H. Fleming - EVP and CFO

Analysts

Jennifer Consoli - JPMorgan

Garik Shmois - Longbow Research

Kathryn Thompson - Avondale Partners

Patrick Archambault - Goldman Sachs

Jim Barrett - CL King Associates

Jack Kasprzak - BB&T Capital Markets

Alan Ratner - Zelman Associates

Todd Vencil - Davenport

Mark Weintraub - Buckingham Research

William Fisher - Wells Fargo

Operator

Good morning, ladies and gentlemen and welcome to the USG Corporation Third Quarter 2008 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 will now turn the call over to Mr. James Bencomo, Director of Investor Relations and Pension Investments. Mr. Bencomo you may begin.

James R. Bencomo - Director of Investor Relations and Pension Investments

Thanks, Christine. Good morning and welcome to USG Corporation's third quarter 2008 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 also 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, 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.

Bill will begin by commenting on current market conditions, USG's performance this past quarter and some of the initiatives we have underway as well as our thoughts on the longer term. Jim will then discuss the operating results in our core businesses, and Rick will conclude our prepared remarks by covering consolidated financial results as well as capital spending, debt and liquidity. We'll open up the call to 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 and Controller. So, let's started. Bill?

William C. Foote - Chairman and Chief Executive Officer

Thanks, Jim and thanks all of you for dialing into the call this morning. As always, we appreciate your interest in USG. We are certainly operating in unchartered territory and I don't mean just USG, I mean all of us, everybody on this call. I am sure that every company represented on the call has been affected by the turmoil in the capital markets, one way or another. A problem that was originally confined to the housing and mortgage market, has erupted into an unprecedented global financial crisis that is affecting all of USG's businesses in all of our markets.

When the residential housing market first showed signs of weakening more than two years ago, we adopted a conservative phased approach to stay ahead of the declining market. Those of you that have been following the company for the last two and half years are aware that we would adapt to ongoing declines in the residential housing market by aggressively cutting manufacturing capacity and reducing costs throughout the company.

Conditions changed dramatically in the third quarter. The problem was originally confined to the residential housing market, has grown into a much broader and deeper economic contraction. Given this dramatic turn of events in recent weeks, we are reevaluating our market forecast and preparing plans to stay ahead of the latest decline in our key markets.

We've not finalized our plans, but the changes we make will be significant. They will entail further reductions in costs, manufacturing capacity and capital spending that are commensurate with the economic climate we are likely to encounter in the foreseeable future. We expect to implement those plans before the end of the year.

In addition to the actions we've taken to adapt our operations to the protracted market downturn, we've also maintained a sharp focus on financial flexibility. Since the downturn began in mid 2006, we've succeeded in refinancing shorter term bank debt by issuing $1 billion of 10-year bonds. As a result, we do not have any term debt maturities until 2016.

In addition to those refinancing activities, we also raised more than $400 million in equity, further strengthening our capital structure. As the market deteriorated further, we've continued to seek additional sources of liquidity. Since the beginning of the third quarter, we finalized two asset-backed financings that provide us with approximately $235 million of additional borrowing capacity.

More specifically, we signed a new five-year $170 million receivables-backed credit facility. And just last week, we finalized a ship mortgage financing agreement that we expect to provide us with an additional borrowing capacity of approximately 65 million. More recently, we notified the lead banks of our unsecured credit facility, so we intend to begin discussions with them to seek a waiver or modifications of the EBITDA covenant on our loan agreement to adapt it to the effects of a weakening global economy.

The protracted downturn in residential housing and now the more global economic contraction that has materialized in recent weeks has caused us to respond quickly and decisively. We have taken numerous actions over the past two and half years to optimize both our operations and our finances. We are clearly having a new phase of this economic crisis that will require additional action on our part. We're preparing those plans and we'll implement it soon. As I said a moment ago, they will be significant and appropriate for the conditions we are likely to encounter next year and beyond.

Now, I'd like to turn the call over to Jim Metcalf and Rick Fleming. Jim will discuss the impact of the economic crisis that is occurring in our businesses and how we are adapting to this market conditions. Rick will then describe our financial strategies in greater detail. Jim?

James S. Metcalf - President and Chief Operating Officer

Thank you, Bill. Good morning. Over the last few weeks, I've had numerous conversations with many of our customers. It's accurate to say that everyone is concerned at the severity at this downturn.

Our customers have been in the industry for a while and they've seen previous cycles. But this is the toughest market our customers and we have experienced. The meltdown in the credit markets and the overall economic slowdown in the third quarter had an effect on all of our businesses.

We were originally dealing with the demand problem that was largely confined to our domestic wallboard business. Now we're seeing the impact of the economy in all of our businesses in the U.S. and abroad.

Before I discuss our business in detail, let me mention some key trends in the quarter. Keep in mind that the third quarter was unusual. First, the first couple of months were very similar to the second quarter. But conditions changed late in the quarter, when the economic crisis began to unfold.

In our wallboard business, the trends we experienced in the second quarter continued into the early part of the third quarter. Specifically, we saw weak demand and continued cost pressures on raw materials. On a positive side, we continued to implement price increases for wallboard during the quarter. As we approach the end of the third quarter, wallboard demand weakened further.

The ceilings business continued to benefit from improved performance and momentum in the commercial market. But as we expected, we started these to see signs of a slowdown in the commercial business during the quarter.

In our distribution business, the residential part of our business was soft, while the commercial products were stronger on a relative basis. L&W's business was considerably weaker overall at the end of the quarter than it was at the beginning. And looking beyond the United States, we started to see the signs of a slowdown in most international markets, and many of our product lines.

But on a positive note, I'm proud to report that we were awarded another OSHA Gold Star for excellent performance on the safety front. Our Stony Point, New York plant was honored by OSHA, bringing the total to seven facilities nationwide.

Now I'd like to review each business in little more detail, starting with North American Gypsum. The domestic wallboard market was extremely weak in the quarter. Compared to the third quarter of last year, our wallboard volume was down approximately 27%. U.S. Gypsum shipped 1.7 billion feet of wallboard in the quarter compared to 1.9 billion feet in the second quarter. That's a clear indication that the market remains soft.

We have however successfully implemented price increases this year, including the third quarter. The average price for the quarter was approximately 114.40 per thousand, an improvement from the 109.81 in the second quarter.

The trend in the first nine months of this year reflects modest but steady price increases in wallboard and we will continue to seek price increases through the remainder of this year and into 2009. We ran our wallboard network at approximately 65% capacity utilization in the quarter, which was higher than the rest of the industry.

High raw material and freight costs continue to impact our third quarter results. We have an intense focus in this area through our strategic sourcing and transportation team to reduce our costs. Energy and other costs did moderate late in the quarter, but are still at relatively high levels.

Now turning to our Worldwide Ceilings business, we followed up a record first half with a solid third quarter. Volume in ceiling tile and grid was up 2 and 3% respectively versus 2007.

Price improvement was achieved in each product category in our ceilings business versus last year. But our overall performance was negatively impacted by increased manufacturing costs. Conditions are changing in the overall commercial market, and we are beginning to see the impact of this in our ceilings business.

Our distribution business, L&W Supply recorded an operating profit of $4 million for the quarter. Sales in non-wallboard products declined slightly from the previous quarter, while wallboard volume was down 9%. L&W did realize improved wallboard prices in the third quarter. Like all of our other businesses, we are very focused on cost control at L&W. We have closed or consolidated four locations during the quarter, bringing the total number of closed centers to 24 in 2008. Even after these closures, L&W does remain the market leader with an intense focus on customer satisfaction.

Third quarter results at our International operations reflected the softening in the global market, and it is beginning to impact our total international operations. For example, USG Mexico sales increased 8%, while operating profit was down slightly.

Sales at CGS Inc. increased by 7% during the quarter, but operating profit was $1 million decline from $2 million in 2007.

So as you can see, this is a very difficult market that is affecting all of our businesses at this point. We've clearly entered a new phase in what is already been a multi-year downturn. Over the past two and a half years, we have responded decisively to the declines in our market by removing high cost manufacturing capacity, reducing overall costs and focusing on customer satisfaction.

Given the recent events in the overall economy, we do need to do more as Bill just mentioned. We're finalizing our plans to significantly adjust our operations and our cost structure to the current market demand. We are committed to do what it takes to weather this downturn and position the company for growth.

Now, I'd like to turn the call over to Rick Fleming, who will discuss our financials. Rick?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Thanks, Jim and good morning. As indicated, I'll provide some details on our third quarter financial results including some comments on the housing and credit market situation, and how we're managing our finances during these difficult market conditions.

Third quarter 2008 net sales were $1.21 billion, down 9% from the third quarter of 2007 net sales level of $1.34 billion. Our third quarter operating loss of $40 million included $8 million of restructuring costs and service expenses. In the last year's third quarter, we reported an operating profit of $25 million after $3 million in restructuring charges.

Third quarter 2008 net loss was $40 million compared with net earnings of $7 million in the last year's third quarter. On EPS basis, our loss per diluted share was $0.40 for the third quarter based on the average diluted shares outstanding of 99.1 million. Last year's third quarter EPS was $0.07.

As mentioned, the third quarter of 2008 results included a restructuring cost related to the closure of several manufacturing and distribution facilities and start-up costs for new plants in Michigan and Pennsylvania.

The restructuring charge was $3 million after tax or $0.03 per share, and after tax start-up expenses totaled $2 million or $0.02 per share. We anticipate that there will be additional start-up expenses in the fourth quarter of approximately $5 million pre-tax, primarily associated with the fourth quarter start-up of the Washingtonville, Pennsylvania plant.

Bill and Jim described the challenging market conditions that we are dealing with and how our three core businesses performed. Let me mention that our economic work show that housing is starting to show signs of bottoming during July and August of this year. But in late August and early September we have seen a much deeper credit crunch than we have experienced in decades, and now appears the general economy is entering into a recession.

Given this situation, we're taking further actions for what to be a longer housing recession and a longer time at the trough. With that backdrop, I will now describe what we've done, and will be doing to manage overhead, capital spending and our balance sheet. I will start would overhead.

Reflecting actions to reduce cost since last year, selling, general and administrative expense or SG&A for the nine-month period totaled $287 million, down $19 million or 6% from the same period last year. And as Bill and Jim indicated, in light of the further weakness that we anticipate in our markets, we will be taking additional actions to further reduce overhead expenses. Although our plans are not yet finalized, these actions will be significant.

Interest expense for the third quarter was $21 million and totaled $59 million for the first nine months of the year. This is down from $85 million through September last year. We are currently anticipating our annual interest expense will run about $85 million this year, net of about $18 million in capitalized interest.

The effective tax benefit rate was 35.4% for the third quarter 2008, which brought our year-to-date rate to 39.1%. Depending on the fourth quarter mix worldwide income, we also anticipate a full year tax benefit rate of about 39%.

Regarding capital spending, capital expenditures totaled $37 million in the third quarter compared to $170 million in the same quarter last year. The significantly lower level of CapEx spending this year reflects the substantial completion of a number of strategic investments, including two new low-cost wallboard plants in the U.S. and a new state-of-the-art paper mill.

CapEx for 2008 is expected to be about $240 million, down from $460 million for all of 2007. Given the high level of new investments that we've made in our operations over the past few years and the soft business conditions, we plan to continue to reduce debt [ph], although we are still finalizing our CapEx target for 2009, it will be well blow $100 million versus this year's level of $240 million.

Regarding our cash and debt situation, our cash balance as of September 30 was $159 million compared with $181 million at the end of the second quarter. Total debt was $1.464 billion as of September 30 compared to $1.385 billion at the end of the second quarter.

Debt as of September 30 included $226 million drawn on our $650 million revolving credit facility, the results from additional $78 million of outstanding letters of credit backed by the revolver.

As housing market downturn began to unfold in 2006, we took a number of actions to proactively manage our financial position and liquidity. These actions included paying down and extending maturity of our outstanding debt, issuing equity and adjusting the terms of our credit facility. As a result, USG has no term debt maturities before 2016 and maturity of our loan credit facility was extended to 2012.

More recently, we have been adding new sources of liquidity. For instance, in September, we entered into a new five-year $170 million secured revolving credit facility backed by our accounts receivables. Today, the full $170 million is available to us. We've also put in place a financing program for our ships that hold Gypsum rock that will provide about $65 million of additional liquidity. So since beginning of the third quarter, we have raised $235 million of additional liquidity.

And as Bill mentioned, we're also exploring other financing arrangements including possible debt and equity issuances that might be used to reduce or eliminate the need for existing unsecured revolving credit facility.

Today, we also reported that if current construction and financial market conditions persist, and our steps to adjust operations, programs and staffing to those conditions do not adequately reduce costs or we are unable to implement other financing arrangements or modifications to our unsecured credit agreement, we may have difficulty meeting the EBITDA covenant contained in that agreement as of the end of the first quarter of 2009, possibly as early as the fourth quarter of 2008. But I want to emphasize that we are fully in compliance with all terms of agreements as of September 30.

As Bill mentioned, we have notified our lead banks under this agreement and we intend to begin discussions with them with respect to a possible waiver or modification of the covenant. As many of you know, USG has very strong relationships with these banks and we look forward to productive discussions with them.

So in conclusion, I'd like to echo Bill and Jim that these are challenging times for the U.S. economy and therefore for USG, we've been prepared for this. Contingency plans were developed and liquidity has been enhanced as evidenced by the $235 million we have raised since the beginning of third quarter. And we will continue to seek additional liquidity to diversify our sources of funding.

Finally, a key part of our plan is to return the corporation to a cash flow positive situation after CapEx and interest.

The final part I'd like to share with you is that although these are challenging times, we've been there and done it before. This team has dealt with many recessions and restructurings. We know how to deal with tough situations; we know how to make sure that we're well positioned to capitalize on the eventual recovery of the economy at our markets.

Now we will be happy to answer any questions you may have.

Question And Answer

Operator

Thank you. [Operator Instructions]. The first question comes from Michael Rehaut from JPMorgan. Please go ahead.

Jennifer Consoli - JPMorgan

Hi, this is Jen Consoli on the line for Mike. Good morning. My first question, I just wanted... I know that there is a lot of numbers, and with the additional liquidity, what was your total liquidity position as of the end of the third quarter?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Our liquidity position was over $600 million with the new liquidity that we've added. Now there is a provision in the credit agreement, there required to be a minimum liquidity of $300 million. But the gross number was over $600 million.

Jennifer Consoli - JPMorgan

Okay.

Richard H. Fleming - Executive Vice President and Chief Financial Officer

I mean year-to-date.

Jennifer Consoli - JPMorgan

Okay. And that includes this additional 235 million?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

That's correct.

Jennifer Consoli - JPMorgan

Okay. Secondly, as far as the EBITDA covenant, where were you at the end of the third quarter and what exactly is the requirement that is stated in the agreement right now?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

For the EBITDA, covenant changes by quarter, it did contemplate in '09 the impact of our cost saving activities and then it had a general recovery contemplated in 2010. And as part of our view right now that this maybe an elongated recession with another write-down, that's why we're proactively addressing the covenant levels that we've set previously. But to give you the numbers for the five... for the quarter of ending September 30 was $5 million. We were well above that, several million dollars above that. The covenant goes to a $20 billion rolling 12-month level of EBITDA in the fourth quarter and then it goes to $40 million in the first quarter.

Jennifer Consoli - JPMorgan

Okay, it's great. And then were there any capacity closures announcements made by your competitors during the past quarter that you know off?

James S. Metcalf - President and Chief Operating Officer

During the quarter, we have... let me give you the capacity closures for this year. We had approximately three by National Gypsum, one by Lafarge, two by Georgia-Pacific and one by CertainTeed. Those all... those were all this year.

Jennifer Consoli - JPMorgan

Okay. So there was nothing incremental this past quarter?

James S. Metcalf - President and Chief Operating Officer

Just some small incrementals, couple of hundred million fee, nothing of substantial nature.

Jennifer Consoli - JPMorgan

Okay, great. Thank you.

Operator

The next question comes from Garik Shmois from Longbow Research. Please go ahead.

Garik Shmois - Longbow Research

Hi, good morning. This is Garik Shmois of Longbow Research. Just regarding the capacity closures, could you just give us a up-to-date figure as far as how much capacity has been removed by those players this year?

James S. Metcalf - President and Chief Operating Officer

Well, let me respond... let me tell you what we've done. We have taken out capacity in Jacksonville, Florida; Santa Fe Springs, and our old Northrop [ph] plant. And that was done in 2007 and 2008. Along with that; Detroit, New Orleans; Boston, Massachusetts and Fort Dodge. If you look at our total... and that equates to about $1.8 billion feet. If you look at the total capacity that we've taken out with the 1.8 and shift reductions, it equals about 5 billion feet.

Garik Shmois - Longbow Research

Okay, thank you. It's helpful. And can you just update us if you have any wallboard price increases in the market currently?

James S. Metcalf - President and Chief Operating Officer

We have a price increase announced for yesterday.

Garik Shmois - Longbow Research

Okay. And the magnitude of that was?

James S. Metcalf - President and Chief Operating Officer

10 to 12%.

Garik Shmois - Longbow Research

Okay. And could you Rick, I think you mentioned that you are hedged on natural gas. In the last conference call you said 50% for 2009. Could you just update us, as far as where you stand now, what the average price looks like?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Sure. Yeah, for the balance of 2008, we've actually hedged the year at about 70%, and the hedge rate at the time we put it in was $8. As you know, gas has done quite a round trip, it went from 6.50 to 12.50 now back to a little bit around 6.50, perhaps today was at 6.12. So it's been quite a round trip by natural gas. The balance of once again '08 were about $8 versus was today of spot level of between 6.10 and 6.50 depending upon really the moment of the day.

Relative to 2009, we're about 50% hedged. We laid in those hedges on a dollar across the average basis, as gas was rising earlier in the year. And keeping with our policy, the average blended rate for '09 that has been hedged, is about 9.50 to mid 9s. But today's spot for the futures curve would be basically depending on the month of 2009 between 6.90 to 7.37 roughly.

Garik Shmois - Longbow Research

Okay. That's helpful. And just lastly, could you just talk about maybe some of the customers that you've been talking to on the distribution? And have you seen some of them go out of business or has there been some rationalization on that side of the business?

James S. Metcalf - President and Chief Operating Officer

At this point, we've seen mostly rationalization similar to what you've seen with L&W's closing centers consolidations. But we haven't seen any major closures of businesses.

Garik Shmois - Longbow Research

Okay, great. Thank you very much and good luck.

James S. Metcalf - President and Chief Operating Officer

You are welcome.

Operator

The next question comes from Kathryn Thompson from Avondale Partners. Please go ahead.

Kathryn Thompson - Avondale Partners

Thank you. In case of average pricing for the quarter, but could you tell us what pricing for wallboard was at the end of the quarter and where it's progressed since then?

James S. Metcalf - President and Chief Operating Officer

We only report our quarterly average realized selling price, so you have to get back to us next quarter. But what we started of the year, let me go back. We started out the first quarter around a $104, so we've realized about $10 from the 1Q to 3Q.

Kathryn Thompson - Avondale Partners

Well, as I understand there have been... there's a price fees increase in August and in September at least qualitatively. Could you at least clarify how much of the price increase in September went through for the industry and for USG?

James S. Metcalf - President and Chief Operating Officer

Well, we basically realized 4% from the second quarter to third quarter of our price increase.

Kathryn Thompson - Avondale Partners

All right. And as moving over to volume, how did... I know you gave the final number for the quarter. But how did volumes been throughout the quarter and where you're seeing current trends on a volume basis for wallboard?

James S. Metcalf - President and Chief Operating Officer

As I said in my prepared comments, the volume for the quarter was quite weak. We shipped about 1.7 billion I think was the number. We're seeing volumes trending down in the fourth quarter from a daily rate. And if you look at typically the third quarters is one of our busier quarters and we do not see that happen. Actually, volumes trended down from 1Q to 3Q throughout the year.

Kathryn Thompson - Avondale Partners

Okay. So trend wise, it was down and it's kind of continuing through this quarter?

James S. Metcalf - President and Chief Operating Officer

Yes. And again a good litmus test is to just follow housing starts and you add about three and half months to the housing start numbers and that will give you the trends of the total wallboard industry demand.

Kathryn Thompson - Avondale Partners

Sure, of course. Also as far as taking that a step further with volumes, were you seeing any particular geographic strength or weaker areas?

James S. Metcalf - President and Chief Operating Officer

Absolutely. The Southeastern part of the United States is probably the weakest, led by Florida. Of course you just look where housing slow, you know the Nevada markets. Texas is relatively a solid market up through the Midwest. So it is a regional business. It's basically west of the Mississippi is a much stronger market versus the Eastern Seaboard.

Kathryn Thompson - Avondale Partners

Okay. And at this point, just assume all things equal, no plant closures for yourself or for your competitors, what is your breakeven point for your wallboard operations?

James S. Metcalf - President and Chief Operating Officer

For the industry breakeven is about $130.

Kathryn Thompson - Avondale Partners

And how is that significantly different from you? I mean it seems like it were... your number will be... have to be north of that.

James S. Metcalf - President and Chief Operating Officer

We are the low-cost deliverer in the industry.

Kathryn Thompson - Avondale Partners

So would you say your breakeven is around $100.

James S. Metcalf - President and Chief Operating Officer

We don't comment on that.

Kathryn Thompson - Avondale Partners

And also with your CapEx, what is your maintenance CapEx on an annualized basis, could you remind us about [ph]?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

This is Rick Fleming. Our maintenance CapEx, we've given guidance for past tends to be about equal to our depreciation, which...

Kathryn Thompson - Avondale Partners

Okay.

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Which is about $170 million. But as you heard from my remarks, we feel we can reduce that substantially in '09 because we've put so much money into plans recently, so we believe we can take it to a much lower level.

Kathryn Thompson - Avondale Partners

Okay. Great, excellent. And just a final question. How willing are you... I know you've done a good job of shutting done more capacity in the industry than some of your peers. Could you walk us through the decision making process right now as you consider pulling back capacity and at what geographic locations would be the top candidates?

James S. Metcalf - President and Chief Operating Officer

Well, we look at lowest delivered cost and servicing our customers. That's ... those are really the key areas. When we add new capacity, we will be turning on our new Washingtonville, Pennsylvania plant which will be the lowest cost. Our plant in the Northeast, obviously that would put pressure on our other facilities. So we put the new plants into the network and then we look at the lowest delivered cost by major metropolitan areas.

Kathryn Thompson - Avondale Partners

Okay. And I assume that you'll give later on... you said you're going to give greater detail about anticipated changes. I assume you'll be able to quantify at that point in time what percentage of your book of all capacity is being taken out? I mean, that's question, will you be able to quantify that when you layout your specific...

James S. Metcalf - President and Chief Operating Officer

Oh, absolutely, absolutely. When we talk about taking capacity out, we do not want to announce anything publicly until we talk to our employees at those facilities.

Kathryn Thompson - Avondale Partners

Absolutely, understood. Thank you so much for answering the questions.

James S. Metcalf - President and Chief Operating Officer

You're welcome.

Operator

The next question comes from Patrick Archambault from Goldman Sachs. Please go ahead.

Patrick Archambault - Goldman Sachs

Hi, good morning.

Unidentified Company Representative

Good morning.

Patrick Archambault - Goldman Sachs

Yeah, just a couple of quick ones. In terms of... you have this new secured credit facility. I was wondering, do you have any additional unencumbered collateral that you might be able to provide to get a waiver for your covenants on the unsecured piece?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Sure. Well, the new credit facility I alluded to was backed by our accounts receivable. And therefore, inventory and plant equipment do not have any encumbrance on them.

Patrick Archambault - Goldman Sachs

And have you ever provided any kind of ballpark estimate as to sort of what that might add up to?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

It'd be substantial. It would be well above anything that we would need, liquidity wise.

Patrick Archambault - Goldman Sachs

Okay, great. I'm sorry, I might have missed this, did you guys give any numbers out in terms of industry volumes, and how your share might have performed for the quarter?

Unidentified Company Representative

From 2Q to 3Q, our share was about equal to the second quarter. We were down year-on-year about 27%. Year-on-year, we did lose some share, but the share we did lose were in unprofitable areas, as we balanced price and volume.

Patrick Archambault - Goldman Sachs

Okay. And if I can just ask directly, can you give us a number for the industry from a percentage perspective year-on-year?

Unidentified Company Representative

Yeah, it's about 20%.

Patrick Archambault - Goldman Sachs

Down 20%. Okay, thank you.

Unidentified Company Representative

Welcome.

Patrick Archambault - Goldman Sachs

One last quick one. I guess in terms of deferred tax assets, it sounds like obviously part of what you're considering is a timeframe for recovery, and which will be extended. And I was just wondering about the possibility of having to write some of those deferred tax assets down, based on that new extended timeframe?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

So you're referring to the valuation allowance concepts?

Patrick Archambault - Goldman Sachs

That's exactly right, yeah.

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Well the bulk of our deferred tax asset, over $300 million is related to the federal carry forward, and that's a 20-year carry forward. So in that regard, we feel highly confident that this recession will be over well before that. And then in addition, we have tax credits as well, at the federal level that would be roughly about $60 million. So in combination, that's the lion share of what we have.

The issue on valuation allowances comes more at the state level, where some of the states do not have carry forwards of that link, and we do review it every quarter, and have put up a valuation allowance. So far we're around 65 to $70 million in the three [ph] quarters that's probably given the circumstances.

Patrick Archambault - Goldman Sachs

Okay. But it sounds like in terms of order of magnitude, the federal piece is the biggest piece?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

It's by far and way the big piece. And as mentioned, we have a long time horizon on that issue.

Patrick Archambault - Goldman Sachs

Okay, thank you. That's helpful. I guess just last one, if I may. Can you just give us a sense of... I understand there is more color on this coming and maybe we have to wait. But can you give us just a sense on what your expectations are for commercial construction? You know, the estimates ranged all over the map from sort of flat to down 10% and wanted to just get a sense of where you guys come out on that?

William C. Foote - Chairman and Chief Executive Officer

What we've been looking at really in a two year chunk because we do have a pretty good lag on commercial, and we're looking around a 15% between '09 and 2010. So pick is a 10 and 5 or 8 and 7, so we are kind of looking at all the numbers as you are, but it's double-digit.

Patrick Archambault - Goldman Sachs

Okay, thanks a lot William. That's very helpful.

Operator

The next question comes from Jim Barrett from CLK Associates. Please go ahead.

Jim Barrett - CL King Associates

Good morning, everyone.

Unidentified Company Representative

Good morning, Jim.

Jim Barrett - CL King Associates

Rick, most of my questions have been answered. But can you talk about your input costs for a moment. If we set aside your national gas hedges, on an annualized basis what kind of savings would you envision if your various inputs because stayed at current levels, if we look out at 12 months?

James S. Metcalf - President and Chief Operating Officer

What, if you Jim, let me understand your question, if natural gas stays constant, is that the question?

Jim Barrett - CL King Associates

Certainly, led by natural gas, yes.

James S. Metcalf - President and Chief Operating Officer

Yeah. That would actually help, it's also raw materials. There is a lot of... we talk a lot about energy, but raw materials have also had a lot of inflation as we've looked over the last 12 months.

Jim Barrett - CL King Associates

Right.

James S. Metcalf - President and Chief Operating Officer

But as we lay in our new capacity, you figure and with Washingtonville, the new capacity we've laid in over the last of couple of years, it's going to help us 4 to $5 a thousand on input costs.

Jim Barrett - CL King Associates

For that one plant specifically?

James S. Metcalf - President and Chief Operating Officer

No that would be Washingtonville and the new plant at Norfolk, Virginia.

Jim Barrett - CL King Associates

And Jim, if we could just move over to the 27% drop in volume versus the industry, you appear to be losing share to a competitor who has chosen to sell at below his cash cost. Is that correct? Is it concentrated among one or two competitors or do you see that on a broader basis occurring?

James S. Metcalf - President and Chief Operating Officer

No, it's actually it's pretty focused in geographic area Jim. As I said, we are... it's kind of tail or two markets here. In the west, it's a much profitable market. The Southeastern Florida is a market that there is a lot of competition and we chose to balance pricing volume in geographic areas. But it's not limited to a broad band of competitors. It's really in a market that we consciously have raised prices and given up share.

Jim Barrett - CL King Associates

Okay, thank you very much.

Operator

The next question comes from Jack Kasprzak from BB&T Capital Markets. Please go ahead.

Jack Kasprzak - BB&T Capital Markets

Hi, thanks. Good morning. Just a couple of housekeeping items. Rick, I think you... I thought you said, for '08 your tax rate for the year would be about 39%. Is that a good... for modeling purposes, a good number to use for '09 is what would you think?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

That I didn't say 39%. And the issue that you get into when you kind of project it going forward is the worldwide Mexican countries. Many foreign countries have lower tax rate than United States. If general income levels stay at today's level going forward in foreign countries, then 39 would be a good number. It could wiggle up a little bit depending upon what happens with the trends overseas.

Jack Kasprzak - BB&T Capital Markets

Got you. And then with regard to the credit facility negotiation that you are involved in, can you give us any sort of color on the timing of when you think you might get some feedback there?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Yeah, I'll be happy to. First of all, as mentioned, we have been in touch with our lead banks. We are uniquely structured in that five of our closest banks are over 51% of the facility, and that's the threshold board level for any modification.

So the entire syndicate is very important to us. But I just want to point out that, that's the key component of sort of the mathematics. And we're very close to those banks as I alluded to, as you maybe aware through the expenses restructuring, we assured that they were paid in full. There is lot of goodwill between us and them, we work closely together during that period.

The banks themselves have all expressed that they wanted to be very, very productive conversations. Several of them said how can we help you, what they're really waiting for right now is quantification on a precise level of the operational adjustments that we will be making because we have to pull that into our forecast.

But the other thing I said to you was as well as the products were being proactive starting right now, they said there's going to be quite a queue of companies lined to restructure their covenants at year end and sooner we can do it the better and they look forward to once again getting this done pretty quickly. So we are very, very pleased with the dialogue so far, we are working up our new forecast and we'll just be planning ahead.

Jack Kasprzak - BB&T Capital Markets

Okay. Great. That's it for me, thank you.

Operator

The next question comes from Ivy Zelman from Zelman Associates. Please go ahead.

Alan Ratner - Zelman Associates

Good morning guys. It's actually Alan Ratner on for Ivy. I was hoping to ask a quick question here on the Ceilings segment, specifically related to the margin there, which kind of dropped of from where it had been running out over the prior few quarters. And at least top line was pretty much inline with where we're really looking for. So somebody can expand on your comments about the cost issues and still it's been an issue now there for several quarters. So I was wondering if there is anything incremental in the quarter or maybe also related to your comments about the commercial slowdown when... whether that had any impact.

Unidentified Company Representative

Really the big impact if you look at operating profit quarter-on-quarter was on our tile side of the business, that's where the raw material cost came in that affected the bottom line. As I indicated in the prepared comments, our top line look good. We stayed fairly ahead of the steel increases, but that's a daily watch that we have to do with our strategic sourcing. So the variance quarter-on-quarter was increased energy and raw materials similar that we have in the wallboard business.

Alan Ratner - Zelman Associates

And how does the steel cost trend throughout the quarter, so I mean by the end of the quarter was that any better off or did that continue to increase?

James S. Metcalf - President and Chief Operating Officer

No, actually, steel, it's still at a high level, but at this point it has plateaued. I mean we are looking forward. It's going to be at very high levels. But we think some of the escalations are that we've seen over the last year are going to start subsiding, particularly what's happening in the worldwide economy.

Alan Ratner - Zelman Associates

Okay. So would you expect absent any sharp fall-off on the top line to see a little bit of improvement there, on a sequential basis next quarter?

James S. Metcalf - President and Chief Operating Officer

On steel?

Alan Ratner - Zelman Associates

Yeah.

James S. Metcalf - President and Chief Operating Officer

We're going to stay ahead steel. Our big concern on the ceilings business is overall demand. But we're starting to see some softening. We're seeing some jobs being cancelled particularly, office construction. And the key number you have to look at in our business, in the ceilings business, we look at job creation. So those segments are starting to slow. So the trends over the next six months on the ceilings business that we've made... the demands are going to start to get a little soft.

Alan Ratner - Zelman Associates

Okay, great. And just the second question, I think you made a comment earlier about in the wallboard business about the energy costs, moderating late in the quarter, obviously still at high levels. And with... but was wondering, kind of what impact or benefit you should get there, keeping in mind the hedge that you have in place.

James S. Metcalf - President and Chief Operating Officer

Well, that's exactly right. As Rick indicated, we're hedged for this year. The spot market has come down. But it's just not natural gas, it's anything that's energy related, diesel, anything fossil fuel, we're starting to see a little bit of moderation. But they still are at historic level. So, we're hoping this is going to start trending through this quarter. But it's something that doesn't come down as fast as it went up.

Alan Ratner - Zelman Associates

Okay, great. That's all from me. Thanks guys.

Operator

Next question comes from the John Emerick [ph] from Ironworks Capital. Please go ahead.

Unidentified Analyst

Hi, thanks. Could you provide an update as to how the assets in the pension fund are performing year-to-date?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Sure, I'll be happy to. It's... looking at sort of the historical returns from the capital markets, I have to tell you that this one is out of the tail end of the exponential [ph] curve. But we really feel pretty good about how the funds done so far. We went into the year with a fully funded position, both on accrued liability basis, and also projected liability basis. And to-date through September, we're down roughly about 16%, which is pretty much in keeping with some of the market averages, is actually a little bit better. So, we're... nobody likes to have those types of numbers. But by and large, I'd say that fund is doing well in terms of its liquidity situation, and also it's funded status.

Unidentified Analyst

Given what's happened since then, and you were funded coming into the year, what... if the year ended today, let's say, what would it do just generally speaking to your pension expense next year and any funding requirements in '09?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Well we will obviously be providing all that in our disclosures as we get into the 10-K season. But on balance, we don't anticipate any dramatic change in our overall pension expense, or for that matter funding level. We've been cash funding historically about $45 million in the fund. We actually have taken a bit of a breather this year. But we'll be I'm sure, picking that up as we get towards the end of the year. But the... it's generally by the way, you put your cash in the private tax, we haven't done as of yet.

The other almost I would advise you to focus on the type of pension expenses, is the two part equation. You have the investment return, but you also have the discount rate. And because of the spread widening on corporate bonds, we anticipate there'll be some improvement on the overall liability calculation on that present value basis. So right now, we talk with our actuary but we don't have the precision yet around these numbers. But his gut feel was that the two would pretty offset each other to some degree.

Unidentified Analyst

Lower present value on the PBO basically?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Yes the liabilities would be lower because of higher discount rate.

Unidentified Analyst

Okay, thank you.

Operator

The next question comes from Todd Vencil from Davenport. Please go ahead.

Todd Vencil - Davenport

Hey, good morning.

Unidentified Company Representative

Good morning, Todd.

Todd Vencil - Davenport

Most of my questions have been answered, but just kind of a global question, I mean, I know that you guys are hedged and you've talked about the sort of stickiness. Energy price is coming down at a downside, but energy prices are dropping, you guys are bringing in lower cost capacity. You've got number of price increases. I mean how close do you feel like we are to sort of playing out the string with the... in terms of price increases given the industry is probably going to be in the 50s in terms of capacity utilization for very long. You do you feel pretty confident about the ability to as you say continue getting price increases this year and then into 2009?

William C. Foote - Chairman and Chief Executive Officer

We're going to work very hard on that. We're focused on profitability, we invest a lot in the industry with research, sales and marketing and we're going to fight as hard as we can and we are going to not, we have a price increase in market now and we are going to continue as I said in our prepared comments to put price increases where appropriate in 2009, but it's not an easy market to navigate.

One thing that we are looking at is our wallboard spread. If I can just comment a little bit on what we are doing, is we are just not waiting for natural cost to come down on a cost basis. We have intense focus on our efficiencies at our plants. Our plants are running basically at all-time high efficiencies at recovery speed and delay. We have a very aggressive strategic sourcing group that's looking at not only how we procure, but our usage at our plants and we're also looking at continuing to optimize the network. We have the lowest delivered cost network in the industry and we want to take care of all of our customers. But this isn't just about marketing your price up or waiting for natural gas to come. We are focused on our wallboard spread and we have initiatives in each part of our operations to pull each one of those levers.

Todd Vencil - Davenport

Got it. Thanks for that. And just I'm sure it's too early on the one those announced yesterday, but just remind me on any of the price increases you guys have put through so for this year, several price increases. Have you gotten all or effectively all of each of those increases?

William C. Foote - Chairman and Chief Executive Officer

No, we've been realizing anywhere between a third and 50% of the announced increases. We came into the year with probably a $10 premium over the industry. So again, we provide a lot to the industry and we're going to balance our pricing volume as we go forward.

Todd Vencil - Davenport

Okay. Thanks a lot.

Operator

The next question comes from Andrew Saul from Acidus Street Advisors [ph]. Please go ahead.

Unidentified Analyst

Good morning, Bill, good morning Rich.

William C. Foote - Chairman and Chief Executive Officer

Hey Andrew.

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Hey Andrew, how are you doing?

William C. Foote - Chairman and Chief Executive Officer

Good to hear from you.

Unidentified Analyst

Same there. I had a quick question on the capital expenditure. When I look at the second quarter Q, the company had about $188 million of CapEx commitments going forward and then it looks like you guys spend about $37 million this quarter, and now that the current Q says $286 million in CapEx commitment. So my math and maybe I'm wrong, it looks like about $135 million in new CapEx projects that were added there. If I am understanding that correctly, I guess what would be the projects and if I am misunderstanding it please you'll correct me?

William C. Foote - Chairman and Chief Executive Officer

I think the majority of that falls in spending and Rich can go over the exact numbers. We are... have been finishing up our Washingtonville, Pennsylvania plant and the CapEx, that's the majority that CapEx in 2008.

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Right. The three major projects, Andrew the... they're enumerated in our current 10-Q that was filed today, are basically the $243 million for Washingtonville, which is largely spent this year, the $75 million for the new ship that will be delivered at the end of this year, and is incorporated in the numbers I shared with you for this year's spending. And then out in the future, we have a stocking plant of $226 million which as we said, will only begin construction till 2010. So those were the major commitments at this time.

Unidentified Analyst

Okay. Great, all right. Thanks so much.

Operator

The next question comes from Mark Weintraub from Buckingham Research. Please go ahead.

Mark Weintraub - Buckingham Research

Thank you. You shared with us that your view on commercial business might be down a cumulative 15% over the next few years. Could you share with us what your view on the residential side would be?

Unidentified Company Representative

Yeah, we putting in our projections for 2009 around at 800,000 housing start number.

Mark Weintraub - Buckingham Research

Okay. So is that about a 10% drop or so from this year, or would that be the relative to this year?

Unidentified Company Representative

Yeah, that's a little more than that, it's closer to 15. If you look at the gypsum, we're looking at... if you look at the total opportunity, wallboard opportunity all of our segments for 2009, we're looking at about 12% drop year-on-year, about 22.5 billion feet total industry opportunity.

Mark Weintraub - Buckingham Research

Okay. And so if I take this third quarter, which is seasonally, typically a stronger quarter, but if I take that you were operating at about 65% operating rate if I heard you correctly, that would suggest you've got U.S. installed capacity of about 10.5 billion. Does that include the new 1 billion facility or not, I assume it does not.

Unidentified Company Representative

The Washingtonville facility; that does not include that.

Mark Weintraub - Buckingham Research

Okay. So basically if you include that here about $11.5 billion?

James S. Metcalf - President and Chief Operating Officer

Yes exactly.

Mark Weintraub - Buckingham Research

Okay. And if I'm doing my math right, we look at the fourth quarter, it looks like order of magnitude you might ship 7 to 7.5 billion as we take a wide range this year in wallboard shipment, is that about right?

Unidentified Company Representative

That's pretty good, that's pretty close.

Mark Weintraub - Buckingham Research

Okay. And then is it fair to conclude that if your market share were to stay the same and I realize that could change, but if your market share would stay same, from what you're saying you might expect roughly a 10 to 15% decline in your shipments of gypsum next year?

Unidentified Company Representative

The industry shipments are going to be down about 12% and we'll balance pricing volume appropriately where profitability... with profitability as top of our list. So it really ends up where our market share... where we want our market share to be.

Mark Weintraub - Buckingham Research

Okay. So obviously, we're waiting we'll see what your decisions on how you're going to adjust to that is. But these are obviously pretty big numbers. And just as a follow-up within that context, you'd mentioned industry breakeven about $130. Was that first of all, a cash level that you're talking about, that 130?

Unidentified Company Representative

Yes, it does.

Richard H. Fleming - Executive Vice President and Chief Financial Officer

When we quote our... those types of costs, we always quote cash costs.

Mark Weintraub - Buckingham Research

Okay. And so does that relate directly to the 114 price that you reported for the third quarter, or are there differences so that you can't assume that by your estimate, the industry was operating at $16 negative cash per unit or ton?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

That would be a comparison of the appropriate. This is Rick Fleming. But keep in mind that we tend to be higher on price than some of the competition. So where some of the competition, many have whom don't report, they would be even dealing with a more negative spread that you just quoted.

Mark Weintraub - Buckingham Research

Interesting. So by... based on your analysis, the industry has actually been operating at more than a negative 16 per unit cash base as well, okay.

Unidentified Company Representative

Yes.

Mark Weintraub - Buckingham Research

Thanks very much.

Operator

The next question comes from William Fisher from Wells Fargo. Please go ahead.

William Fisher - Wells Fargo

Good morning, gentleman. Thank you for your time. You said earlier that you have closed 24 L&W supply locations year-to-date, and four in the third quarter. Do you plan on reducing your transportation fleet, feeding product to the dwindling market share this year?

Unidentified Company Representative

Absolutely. We reduced our fleet significantly on all pieces of equipment at L&W.

William Fisher - Wells Fargo

Okay. And do you plan to close additional L&W locations through the fourth quarter and beyond?

Unidentified Company Representative

We don't comment on any forward-looking closures as I said in the earlier call. We want to announce that obviously to the individual employees at those centers. But everything is on the table at this point.

William Fisher - Wells Fargo

Fair enough. And with regards to the EBITDA covenants that you are having difficulty meeting or potentially meeting, can you give me an idea what that benchmark is as far as the requirement?

Richard H. Fleming - Executive Vice President and Chief Financial Officer

Sure, I'd be happy to cover that again. Once again, our disclosure was that we could have an issue, that's an appropriate event and very important distinction. And that we've entered into dialogue with our banks on a proactive basis to just deal with it early in the process. But to give you the numbers, for the fourth quarter once again, this is on a rolling 12-month basis, so it'll be all of 2008, the EBITDA covenants is $20 million, as calculated in accordance with the credit agreement. And then, for the first quarter of '09 it's $40 million and to just give you the annual number for '09, right now it's $75 million.

William Fisher - Wells Fargo

Excellent. That covers my questions my questions. Thank you.

Operator

Gentlemen, at this time, there is no additional questions. Please go ahead with any including comments.

James R. Bencomo - Director of Investor Relations and Pension Investments

Great. Thanks so much. Given that that concludes our questions, Bill, do you want to conclude with some final remarks.

William C. Foote - Chairman and Chief Executive Officer

Thank you, Jim. We're undoubtedly in one of the worst housing markets in decades. It's an extremely challenging environment, we're doing everything we can to control the factors that are within our controls. We have succeeded in removing structural cost from the business, you can see it in our results.

Given the ongoing decline in the economy, we need to do more to properly align our business for the market. We're formulating those plans now and we will be implementing before the end of the year. We're continuing to actively manage our financial flexibility, just as we have been doing since the market first started to decline in 2006.

We added $235 million in liquidity with two recent asset-backed transactions and now we'll be talking to our banks on modifying raising the EBITDA covenant from the level [ph]. We know that the key to future successful will be spent in part on having financial flexibility to manage through this downturn.

While we deal with the turmoil in our markets and the impact in our business, we remain committed to maintaining two of our greatest assets; our strong organization and our excellent relationship with customers. Our people have worked hard over the years to strengthen our ability to serve excellent customers like Home Depot, Lowe's, GMS and the Drade [ph]Group

We realize that our long-term success will be dependant on our ability to continue to meet demands of those customers. By doing so, we will position the company for an eventual market rebound. Thanks again for joining us this morning.

James R. Bencomo - Director of Investor Relations and Pension Investments

Thanks Bill and thanks all for you us joining us today. That does conclude our call. I'd like to mention that we will have a taped replay available in a few hours by dialing 1888-843-8996 and entering the passcode of 22959595. Thank you very much.

Operator

Thank you for participating in the USG Corporation third quarter 2008 earnings conference call. This concludes your conference for today. You may all disconnect at this time. .

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