USG's Gloomy Outlook on Housing, Manufacturing

| About: USG Corporation (USG)

On USG Corp.’s Q3’08 conference call, executives say their liquidity at $600 million is good. The outlook, however, is distinctly gloomy. USG projects a 15% decline in both the commercial and residential construction businesses over the next few years. Notably, all gypsum manufacturers are currently manufacturing and selling their product at a significant loss. Company pension plans are down too.

Loss calculations for a large firm like USG vs. smaller suppliers:

USG says the industry’s breakeven cash price for manufacturing gypsum is $130. Based on their market share, shipments and overhead, USG is selling gypsum at $114 per unit.

Q: By your estimate, the industry was operating at $16 negative cash per unit or ton?

A: That would be a comparison of the appropriate… 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.

Commercial construction is slowing:

We started these to see signs of a slowdown in the commercial business during the quarter… 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.

Factory closings/layoffs:

We had approximately three… capacity closures for this year…by National Gypsum, one by Lafarge, two by Georgia-Pacific and one by CertainTeed..

Hedging natural gas:

For the balance of 2008, we've actually hedged the year at about 70%, and the hedge rate… was $8. 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… Relative to 2009, we're about 50% hedged… The average blended rate for '09 that has been hedged, is about 9.50 to mid 9s.”

Pension funds:

To-date through September, we're down roughly about 16%... 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.


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