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USG (NYSE:USG)

Q4 2010 Earnings Call

January 26, 2011 11:00 am ET

Executives

Brian Moore - President and CEO

William Foote -

Richard Fleming - Chief Financial Officer and Executive Vice President

James Metcalf - Chief Executive Officer, President and Director

Analysts

Daniel Oppenheim - Crédit Suisse AG

Jamie Baskin

James Barrett - CL King & Associates, Inc

Michael Rehaut - JP Morgan Chase & Co

Trey Grooms - Stephens Inc.

Robert Wetenhall - RBC Capital Markets, LLC

Todd Vencil - Davenport & Company, LLC

Dennis McGill - Zelman & Associates

Robert Goodman - CRT Capital Group LLC

John Kasprzak - BB&T Capital Markets

Garik Shmois - Longbow Research LLC

Seth Yeager - Jeffries & Company

Operator

Welcome to the USG Corp.'s Fourth Quarter 2010 Earnings Conference Call. My name is Christine and I will be your operator for today's conference. [Operator Instructions] I will now turn the call over to Brian Moore, Senior Director, Investor Relations. Mr. Moore, you may begin.

Brian Moore

Good morning, and welcome to USG Corp.'s Fourth Quarter 2010 Earnings Conference Call and live webcast. We will be using a slide presentation in conjunction with our call today. It is available by going to the Investor Information section of our website, www.usg.com and clicking on the link to the webcast.

Before we proceed, let me remind you that certain statements in this conference call may be forward-looking statements under securities laws. These statements are made on the basis of management's current views and assumptions about business, markets, 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 of the Board; Jim Metcalf, President and CEO; and Rick Fleming, Executive Vice President and CFO. First, Bill will make a few opening comments. Jim will follow with comments on market conditions, how our operating units are performing and the outlook for our businesses. Rick will conclude by covering consolidated financial results. We will then open up the call for questions and conclude with a few comments from Jim. We would like to ensure that everyone has an opportunity to ask questions so when we get to the Q&A session, callers are asked to limit themselves to one question and one follow up.

Bill?

William Foote

Thank you, Brian. Good morning to all of you. Thanks for joining us on the call. As always, we appreciate your interest in USG. My comments today will be brief. Jim and Rick will review the operations and the financials for the fourth quarter and the past year in just a few minutes.

What I would like to comment on are some of the leadership changes that we made late last year. We announced last October that I would move to the role of Chairman on January 1 and that Jim would take over as President and CEO. This transition was part of an ongoing executive succession plan that I developed working closely with the USG Board of Directors over the last few years. Transition is going just as planned and is proceeding smoothly.

I've had the opportunity in recent years to introduce many of you to Jim, and I want to thank you for your support of me, Jim and our company during this time of transition.

In addition to the CEO transition, there are other executive management transitions underway as well. Some of you have had the opportunity to meet Fareed Khan, who was appointed Executive Vice President of Finance and Strategy. Fareed is working closely with our CFO Rick Fleming on the company's financial strategy, as we manage through the remainder of the recession and prepare for the recovery. Fareed has been with the company for more than 10 years, most recently as head of Building Systems.

Chris Griffin is now the Executive Vice President of Operations. Chris is responsible for our worldwide operations. Most recently, he was responsible for our International business. Chris has also been with the company for more than 10 years and has a very strong background in operations.

Other members of the senior leadership team continue in their roles including Brendan Deely, he runs L&W Supply. And heads of our key staff units, namely Brian Cook in Human Resources and Stan Ferguson, our General Counsel.

This is an exceptionally strong and experienced team that will be implementing our near-term strategy to emerge from the recession, and in due course, to resume our long-term growth plan. As we enter 2011 in what we hope will be the final stages of this recession, I have great pride and confidence in USG's strong foundation. The company is leaner and more efficient, our customer relationships are as strong as ever, our spirit of innovation is vibrant and our balance sheet provides us with substantial liquidity. We have realistic and exciting plans to re-establish our growth agenda, both domestically and internationally as we work through the back end of the great recession.

Looking ahead, I remain optimistic that the demographics will again stimulate demand for our products and services. People will get married and start families, the U.S. housing stock continues to age and world economies will grow, all of which will stimulate meaningful demand for our products and services.

I look forward to working with Jim and his team, as they implement our strategy to emerge from the great recession and resume our growth agenda.

With that, I'd like to turn it over to Jim.

James Metcalf

Thank you, Bill and good morning. At the end of the day, a company is only as strong as its people and we are fortunate at USG to have a strong team of hard-working, experienced and dedicated professionals.

I want to spend a few minutes talking about our business before turning it over to Rick Fleming, CFO, who will summarize the financial results. 2010 was another challenging year for our industry and USG. We got no help from the market in terms of any recovery in the key markets we serve. In fact, the U.S. wallboard market actually contracted for the fourth year in a row. Despite these depressed external conditions, I actually feel positive about our business. Why would I say that? Clearly, our profitability is unacceptable. I hate to see this great enterprise losing money. But we feel that we are in the final stage of one of the worst market downturns our industry has ever seen. I'm optimistic because I see the progress of our operating and financial strategies impacting the business; I'm optimistic because we have another year that we're closer to recovery; and I'm also optimistic because I see the hard-working employees of this fine company, USG, showing up energized and focused on making sure we come out of this downturn a stronger and more dynamic company.

We continued to make progress in 2010. When you take out the noise of multiple restructuring, positive litigation settlements and the like, our core businesses performed better in 2010 even through market conditions as they continue to deteriorate. We think the worst is behind us. We don't expect 2011 to be a banner year, but we may see the early signs of recovery beginning to creep into our industry. We do believe the basic fundamentals that drive our business: demographics, household formation and aging housing stock will bring new housing, commercial and repair and remodel segments back towards historic averages. When this occurs, you will see the operating leverage in our businesses really starting to kick in.

Now let me briefly hit on some of the key factors driving our results during the fourth quarter and 2010 in general. We got no help from the market during 2010. The optimism during the first quarter about our recovery faded and the year basically ended up sideways. Industry wallboard shipments in the United States were actually down 6% or 17.3 billion feet. This is actually where the industry was in the early 1980s, when the population in the United States was roughly 80 million people less than it is today. Housing starts finished the year at 588,000 units. Now this is an improvement from 2009 but we look at this as a rounding error.

Long-term fundamentals suggest that this should be approaching 2x to 3x these levels, so we still have a long way to go on housing. New commercial markets were down, but commercial repair and remodel was actually better than anticipated. This really helped our ceilings results. We also saw some stabilization in Residential Repair and Remodel. Aging homes need work, and we are starting to see some of this entering into the equation.

I've covered our strategic priorities many times before: Strengthen the core, expand internationally, grow adjacent products and accelerate our innovation. We believe that these are the right priorities to drive long-term shareholder value. Clearly, we are more focused on the first one: our core businesses. But we haven't forgotten about the others. Given the market conditions, I'm going to spend more time this morning on our core business. But keep in mind that we have targeted efforts against all four priorities.

Over the cycle, we have very strong core businesses. They are focused, related, and drive attractive returns. Two of these businesses, U.S. wallboard and building products distribution, are challenged by the dynamics of the market. Our other businesses are healthy. Of course, they could use more demand, but the margins remain solid and they are generating attractive returns on the capital that we've invested.

As we look at our core, first, we want to drive continuous improvements in wallboard profitability. We've been relentless in cost reductions. We've closed an idle plant and right-sized the organization multiple times to keep pace with declining demand. We reduced our legacy costs, minimized capital spending and divested surplus and unproductive assets. But even cost reductions have its limitations. We've also implemented price increases at every opportunity. Even with the low utilization rates throughout 2010, we got some traction on price improvement.

Second, we continue to aggressively restructure our Distribution business, L&W Supply. This is a great business over the cycle. But velocity is critical to achieve attractive returns, and this velocity, quite frankly, hasn't been there. Immediately after the financial crisis that impacted commercial construction, we accelerated our program of center closures and network optimization at L&W. We call this our back to black program, which drove the improving the trends that you're seeing. We've now expanded our focus to customer service, strategic sourcing and productivity levers to drive L&W Supply to profitability.

Our third area of focus is to keep our non-wallboard businesses healthy. Clearly, our Ceiling business is very solid, but so are the surfaces and substrate units in our U.S. and our international platforms.

Lastly, we remain laser-focused and our controllables: safety, quality and customer satisfaction. In each area, we continue to drive towards new record performances.

Now I'd like to give you a quick overview of our operating results by business. About half of U.S. Gypsum's results obviously are driven by wallboard. The other half comes from a variety of related building products that we group together in Performances Surfaces and Performance Substrates businesses, which continue to outperform the market. Wallboard remains the core issue driving our operating losses, but we are making progress with a relentless focus on profitability. We've lowered our manufacturing costs in our wallboard facilities. We've removed older, inefficient manufacturing capacity, and we continue to innovate.

On our call last quarter, we described the successful rollout of our new, lightweight wallboard product, SHEETROCK Brand UltraLight Panels. Customer response has been extremely positive, and we've accelerated our rollout plans to accommodate the positive market reaction to this unique new product. Specialty dealer and big-box retailer demand will continue to expand our coverage with successful conversion in the markets we serve. We've been relentless on cost reduction across multiple areas. We are driving efficiency improvement at the plant and network level, as well as our back-office activities. Running our network at near record efficiencies with historically low market condition, provides powerful leverage as demand returns.

Let me give an example of our improved network efficiencies. We made a decision to idle one of our quarries in Eastern Canada. This was a significant restructuring charge in the fourth quarter, along with several wallboard and paper plants. The reason behind idling this quarry was a combination of reduced market demand and the progress our natural rock plants along the East Coast have made, converting to synthetic gypsum. As you know in this region, all new state-of-the-art plants were built around synthetic sources, but by converting our natural rock plants, we are achieving lower-costs, higher efficiencies and most importantly, servicing our customers in these major markets.

Now I'd like to turn to L&W Supply. L&W, our Distribution business, has made progress during 2010. As I mentioned, this business is a great business but challenged by low demand. Velocity is critical to any distribution business with a footprint like L&W has. During 2010, the loss in the fourth quarter was significantly less than any quarter this year.

We aggressively scaled our network of distribution centers to market conditions. We did this without exiting any strategic markets or negatively impacting our ability to serve our customers. We have closed over 100 locations during the downturn and continue to optimize the L&W network.

In addition, we've turned our attention at L&W to more fundamental performance levers: Our customer service capabilities, supplier partnerships and a variety of operational activities ranging from inventory management to back-office transactions. We remain committed to our Distribution business. It is under significant pressure given the market conditions, but it has and will drive attractive returns over the cycle.

Our Ceiling business remains very healthy. Margins remain solid and we will continue to focus on architectural specifications, margin improvement, the commercial repair and remodel opportunities and strategic sourcing on key commodities like steel. Our international units are also performing well, led by strong results in Canada and Europe. We are a leader in Mexico and we are seeing solid returns in spite of the social turbulent events that occurred during the course of 2010. Like most companies, we're seeing positive dynamics in emerging markets and we are addressing these opportunities to grow the business internationally.

The best way to frame the market outlook is very simple, both short- and long-term. Short-term, we view 2011 as another tough year. We may see some positive comps, but the magnitude will not be significant. That said, we do think the worst might be behind us and that our U.S. market may finally be in the early stages of recovery. Clearly, housing would be challenged by foreclosure, valuation and employment, but basic demographics will start to improve the overhang. We expect to see some positive comps in repair and remodel as well. Again, at low levels. And the overall commercial opportunity will still be under pressure in 2011.

We at USG remain very positive about the long-term fundamentals that drive our business. We make products that serve basic needs, or as I like to say, USG provides shelter. We don't have substitute products that are displacing demand. We don't have globalization dynamics that are shifting output to other markets. What we have is a black swan downturn in the fundamentals that drive demand for our products. When those fundamentals begin to return to historical averages, we will see recovery in demand. They don't have to get to peak levels, they just have to head towards the averages.

When this begins, we will see the operating leverage return to our business. The actions that we've taken over the last few years have provided a strong foundation. In the meantime, we will continue to work our strategy for the downturn without losing sight of our long-term opportunities and aspirations.

So with that, I'd like to turn to Rick Fleming to cover the numbers. Rick?

Richard Fleming

Thanks, Jim, and good morning to all of you. As you mentioned, I'll recap our fourth quarter and full year financial results, and provide some additional details on interest expense, taxes, capital expenditures, debt and liquidity.

Fourth quarter 2010 net sales were $696 million, down 3% from the fourth quarter of last year. Our fourth quarter operating loss is $95 million compared to an $11 million loss in the fourth quarter of 2009. You may recall last year's fourth quarter included $97 million of income, due to a litigation settlement with Lafarge. Fourth quarter 2010 operating loss included $56 million of restructuring and asset impairment charges, compared to $29 million last year. The majority of these charges relate to our recent cost reduction actions that we estimate will save us about $25 million annually, and the rightsizing of our gypsum paper manufacturing assets and Canadian mining assets. We believe that these restructuring actions, combined with our previously-announced ongoing restructuring of gypsum wallboard manufacturing assets in our L&W centers, will continue to move us toward profitability. The breakdown by business segment of the $56 million of restructuring and impairment charges is detailed in a schedule attached to the earnings press release.

The fourth quarter 2010 net loss after tax was $121 million, a $1.17 loss per share. This compares to a $598 million net loss in 2009 or $6.02 per share, which includes a $548 million non-cash deferred tax valuation allowance charge. Now I'll briefly recap the full year results.

Net sales were $2.9 billion, a 9% decline from last year. Our operating loss for the full year 2010 was $260 million, including restructuring and impairment charges of $110 million. This compares to an operating loss of $185 million for the full year of 2009, which includes $123 million of restructuring and impairment charges in the previously-mentioned Lafarge settlement. Our net after-tax loss for the full year 2010 was $405 million or $4.03 per share, this compares with a net loss of $787 million or $7.93 per share for last year, being a $575 million deferred tax valuation allowance charge for the full year.

Now I'd like to re-emphasize the big take-away that Jim mentioned regarding these results. Our adjusted operating loss, which excludes restructuring and impairment charges and the Lafarge settlement income improved $38 million to almost 50% in this year's fourth quarter versus last year. And for the full year, it improved $9 million despite the 9% decline in sales. These results underscore that our restructuring actions are bearing fruit. You will find a schedule attached to the earnings press release, which reconciles GAAP operating profit to adjusted operating profit.

Now I have some details in the P&L and discuss what we've done to manage capital spending and our balance sheet, including liquidity. Let me start with interest expense. Interest expense is $49 million for the fourth quarter of 2010 and $183 million for the full year. With the recent senior note offering that we completed in November, our interest expense will increase in 2011 to about $209 million on a P&L basis and approximately $199 million on a cash basis. Regarding taxes, the fourth quarter tax benefit rate was about 15% and the full year rate was approximately 8%. As you may recall, with last year's booking of a deferred tax valuation allowance in all federal and most state taxes, virtually all domestic tax benefits and provisions now flow to the deferred tax valuation allowance account until this account can be reversed in the future when the corporation has sufficient cumulative net earnings. During 2011, we will pay foreign taxes and some state taxes, and this should result in an effective book tax provision rate of about 4%, depending on the mix of worldwide income.

Turning to capital spending. Capital expenditures totaled $39 million in 2010 and we are forecasting about $50 million of capital spending for 2011. We continue to benefit from substantial investments in our operations that we've made over the past several years, and this has allowed us to keep expenditures at or below the $50 million level. Regarding our cash and debt situation, our December 31 cash, cash equivalents and marketable securities balance, excluding $4 million of restricted cash was $907 million compared with $544 million at the end of the third quarter and $690 million at the end of 2009. Our year-end cash position benefited from our recent $350 million senior note offering, but we also benefited from continued strong working capital management, tight spending control and surplus asset sales. Specifically, we had net primary working capital released in 2010 of $44 million. We held, as previously mentioned, CapEx to $39 million and we completed surplus asset sales of $23 million. And I'm pleased to mention that we have made further progress in 2011 as we now have another $10 million surplus asset sale under contract.

Now I will provide further details on our very strong liquidity position. We currently have nothing borrowed on our revolving credit facility. This facility is subject to a borrowing base and $126 million was effectively available to us at the end of December. This amount's in line with our cash, cash equivalents and marketable securities and the undrawn CGC credit facility, resulting in $1.063 billion of liquidity as of December 31.

Finally, I should mention that in December, we successfully re-syndicated and extended the maturity of our bank credit facility. Our new facility is $400 million versus $500 million for the old facility, but it has a lower spring income and threshold, which has the benefit of increasing our liquidity by $35 million. Maturity date for the new facility is December 2015, assuming a 2014 maturity of 9.75% bonds has been funded or refinanced by May 2014, or we have $500 million liquidity at that time.

Let me conclude by emphasizing some points made by Jim. Market conditions in 2010 remain challenging for USG, particularly in our U.S. Wallboard business. But we expect some modest improvement in 2011. In this environment, we will remain intensely focused on returning USG to profitability through cost management and matching our assets to the available market opportunity, while maintaining our financial flexibility. So in summary, we believe that we have weathered the storm. The worst is over and we are well-positioned to take advantage of early recovery whenever it comes.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Kathryn Thompson from Thomson Research.

Jamie Baskin

This is Jamie Baskin on the line for Kathryn. My first question, could you provide any clarity on USG's UltraLight products in terms of cost of production or margins?

James Metcalf

As I said in my prepared comments, we are varied about UltraLight. The customer response has been exceptional, we've accelerated our rollout and plan to have a full half-inch rollout in 2011. We don't put our costs -- as we always have, we focus on manufacturing all of our products regardless of where they are on the premium price scheme or especially products at the lowest delivered cost that we can. We're focused on efficiencies. We feel that it has a good margin and the product is a separate product category. So there is a premium for the product in the market. So we don't lose our costs, we're focusing the lowest cost possible for the product, we've had some successes, we've just rolled it out with some natural rock plants and we're very excited.

Robert Goodman - CRT Capital Group LLC

Well, can we expect costs to be more than the wallboard? Or, will you disclose that?

James Metcalf

We do not disclose [Audio Gap] But as I said, we are focused on -- every product we make, we want to make it at the lowest cost available and we have some objectives for our manufacturing [Audio Gap] and we are through the learning curve as we all roll this out. So we're very excited about it, and we think from a market share and a margin standpoint, it's going to be a great product for us.

Jamie Baskin

And with industry putting out price increases in February and March, one of your competitors, in the past few days, put out a price increase letter with no specific amount. Just want to get your take on this strategy and if you feel this is kind of an unusual tactic?

James Metcalf

Well, I don't comment on competitors or competitors' pricing. What I will say is, we have a price, a wallboard -- I'm assuming you're talking about wallboard.

Jamie Baskin

Correct.

James Metcalf

Yes, we have wallboard price increase announcement on the street, as we speak, for February 7 at 25%. Our salespeople are talking with our customers right now. We're in a very low utilization market as we speak, but as we got in 2010, we did get price improvement throughout the year. And we're going to continue to get price improvement at every opportunity we can. We have a value proposition. You brought up UltraLight, which I think is a great new product for the market. We provide great service, we have a full product line. So we're going to continue to price our products as value-added products in our value proposition of dealing with USG.

Operator

Your next question comes from Garik Shmois from Longbow Research.

Garik Shmois - Longbow Research LLC

Just wanted to touch on L&W for a second. Good quarter with respect to the cost improvement and the margin improvement there. I was just wondering if you look out to 2011, you're saying that markets appear like they're stabilizing, could see little bit of -- if things turn the right way. Given the trajectory of margin improvement in that business, could you see a scenario in which on, maybe some of the seasonally stronger quarters next year that, that business comes back to breakeven or turns to profit at all?

James Metcalf

Well we are focused on breakeven and profit ASAP. Not giving any projections, one thing I have to look at L&W, majority of their business is really dedicated to commercial construction. If you look at the commercial construction market, it is lagging. It's tied to employment. So we're going to continue to take costs and focus on a lot of the things I mentioned in our prepared comments: Back office, supplier agreements, really efficiencies at the center level, de-layering the organization and really, really focus on lowering our breakeven. So in 2010 was very positive. We're still in a very, very tough market in the distribution area. So our objective is profitability as soon as possible and where we [Audio Gap] to get there, but we still have a tough road ahead of us on distribution.

Garik Shmois - Longbow Research LLC

And how much of your sales now in distribution is commercial versus residential?

James Metcalf

It's about 2/3.

Garik Shmois - Longbow Research LLC

2/3 commercial?

James Metcalf

Yes.

Garik Shmois - Longbow Research LLC

And just lastly, just a follow-up to that just on the wallboard, can you break out the sales for new housing, repair and remodel and commercial for us?

James Metcalf

Yes. The breakdown is, total sales of just over 50% is repair and remodel. And that's broken out basically half-and-half residential and commercial. Give about another 25% is new res, and then remainder is new commercial.

Garik Shmois - Longbow Research LLC

And just one last housekeeping question. On the restructuring in the quarter, I'm assuming $16 million from the North American gypsum was applied to the other subsidiaries in connection with the closures in the Nova Scotia quarry. Was the rest of the $53 million for North American Gypsum, was that applied to the U.S. Gypsum Company or that's spread out throughout the other businesses there?

James Metcalf

It was applied to U.S. Gypsum Company.

Operator

Your next question comes from James Grooms from Stephens Inc.

Trey Grooms - Stephens Inc.

This is Trey Grooms of Stephens. You mentioned the February price increase for wallboard, I guess it was 25% or so, does the L&W business -- does it also have the increase letters out? Or, how does that typically work with the Distribution business?

James Metcalf

The Distribution business is -- we like to be in concert with our Manufacturing business. L&W will treat the increase as we do in the market, putting either letters in the market or talking to their customers on a verbal basis. So one of the improvements we had in 2010 was L&W being very focused on getting price improvement in a very tough market. So yes, we want to have L&W in concert with our price improvement or price increases and dealing with their customers on a one-on-one basis.

Trey Grooms - Stephens Inc.

And then also, you guys closed the Empire, Nevada plant in the quarter, do you see anything else out there that you could close or idle at this point? Or since volume -- looking out to 2011, you think could possibly be up modestly? At this point, are you pretty happy with the structure you have in place now?

Brian Moore

We do have a plan if the market would come down, but right now, we feel comfortable. We're running our network pretty efficiently. Our low cost and medium-range plants are about 98% of our shipments, and we feel that by the idling of Empire, we can deliver product into those areas still at a low delivered cost basis. So we always have a contingency plan. If the market does surprise us and is stronger than we anticipate, we can just run our low-cost, high-speed plants another day or two. So we feel right now we're in good shape.

Operator

The next question comes from Michael Rehaut from JPMorgan.

Michael Rehaut - JP Morgan Chase & Co

First question on the restructuring activities that are certainly ongoing in the U.S. Gypsum segment. I was wondering, all else equal, if we kind of ran at a similar type of volume in 2011 versus 2010, what the net incremental impact of the actions you took in 2010 might have on margins in 2011, or just operating profit, dollars incremental benefit?

James Metcalf

Well the most recent restructuring was corporate-wide and it was approximately $25 million restructuring. And that is on top of the numerous restructurings we've done over the last few years. And if you look at it, it's just North of $500 million. But the most recent one was totally corporate, not just U.S. Gypsum. But it was $25 million.

Michael Rehaut - JP Morgan Chase & Co

I just don't want to take up my second question per se, but just to clarify, does that mean that you expect $25 million of benefits? I mean, that might be the restructuring charge. I know that you had a similar type -- you had, I think in the 8-K, are there other actions as well? But just net incremental dollar benefit in 2011, I was just hoping to clarify that.

James Metcalf

We had obviously restructuring -- you have restructuring charges. It was the benefit $25 million.

Richard Fleming

That's the benefit, Michael.

Michael Rehaut - JP Morgan Chase & Co

Second question, just on the ceilings margin at the USG Interiors, you did definitely had a better margin looking for -- I think, seasonally in 4Q, you typically have, I believe, a lower margin and you had that with, I believe, just only slightly better volume. So looking into 2011, should we expect maybe some margin improvement in that area, due to either pricing or some activities on the cost side? I was wondering if you could give a little clarity there, in terms of what drove the upside year-over-year and how should we think about 2011?

James Metcalf

Our main objective of our Ceilings business is margin improvement. We've been really focused on that for the last four years. So we're going to continue down that track into 2011. And we're doing it numerous ways. As I said, it's our strategic sourcing on steel [Audio Gap] cyclical, staying ahead of steel inflation and putting price improvements in the market [Audio Gap] its efficiencies at the plants, focusing on running our plants, both from a grid and a tie-up basis at [Audio Gap] of efficiencies. And also, its focusing on some of the markets that have been emerging. And one market we've been focused on is the commercial repair and remodel. So we're going to continue to be relentless on margin improvement, our [Audio Gap] share and we're very are pleased with the ROI of the business. And we may get a little bit of wind at our back on demand, but we aren't expecting that. We still think that new commercial market's going to be under pressure and we aren't expecting much help from the market.

Operator

The next question comes from Jack Kasprzak from BB&T.

John Kasprzak - BB&T Capital Markets

My two questions will be for Rick. Firstly, when adjusting for the restructuring charges in the quarter, should we make any adjustment to the tax effect of that? Was there any tax effect there?

Richard Fleming

Well, as I mentioned, the effective tax rate in the quarter was 15% as a benefit. But on a go-forward basis, Jack, you really should think about the fact that we will probably have a situation in 2011 where we have to provide a small tax provision against even though we have losses in the U.S., overseas, so we're estimating right now the effective tax provision rate in 2011 will be averaging around 4%, depending upon the mix of the worldwide income. Does that answer your question?

John Kasprzak - BB&T Capital Markets

I guess. I mean, in other words, when we're stripping out the charges in Q4, still use a 15% -- still show a percent benefit?

Company Speaker

I'm going to have to be a little more complexer than I want to. I'll make it still simple but the stripping out of charges for the restructuring in Q4, if you're going to basically be focusing on the domestic side of the fence, really will have -- basically have no tax provision or benefit associated with them because of the deferred tax valuation allowance.

John Kasprzak - BB&T Capital Markets

I guess the second question would be a different way to ask, at least partially be effective some of the cost cutting [Audio Gap] Do you think SG&A expense in 2011 would be down in absolute dollars versus 2010? Can you give us any directional guidance there?

Richard Fleming

I'd be happy to. We actually have a corporate objective with this most recent set of cost actions to bring SG&A, which came in at $314 million for the year, $300 million in 2011.

Operator

Your next question comes from Den McGill from Zelman and Associates.

Dennis McGill - Zelman & Associates

First, I guess, maybe Rick this would be for you. But can't you just walk through the thought process around doing a debt deal at the end of last year, improving the liquidity and obviously taking sort of a near term hit here with the interest cost, but what you guys are thinking from more of a conservative standpoint or just the timing of that?

Richard Fleming

Sure. Well first of all the high-yield market was particularly attractive coming off of the election and right on the cusp of the fed announcement of quantitative easing, so we actually -- and sometimes as one of my colleagues says, luck favors the prepared mind, but we actually hit the market probably for the low of interest rates in 2010, and when we did the eight and three eighths and so we were pleased with the timing.

So part of it was opportunistic, the market was available, it was deep for us and we could lay some liquidity on the balance sheet. Our thinking from a philosophy standpoint was we wanted to, first of all, for sure have adequate liquidity to get through this very challenging recession. But also, as we get a sense that the recovery really is in place and we're in a position to effectively restart our growth activity, we really can now jumpstart some of those investment opportunities, particularly things like UltraLight, with that incremental liquidity. So we're going to be very conservative with that, as Jim would say, we'd we're not going to spend the money until we're really comfortable, but it's there for that purpose in addition to the ability to get through the great recession. The other thing that was weighing on our mind minds was the opportunity to sort of couple, both the bond offering with the renewal of our bank lines. The bank market's a bit more challenged these days in the high-yield market. And so by having the two kind of go hand-in-glove, we're able to successfully re-syndicate to a much smaller group, a relationship-oriented bank also to extend out that 2015 maturity.

Dennis McGill - Zelman & Associates

The second thing, I was just hoping you could also review sort of where we are within the nat gas hedges and where the costs position would look like in 2011 if these just hit your expectations and the futures curve doesn't move a whole lot?

Richard Fleming

Relative to the 2011 hedging program, I'm pleased to report this will be basically the final year that we have any of the old legacy swaps. Right now, our hedge ratio is about 40%, about half of that lets call it 23%, its roughly the old legacy swaps that were done in the low $9 projected term area. In terms of the rest of the hedging program is really options, which allow us to take advantage of falling gas prices if they do occur. If you look at the percentage program right now that's [Audio Gap], it's going to be 77% although the hedge ratio is 49% because of the use of options. When you do sort of a weighted average of the legacy swaps with the current spot market, which is about $4.46 per decatherm up from about $4.39 at 12/31. You come up with a pretty much of a flat gas cost year-on-year. Could be down a little bit depending upon how spot moves, but it's going to be in that same kind of zip code. And last year we ran at 570 weighted average basis, maybe a little bit less than that kind of, but that's about the zip code we're in.

Dennis McGill - Zelman & Associates

Just a number quickly, the distribution branches, how much -- how many did you end the year with?

James Metcalf

153.

Dennis McGill - Zelman & Associates

So no closures on the fourth quarter, then?

James Metcalf

Not on a net basis. No.

Operator

; Your next question comes from Jim Barrett from CL King & Associates.

James Barrett - CL King & Associates, Inc

Jim, could you give us some more details on UltraLight in the accounts where it has been stocked for a reasonable period of time? Can you tell us what percentage of your wallboard sales are represented by UltraLight? Can you tell us whether you're measuring your share progress in those accounts as well?

James Metcalf

Yes. As I've said, we're very pleased. And the reason we're pleased, our customers are in where -- we had to accelerate, as Rick said, our rollout because of customer demand. We're seeing now -- and we are tracking it very closely, we're seeing a conversion from UltraLight over half-inch exceeding our expectations. Some of the conversions are north than 33%, and this is with our customers selling that at a premium. We're being very specific on how we'd like UltraLight marketed and resold in the market. So this is not -- we are not commoditizing this product. We're looking at it in a very specific market. We're looking at similar to how we distribute ceiling tile. And instead of having open distribution, we're being very focused on how our customers would resell it, merchandise it, and track the products. So the conversion over half-inch is being sold in the market at a premium over half-inch is very successful. It's exceeding our expectations. It's exceeding our customers' expectations. We're getting our efficiencies at our original plants, our East Chicago and Aliquippa plants, our efficiencies are very, very good. The learning curve is getting shorter for us. So we are really excited. We think this is a great product for our customers. This is something new for the market. We are very focused on expanding our portfolio. We've had some great success that we'll be reporting in the near future on that. And this is something that has been great for morale, not only for us, but also for our customers. So we're extremely excited about this, Jim.

Operator

The next question comes from Bob Wetenhall from RBC.

Robert Wetenhall - RBC Capital Markets, LLC

I wanted to see if you could provide a little insight into the Building Products Distribution segment, because it looks like your operating loss as a percentage of sales is down nearly 1,000 basis points, which is a huge improvement. And at the same time your overall revenues are also declining. So I'm trying to understand how you're able to take out cost faster than the declining revenues.

James Metcalf

Well we've had a very, very focused approach. As I said a year ago, when we saw the commercial market really, really dropping, we've got ahead of this. We de-layered. We got to a point that we closed centers but we wanted to focus on the operations. We improved spreads. As I said in the earlier call, L&W's been very focused about price improvement in the market and improving their wallboard spreads. We've focused on efficiencies, we've looked at our back office, we've de-layered some of our back-office activities and leveraged technologies. So it's been a very focused initiative that we call back to black, back to profitability. So it's been cost reduction, it's been productivity improvement, the centers and it's been spread improvement, not only on wallboard but on other products as well. We still have a lot of work to do, but we're starting to see some trends that are promising.

Robert Wetenhall - RBC Capital Markets, LLC

And on that, do you expect to be profitable on that business this year?

James Metcalf

As long as we're -- our focus is profitability as soon as possible. We aren't making any projections. The thing you have to look at in L&W, a large percentage of their business is focused on new commercial. So new commercial is still under pressure and the market's still going to be under pressure in distribution.

Robert Wetenhall - RBC Capital Markets, LLC

And for my second question, in North American Gypsum, you have some modest margin improvement going on there. Could you just talk a little bit about the spread between wallboard pricing and cost, and if you think that new improved margin is sustainable going forward?

James Metcalf

Well, we started 2010 with basically little or no spread in wallboard, and we had spread improvement throughout the year with price improvement, as I mentioned earlier, and some phenomenal efficiencies at our plants. So the good news, we started 2010 with little or no spread and we're starting 2011 with spreads. So everyone can have their projection where volume is going to be. So we're cautiously optimistic on spread, that's why we're going to be very proactive on price improvement and very relentless on cost reductions.

Operator

The next question comes from Todd Vencil from Davenport & Company.

Todd Vencil - Davenport & Company, LLC

I did have a question about the litigation settlement that you guys reported a year ago, my recollection is you got -- that was $105 million settlement and you booked $80 million of it. Did you get the other $25 million in the fourth quarter this year?

Richard Fleming

Yes. On a cash basis, yes. All the income was booked last year, but the receivable was collected this year for $25 million.

Todd Vencil - Davenport & Company, LLC

That contributed to the cash balance at the end of the year, right?

Richard Fleming

It did, yes.

Operator

The next question comes from Dan Oppenheim from Credit Suisse.

Daniel Oppenheim - Crédit Suisse AG

Was wondering if you can comment in terms of the assumptions in terms of what you have to put into the pension fund this year. If you could review that at this point.

Richard Fleming

Our investment return assumption remains at 7%, which is at the conservative end of the spectrum. We had a terrific investment year in 2010, but still preliminary because some of our alternative assets have yet to be fully reported. But it's looking right now, it will be an excess of 16.25% return. So we certainly beat that assumption. That's going to benefit our situation on a go-forward basis. On a funding basis, PPA calculation, which is what you use for contributions, we expect to be basically fully-funded with the interest rate smoothing that's in that calculation. On an accounting basis, with the ABO, deal which is assets versus benefits earned to-date, we're about -- underfunded by about $35 million on a PPO basis, which includes future salary increases, we're underfunded for a time by $163 million. But all in all, the pension plan funding status has significantly improved year-on-year.

Todd Vencil - Davenport & Company, LLC

And then I guess a second question. I'm wondering about the L&W. You talked about the, actually the goal overall in terms of reducing SG&A for 2011. But the thought that we might see initial signs of recovery. Should we expect to see still incremental restructuring activity? How much do you think is left at this point, or do you think it's really gone through in terms of seeing most of the efficiencies from a manufacturing perspective?

James Metcalf

You're talking about L&W restructuring?

Todd Vencil - Davenport & Company, LLC

Well I was sort of -- it was rambling, I guess. But some, in terms of L&W, whether it's any yard closures or on the manufacturing side, was anything left there as you see it?

Brian Moore

Well let me just comment on L&W. We're still in a tough market with the majority of their business tied to commercial construction. We're going to continue and we have contingency plan and trigger points. And we're going to continue to improve efficiencies. We have some ongoing initiatives, kind of Phase 2 on our back to black, which we focused on, on customers in the yards, in the operations. Some de-layering, we need to get the full benefit of our back-office initiatives. So we're going to continue until we see some solid operating profit to continue to right-size our businesses. I'll be focused on price improvement for L&W's spread improvement, dealing with our strategic sourcing group. So our work isn't done, really, in L&W and on the manufacturing side. As we have in the last four years, we've had a contingency plan and trigger points in this very turbulent market we're in. So we aren't out of the woods yet. We're staying very focused on the short-term. As Rick said earlier, we have adequate liquidity, and we're going to make sure that we get through this before we claim victory. So we're going to continue to focus on being as efficient as possible.

Operator

The next question comes from Seth Yeager from Jefferies & Company.

Seth Yeager - Jeffries & Company

So keeping in mind that you guys have spent quite a bit on capital projects in '06 through '08, what sort of numbers should we think about beyond 2011 with D&A running at about $180 million a year?

James Metcalf

Are you talking on CapEx?

Seth Yeager - Jeffries & Company

Yes, CapEx.

James Metcalf

As you know, we've been around a $50 million. Actually, we've targeted $50 million the last two years, and with the tough market we been in, we've come in under that. We have great plants now. As you said, we made some great investments and we think that if the market continues to go sideways, we would be at that level for the next couple of years. Obviously, CapEx typically drifts towards depreciation. So we can't be there for -- the beauty of the investments we made the last 10 years in our network, we have a great network and we're focused on -- right now, it's on UltraLite and it's on safety. It's on the environment and energy. And so we feel if the market doesn't rebound over the next 24 to 36 months, we can still keep the belt pretty tight.

Seth Yeager - Jeffries & Company

But just to clarify, I think on the last call you had mentioned being able to maintain the $50 million level through 2011, so now you're saying that you can go beyond 2011 at that level?

Brian Moore

We would have to, yes.

Seth Yeager - Jeffries & Company

Now, I guess this is one quick follow-up. You mentioned in your prepared remarks an expected improvement in both resi and commercial R&R. Is this like a mid-single digit number that you guys are looking at for 2011? Just give us an idea of what your...

James Metcalf

Low. I would say low-single digits.

Operator

The final question comes from Adhi Parsajarazi [ph] from Exane BNP Paribas.

Unidentified Analyst

Can you please give us your volume expectations for plasterboards for 2011?

James Metcalf

As I said with the previous question, we believe its going to be very low single-digit increase. And this would be the first year in five years we see any type of increase, but very, very low single-digit improvement.

Brian Moore

I think that concludes our questions. Jim, I think you have a few concluding remarks.

James Metcalf

Well thank you, and we appreciate you joining us this morning and in your interest in USG. Assuming the role of CEO, I'm very excited and very proud to lead this fine company; a company made up of the greatest employees, I believe, in the industry. Our focus is on the fundamentals: it's safety, it's our customers, it's quality and innovation. And hopefully you see innovation coming through in this very tough market with our new product UltraLight. That consistent focus really has been a guide for our company's history through good markets and bad. And as I like to say -- and I said earlier, USG provides a very basic need: we provide shelter. It's spaces where people live, work and play. So it's a product, it's a service that we feel that the industry needs and will need as we go into the future. Our innovation and leadership will continue to provide the better way for the construction industry, just how it has for the last almost 110 years that USG has been around. We really appreciate your time. And I personally look forward to continuing to dialogue with you in the coming months and years ahead.

Brian Moore

A taped replay of this call will be available until Friday, February 4. Information is available on usg.com. That concludes our conference call. Thank you.

Operator

Thank you for participating in the USG Corp.'s Fourth Quarter 2010 Earnings Conference Call. This concludes the conference for today. Thank you for your participation. You may all disconnect.

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