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USG (NYSE:USG)

Q1 2011 Earnings Call

April 20, 2011 11:00 am ET

Executives

Brian Moore - President and CEO

Fareed Khan - Executive Vice President of Finance and Strategy

Richard Fleming - Chief Financial Officer and Executive Vice President

Unknown Executive -

James Metcalf - Chief Executive Officer, President and Director

Analysts

Daniel Oppenheim - Crédit Suisse AG

Rodny Nacier - KeyBanc Capital Markets Inc.

James Barrett - CL King & Associates, Inc

Kathryn Thompson - Thompson Research Group, LLC.

Robert Wetenhall - RBC Capital Markets, LLC

Ivan Marcuse - Northcoast Research

Garik Shmois - Longbow Research LLC

Seth Yeager - Jeffries & Company

Joshua Pollard - Goldman Sachs Group Inc.

Unknown Analyst -

Mark Weintraub - Buckingham Research Group, Inc.

Operator

Welcome to the USG Corporation First Quarter 2011 Earnings Conference Call. My name is Monica, and I will be your operator for today's call.

[Operator Instructions]

I will now turn the call over to Brian Moore, Senior Director, Investor Relations.

Brian Moore

Good morning. And welcome to USG Corporation's First Quarter 2011 Earnings Conference Call and Live Webcast. We'll be using a slide presentation in conjunction with our call today. It is available by going to our 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 the results and our outlook are Jim Metcalf, President and CEO; and Fareed Khan, Executive Vice President, Finance and Strategy. Jim will provide a general overview of the quarter plus additional insight into some of our businesses. Fareed will then review the financial results for the quarter and will provide context to help understand the main drivers for those results. We will then open up the call for questions and conclude with a few comments from Jim. Also present for the question-and-answer session will be Rick Fleming, Executive Vice President and CFO. Jim?

James Metcalf

Thank you, Brian. Good morning. And thank you for joining us. I know most of you are regular participants on these calls, but I'd like to extend a special welcome if this is your first time joining our call. My management team and I really appreciate your interest in USG. USG is a great enterprise and I am proud to be at the helm leading and representing our employees worldwide. There's not a more dedicated and committed group of people anywhere. The progress we are making in this environment is a direct result of the hard work of our team. For our customers who are on the call, I want to take my personal thank you to you and we look forward to continuing to support your business with the finest products and services in the industry. We really appreciate all of our customers. Business conditions like the ones facing the U.S. housing and construction market really test a company and its people. Not many enterprises, particularly in manufacturing and distribution business with a large infrastructure, can navigate conditions like we have. But this is exactly what we are doing at USG. With no help from demand, we continue to march towards profitability. We've been aggressive on cost reductions, but we have not compromised the fundamentals that make USG what it is, a leader in building products. We have one of the best safety records in all of corporate America. We produce the highest quality products in the industry and we continue to lead with innovation.

Our top line results were essentially flat with last year, but we continue to make improvements to our bottom line. Our business is performing better with our largest markets still declining. But still, we are not where we want to be. We remain relentlessly focused on profitability and growing our business. We refer to this operating environment as a self-help type of market. Market demand in the U.S. is not going to be much help in the short-term, so any gains that we're seeing are driven by our people and our operations. This is truly a three-yards-and-a-cloud-of-dust performance. In this self-help market, we've reduced the operating loss by 30% versus last year. This is still a loss, but still a few more yards in the right direction.

We are confident the actions we're taking during this downturn has strengthened our company making it more efficient to drive long-term success, such as our customer satisfaction, our operational excellence and the innovation that you're seeing in the market today. Our products and services meet a basic need. We provide shelter. It's where people live, work and play. The long-term demographics that drive demand for our products are favorable and we remain optimistic about our growth opportunities.

Now I'd like to briefly review the first quarter and then I'm going to turn it over to Fareed Khan who's going to give you a little more detailed look at the business.

Overall market dynamics during the quarter were mixed. U.S. housing remains at historic lows, with little improvement and a lot of headwinds. Housing starts in the first two months of this year were weak and the recent increase in March is still off of very low numbers. Projections for total starts are in the 590,000 to 770,000 range and our forecast is about in the middle of that. R&R trends have improved and demand in this segment continues to get traction. Harvard Joint Center for Housing projects home remodeling to improve about 6% this year, which equates to about 3% for our products. USG is well-positioned with major home improvement retailers, with our national footprint and innovative products like SHEETROCK Brand Ultralight Panels to capitalize on the recovery in this segment.

Commercial construction is still challenged. But there are many -- there are some signs that we're at the bottom. Vacancy rates in major cities have stabilized. Architectural billings have increased since the January 2009 trough and McGraw-Hill is forecasting commercial contracts signed this year will increase about 8%. So clearly, our biggest challenge is the U.S. market demand. Most international markets that we compete in are showing recovery. And we continue to focus our actions with our industry recognized brand, technology and our partnerships. Overall, there's a fair amount of uncertainty regarding the timing and pace of the recovery in our key markets, but we can see that our operating strategies continue to show positive results.

Now I'd like to touch on each of our key businesses, starting with U.S. Gypsum. Wallboard volume went down compared to last year, but the market last year was influenced by the stimulus credit for first time homebuyers. As we now know, that boost was temporary and then industry demand subsequently declined as 2010 unfolded. Our wallboard shipments actually increased in the first quarter compared to the fourth quarter of last year, which is the first time since the beginning of 2007. The average wallboard price in the quarter was up compared to last year's first quarter, and we did announce a March price increase that's got traction in the market.

As we continue to emphasize innovation, we recently introduced another product in our lightweight product wallboard portfolio. USG was the first to introduce a lightweight half-inch panel, and now we're the first offer a 5/8 panel. This introduction is significant, because it brings our lightweight and sustainable product line to the commercial market where labor rates are much higher. Still the lightest, and just as important, the strongest in the industry, we're now providing the commercial contractor with a solution for improved profitability in this challenging market. USG invented the lightweight panel category and we remain committed to be the leader, with additional products to meet our customers need. So stay tuned. You'll see what we have coming.

Now I'd like to turn to our Distribution business, L&W Supply. The L&W team has realigned the organizational structure to improve results and position the business for growth. These initiatives go far beyond closing and consolidating branches. We have right sized the branch network but, in addition, we've now taken layers out of the organization and have centralized decision making. At L&W we have the three Ps at work, purchasing, pricing and people. These are all handled now on a centralized basis. It is a fundamental realignment that focuses on operational excellence at our branches, and a coordinated sales organization focused on key customers. Our goal at L&W is to leverage our nationwide strength but do it with a local commitment. What I like to say is, getting L&W better will make us bigger.

Next, I’d like to acknowledge our Ceilings and international business unit. The results during the quarter, and really over the last year, have been absolutely outstanding. Worldwide Ceilings sales increased 7% and operating profit increased over 40%. Virtually all product categories showed both top and bottom line improvement. We've been able to say ahead inflationary trends with price improvement, we've improved efficiencies at plants and service levels for our customers. But most importantly, in our Ceilings business, we remain committed to profitable growth. Our focus on architects, emerging segments and our commitment to our dedicated distribution base have been key success factors in our Ceilings business.

I'm also very pleased with the performance of our international businesses. Our business units in Mexico and Europe have increased sales and profit versus last year, and we have improved results in our joint venture in China. Part of our strategy is to continue to build on our international footprint, by bringing innovative products and solutions to key markets and customers. As markets develop, particularly in the commercial industry, the need for productivity enhancing products increases and our customers look to USG for those solutions. One great example is the tallest building in the world, the Burj Dubai Tower. It was built by using USG SHEETROCK Brand Panels.

In summary, the first quarter was largely what we anticipated. Weak U.S. demand but with improvements in our operating results, largely attributable to the actions we've taken throughout the company to improve our operations, to reduce our costs, drive towards profitability, and take care of our customers. As we look forward, the pace of the recovery remains uncertain, but we are confident that our efforts to realign and focus our business will continue to contribute positively to our operating performance. Long-term, the demand fundamentals for our products remain positive. We remain optimistic about our opportunity to grow and thrive as the market continues to recover.

Now what I'd like to do is turn it over to Fareed Khan and he's going to review the numbers in more detail with you.

Fareed Khan

Thanks, Jim. Good morning, everyone. And thanks for joining us today. I'm going to dig a little deeper into some of the key numbers behind the operating results that Jim just outlined. I'll touch on the P&L and also provide some additional details on debt, liquidity, overhead, interest expense, capital spending, and taxes. The overall message today, and what you'll see in the numbers, is that our top line remains challenged by weak U.S. housing and construction fundamentals, but we continue to make tangible progress on profitability through our operating initiatives. We remain focused on cost reduction, maintaining financial flexibility and cash preservation in both our operations and financing activities.

For the first quarter ended March 31, 2011, USG's consolidated net sales were $721 million. This is a $5 million or 1% increase versus the same period last year. Net sales were up about 3.5% from the fourth quarter 2010, which is more, due to seasonality than any structural improvement in demand. Consolidated gross profit margin was 5% for the quarter. Total gross profit of $36 million was up $22 million from the same period last year. SG&A expenses totaled $85 million or about 11.8% of sales for the quarter. Restructuring charges of $9 million for the quarter were down from $12 million last year. These continue to be related to our cost reduction initiatives.

Our first quarter operating loss was $58 million, compared to a loss of $82 million in last year's first quarter. This is a $24 million reduction in operating loss, resulting from margin improvement in our core businesses. Our net loss for the quarter was $105 million down from $110 million a year ago.

Let me, very quickly, cover the drivers linking our operating loss to our net loss. Two factors are important here. First, our interest expense for the quarter increased from $45 million a year ago to $52 million. This is a consequence of the additional liquidity that we added to our balance sheet via the $350 million bond offering we concluded in the fourth quarter of 2010. As you may recall, the high yield bond market conditions were very favorable and we took the opportunity to significantly increase our financial flexibility by layering in addition liquidity. Second, we recorded an income tax benefit that was about $14 million below last year's first quarter. Our tax benefit in the first quarter of 2011 was $3 million in contrast for the same period last year, our income tax benefit was $17 million. With average diluted common shares outstanding of roughly $103 million, our net loss translates into $1.01 per share loss for the quarter, down from $1.10 a year ago.

Jim discussed our key businesses and our operating focused areas. Let me now, very briefly, touch on segment results.

The softness in the U.S. market continued to impact North American Gypsum and L&W results. For both businesses, net sale declined 2% year-on-year. North American Gypsum net sales were $416 million for the quarter and L&W Supply was $243 million. Despite lower net sales, both businesses reduced operating losses. North American Gypsum losses fell by $6 million to a loss of $29 million. L&W losses were reduced to $17 million and have narrowed to $22 million for the quarter. Our U.S. Wallboard business, a key driver of North American Gypsum results, shipped 990 million feet in the quarter, which was down from 1.15 billion feet over the same period a year ago. Industry shipments declined about 230 million feet from last year's first quarter levels. This was not unexpected, as we had the impact of the homebuyer tax credit temporarily boosting shipments last year. Industry shipments were up about 2.5% versus the fourth quarter 2010. Not a large number, but it is the first time in a while that we've seen sequential improvement in wallboard industry shipments. As Jim mentioned, our average wallboard price was just over $109 per thousand square feet for the first quarter. This is up about 2% versus the same period last year, but down sequentially by about $2.80 versus the fourth quarter of 2010. Obviously the March 7 price increase had limited impact on our overall financial results for the quarter, given the timing of the increase late in the period.

L&W volumes year-on-year, for the quarter, were down 20%. The revenue impact of this volume decline was partially offset by a 9% average increase in wallboard price over the same period. Gypsum's margins was up 33% for the quarter versus 2010. Over the same period, sales from construction metal products and fuel [ph] products were up 10% and 8% respectively, which helped offset volume declines in other product categories. The aggressive restructuring underway at L&W continues to have an impact on the bottom line, and contributed about $10 million to the operating profit improvement. As of March 31, L&W operated 163 branches nationwide.

First quarter net sales from our Worldwide Ceiling business increased from $165 million in 2010 to $177 million. The primary driver was higher volumes and higher selling prices in the United States, but all of our international Ceilings business had both top line and bottom line growth. Overall operating profit increased from $18 million a year ago to $26 million, and was up $14 million from the fourth quarter. As Jim mentioned, every key product category had margin improvement over the period.

Let me briefly touch on [indiscernible] I mentioned in some more detail. SG&A expenses totaled $85 million for the quarter, restructuring and impairment charges were $9 million. During the quarter, we continued to drive cost reduction initiatives, $4 million in restructuring related to severance cost for workforce reductions across all of our businesses. The remaining $5 million in restructuring related to various costs associated with the closing, idling of our manufacturing, mining [ph] and distribution network. Salary freezes, reductions in employee and retirement benefits, and health care savings associated with our adoption of the employer group labor plan helped to offset inflationary pressures in retirement and long-term compensation plans. We also continue to make targeted investments in long-term growth and productivity initiatives. These include SHEETROCK Ultralight Panels and other key product introductions, upgrades to our technology infrastructure and an enterprise-wide back office optimization project.

Financial flexibility is a key element of our strategy for the downturn and we're watching cash very closely. We closed the first quarter in 2011 with cash, cash equivalents and marketable securities of $769 million, compared to $585 million this time last year. As I mentioned, our bond offering in the fourth quarter of 2010 was important in ensuring we have ample liquidity to navigate a protracted downturn, but it has also increased our interest expense. On an annual basis, we expect our interest expense to be roughly $209 million on the income statement and about $199 million on a cash basis. This is up roughly $30 million from 2010 levels. We continue to manage capital expenditures very closely. Total CapEx in 2010, for the full year, was under $40 million. We're planning to spend approximately $50 million for 2011. Our prior investments and the benefits of a modern, optimized manufacturing network allow us to maintain low levels of CapEx without impacting operations.

Total debt now stands at $2.3 billion. We've been careful to structure the balance sheet to push out maturities, eliminate covenants and build in convertible or callable features. We have $300 million of debt maturing in August 2014. Additionally, $750 million or about a third of our total debt is either callable or convertible. Cash usages in the quarter include $44 million for interest expense, $18 million related to restructuring activities and $13 million for capital expenditures. The remaining cash drain was from operating activities. Due to the seasonality of our business, we build working capital during the first quarter. This amounted to a $73 million use of cash over the period. While working capital draws cash in the first quarter, it typically contributes during the remaining three quarters, with the largest contribution in the fourth quarter, as inventories are drawn down for the winter months. Total liquidity was $958 million at the end of the first quarter.

Let me now close with the following remarks. Clearly, we got no help from macroeconomic drivers. Consolidated sales were essentially flat versus last year and volumes in our U.S. Gypsum and distribution businesses were down. Our margin initiatives, both on the price side and the cost side, drove solid bottom line profit improvement year-on-year, in each of our key businesses. We remain very committed to margin improvement and will continue to optimize our operations. Our investing activities are very focused on strategic priorities. Key differentiating products like Ultralight panels, our technology and service infrastructure and on variable-lizing [ph] our cost structure.

With that, let me turn it back over to Brian Moore. Brian?

Brian Moore

Thank you, Fareed. We are now going to open up the call for questions. We want to ensure that there's plenty of opportunity to ask questions, so callers are asked to please limit themselves to one question and one follow- up. Operator, please open up the phone lines for participants to ask questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from Michael Rehaut of JPMorgan.

Unknown Analyst -

Hi, this is actually Jason Marcus, in for Mike. For the Wallboard business, I just wanted to know what your capacity utilization was for the quarter versus the industry’s? And also, regarding the price hike for March 7. Is that just a deferral of the February 7?

Richard Fleming

Price increase, yes. We move from February to March on our price increase. And capacity utilization is running about 45%.

Unknown Analyst -

For the company?

Richard Fleming

Yes.

Unknown Analyst -

And what was the -- do you know what the industry was?

Richard Fleming

No. We don't have the industry numbers right now. Probably close to that zip code.

Unknown Analyst -

And regarding Ceilings. Can you talk a little bit about what drilled the strength?

James Metcalf

Excuse me. I appreciate your question on Ceilings, but we're trying to keep this to one question. I'll answer the ceilings question and just for the rest of the callers, we just want to make sure we have enough time. So, not to interrupt you, but please continue on Ceiling.

Unknown Analyst -

Okay, I just wanted to know what really drove the strength in Ceilings during the quarter in terms of margin performance and if you think that performance is sustainable going forward.

James Metcalf

Well the margin performance on Ceilings has been -- there's been a consistent trend, really, the last 18 months and it's been a focus on staying ahead of inflation, particularly on grid and now on some of the raw materials that we're seeing on ceiling tile getting price improvement in the market. It's also focusing on having a very efficient distribution network. And also, we've looked at some of the emerging channels. For example, commercial repair and remodel, we have focused on that over the last couple of years. So it's really been two or three initiatives. It's really -- we have focused on profitable growth versus -- really focused on market share. And we think we're in a really good zone with our Ceilings business. We're very, as I said, we're very excited about it and it's a very big bright spot. One of the other areas on Ceilings is we have a business unit that is accountable and focused on this every day. And our folks live and breathe ceilings -- that are in this unit. So, great job by our folks, and we're going to continue to trend, we hope.

Unknown Analyst -

Great, thank you.

Operator

Our next question comes from Garik Shmois of Longbow Research.

Garik Shmois - Longbow Research LLC

Hi, thank you. Just have a question on volumes and your expectations for 2011. If I remember correctly, coming out of the fourth quarter, you mentioned that you were expecting very low single-digit volume improvement in wallboard shipments in 2011. I was just wondering, after the first quarter, if you're view has changed at all. If there's any potential downside risk to it.

James Metcalf

Well, as we said, the shape of this -- there is some uncertainty, but we still believe there's some segments that are showing some glimmer, and that's in the Repair and Remodel segment. We think that R&R growth is still at [indiscernible] percent. We're comfortable with that. Non-res [non-residential] is -- we have around an 8% number, but you have to remember that's a lag number. So, a lot of that will be going into 2011 -- or excuse me, 2012. So, last year, the industry shipped just north of $17 billion. And our feeling right now for the first quarter is we're going to see some slight improvements, but the industry is still fairly soft.

Garik Shmois - Longbow Research LLC

Okay, thank you very much.

Operator

The next question comes from Bob Wetenhall of RBC Capital.

Robert Wetenhall - RBC Capital Markets, LLC

Hi, good morning. I just had some questions. It looks like you guys did a very good job of taking a lot of cost out to drive margin in L&W on a declining sales base. And I was hoping if you could provide or share with us if -- now that you're at 163 depots, is that number going lower? And do you think the size of the improvement is sustainable or should we expect more improvement as we move through the year?

James Metcalf

Well that's a great question, and as I said in my prepared comments, initially we were taking branches out. And we're -- and the reason I use the term branches is we're very focused on our operations and we separated our organization, focused on operations. And then also focused on sales. So, our 163 branches, we feel is a great number at this point. There's a tremendous amount of leverage now at L&W with some additional volume that we hope that the demand provides in the future. But the cost taken out of L&W, I think a great comparison would be the operating results this quarter. If you compare that to the second quarter of last year. Operating loss was $22 million in the second quarter of last year. $22 million this year and there was 90 million feet less volume that ran through the system and $40 million. So you can see, taking the cost out has tremendous leverage for L&W. We think we're optimized right now, with the amount of locations. We haven't left any strategic markets. And as I said earlier, this is all about making L&W better, which we think we'll grow the business. It's focusing on our strategic sourcing, it's focusing on strategic customers and it's really optimizing our centers. So, we will always look at ways where we can take cost out, but taking a lot of branches out, we don't think that's part of the plan at this point.

Robert Wetenhall - RBC Capital Markets, LLC

Thank you.

Operator

Our next question comes from Rodny Nacier of KeyBanc Capital Markets.

Rodny Nacier - KeyBanc Capital Markets Inc.

Hi. Hello, everyone. On the wallboard side, can you comment or expand on monthly pricing trends that you guys saw throughout the quarter?

James Metcalf

We only talk about quarterly numbers. So, as I said, our March price increase was effective during the month, so you will see that in the second quarter numbers. So, if you look at -- we finished the quarter north of $109. And that was, as Fareed said in his comments, about $2 less than the fourth quarter. But we don't report on monthly trends.

Rodny Nacier - KeyBanc Capital Markets Inc.

Okay, thank you. And could you break out the -- for wallboard, the split of residential repair, remodel new res, and our new non-residential construction?

James Metcalf

You're getting a bonus question, you know that.

Rodny Nacier - KeyBanc Capital Markets Inc.

Appreciate it.

James Metcalf

Okay, all right. If you look at the footage, if you look at repair and remodel, and residential is about 85% of the wallboard demand. So that's about -- repair and remodel is about 55%. Non-res is less than 10%. So the big driver on wallboard demand is repair and remodel, and that's broken down half-and-half, commercial and residential.

Rodny Nacier - KeyBanc Capital Markets Inc.

Okay, and that was for 1Q, right?

James Metcalf

Yes.

Rodny Nacier - KeyBanc Capital Markets Inc.

Okay, thank you.

Operator

Our next question comes from Kathryn Thompson of Thompson Research.

Kathryn Thompson - Thompson Research Group, LLC.

Hi, thanks for taking my questions today. The inventory was higher than expectations, in light of a softer top line. What's driving this increase and why the inventory build in the quarter?

Fareed Khan

Kath, it's Fareed. That's a very typical seasonal pattern. So we ended last year with fairly thin inventories across the network, both in building systems and L&W. And so, it's just a typical build as we came into the season. So, I'd say there's really nothing unusual about it from an operations standpoint.

Kathryn Thompson - Thompson Research Group, LLC.

So nothing really related, for instance, to Ultralight and trying to meet demand for big box with that?

Fareed Khan

No, and I mean that's a factor, but it's not going to contribute overall. As I mentioned, there's about a $73 million use of cash for the quarter. As we go through the year we'll see that inventory come down and contribute back from a cash standpoint.

Kathryn Thompson - Thompson Research Group, LLC.

And my second question is, it appears that a decent portion of the March price increase has flowed through, and it's a safe assumption that we should at least see some sequential improvement in pricing going into Q2. Correct?

James Metcalf

Kathryn, this is Jim. We don't give any projections on price.

Kathryn Thompson - Thompson Research Group, LLC.

Are you hearing anything different in the market than what we are in terms of the price acceptance in March?

James Metcalf

The March price increase has gotten tractions. Yes, it's absolutely gotten traction.

Kathryn Thompson - Thompson Research Group, LLC.

Okay, great. Thank you so much.

Operator

Our next question comes from Joshua Pollard of Goldman Sachs.

Joshua Pollard - Goldman Sachs Group Inc.

First question, and I guess it is the last. What percent of your deliveries, in the Gypsum, is on spot versus contract? I guess, what I'm ultimately trying on [ph], and I think what your investors would be interested in is, if you guys really start to continue with your traction on pricing in March and potentially get some more price increases. How much of that is actually going to drop to the average realized price that we see versus how much you guys have sort of already tied up in larger projects like potentially what you guys did in Dubai, potential with Freedom Tower here in New York? Just interested in the spot versus contracts out of your business? Thanks.

James Metcalf

Sure. That's a great question and there's always job protected prices. I think the bad news to that is there's not a lot of big large jobs, like you just indicated, where you need that type of job projection. But we do track that. We don't disclose that. But it is a smaller percentage of our overall invoice price. So we have centralized monitoring of job quotes, we make sure that they are legitimate jobs. For the footage, we track them. And we typically put escalators, depending on the length of the job, on those job quotes as we look at our pricing. So it is a balance, but it is a -- again, we don't disclose that, but there are job quotes and as we like to call it, invoice pricing, which is the larger percentage.

Joshua Pollard - Goldman Sachs Group Inc.

What do you mean by invoice pricing? I guess as a follow-up.

James Metcalf

Every day pricing. As your example, job price for the Freedom Tower would have a certain price with escalators. Everyday pricing would be something we're shipping to our dealers for their warehouse and for their everyday jobs, and it's what the market price is at that point.

Joshua Pollard - Goldman Sachs Group Inc.

So, is it fair to say that, that overall contract, that are job protected business is, call it, less than 20% of your business when you say it's just a small percentage?

James Metcalf

We don't disclose that. But it is a smaller percentage than our everyday price. We just can't disclose that. Thank you.

Joshua Pollard - Goldman Sachs Group Inc.

Thanks guys.

Operator

Next question comes from Trey Grooms of Stephens.

Unknown Analyst -

Yes, this is actually P.J. Dickey in for Trey. Jim, just looking at the wallboard demand. Looks like your volumes were down about, a little over 13.5% year-over-year during the quarter, and I believe the industry was somewhere around negative 7% for the same period. So it seems there's a little bit of market share lost there. Can you just, kind of explain, kind of what's going on there? Are you guys be more selective with customers or -- just some color there would be helpful? Thanks.

James Metcalf

Sure, thank you. Really, it's in three areas, I would say. First, as we talked and free touched on some of the L&W price improvement, we've taken a very disciplined approach to get price improvement both from manufacturing and distribution. So, when L&W raises prices -- I've said in previous calls, that at L&W we're willing to park trucks. And this is about our road to profitability and really focused on partnering with the right customers in the market. So when L&W raises prices and we will pass on some jobs or pass on market share, that equates back to the Gypsum business. So that's the first thing. The second area on that is shedding customers that have a high credit risk. We're in a very tough market. There's a lot of customers under pressure from a credit standpoint and we take a very disciplined, a very conservative approach on our credit exposure. So that's the second area. And the third area is, we look at unprofitable areas. And we are going to take a very diligent approach, that we aren't going to ship into areas that don't make sense from a profitability standpoint. So it's really three areas, it's very strategic. As we've talked over the last, really, 18 months, our strategy has been balancing price and volume. And really focused on profitability. So, raising prices on L&W, shedding customers with a high credit risk and looking at unprofitable areas are really kind of the 3 drivers of what you can see on our volume.

Unknown Analyst -

Great, thanks. I'll get back in queue.

Operator

Our next question comes from Dennis McGill of Zelman & Associates.

Dennis McGill

Good morning, thank you. I was hoping you guys could elaborate a little bit within the Ceilings, on the top line. Can you break apart what you're seeing on the volume side? From price, both in terms of grid and tile? Just to help us understand kind of the trends there?

James Metcalf

If you look at the volume, really, in each product category. If you look at tile broken out and our high-performance tiles, our volumes are very, very solid. Double-digit increases. And really, each product line is up. I mean, there's not a one product line that really jumps out, that's exponentially higher. We're very pleased with the unit growth. Now it's not huge, but we have unit growth. As you see, we have top line revenue growth and margins. So, it's a very disciplined approach. This is not a big market share grab. Our strategy is profitable growth and we feel that our strategy focus on some of the segments out there, for example, commercial Repair and Remodel, with some of the things we're doing in the field, has really helped that. So, if you uncouple each area, it's just not on price improvement. We are getting some nice unit growth by each product category and none's really jumping out ahead of the other.

Dennis McGill

Just to be clear. If we separate grid and tile, grid and tile both would be, I'd say, low-single digits in volume for the quarter and the balance would be price?

James Metcalf

Are we disclosing our volume there? Our unit volume? I don't believe we are.

Unknown Executive

We haven't disclosed in the past. But, grid was particularly strong in the quarter.

James Metcalf

Yes. You're in the zip code, but we aren't going to disclose that. But, I would just say, from a standpoint, we are seeing some slight volume increases along with price improvement and top line revenue.

Dennis McGill

Am I getting in trouble for this? But, can you just talk about corporate expense? Both in the quarter? The increase that we saw? And then, expectations for the year?

James Metcalf

Is this your second question or follow-up to your first because that's a bit …

Dennis McGill

It's completely related to my first. It's a second...

James Metcalf

Okay, all right. So, we'll have Fareed handle that one.

Fareed Khan

Okay. Yes, you did pick up on the increase in corporate cost. There's a couple of drivers in there. Let me start by saying that our actual people costs were down year-on-year through, I think, on reductions and other cost initiatives that we have. We did invest in two areas. One, related to our technology infrastructure, tied to an ERP upgrade. A routine necessary for us to continue to optimize our network. And the second is a corporate-wide initiative that we have around reengineering our back-office that cuts across all of our business units, using an outsourcing model. There's some other onetime charges in there around environmental. And the last area was some long-term incentive charges are typically front-end loaded into the first quarter. So it looks higher than it was in increase. Predominantly onetime charges that offset for the quarter anyway, the work we've been doing on just general cost reductions.

Dennis McGill

So the balance of the year should look more like what we have been running at prior to this quarter then?

Fareed Khan

We will see higher corporate expenses in the first quarter, and then they taper off, if you look back at last year. And I think we'll expect the same thing.

Dennis McGill

Okay, thanks again guys.

Operator

Our next question comes from Ivan Marcuse of Northcoast Research.

Ivan Marcuse - Northcoast Research

Hey guys. Thank you for taking my question. My first -- my question really is, why were revenues -- if revenues were flat in distribution, from fourth quarter to first quarter, why did operating profit drop $10 million? And what sort of drove that and how should I think about that going forward?

James Metcalf

Sure, that's -- if you look at the fourth quarter, we had some onetime benefits in the fourth quarter with some settlements we got on some litigation as well as the Chinese wallboard. So, if you look at those, there is about $10 million that where onetime benefits in the fourth quarter. So, that basically takes it to -- I think we were at a negative $12 million in the fourth. So, that puts it basically flat sequentially. I think the better comparison, as I said earlier, was the first quarter of this year compared to last year's second quarter, which both quarters were a negative $22 million and last year, we had an additional $40 million of revenue flowing through there. So kind of -- it shows what the cost reductions and the margin improvement has done for L&W. So, L&W is making progress. We aren't where we want to be, but I think the organization is very focused. We've taken a lot of the decisions that typically have been in the field. We centralized those and can control those, particularly on pricing, here corporately. And we've taken a lot of costs out at the center locations in addition to the branches. So, our strategy with L&W, as we said last quarter, was back to black. That's important to get L&W profitable and we hope to see some improvement as the year unfolds.

Ivan Marcuse - Northcoast Research

Great. And then my second question is in the Ceilings business. You're going through a more seasonally stronger second and third quarter. Would you expect margins to continue their upward trend? Or do you have higher input cost of raw materials flowing through the P&L? Be a little bit of an impact going second, third? Thank you for taking my questions.

James Metcalf

Well, we don't give projections on future earnings, but we're very focused on margin improvement in Ceilings. It's profitable growth. I would be very disappointed if we did not continue the trend that we're seeing in our Ceilings business. And we're going to continue to stay ahead of inflation, particularly on steel. As everyone knows that's a very volatile commodity there. We have a great strategic sourcing group that stays ahead of steel cost so we can stay ahead of that in the field. And we're going to continue with our strategy that we've had the last three years is, profitable growth.

Operator

Our next question comes from Jim Barrett of CL King & Associates.

James Barrett - CL King & Associates, Inc

Good morning, everyone. Jim, one question, one follow-up. What level of annualized shipments, at U.S. Gypsum, at this point, given your cost structure and assuming some price improvement from the March price increase, would get that business back to breakeven in your view?

James Metcalf

Well, Jim, that's something we focus on every day and actually, it's getting past breakeven. It's getting profitable, and as we've said before, we don't give projections. We have lowered our breakeven tremendously, with our $600 million of cost coming out. It's two areas, we need demand and we need spread improvement. And when those two things happen, we're going to get to break even, but unfortunately I can't give you a projection today.

James Barrett - CL King & Associates, Inc

And then the related question. You're finally getting traction with the March increase. Do you sense that the industry is getting more disciplined, in terms of pricing the product at this point?

James Metcalf

Well, I don't want to comment on the industry. I know we're very disciplined, and one of the things that we have changed in the last year is we've been very disciplined on the manufacturing side. But what the changes we've made at L&W and the new pricing policies we put there, we are extremely disciplined on the L&W side. And I think that's really important, having USG and L&W very disciplined in pricing. And as you'll see, as Fareed commented on L&W, L&W has got price improvement in a very soft market with that type of discipline.

James Barrett - CL King & Associates, Inc

Thank you very much.

Operator

Our next question comes from Dan Oppenheim of Crédit Suisse.

Daniel Oppenheim - Crédit Suisse AG

Thanks very much. In regard to the price increase and the traction that you got in March, what would you say, in terms of the volume there? Do you see any pre-buying taking place there? Any additional volumes that you saw, either in, call it, early March during that time?

James Metcalf

That's always a good indication of, are your customers believing the price is up. And seeing some pre-buying is always a good sign. Our customers are very focused on their working capital, so they really, really watch that. So, we did see some signs of that, and that was more in a regional basis.

Daniel Oppenheim - Crédit Suisse AG

Okay. And the second, in terms of the lightweight product. Is there any additional marketing expense going into that as we think about margins? Where would you saw margins are on that? And what's sort of market is going in that now? And sort of share of the business that you seen now versus where it should be?

James Metcalf

See, this is a great second question. Because I am so glad you’re asking about Ultralight, because this is the absolute most exciting thing I know our company has done and the industry is extremely excited about this. Just as a proof point on Ultralight, if you went back a year ago, there were less than 60 locations in the United States that carried Ultralight. Now we have over 1,000 outlets. 1,000 outlets that are carrying Ultralight, and most of these customers that are carrying Ultralight are getting a premium to their customers. So you think about how soft this market is, that our customers -- we're providing them some additional profit so they can grow their businesses. So we've just introduced our 5/8 product, the first in the industry. This is a product that will be very successful in commercial construction because of higher labor rates. For example, commercial drywall hangers in the city of Chicago make up to around $75 an hour fully loading in the benefits. So if you think about Ultralight that's lighter, that's stronger, that's good for the environment, that it will provide better productivity for commercial contractors, it will make them more profitable but be able to get more USG jobs. So we're very excited about this. We're going to continue to develop new products, and as I said in my prepared comments, stay tuned because we're working really hard from an R&D standpoint to come up with some additional products for our customers. In terms of the marketing expenses, we do have a marketing campaign to support Ultralight, but it's redeploying expenses, it's not addition to. This is our #1 focus in the Corporation, from an R&D manufacturing and marketing standpoint. So we didn't have the luxury to add cost for Ultralight, we just got to make some tough choices, and this is our #1 priority. So we redeployed our cost and we're going to continue to support it with marketing, but more importantly, is get it in the hands of our customers so they can grow their business.

Daniel Oppenheim - Crédit Suisse AG

Thanks very much.

Operator

Our next question comes from Seth Yeager of Jeffries.

Seth Yeager - Jeffries & Company

Hey, guys. One quick question. From the $25 million or so in cash savings, from the restructuring actions in the fourth quarter. Did any of that flow through in the first quarter? And based on your modest volume improvement outlook. How should we think about that through the balance of the year?

Fareed Khan

Yes. It flowed through the first quarter. We saw about $3 million in SG&A reductions. Those were offset by onetime charges. We've also reduced some of our long-term legacy cost, going to a group labor plan. We've reduced our matches on 401(k) and other areas. So it does flow through, there's just a lot of kind of puts and takes around the first quarter results, as I mentioned earlier. So we're definitely seeing the cost reductions flow through. It's something we track very closely through each of the initiatives that we have.

Seth Yeager - Jeffries & Company

And for the balance of the year, is there any -- is that going to be lumpy or is it fair to just kind of run it in a 1 year fashion?

Fareed Khan

You have to kind of make your own assumptions in the model. I mean, it should flow through throughout the year. But there are different elements in there. And we also -- we continue to look at every opportunity to reduce cost as move forward. You've seen in prior years, sometimes multiple initiatives flowing in throughout the year.

Seth Yeager - Jeffries & Company

All right, great. Thanks a lot.

Fareed Khan

If you want to talk more about your model, we could do it off-line a little bit more if you want.

Seth Yeager - Jeffries & Company

Thanks, appreciate it.

Operator

The next question comes from Phil Bobacelli from Deutsche Bank.

Unknown Analyst -

Hi there, this is Sean Wandrack sitting in for Phil. Do you guys have a free cash flow target? Or in other words, a cash target for the end of 2011? Thank you.

Fareed Khan

We do. I mentioned cash is a pretty important to us. Our cash interest expense, as I mentioned, is about $199 million. We've got -- we're targeting about $50 million in CapEx. Leave the EBITDA assumptions up to you guys in your models. But we look -- we manage those two very closely. We're also looking at working capital very closely as well, and I mentioned, there's some seasonal impacts that you have to factor it in. We do anticipate a cash burn this year, that's in the plan and that's part of the reason we're very focused on liquidity. So, you can kind of work that out on your own assumptions around EBITDA, but we would anticipate a cash burn.

Unknown Analyst -

How about in terms of cash taxes for the year?

Fareed Khan

So, we have some credits coming in the first quarter which offset our taxes. I would suggest around $10 million to $15 million for the year. We have a cash loss carryforward that applies to a lot of our federal taxes, but we do have some state taxes in some profitable international subsidies. So $10 million to $15 million, if that's your range you'd be fine.

Unknown Analyst -

Okay, thank you. And do you think that working capital builds in Q1 will be able to cover most of the working capital for the year?

Fareed Khan

That's typically been the pattern in prior year's. Where it's a lift in the first quarter and then we work that down and in the fourth quarter it contributes.

Unknown Analyst -

Okay. Thank you very much.

Operator

The next question is a follow-up question from Bob Wetenhall of RBC Capital.

Robert Wetenhall - RBC Capital Markets, LLC

Hey, thanks for taking a final question. Just wanted to ask Jim. What are you most excited about? In terms of your three segments? Which you think is the most margin upside? Given the changes you're making to the business model.

James Metcalf

Well, I think, I'm excited about all of them quite frankly. We've taken a lot of costs out. There's a tremendous amount of leverage in the business. In past calls, we've talked about the leverage in the Manufacturing business. And that incremental dollar coming through of what that does to margin, but there is a tremendous amount of leverage in L&W. And I don't think we really highlighted that to our analyst and investment community. We're going to continue to do that in discussions. But, I think with the reorganization of L&W, we're very focused operationally. From a sales standpoint, we decoupled that. I'm really excited about going forward with L&W. With our plant network, on the manufacturing side, we're running our network. We have some very -- our very low cost plants, great facilities, great people. So, there's tremendous amount of leverage there. I touched on the Ceilings business. We're going to continue to march on to the Ceilings business. And then, along with that, we have some very interesting strategic opportunities outside of the United States. We have a very robust international team. We've put some great leaders leading our international business. And we want to continue to diversify our portfolio as we go forward. So actually, I'm excited about all of these and there's great opportunities. The one thing we need is a little bit of demand help here, and what we need you to do is go out and buy a house or remodel your house and go in to your local outlet and go buy some Ultralight, because we think you'd be really happy with that. So you can help us get there.

Robert Wetenhall - RBC Capital Markets, LLC

All right guys, thanks a lot.

Operator

Our last question comes from Mark Weintraub of Buckingham Research.

Mark Weintraub - Buckingham Research Group, Inc.

Thank you. First, a competitor had indicated that they seem to have gone about $8 to $10 from the March price increase. Would that be a fairly accurate assessment of where you are? Or can there be quite significant differences from one competitor to the other?

James Metcalf

I don't comment on competitive pricing, as I've said before, we got some pricing in our March increase, some traction. We feel very comfortable and we're getting some price improvement and will be able to report that next quarter. And you'll be able to see how we did.

Mark Weintraub - Buckingham Research Group, Inc.

And historically, would you say there tends to be fairly similar movements from competitor to competitor? Or can it because of regional differences, what have you, can there be quite wide spreads?

James Metcalf

I feel more comfortable talking about what we do with our pricing. So I can talk about our regional trends, but not our competition.

Mark Weintraub - Buckingham Research Group, Inc.

And then in terms of freight cost. Obviously, we've seen diesel go up some. How does that seep through in to your cost structure? What type of metric should we be thinking about to try and assess the impact?

James Metcalf

Well, diesel -- actually, anything fossil fuel is going to have some inflation, particularly on plastic pails, in our joint treatment business. We've had some joint treatment price increases and the market's staying ahead of that. Diesel fuel has an impact on our customers, on our distribution. So, it's not a huge impact that we see on freight. A lot of -- our freight on the wallboard side, our customers pay for the freight, it's after deducting freight. So it's part of -- we see more, the fossil fuel inflation in some of our other products, latexes, plastic pails and some of our raw materials that we're going to continue to stay ahead of. One wonderful thing we have, as a corporation, we have a world-class strategic sourcing group that stays on top of any type of commodity changes, be at diesel fuel, waste paper, natural gas. And we think we do a pretty darn good job staying ahead of inflation and making sure it doesn't impact margins. So not a huge impact on diesel on the wallboard side more on -- a little bit on pails, we have price increases saying ahead of that. And on our L&W, we're getting price improvements there. So, I don't think it's anything significant.

Mark Weintraub - Buckingham Research Group, Inc.

Okay, that's helpful. Thank you.

Operator

This concludes our questions. I will now turn it back over to Brian Moore for closing remarks.

Brian Moore

Thank you, and thank you for all your questions. Jim, I believe you have some concluding comments?

James Metcalf

Yes, thank you. And I really appreciate all the questions and I'm glad everyone listened to us about the one question. I'm glad everyone followed through with that. But I do, all kidding aside, appreciate your interest in our company and as we said we've been operating in a very weak market for several years, but the foundation of this company, that's almost 110 years old is very, very strong. And we're committed, that the actions we've taken have strengthened this foundation. We have the industry-leading brands. We have the strongest, and I believe, the best customer network, not only in the United States, but outside of the United States. And I think what you're seeing is we have an unrivaled market coverage. We're very well-positioned for the recovery. We serve all the segments. And with our broad footprint that we have in manufacturing and distribution, we're positioned, regardless of where the rebound is, particular geographies, we are there to capture that rebound. As I mentioned a few minutes ago, our supply chain is extremely efficient, it's very unique compared to our competition and what it does, it provides tremendous, tremendous flexibility in this evolving market. In addition to our national footprint, I'm very, very proud and I think you're starting to see the results of our product innovation, which has provided a much-needed solution for our customers. Our customers have been asking us, give us the solution to get through this tough market. Our lightweight product platform gives our customers the answer for improving their business through increased productivity and performance, and these are also with products that have a high sustainability area. Outside the United States, our business has excelled. I'm very proud of the efforts with our International business, and it really provides a window for our company for growth and as I said earlier, for diversification. Our reputation for quality, innovation, will continue to facilitate growth opportunities beyond North America. And as I said earlier, USG provides shelter. We provide a basic need that everyone needs. And we really believe the opportunities, over the long-term, will be significant, both in the United States and international and we are positioned to profitably grow this fine company.

I really appreciate your interest and more importantly, we all appreciate your support of USG. And thank you so much.

Brian Moore

That concludes our call. A taped replay of this call will be available until Friday, April 29th. Information is available on our website, www.usg.com. Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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