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USG (NYSE:USG)

Q3 2011 Earnings Call

October 20, 2011 11:00 am ET

Executives

Brian Moore - President and CEO

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

James S. Metcalf - Chief Executive Officer, President and Director

Analysts

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Angela Uttaro - Oppenheimer Funds

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Michael Dahl - Crédit Suisse AG, Research Division

Rodny Nacier - KeyBanc Capital Markets Inc., Research Division

Jason A. Marcus - JP Morgan Chase & Co, Research Division

James Barrett - CL King & Associates, Inc.

Garik S. Shmois - Longbow Research LLC

Trey Grooms - Stephens Inc., Research Division

James Finnerty

Unknown Analyst -

Seth Yeager - Jeffries & Company

Kathryn I. Thompson - Thompson Research Group, LLC.

Operator

Welcome to the USG Corporation Third Quarter 2011 Earnings Conference Call. My name is Monica, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. 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

Corporation's Third Quarter 2011 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 Relations 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, market and other conditions, and management undertakes no obligation to update these statements. The statements are also subject to a number of factors, including those listed at the end of today's press release, and actual results may be different from our current expectations.

With me today to discuss our results and our outlook are Jim Metcalf, President and CEO; and Rick Fleming, Executive Vice President and CFO. Jim will provide a general overview of the quarter plus additional insights into some of our businesses. Rick will review the financial results for the quarter, the corporation and the business segments. We will then open up the call for questions and conclude with a few comments from Jim.

Jim?

James S. Metcalf

Thank you, Brian, and good morning. Thank you for joining us today, and we appreciate your interest in USG. As we position for success, what I'd like to say about our company is USG provides shelter. It's where our customers live, work and play. We are not a company that solely relies on housing, which is currently less than 25% of our portfolio. We are not just a wallboard manufacturer, even though it currently casts a very long shadow on our business.

USG's portfolio of surfaces, substrates, ceilings and distribution add diversity to our leading wallboard foundation. These industry-leading businesses position USG as a solution provider in building products.

As we look at our current environment, the recovery in the U.S. economy continues to be fragile. For the most part, our key markets continue to experience recessionary levels that are at/or near record lows. Outside the United States, our markets have stronger demand. Some of our international markets, like western Europe, have slowed as well. While we are expecting a recovery, we are not waiting for it to happen. We need to successfully operate USG within the current market demand levels. We need to continue to lower our breakeven, with a very sharp focus on profitability.

To accomplish our objective of profitability and our aspiration of a more diverse company, we have established 3 strategic priorities: strengthening our core businesses, which is North American manufacturing and distribution; diversifying our earnings; and differentiating through innovation. What I'd like to do is touch on each one of these.

First, strengthening our core. This is a key strategy and has been our major focus over the last few years, in fact we've been spending most of our time, and we continue to do it, on strengthening the core of our business. If you step back from all the facts and figures, we have 2 areas that we need to improve: wallboard gross profit; and L&W profitability, which are 2 very large areas we are extremely focused, and they provide a tremendous upside leverage for the company.

We have initiatives in both areas to continue improvement, such as our launch of SHEETROCK UltraLight Panels and major structural changes in L&W, which has resulted in 6 consecutive quarters of improved results.

Innovation at USG is a core value, and differentiation from competition is vital, particularly in this very challenging market. We continue to have a leadership position providing our customers with very exciting new products. Most recently, we created an entirely new product category, lightweight wallboard. SHEETROCK Brand UltraLight Panels were the first lightweight product to hit the market, now in the over 2,300 locations.

Over the last month, the most exciting news that we have is the introduction of lightweight wallboard for the commercial contractors. We've expanded the product family to include 2 fire-rated lightweight wallboard products targeted at the commercial market. Our 5/8 FIRECODE 30 and our 5/8 FIRECODE Type X will provide increased productivity in large commercial projects where labor rates and efficiency are vital to our commercial contractors. With all the necessary UL certifications, these products, again, differentiate USG in the market.

But we are going to continue to invest in innovation. We are currently exploring methods to expand our lightweight technology to other product lines. And we are actively developing new environmentally-friendly technologies for our products and our manufacturing processes. Our goal is to significantly reduce energy in manufacturing and meet our customer's demand for greener, more sustainable products with continued cost efficiencies.

Rick Fleming will provide the details of the quarter. But before he does, I'd like to describe our third strategic objective, diversify our earnings. Over the long term, USG has successfully led to demand cycles because we serve all 3 key domestic segments: residential, commercial and repair and remodeling. This diversification in our portfolio typically helped us soften weak demand in a particular segment.

The current recession in the U.S. construction market is unique because all 3 segments have experienced simultaneous declines. In fact, this is the first time in my 30 years in the industry that all 3 segments had been significantly down at the same time. Being the leader in these segments, our high exposure to the U.S. market has had major impacts on our results. When we look at the performance of our international operations, they grow and contract at a different pattern than the U.S.

Diversifying our earnings is critical, as we position USG over this cycle. Our current international business does not have the critical mass to counterbalance our U.S. operations, but we do have wonderful international opportunities to invest and grow. This will help reduce the impact of the U.S. construction cycles and diversify our earnings strength.

For example, our growth and market share leadership in Mexico serve as a template on how we can effectively expand internationally. Investments in landed assets, local managements and sharing USG best practices provide a foundation for profitable growth.

Expanding internationally does require careful thought and planning to select the right market at the right time. We have a plan for very targeted growth where we can be the market leader. And we believe we can replicate our success in Mexico and other markets to diversify our earnings and increase the percentage of revenue from businesses outside of the United States.

In conclusion, our business has 2 critical fixed areas: U.S. wallboard margin and L&W profitability. With a focus on innovation and structural changes at L&W, these areas continue to show improving trends. Our management team's focus is to continue to lower our breakeven, return to profitability and position USG for growth.

With that, I'd like to turn to Rick Fleming, who will review our third quarter performance.

Richard H. Fleming

Thanks, Jim. And good morning to all of you. Thank you for joining us. As Jim mentioned, I'll recap our third quarter financial performance and provide some additional details on our operations. I'll, also, provide some comments on overhead, interest expense, taxes, capital expenditures, debt and liquidity.

As you heard from Jim, the major headline for the third quarter is that our key U.S. markets of repair and remodeling, commercial construction and housing continue to experience recessionary levels of activity. But despite this weak demand, we are continuing to make progress towards profitability through operating initiatives and controlling the controllables.

At the top line, we did see another positive uptick during the third quarter this year, as this was the second quarter this year, and the second time since the beginning of the downturn in mid-2006, where we experienced a positive sales comparison versus the previous year. Some may consider this a small step, but it was a step in the right direction.

Now turning to the results. Third quarter 2011 net sales were $792 million, up 4.5% from the third quarter of 2010 net sales level of $758 million. Our third quarter operating loss was $76 million compared to a loss of $58 million in last year's third quarter. These results included $59 million of restructuring and asset impairment charges this year and $35 million last year.

Majority of this year's third quarter restructuring and impairment charges relate to a noncash write-down in the carrying value of our Windsor, Canada gypsum quarry and ship loading facility. As part of our continuing efforts to adapt our operations to market conditions, we idled these assets earlier this year, and after an extensive study, we plan to shut them down permanently in December. The rightsizing of our mining assets follows our earlier efforts to rightsize both our manufacturing footprint and our distribution business.

Including the restructuring and impairment charges, our adjusted operating loss was $70 million versus $23 million in last year's third quarter, calculated on the same basis. A schedule reconciling GAAP operating profit to adjusted operating profit is attached to the press release.

The third quarter 2011 net loss after tax was $115 million or $1.09 per share based on average shares outstanding of 105.3 million. This compared to a net loss of $100 million or $1 per share on 100.1 million average shares outstanding in last year's third quarter.

In the interest of time, I will not recap the 9-month results, which are delineated in our press release and its attachment, other than to note that the impact of our actions to return USG to profitability were evident here too. Those were essentially flat for the first 9 months of 2011, compared to the first 9 months of 2010, and our adjusted operating loss and GAAP operating loss improved by $26 million and $10 million, respectively.

I will now provide more detail on our third quarter segment results. Softness in the U.S. market continue to impact all 3 of our business segments: North American Gypsum, Building Products Distribution and Worldwide Ceilings. In our North American Gypsum unit, net sales increased about 6% to $437 million for the quarter, while operating loss increased versus the third quarter of last year due primarily to lower margins in the U.S. for both wallboard and joint compound and higher restructuring and impairment charges. Our U.S. Wallboard business, a key driver of North American Gypsum results, shipped 1.046 billion square feet in the quarter, an increase of 1.8% compared to the third quarter of last year.

Although average selling prices for the quarter increased compared to the first and second quarters of this year, they were lower than in the third quarter of 2011 versus the third quarter of 2010, with an average realized price for the third quarter this year of $111.66 per MSF versus $114.45 per MSF a year ago, and this lower price level impacted wallboard margins.

Joint compound has slightly lower volumes, but the major factor that negatively impacted margins here was an increase in plastic pail cost, that was primarily driven by higher resin prices. We have a number of cost reduction initiatives in place to improve joint compound margins, and we also implemented in September a 5% price increase for these products. We should also mention a one-time item that occurred in the quarter which does not affect segment results but does affect the business unit results of the United States Gypsum Company, CGC or Canadian Gypsum Company and Canadian Mining.

During the quarter, we entered into a tax settlement with the top [ph] authorities in the U.S. and Canada, which had the impact of reallocating about $12 million of expense from the United States Gypsum Company to CGC and Canadian Mining. And this improved U.S. Gypsum operating income by that amount, while reducing our CGC and Mining operating income by a like amount. By the way, this tax settlement resulted in a $4.1 million tax refund to the corporation.

In our Building Products Distribution business, the fundamental restructuring of L&W supply is clearly improving results. In fact, the third quarter of 2011 represents the sixth consecutive quarter in which L&W Supply posted improved operating losses over the comparable period in the prior year. The changes that have taken place at L&W are substantial. From supply chain initiatives to high-end focus on commercial contractor to the way we have separated the sales function from the operation at the branches. We are pleased with this progress, and we expect to see further improvements.

Net sales from our Building Products Distribution business were essentially flat at $283 million, compared to the third quarter of last year, and same-store sales were up 1% for the quarter versus last year.

As our operating losses improved versus last year's third quarter, our efforts to refocus the business, restructure operations and reduce costs continue to take hold. L&W wallboard volumes this year-over-year for the quarter were down 13%, while the average wallboard price increased over 1.2% versus the same period last year. L&W's wallboard margin was up 10.5% for the quarter versus the third quarter of 2010. The addition of sales from construction metal products, and ceiling products were up about 10% and 8.5%, respectively, during this year's third quarter, which helped in part to offset the wallboard volume decline.

As of September 30, L&W operate 155 branches versus 163 at the end of the second quarter of this year. Our ceilings business has performed very well throughout the great recession, and that trend continued in the third quarter. Both sales and operating profit in Worldwide Ceilings were up versus last year despite continued soft market conditions.

Third quarter net sales for Worldwide Ceilings increased $9 million to $183 million, and third quarter segment operating profit was $25 million compared to $21 million from last year's third quarter. USG Interiors, the largest business unit in the segment, experienced a $1 million increase in operating profit in this year's third quarter versus the third quarter of 2010, as price increases offset the raw material cost pressures experienced earlier in the year.

Now I'll add some additional details in the rest of the P&L and discuss what we've been doing to manage capital spending and our balance sheet, including liquidity. I will start with overhead. We have continued to contain our selling and administrative expenses. In fact, our current annualized SG&A spending is at 2002 levels. In the quarter, SG&A expenses were $70 million, down $4 million from the same period last year, as our cost control actions continue to positively impact results. For the first 9 months of 2011, total SG&A results were down $4 million to $227 million versus the 9 months of 2010.

Interest expense was $54 million for the third quarter, $158 million for the first 9 months, and is higher than last year due to our November 2010 bond offering. We currently anticipate that interest expense will be about $210 million for all of 2011 on a P&L basis and about $195 million on a cash basis, offset in part by about $6 million of projected interest income.

As you may recall, we presently have a full valuation allowance on the deferred tax assets of the majority of our operations, and as a result, our effective booked tax rate continues to be minimal. The effective tax rate was 11.2% for the third quarter 2011, resulting in a 9-month tax rate of 5.4%. Looking ahead to the full year, we anticipate an annual tax rate of 3.7% depending on the mix of worldwide income.

Turning to capital spending. We continue to benefit from substantial investments in our operations that we made prior to the downturn, and this has allowed us to keep annual capital expenditures at the $50 million level. Capital expenditures totaled $30 million in the third quarter of 2011 compared to $7 million in the same quarter of last year. For the first 9 months, CapEx totaled $38 million, and we continue to forecast about $50 million of capital spending for the full year.

Turning now to cash and debt. We are very satisfied with our liquidity position. You can see the numbers in our financial statements. At September 30, we had cash, cash equivalents and marketable securities of $677 million, and we have nothing borrowed on our revolving credit facility. If we include the borrowing capacity on our credit lines, we had total liquidity of $883 million. Total debt as of September 30 was $2.3 billion, essentially the same as the balance at the end of the second quarter, as well as year-end 2010.

In addition, we continue to have a number of liquidity initiatives around working capital management and further surplus asset sales. We presently have about $15 million of asset sales in our contract, and we expect that $5 million of these sales will be completed in 2011 and the balance, in 2012.

Let me conclude by emphasizing that we continue to have an intense focus on improving our profitability, reducing our costs and managing our balance sheet and liquidity. And despite the soft demand levels that we are experiencing, we are encouraged that our actions will return USG to profitability of bearing fruit. But we still have much more work to do, so our intense focus on profit margins, costs and cash continues.

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

Brian Moore

Thank you, Rick. [Operator Instructions] Operator, please open up the phone lines for participants to ask questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Michael Rehaut of JP Morgan.

Jason A. Marcus - JP Morgan Chase & Co, Research Division

This is actually Jason Marcus, in for Mike. I was hoping maybe you could give us a little bit more color on the SHEETROCK UltraLight, in terms of the percentage of the business that it currently represents, and maybe what you expect that should go to in the near-term. And also, if you could provide the pricing differential between SHEETROCK UltraLight versus the other wallboard products.

James S. Metcalf

Well, appreciate the question on UltraLight. First, I'd like to say, we are very excited about the introduction of our 5/8 FIRECODE 30 and our 5/8 FIRECODE Type X. This is something our commercial contractors have been asking for. It was a very challenging project for us, and I'm extremely proud of our research, development, technical people and manufacturing teams that have worked very hard to get this into the market, actually sooner than we had anticipated. When you look at labor rates that are anywhere from $70 to $100 in our major cities, this is going to be a big product for our commercial contractors. The 1/2 inch UltraLight that we've had in the market for just over a year, quite frankly, has exceeded our expectations. As I said in our prepared comments, it's in over 2,300 locations. It's available nationally, nationwide now, and in Canada. So we're extremely excited about that, and what we like about it is our customers are selling this product at a premium. So our customers are getting a value-added product in a very, very tough market. So our customers are very excited. The percent of UltraLight as a percentage of our total 1/2 inch has exceeded our expectations. We are not disclosing that number, but each month, it continues to grow. And our customers are requesting it in the market. So we're very pleased with it. A couple of things I'd just like to mention on UltraLight, which many of you have been asking us over the last couple of weeks, about the impact to our customers. We've just received 2 very exciting awards about UltraLight. One was, we've just been honored to be the -- UltraLight was the Product of the Year award by Global Gypsum, which is a worldwide association of gypsum manufacturers that will be meeting in Las Vegas. And UltraLight was the product of the year. And we just also received, from one of our largest customers, the Home Depot, Innovation of the Year Award, which really put some teeth into this product. And we're extremely excited and honored that Home Depot would recognize UltraLight as their top innovative product of all the products that they sell through the big-box retailers. So we appreciate the interest you have on UltraLight, and we're very excited about the growth of it.

Jason A. Marcus - JP Morgan Chase & Co, Research Division

Just as a follow up, could you provide your capacity utilization versus the industry's for the quarter?

James S. Metcalf

We're running about 45%.

Jason A. Marcus - JP Morgan Chase & Co, Research Division

Do you happen to know what the industry is?

James S. Metcalf

It's probably a little higher than that, probably 48% or so.

Operator

Our next question comes from Garik Shmois of Longbow Research.

Garik S. Shmois - Longbow Research LLC

I just have a question here, you've recently eliminated job quotes for wallboard pricing, as have most of your competitors. I was just wondering if you could provide a little bit more color based on your conversations with people in the field, how this has been received over the last couple of weeks by your customers and how sustainable do you think this change in pricing behavior appears to be.

James S. Metcalf

That's a great question. Just to kind of step back, job quotes really started over the years as it provided some certainty on projects that bid out in the future. This gave our customers some predictability on future increases. But as everyone knows about the major decrease of large projects and, quite frankly, a very, very inefficient process for our customers and really for us, we took the position to eliminate the job quotes in 2012. We will have a single price level for our customers for the year, which will reflect our value proposition. It will take a lot of uncertainty out. This is different for our customers, but the preliminary conversations that we have, have been very encouraging with our customers. Our price for 2012 will be announced in early December. So it's so far, so good. Our customers, it is different for them. It's a -- we want to make sure we're communicating clearly with our customers. But quite frankly, this eliminates a lot of administrative burdens. And we think it's going to help our customers plan better for 2012 on their product costs.

Garik S. Shmois - Longbow Research LLC

Is most of the pricing that you provide subject to the quoting behavior? Or is it mostly spot?

James S. Metcalf

You mean current levels?

Garik S. Shmois - Longbow Research LLC

Yes.

James S. Metcalf

Current levels, it really varies. There's a pretty -- it varies by region, but our percentage of job quotes is less than half. But there's not that many large jobs out there. Quite frankly, if you look at our pricing over the last, really, year and a half, we've had prices that have averaged $111. So we've -- and if you think about that, the pricing has been fairly stable, but if you think of all the administrative cost of price increases up and down and the letters and a lot of the conversations we have on these calls, that we think going forward from an administration standpoint, this is going to be good for our customers, and we know it's going to be good for us. So this will eliminate a lot of the uncertainty, but also a lot of the inefficiencies that go along with it.

Operator

Our next question comes from Kathryn Thompson at Thompson Research Group.

Kathryn I. Thompson - Thompson Research Group, LLC.

I'm just following on with the job quote elimination question. Taking a step further, what sort -- type of pushback are you getting from homebuilders about job quotes elimination? And does the elimination of job quotes improve current realized price, and should clean up your backlog of job quotes?

James S. Metcalf

Well, right now, we haven't really received that much pushback on the job quote policy. It's gone -- it's been -- gone fairly well, we're really pleased. It's still early. We'll be able to have a better review of it and be able to give you fact-based next quarter. But we think it will clean up some of the inefficiencies, as I said, and some of the low-end pricing that's out there. So we will be announcing our price around December 1, and we'll take into account how the market looks, what raw materials -- raw material inflation and any type of market conditions that we see. So we think that this is very different for the industry, but we think that it will get some clarity to our customers so they can quote jobs and they can take some costs out of their system.

Kathryn I. Thompson - Thompson Research Group, LLC.

And just to clarify. I mean, I know you've had conversations with distributors. But you're saying that you haven't necessarily gotten any pushback from builders or contractors about this. Is that a correct interpretation?

James S. Metcalf

This is different for them. I mean, they will have more certainty on their prices. And quite frankly, builders are not that big of a percentage of our business.

Kathryn I. Thompson - Thompson Research Group, LLC.

Okay, great. Given some of the changes and adjustments you've had to your footprint, where do you think breakeven is now in terms of overall housing starts? Or how should we think about breakeven changes in your structure?

James S. Metcalf

I would not look at breakeven as housing starts. We look at breakeven, Kathryn, as total industry shipments because you have repair and remodel, which is now over 50% of the opportunity. So housing starts have a big impact. As you know, the metric of every 100,000 housing starts, it's approximately $8 billion feet of wallboard industry demand. But we feel, obviously, our breakeven, if you look at our numbers, we've taken out approximately $500 million in costs. So we've lowered our breakeven by that amount. And we look at breakeven for industry shipments not just housing starts. And we do not disclose what that number is.

Operator

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

Rodny Nacier - KeyBanc Capital Markets Inc., Research Division

With your strategy to diversify your overall business, how does that now impact your strategy within the U.S. Wallboard business, specifically? And within that context, could you address your views on USG's current installed wallboard capacity and if incremental curtailments are part of your plan?

James S. Metcalf

As I've said in my prepared comments, our strategy is really in 3 parts, strengthening the core, which is North American manufacturing and distribution. And really, that's where we've been spending 80%, 90% of our time. So diversifying our earnings is really positioning our company of how we look in the next trough, as I like to say. So obviously, North American gypsum is a key market for us. We are not turning our back on manufacturing and distribution in North America. In fact, that is -- if you look at our average EBITDA over the cycle, it's $400 million to $450 million. So that's why we have to protect that core of the business. But along with that, there are some opportunities to continue to diversify our portfolio, as we've done in North America, between residential, commercial and repair and remodel. And we have some very, very interesting opportunities outside of North America. And I like -- that's why I like to use the example of Mexico, of having a couple of more Mexicos in our portfolio. If you look at our network in North America, our current manufacturing network with the current demand, and we're taking the approach that we're not going to have much uptick in demand over the next year. We think our current footprint is appropriate. We look at lowest delivered cost in each major metropolitan area. So right now, the footprint that you see is how we'll be operating. We do look at that every day. And if there is a downtick, we do have a contingency plan, if things get worse, of what capacity would come out. So along with that, we have the same type of rigor around our distribution footprint. As Rick alluded to in his comments, we took out some centers during the last quarter. And our current L&W footprint, we feel, is appropriate in these current levels.

Rodny Nacier - KeyBanc Capital Markets Inc., Research Division

And just as a follow-up, in the Wallboard business, again. With your current plans to increase pricing in that business, could you just help us, provide us with some color on what you're seeing now versus maybe last quarter and your decision to first -- what's your decision to increase this pricing now?

James S. Metcalf

Well, we have not announced a price increase for the beginning of the year at this point. We will be -- we're looking at the market conditions, all the things that I just talked about. And we will be giving price -- we'll have a price announcements to our customers at/or around December 1. So you'll see that in the market when you do your channel checks, first week or so in December.

Operator

The next question comes from Trey Grooms of Stephens.

Trey Grooms - Stephens Inc., Research Division

So just on the -- you guys have, like you mentioned, lowered your costs of about $500 million or so, and one of the strategies here is to continue to lower your breakeven. I think you mentioned energy and reducing energy costs there. Can you talk about, I mean, how are you planning on doing that, and what's different kind of -- with your strategy going forward, and how you plan on taking out more costs?

Richard H. Fleming

Sure. Trey, it's Rick Fleming. Obviously, as Jim just mentioned, part of the equation has been to rightsize our infrastructure to the current market. I alluded to in my comments that we've pretty much worked through the manufacturing assets at this level of demand. We've been at work on the L&W side of the equation, but we think we're pretty close to completing that scaling. And then, of course, we did mining assets in the third quarter. I want to assure you that no rock will be unturned as we move this corporation to profitability. And the menu of things that we're exploring right now to further improve our situation, both from a profitability standpoint and a cash burn standpoint, include everything from looking at our benefit programs, we have a number of profit enhancement initiatives that run the gamut from the 5/8 introduction, all the way through looking at the effectiveness of how we're organized as a company. As part of that, we're looking at the back office and how that can be streamlined. And we're looking, really, at a number of other initiatives that are very numerous. And the process is intense. We have extreme follow-up activity going on. And I think you'll continue to see the fruit of these efforts as we go into the fourth quarter and into 2012.

Trey Grooms - Stephens Inc., Research Division

When you mentioned energy-specific, I didn't know if there was something you guys -- some kind of change you guys had in mind going forward from your hedging -- with your hedging strategy, or some plant changes you had identified that could save you some there. Is there anything there that we should look forward to?

Richard H. Fleming

Well, energy comes into 2 parts, right? It comes in price and it comes in usage. On the price front, we will benefit in 2012 by the current gas prices and the fact that we will be more hedged with options as opposed to swaps. That's probably going to pick up $11 million to $12 million this year-on-year. But on the usage front, which is what Jim was alluding to, we have a number of initiatives in our lab and in our plants that will decrease usage and, therefore, improve cost. But also, it's good for the environment.

Operator

Our next question comes from Seth Yeager of Jefferies & Company.

Seth Yeager - Jeffries & Company

Can you break out the noncash impairments that you took during the quarter versus some of the cash restructuring items?

Richard H. Fleming

Sure. During the quarter, as you know, we had $59 million of restructuring and impairment activity. $42 million of that was the impairment activity as it relates to the Windsor facility. There's about $10 million in that for the adjustment of ARO, which today is noncash, but over time, could be cash as you work through the reclamation activity. And then last, but not least, $7 million of that was for L&W restructuring, about $4 million of that was restructuring -- accruing for leases that will be effectively terminated over time, but paid in full. And so we accrue for that, but the cash goes out later and then the balance was like sort of cash cost and severance, et cetera.

Seth Yeager - Jeffries & Company

Okay, great. And then just as a follow-up, it sounds as if you're fairly comfortable around your current footprint under the sort of flat assumption going forward. But how do you guys prioritize your use of cash around expanding internationally, expanding your UltraLight line, and versus minimizing your CapEx and cash burn with your upcoming 2014 debt maturity?

Richard H. Fleming

That's a great question. So we've been running about $50 million of CapEx, and we are on record saying that we could hold that level in 2012 if we need to. We also are exploring the possibility given market conditions and the overall cash generation of the company to potentially take that CapEx level up to $75 million. That balance would be highly dedicated to higher returns projects and some of the strategic initiatives that Jim has alluded to. Relative to today's level of activity, the vast majority of our $50 million has been dedicated to UltraLight and getting the plants effectively in a position to manufacture UltraLight, both the 1/2 inch and the 5/8.

Seth Yeager - Jeffries & Company

Got it. Okay. And then as far as expanding internationally, I mean, have you pegged any numbers around what sort of cost you would incur there?

James S. Metcalf

This is Jim. On our international, what's been really interesting to us is with our technology and our innovation, certainly utilizing a lot of that is our currency. So some of our early expansion has been with technology and joint ventures. So our international expansion, I like to call it an asset light, our capital light expansion in this environment. We're going to be very pragmatic. We're going to utilize JVs and alliances, as well as leveraging our technology as currency. But we do have a percentage of our CapEx, as Rick alluded to, if it's $50 million or $75 million, allocated to high return projects, projects that reduce energy, as well as projects that diversify our earnings either through international or through adjacencies.

Operator

[Operator Instructions] Our next question comes from Dennis McGill of Zelman & Associates.

Dennis McGill

Rick, I was just hoping you could talk a little about cash flow expectations, both fourth quarter and, I guess, how we should think it about moving forward if demand doesn't change too much. I'm realizing revenue was up a little bit, EBITDA was up a little bit, but cash burn has deteriorated versus last year. How should we sort of think about that moving forward?

Richard H. Fleming

Let me address the quarter first, Dennis, and then I'll talk about the trends going forward. Relative to the third quarter, our cash usage was about $48 million, very similar to the second quarter. Looking at the quarter on quarter, second quarter to third quarter, the only items of note that I would characterize as something to consider as with an impact on the third quarter that wasn't in the second quarter, related to the fact that currency moves probably accounted for about $10 million of the usage of the cash. These are not realized. The currency moves is when you translate cash held overseas back to U.S. dollars, you end up with a lesser number. A good part of that was the Canadian dollar change, which went from $1.04 beginning of the quarter down to $0.95, not really realized, but nonetheless in the numbers. The other item for the quarter that was impactful was, we topped off our pension contribution for the year of $10 million. So between the 2, it was about a $20 million swing that impact to the third quarter. Going into the fourth quarter, we generally find ourselves with a cash situation that moderates tremendously in terms of cash usage. Part of that revolves around working capital liquidation, but in previous -- if you look back at history and previous fourth quarters, we actually can be cash neutral to slightly negative. And I think that trend will continue for the fourth quarter of 2011. We also benefit in the fourth quarter by the fact that, as I alluded to, we have a $5 million asset sale that will consummated in the fourth quarter, that will be added to the cash situation. Going into 2012, we're obviously telling our investors that we're moving heaven and earth to get this company back to breakeven operating profit. If we can accomplish that objective, we're not putting a date on it, we will substantially reduce the amount of cash that we're using. That's key to our equation, and I alluded to a number of initiatives we have in that area. So we are working hard, and we think we can improve the situation as we get closer to the 2014 maturity. It is our intent to pay that off of our existing resources, but we'll have to see where we get on that situation as the environment unfolds.

Dennis McGill

Very helpful. Just a second question. Could you break out, on the wallboard side, how much of the business, roughly, is 1/2 inch versus 5/8? And then any color you can put around the trends on a year-over-year basis, one versus the other, as compared to the 2% total growth?

James S. Metcalf

If you look at the 1/2 inch versus 5/8, and this is an estimation, and I also have the analysis follow-up with the specifics, but our primary, it's probably about 60%, 1/2 inch; and 40%, 5/8. That is predicated with we have a pretty large footprint in the big-box retailer business is repair and remodel, repair and remodel is over 50% of our footprint. But we can follow up with you on specific numbers of that, if those are disclosable numbers.

Richard H. Fleming

And I think, actually, that's a pretty good estimate. Dennis, just for your background, take wallboard demand and break it into the subsegment, about 59%, 60% is R&R right now. About half and half of residential versus commercial. Then you have new residential about 27%. You have new non-res about 8%. And then the other category is about 6%. So that, as you know, the user is the 5/8 or the commercial segment.

Operator

The next question comes from Bob Wetenhall of RBC.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

It seems like in the Wallboard business that weaker pricing offset the volume growth. But for North American Gypsum, you actually had very good 6% revenue increase. And I was trying to understand how you were able to achieve that revenue growth.

James S. Metcalf

Bob, a couple of areas. We did -- as you know, we did have unit growth. We do on our wallboard volumes year-on-year. We also -- other categories in the North American Gypsum, we had -- in our substrates business, we had a fit performance with DUROCK. Solid performance there. From a top line basis, our Canadian business continues, even with the adjustments there, continues to grow. We grew the UltraLight category in Canada, Western Canada, which was very good from a top line basis. So it was really a little bit of everything. It was some volume growth, not just top line unit growth. It was -- in the numbers, it was -- our substrates growth was something that was good. And quite frankly, we're very pleased with UltraLight. That's been a -- some great wind in our backs. So it's not one magical bullet, it's a march of 1,000 steps.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Got it. As a follow-up, the margin improvement year-over-year in L&W was very dramatic. And I'm just curious, if that trend is sustainable, do you expect that in L&W, specifically, you could reach breakeven at current demand levels in 2012?

James S. Metcalf

Great question. You know I'm not going to give you a projection, but you're trying. I will say, L&W has just done a phenomenal job. As I've said, it's been 6 consecutive quarters of improved trends. We still aren't at breakeven yet, but we do have a line of sight to it, which is great. They've really done it on a few fronts, wallboard spread improvement. So their margins in wallboard have improved, and they've done a great job of raising prices in the market. And that's something that that's taken with -- that's a direct output of their new organization and having more discipline in the market and having fewer people with pricing authority. So wallboard price improvement has been one. Their margin improvement on steel, insulation and ceilings, so those complementary products, so it's been a laser focus there. And quite frankly, taking cost out. So it's been -- I'd like to refer to it as been a weed and feed business. And L&W has dramatically restructured itself. They're very focused on branch operations, separate from the sales and focused on commercial contractors. So we're very pleased with the trend. We are operating in really the mindset, not only in L&W, but the entire corporation, Bob, that we -- our plan is to get operating profit breakeven in the environment we're living in. So as Rick said, we have to move heaven and earth to get this done, but we are not banking on a recovery, and we'll be very impatient to turn this place around. So I'm pleased with L&W's results, but we need to fix wallboard margins. And if we do those 2 things, a lot of good things are going to happen.

Robert C. Wetenhall - RBC Capital Markets, LLC, Research Division

Just sneak one quick in. I think this is your first positive comp in L&W. Do you expect sales to remain in positive territory going forward? Because I'm just trying to figure out, you said you are at 155 distribution units. Is that kind of the level you want to be at? Or should we expect further rationalization of the portfolio?

James S. Metcalf

We keep an eye on that every month. And we really focus on that comp store number that Rick alluded to, and that was up 1%. And there could be a little bit of pruning around the edges but in the current environment, we think we're in pretty good shape with the current network. And if there is a downtick, we're very flexible to move this up or down. And on the other side is we think with any increase in demand, which we aren't expecting near term, but if there was an increase in demand in L&W, we don't have to add any centers, which is nice. We'll be able to leverage up our distribution as well as our manufacturing business with additional demand coming through the system. And that's where the leverage really starts getting some traction. So we think right now, we're in good shape.

Operator

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

James Barrett - CL King & Associates, Inc.

Jim, could you talk about the volume growth of 2%? Would you able to tell us to what degree that represented gains in market share?

James S. Metcalf

We -- very slight. We aren't really focused on our market share. This is about making the profitability, as we've talked, Jim. But if you look at from a regional basis, our business was stronger east of the Mississippi. And that had a lot to do with UltraLight conversions.

James Barrett - CL King & Associates, Inc.

Good. And as we move to 2012, regardless of what the demand is, would you expect UltraLight, based upon what you've seen today, to drive meaningful market share growth? How should we anticipate that?

James S. Metcalf

I think UltraLight will provide us the opportunity for profitable reasonable growth.

Operator

Our next question comes from Mark Weintraub of Buckingham Research.

Unknown Analyst -

This is actually John, calling in for Mark. On the topic, the same with the topic of wallboard market share. I know earlier this year you said you have typically run around 30%. Where are you now? And do you think you largely accomplished the goal of getting market share back to where you're comfortable? Or are continued market share gains part of a major part of your strategy going into 2012?

James S. Metcalf

Our strategy into 2012 is profitability. And any type of growth, it needs to be profitable growth. UltraLight is a great avenue for that, as well as we think with the getting rid of our job quote policy and having our customers with more predictability of our price will help. But this is not a market share grab market. We think that it's still going to be flat next year. And where we pick up share from a profitable standpoint and we do it through a value-added product, that's something that, of course, we'll take. Our capacity share is, as you said, around 30%. We have a long way to go there, and we don't have a magical market share number we want to get to. The key is wallboard margin improvement and L&W profitability. Those are the 2 levers we need to pull to turn this around, and we think we have the appropriate actions behind those.

Operator

Our next question comes from Dan Oppenheim of Credit Suisse.

Michael Dahl - Crédit Suisse AG, Research Division

This is Mike Dahl, on for Dan. Just sticking with the UltraLight , I was wondering if you could just give us an update on where you are in the process of converting your plants to be able to produce UltraLight, and what you see is the trajectory heading into 2012 as.

James S. Metcalf

Yes. On 1/2 inch UltraLights, we are shipping nationwide. We have all of our -- we have the plants that will ship coast to coast and into Canada that are up and running. So we're in great shape there. And I'm very proud of the extremely diligent and quick moving process that we did, of our team. And the reason we've moved so fast and we accelerated UltraLight nationwide is our customers really wanted us -- wanted the product. And it's great in this environment, when your customers are really asking for the product. So the 1/2 inch UltraLight is really nation -- U.S. and Canada. And 5/8, our 2 new products in 5/8, is shipping into the northeast United States. And that is because that's where the biggest customer demand is. And we will continue to be rolling out 5/8 into 2012.

Michael Dahl - Crédit Suisse AG, Research Division

And just is a follow-up, what are you seeing as a competitive response to your UltraLight products?

James S. Metcalf

Some of our competitors have products that, quite frankly, have heavier paper and fiberglass in the core. And our customers are really speaking to it. Customers are asking for our product from a performance standpoint, from a workability standpoint. Really, we think we're in a great spot, and we're really judging from our customers' responses. They are asking for SHEETROCK brand UltraLight Panels, and that's why we had to roll it out quickly. On 5/8, there has -- we have not seen any type of response from 5/8 on either one of the product categories.

Operator

The next question comes from Angela Uttaro of Oppenheimer Fund.

Angela Uttaro - Oppenheimer Funds

I'm still a little bit confused on how you're proposing to grow internationally. You suggest through primarily joint ventures and using your technology as capital. So no cash required?

James S. Metcalf

No, no, no. I'm sorry, I wasn't clear on that. We do have -- we will have capital allocated in the CapEx budget that Rick was talking about. Yes. So there will be some capital. What is nice about some of the international markets we're looking at, it's not -- I like to call it an asset-light, a capital-light strategy. You don't have to invest the same amount of capital for a plant as you would in the United States. So it would be in the confines of the $50 million or $75 million of CapEx that you see in our financials.

Operator

Our next question comes from Joshua Pollard of Goldman Sachs.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Just very quickly, you guys are running at about 45% capacity utilization, expecting 2012 to be flat. When you think about your more medium-term strategy for the business, if there was assumption that 2013 were to be flat as well, would you guys then begin to think about more capacity shuttering, or think about some sort of regionalizing of the business? I'm just trying to understand how you guys are approaching, what the out years of demand look like relative to your capacity?

James S. Metcalf

Yes. We actually have different scenarios on demand, and we always look at what if it's either longer, as you said, into 2013, or there's a downtick. And we would have a point of view of what capacity would be idled or shut down. Our network is running pretty well now. We have almost record efficiencies at our current network. We've learned how to run our plants. And there's been some great lessons learned over this recession of how to run these large plants at very low utilization levels. But absolutely, we would look at are there some regions that we would not ship to or not. But it all gets down to is what the margin is. The capacity utilization could be at 45%, but if the margin improvement is there, we would still be running our network. We feel that there may be, if you look at the entire industry, there may be around another 5% to 10% of capacity that could come out. But this is not a taking-capacity-out scenario, this is a lack of demand.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Got it. And then when we think about UltraLight, could you just talk maybe in subjective terms even about the profitability of UltraLight versus your standard product? What's the difference in profitability there?

James S. Metcalf

It's better.

Operator

Our last question comes from James Finnerty of Citi.

James Finnerty

A quick question on asset sales. You've highlighted the ones that are sort of in progress. If necessary, are there additional asset sales that could be done over the next couple of years, if you needed to bolster liquidity?

Richard H. Fleming

Well, the asset sales that we're working on are really surplus real estate. And so they effectively monetize an asset that today is not earning any return on capital. So that the 2 that I alluded to are excess land and a facility that we think can be sold. We have others on the surplus property list that we'll be working on. Some of these take a little bit longer because of zoning issues or effectively the need to find buyers who are looking for that piece of property. The short answer to your question is, yes, we have other asset sales that will be in the pipeline, particularly if you use the to 2- to 3-year time horizon.

James Finnerty

And that would be a similar dollar figure in terms of the ones that haven't been disclosed yet?

Richard H. Fleming

Yes. I mean I think the types of order of magnitude you should think of would be in the area of $10 million to $30 million over time on an annual basis.

James Finnerty

Okay. And just one follow-up question with regard to the 2014 maturity. Just going through some of the language. There seems to be language in the ABL that states that if the 2014 maturity isn't refinanced or diffused by a certain point, that the ABL springs forward if liquidity is below a certain figure, like $500 million. Is that the case? Am I reading the basics of that correctly?

Richard H. Fleming

No, that is the case. In fact, you'll see a description of that in our 10-Q and 10-K. The notion here is that your banks do not want the credit they provide you to fund a bond maturity. And so it's quite common to have a truncation of the credit lines if 90 days before the bond maturity, if it hasn't been funded. Now you can fund it in several ways. In the credit agreement, there's a $500 million liquidity threshold, as long as we are above that, it's a non-issue. The other approach would be to take $300 million of cash and buy T-bills and just defease it. That gets expensive if it's done well in advance of the maturity, but that's another way to handle it. And, of course, the third one is just to refinance it. So but the credit agreement does have that structure in it, that you just alluded to.

Operator

We have no further questions.

Brian Moore

That concludes our question-and-answer session. Jim has to give some concluding comments.

James S. Metcalf

Yes, thank you for your questions. They're all very good ones. And I'd just like to say, and everyone realizes, that the market that we're in is still very challenging, but it's not preventing us from pursuing our strategies. As I mentioned, in the near term, we are extremely focused on profitability, take no -- have no doubt on that. That is our #1 focus. Longer term, we will build a company with more diverse earnings, and we want to differentiate and continue to differentiate through innovation.

And as I said in my opening comments, we're going to accomplish these goals by following these 3 objectives: strengthen, diversify and differentiate. Strengthen, diversify and differentiate, that is our strategy.

As I mentioned, our primary challenge right now, there's 2 of them. Wallboard gross profit, and as we talked about, we have some initiatives behind that. And L&W surplus profitably. We think we're making progress, and we do remain confident that with discipline and focus, we're going to overcome both of those challenges.

As I wrap up this quarter's call, I'd just like to take a moment and I'd like to acknowledge Bill Foote, who will be retiring from USG on December 1. Bill has done an outstanding job of leading our fine company as Chairman for the last 15 years. And he's done this through periods of rapid growth and absolute severe economic contractions.

I've, personally, worked with Bill in a variety of roles throughout my career. And I will say his vision, his leadership, his mentoring, has helped all of us and has helped USG remain the leader in the building products industry. It is my sincere honor and privilege to follow Bill as Chairman and to build on this wonderful company's solid foundation.

We have an excellent management team. I am proud of everyone that works alongside of me. And this management team, as we said, is extremely, extremely committed to maintaining and enhancing USG's long-standing reputation as a leader in our industry.

Thank you for your interest today, and I appreciate you joining us.

Brian Moore

A taped replay of this call will be available until Friday, October 28. Information is available on our website. This concludes our conference call. Thank you.

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