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USG (NYSE:USG)

Q4 2011 Earnings Call

February 06, 2012 11:00 am ET

Executives

Ken Banas -

James S. Metcalf - Chairman of the Board, Chief Executive Officer and President

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

Analysts

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

Kathryn I. Thompson - Thompson Research Group, LLC.

James Barrett - CL King & Associates, Inc.

Daniel Oppenheim - Crédit Suisse AG, Research Division

Garik S. Shmois - Longbow Research LLC

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Trey Grooms - Stephens Inc., Research Division

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

Dennis McGill - Zelman & Associates, Research Division

John F. Kasprzak - BB&T Capital Markets, Research Division

Mark A. Weintraub - Buckingham Research Group Incorporated

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

Operator

Welcome to the USG Corporation's Fourth Quarter 2011 Earnings Conference Call. My name is Sandra, and I will 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 Mr. Ken Banas. Mr. Banas, you may begin.

Ken Banas

Thank you. Good morning, and welcome to USG Corporation Fourth 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 the Investor Information section of our website, www.usg.com, and clicking on the link to the webcast.

Before we proceed, let me remind you that certain statements in this conference call may be forward-looking statements under securities laws. These statements are made on the basis of management’s current views and assumptions of our 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 the 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, Chairman, President and Chief Executive Officer; and Rick Fleming, Executive Vice President and Chief Financial Officer. Jim will provide a general overview of the quarter plus additional insight into some of our businesses. Rick will review the financial results for the quarter and the year for the corporation and the business segments. We'll then open the call for questions and conclude with a few comments from Jim. We would like to ensure that everyone has an opportunity to ask questions, so when we get to the Q&A session, callers are asked to limit themselves to one question. Jim?

James S. Metcalf

Thank you, Ken, and good morning. Thank you for joining us, and we appreciate your interest in USG. Today, what I'd like to do is frame my remarks in the context of our strategic plan, which are 3 areas: Strengthening our core business, which is North American manufacturing and distribution; diversify our earnings through targeted international investments and growth through adjacent products; and third is differentiate through innovation. As we look into 2012, we continue to see a soft market in the United States, even with no expected help from overall demand, our #1 objective is to achieve operating profit as soon as possible. Our management team and talented professionals are aligned and very focused on that target.

Now what I'd like to do is expand on our 3-part strategy of strengthen, diversify and differentiate. First, strengthening the core. Throughout this breathtaking recession, we've been extremely focused and quite frankly, we've been spending the majority of our time and efforts here. Our core businesses in North America of wallboard, ceilings and distribution have the largest impact on our financial results. We have implemented numerous initiatives with a keen focus on safety, customers and quality. Our objective has been to significantly lower our breakeven by closing inefficient manufacturing facilities and distribution branches to position USG stronger as we exit this recession. Strengthening the core is not just about cost reduction, it's becoming more efficient and squeezing value from our assets. For example, our Lean Six Sigma initiative has improved efficiencies at our industry-best manufacturing plants, even with these historically low capacity utilizations. We are committed to our position as the North American leader in building products, manufacturing and distribution. We believe that the actions we've taken and we're going to continue to implement will strengthen these core businesses and have a major impact on our objective of operating profit.

Our second objective is to diversify our earnings. While this recession may be unprecedented for all 3 of our major customer segments to collapse, our goal is to, if not eliminate, but smooth out the cyclicality of our business. To diversify earnings, we're working on 2 fronts: international growth and adjacent businesses. We are focusing on select international markets with attractive growth opportunities. These are markets that we will capitalize on our excellent reputation and brand of USG. A great example of this is our business in Mexico. Our leading market position and critical mass have enabled USG Mexico to have a successful 2011 with exciting opportunities in 2012. With a solid foundation in place, we will be rolling out our newest innovation in Mexico, SHEETROCK Brand UltraLight Panels, this year. As we look ahead, China and India provide growth opportunities for us. We already have a successful ceiling tile joint venture in Beijing, and we plan on building our customer relationships and strong brands in the far east.

We also see an opportunity to diversify our earnings through product adjacencies. An early success has been our entry into the commercial roofing business, with SECUROCK roof board. This adjacent business capitalizes on our industry-leading innovation in gypsum fiber and products like FIBEROCK underlayment. Having early customer acceptance, we are now moving ahead growing our business in the adjacent commercial roofing system. What we've done is we've reallocated our resources using our weed-and-feed approach, and we are currently embarking on a 30-city product roadshow with architects and contractors as we speak.

Our third objective is to continue to differentiate USG in the market through innovation. USG is known and respected for its innovation and contribution to building sciences throughout our 110-year history. It's an important part of our value proposition and something that truly differentiates us from the competition. The latest milestone is the introduction of lightweight technology in commercial construction. Our SHEETROCK Brand UltraLight Panels have been a tremendous success. Customer response has been highly positive, and sales have exceeded our expectations. But stepping back, and before we started our lightweight platform in 2009 with the introduction of the next-generation of DUROCK. DUROCK Next Gen is 25% lighter, easier to cut and faster to install. Lighter, easier, faster is the mantra we're using for our entire lightweight portfolio. We continue to extend our innovation to our flagship product, SHEETROCK wallboard. Half-inch SHEETROCK UltraLight is 30% lighter than standard wallboard. Seeing the success of the half-inch product in the residential segment, we moved quickly to introduce 2 different 5/8 panels that are targeted at the commercial segment. We are in the process of rolling those products out across North America to complement the half-inch product, which is already available nationwide.

It's important to understand that our lightweight technology is a true breakthrough in manufacturing. Having the lightest product in the industry is just the first step, a product that outperforms competition in strength, nail pull and sag, all critical areas on specifications and most importantly, job performance. This platform will allow us to extend to other product categories, focusing on our customers' biggest concerns: productivity and performance. We will continue to differentiate through innovation, as we will be introducing a joint treatment that is 40% lighter, that's right, 40% lighter, that's something our customers have been wanting and asking us for. This new and exciting innovation is being introduced this quarter. Our customers appreciate the fact that our lightweight platform differentiates USG with products that are easier to handle, install, reduces fatigue and is environmentally friendly.

We've made a lot of changes and improvement to our company during this recession, all to position USG stronger. Some were designed to reduce costs, which we have done. Others were implemented to affirm USG's position as the leader in innovation. And others will help us change the profile of our revenues and profits, so we are not so dependent on a single market or segment. All of these changes are benefiting USG. Some are producing immediate results such as our rationalization of our U.S. manufacturing and distribution networks, which have greatly reduced our cost position. Other efforts will deliver results over a longer period of time such as our international diversification. I'm confident that all of them are making USG a better company that will generate attractive returns for you, our shareholders.

Now what I'd like to do is turn it over to Rick Fleming, who will walk through our financial results. Rick?

Richard H. Fleming

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

Fourth quarter 2011 net sales were $750 million, up nearly 8% from the fourth quarter of 2010 net sales level of $696 million. Our fourth quarter operating loss was $42 million compared to a $95 million loss in the fourth quarter of 2010. Fourth quarter 2011 operating loss included $5 million of restructuring and asset impairment charges compared to $56 million last year. This quarter's charges of $5 million included $3 million for the finalization of restructuring expenses related to the Windsor quarry permanent shutdown, and $2 million related to a voluntary workforce reduction program we implemented in the fourth quarter. We believe that our restructuring initiatives, including our previous actions to rightsize our manufacturing, distribution and mining footprints continued to move us toward profitability. Excluding the restructuring and impairment charges, our adjusted operating loss was $37 million versus $39 million in last year's fourth quarter. A schedule reconciling our GAAP operating loss to our adjusted operating loss is attached to the press release.

The fourth quarter 2011 net loss after tax was $100 million or $0.95 per share. This compares to $121 million net loss in 2010 or $1.17 per share.

Now I will briefly recap the full year results. Net sales were $3 billion, an $85 million, or nearly a 3% increase from last year. In 2011, we achieved our first net sales increase since 2006. The operating loss for the full year of 2011 was $197 million, including restructuring and impairment charges of $75 million. This compares to an operating loss of $260 million for 2010, which included $110 million of restructuring and impairment charges. Excluding these onetime restructuring and impairment charges, our adjusted operating loss in 2011 was $122 million versus $150 million last year. Our net loss after tax for 2011 was $390 million, or $3.76 per share. This compares to a net loss of $405 million, or $4.03 per share for last year. I like to emphasize the key point that Jim mentioned regarding these results. Despite lower wallboard volumes in 2011, we have managed to reduce our operating loss before restructuring charges by almost 19% due to our restructuring actions. We have been creating our own recovery and we will continue to do so.

I will now provide a little more detail on our fourth quarter segment results. In the North American Gypsum segment, net sales increased over 7% to $422 million for the quarter, while its operating loss decreased over 70%. These changes are primarily due to a significant reduction in restructuring charges in the fourth quarter of 2011 versus the fourth quarter of 2010, as well as an improvement in U.S. wallboard price, volume and cost. Our U.S. Wallboard business shipped 1.09 billion square feet in the quarter, an increase of 15% compared to the fourth quarter of last year. This was due to better-than-average weather across the country and the increased market acceptance of USG SHEETROCK Brand UltraLight Panels. The average selling prices in the fourth quarter were up both year-on-year and from the third quarter of 2011, with an average realized price for the 2011 fourth quarter of $112.59 per MSF compared to $111.95 per MSF in the fourth quarter of 2010, $111.66 per MSF in the third quarter of 2011.

Our Building Products Distribution business continues to make strides towards profitability. Net sales increased to $264 million for the fourth quarter of 2011, a 5.6% increase year-on-year. The operating loss in this year's fourth quarter increased to $15 million from $12 million a year ago due primarily to several favorable litigation settlements that benefited last year's fourth quarter by $8 million. Adjusting for these onetime benefits, L&W's operating loss continued to improve year-on-year for the seventh consecutive quarter.

The changes that have been implemented at L&W are substantial from supply chain initiatives to a heightened focus on the commercial contractor, to the way we have separated the sales function from the operations at the branches. We are pleased with L&W's progress, and we expect to see continued improvements. The increase in sales at L&W in the fourth quarter of this year was driven by their non-wallboard products. Wallboard volume was down year-on-year by 5.8%, offset in part by a 2.3% improvement in wallboard price. But the majority of the increase in sales occurred in construction metals products and ceilings products, where sales were up 14% and 5.6%, respectively, in the fourth quarter.

Turning to Worldwide Ceilings. Our Ceilings business continues to deliver excellent results. Worldwide Ceilings had increases in both net sales and operating profit in the fourth quarter, and for all of 2011 versus 2010 despite the continued soft commercial market conditions. Fourth quarter net sales for Worldwide Ceilings increased by $15 million to $164 million. In the fourth quarter, segment operating profit was $18 million, a 50% increase from last year's operating profit of $12 million. And importantly, the largest business unit in the segment, USG Interiors, continued to have strong earnings. These results were driven by record grid margins due to both manufacturing efficiencies and strategic pricing actions that offset steel cost increases. Finally, I should mention that for the full year, USG Interiors achieved its highest operating profit in over a decade.

Now I'll add some details on the P&L and discuss what we have 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 or SG&A expenses. In the fourth quarter of 2011, SG&A was $80 million versus $83 million last year. For the full year, SG&A was $307 million compared to $314 million in 2010. We have been able to hold SG&A expenses at 2002 levels, and we have a number of initiatives to further improve our efficiencies in this area.

Now I will turn to interest expense. Interest expense is $53 million for the fourth quarter of 2011 and $211 million for the entire year. On a cash basis, interest was $196 million for the year and it was higher than last year due to our November 2010 bond offering. In 2012, we expect that our P&L and cash interest expense will be at similar levels.

Regarding taxes, 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 book tax rate continues to be minimal. The full year tax benefit rate in 2011 was approximately 2.6%. Looking ahead at 2012, we currently anticipate a tax provision rate of 8.4% due to the mix of worldwide income.

Turning now to capital spending. Our capital expenditures totaled $55 million in 2011. We are forecasting about $75 million of capital spending for 2012. With our new low-cost capacity in place and our older facilities idled as part of our fixed cost reduction efforts, we've been able to keep capital expenditures at a relatively low level for the past 3 years. As noted, our 2012 capital expenditures will be slightly higher in order to fund a number of projects that will generate both top line growth and incremental cost savings.

Finally, as part of our strategy to diversify earnings by growing in select international markets, we also plan to make investments in 2 of our foreign joint ventures that total $18 million, and other opportunities of this type will be considered over time. Regarding our cash and debt situation, our December 31 cash, cash equivalents and marketable securities balance excluding $1 million of restricted cash, was $651 million compared with $677 million at the end of the third quarter and $907 million at the end of 2010. We have nothing borrowed on our revolving credit facility. When you add in the borrowing capacity on our credit lines, we had total liquidity of $834 million. Total debt as of December 31 was $2.3 billion, essentially the same at the end of the third quarter, as well as year-end 2010.

In addition, we continue to have a number of initiatives around working capital management and further surplus asset sales. We closed the $6.5 million sales of surplus real estate in the fourth quarter and we have another sale of $10 million under contract, which is expected to close in the first quarter of 2012.

Let me conclude by emphasizing once again, that job #1 at USG, is to achieve a positive operating profit as soon as possible. We will do this by continuing to focus on improving profitability and increasing our efficiencies, while managing our balance sheet and liquidity. As you can see in our results, our restructuring actions are bearing fruit. And we expect that this will be even more evident as 2012 unfolds. After positive operating profit has been achieved, we will then work toward achieving positive cash flow and positive net earnings. As Jim likes to say, we are eating this elephant one bite at a time. Positive operating profit will be a big bite and that's our first goal, but until USG has also achieved positive net earnings, our work will not be done. So our intense focus on profit margins, costs and cash continues.

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

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Michael Rehaut from JPMorgan.

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

This is actually Jason Marcus, in for Mike. So I was hoping you might be able to give us a little bit of an early indication on the effectiveness of the price increase so far for 2012. And also in terms of the wallboard shipment volume during the quarter, I was wondering, how much of it you think was driven by pre-buying ahead of the increase?

James S. Metcalf

This is Jim Metcalf. First on the pricing, let me just kind of step back because I know there's probably quite a few questions on this, so maybe we can handle this upfront. Really, middle of last year, we were looking into 2012, and we didn't see really any positive uptick in demand. So we really took a strategic view of what our pricing strategy should be going forward. We had a lot of conversations with our customers. We talked, we spent a lot of time internally about what could we do differently. And our pricing strategy, we did take a different approach. The first thing, as you probably know, is we made the decision we wanted to eliminate job quotes. We felt, and again, with conversations with our customers, that there weren't a lot of large jobs. It was very inefficient from our standpoint and our customer standpoint, from an administrative area, and we felt that by eliminating that, would really have clarity on what the true price is in the market. The second thing we decided to do, again, we've been talking to our customers, is they wanted some certainty as you look into the market. So we made the decision to have one price that we would quote our customers for the year. We've never done that before, and we are going to quote one price for the year. But with that, is with a pretty substantial increase to cover any outlook in the market. So it's really 3 areas: job quotes were eliminated, which have been done; one price for the year, which helps our customers plan for their business; and we gave each one of our customers their pricing in December for the year. So that's kind of the reasons we went this avenue. We feel that it's going to help our customers and it's going to help us. And we're quite pleased with where we are in January. As you know, we don't give any prices until the end of the quarter. But the prices have gone up significantly, and we're pleased with the early results.

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

And what about -- in terms of the pre-buying as a portion of the total for the quarter?

James S. Metcalf

There was a little bit of pre-buying, but what we did, we took that opportunity in December to do some maintenance at our plants and get, really, finish up some end of the year things that we wanted to do at the plant. So we really watched any big surge buying. And actually, what we did is we did not add any shifts or add any extra time, we just ran per our logistics model. And our customers, we did not have any pre-buying.

Operator

The next question is from Kathryn Thompson from Thompson Research Group.

Kathryn I. Thompson - Thompson Research Group, LLC.

Along the lines with volumes. Some of our checks are showing a drop off in demand in January. What do you see in terms of your business? And then along with that, you've talked a lot about fundamental changes at L&W. When will these translate to more meaningful, profitable -- improvements in profitability?

James S. Metcalf

The -- we've been very fortunate, Kathryn, in January, weather's been pretty good. The volumes have been steady. We haven't seen a drop-off. And I think we just, it's been fortunate, because we've -- last year, we had about 21 inches of snow in the Midwest. So I think a lot of that is weather-related. We watch our volumes every day and we're still balancing price and volume. I mean, this is a very tender market and our focus, as Rick said in his prepared comments, our #1 objective is profitability. Along with that is the success of L&W. And we've made some significant changes at L&W Supply. And it's really been a major strategic shift for them. L&W's prime focus is on the value proposition for the commercial contractor. We have a broad portfolio of steel insulation and wallboard. And by separating operations from sales, that's given us some great pricing discipline in the market. We've strengthened our back office at L&W, reducing costs through consolidation and we really focused on the non-wallboard categories. So really the -- we aren't going to be pleased until L&W is profitable. But we do have a line of sight, and it's -- we're very focused that will -- I'm not giving a projection, but L&W has a line of sight to profitability. It's really getting wallboard margins higher, and we've had some great price improvement in L&W on wallboard, focus on the product categories of steel and insulation and continue to take costs out. We're continuing to reduce cost at L&W. So it's kind of a 3-pronged approach. And if I -- I'd like to say, it's tomorrow, they're going to be profitable. I mean that's our objective. But it's -- we do have a line of sight on that.

Kathryn I. Thompson - Thompson Research Group, LLC.

But I guess, really, kind of where I need a little bit of handholding is you had a nice increase in revenues, but yet no real leaps or bounds or improvement in terms of operating margins. So how do we reconcile and how do we think about that?

James S. Metcalf

Well, if you take out that onetime -- if you're looking at year-on-year, it was about an $8 million -- it's an $8 million variance. If you take that onetime $8 million positive in the fourth quarter of last year, you're going to see 7 quarters of improved -- decreased losses and improved results. So I think you just have to look at each quarter, the losses get lower and until we're breakeven.

Operator

The next question is from Jim Barrett from CL King & Associates.

James Barrett - CL King & Associates, Inc.

Jim, could you talk about the lightweight joint compound? Is that meant to be margin enhancing? Or -- and will it be priced at the current joint compound price? How should we look at that?

James S. Metcalf

Thank you for bringing up our new product. And as I said in our prepared comments, this is an extension of our lightweight portfolio. And we felt that we weren't going to just focus on DUROCK Next Gen , which the growth has been really astounding there. We're very pleased with the performance and what's been happening on our DUROCK category. We've talked a lot about our wallboard UltraLight, SHEETROCK UltraLight. But we wanted to extend it to joint treatment. As you know, we have a strong market position in joint treatment. And we did not want to rest on our laurels there. We felt that we had to continue to innovate as we want to differentiate with our competition. And this lightweight, Jim, is as I said, 40% lighter. When you think, if you have a 5-gallon bucket, which weighs about 60 pounds, normal joint treatment, this is 40% lighter. That is a significant difference on the job site. It's wonderful for our contractors on the productivity and workman's comp and it's something that the applicators have really been asking us for. Absolutely, it's a premium product. It's sold at a premium. And what's really most important about this, our customers are going to be able to get a premium for this product as well. So as I said, we're introducing it this quarter. It's still very, very early, but we wanted to just let you know that we're going to continue to innovate with the lightweight platform.

Operator

The next question is from Dan Oppenheim from Credit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

I was wondering a little bit more in terms of the international expenditure, you talked about $18 million more into joint ventures. How do you think about that expansion? And how rapidly would it be, just thinking about funding for it in general?

James S. Metcalf

Well, as we want to be very clear, our international growth is very, very important, but it's very selective. We want to be very surgical of where we're going to go, and we want to go into markets where we can be a leader, have critical mass. And what I like to say is, duplicate what we've done in Mexico. We want to do it also in the -- have a realistic point of view, that we're still losing money, and we have to be very cognizant of our balance sheet. So we're going to be very prudent on how much we spend and where. And these are really priorities in the context of our CapEx, our capital spending plan that Rick lined out for you. So this -- as I said, our vision, diversifying our earnings is part of our long-term vision with international growth. But we have to have a very disciplined approach of where we're going to invest and how much we're going to invest. The good news is, we have some very successful joint ventures throughout the world. I mentioned one in Beijing. We also have great joint ventures in Europe and the Middle East. And what's nice about that is, we can utilize our technology in some respects as currency. So our partners really cherish what we bring to the party, a lot of it is capital, but a lot of it is our technology. So we're going to walk before we run here, but it's very important in the long term that we start putting flags down in strategic markets.

Daniel Oppenheim - Crédit Suisse AG, Research Division

Okay. And secondly, I guess, you talked about the price increase and then it's going to be one price for the year. But then also talking about how it's a still very difficult market, and balancing price and volume. And I guess, when I think about balancing price and volume, it would imply sort of being -- having -- adjusting a bit more as the year goes on in terms of the strategy there. But talking about the certainty would suggest sort of one price. How are you looking at that? And should we think more about that certainty on pricing or about that balance?

James S. Metcalf

Right now, we have one price for the year. We are not planning of moving the price down. Our early response from our customers have been, they prefer having the certainty. If there would be some adjustments, we have the opportunity to adjust up immediately, which is nice about this. We don't plan to do that, but it does give that flexibility. If the market would take off from a demand standpoint, which we are anticipating it will this year, we still think it's going to be a flat market. It puts the cap on how high we can go, but we have a significant increase to give us that flexibility. So our plan is not to move the price down. Let's -- one price for the year, and we will -- we're going to run the business that way. We are out of the job quote business. The early reactions have been very, very positive there. And we think over the next quarter or 2, some of the protected work from last year that went into this year will start coming -- will start expiring. So we feel that, right now, it's profitability first, volume second.

Operator

And the next question is from Garik Shmois from Longbow Research.

Garik S. Shmois - Longbow Research LLC

Just given the initial success of the wallboard price increase here, a month into it, plus some of the initiatives you mentioned with respect to cost savings. I mean, do you think it's reasonable that you could return to operating profitability here in 2012, if the price increase ends up sticking through the balance of -- sticking throughout the balance of the year?

James S. Metcalf

Our #1 objective is operating profit as soon as possible. And obviously, getting significant price improvement is a way to get there. It's also getting L&W margins, both on wallboard spread and complementary products going the right direction too. So our objective is operating profit as soon as possible, and that is one avenue to get there.

Garik S. Shmois - Longbow Research LLC

Okay. And just to follow up real quick on L&W strategy, on pricing. Is the strategy to get gross margin improvement as a result of L&W's price increase? Or is it to pass-through simply one for one the price increase from the manufacturing arm?

James S. Metcalf

L&W's objective is margin improvement in all categories, including wallboard.

Operator

And the next question is from Joshua Pollard from Goldman Sachs.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

I would love to understand what portion of your business came in to 2012, job protected, and where you expect those numbers to be as you get closer towards the end of the year? You just made a reference towards a smaller portion of your business being job protected. But I really want to understand, how much of your business is actually benefiting from the recent price increases?

James S. Metcalf

We don't disclose the percentage that's protected. But it's an amount that will be coming off in the next quarter or 2. And again, let me reiterate, those were jobs that were protected prior to us announcing the no job quote policy. So you think that -- we announced that late in the fourth quarter, so it's a small percentage that will start coming off. But it will help on the realized price when those do expire. So we'd anticipate by July, we will have most of those behind us.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Okay. So is the way to think about it is that, as you get towards the end of 2012, that your job protected portion will be 0?

James S. Metcalf

Pretty close to it, if not 0. Yes.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Okay. And then as you guys make this push to profitability, how much of this should come from additional cost cuts? I was just going through your SG&A numbers for the last couple of years, and you sort of been in this range of $70 million to $80 million. And I'm wondering, if there's another step function down that we should expect?

Richard H. Fleming

This is Rick Fleming. We are in the midst right now of looking at our entire organizational structure. We've had a number of incremental adjustments in headcount and workforce. And at some point, it just makes good business sense and good sense to step back and look at your entire organization and consider opportunities such as one back office, one shared service and also opportunities around the span of control. That plan, that master plan, should be pretty much completed by the end of the first quarter, and then there will be some opportunities we think we can identify as part of that. I think we've alluded to you in the past, that we're also in the midst of a lift and shift of some of our back office functions to a low-cost labor market. In this case, India. So that will also be an opportunity. So there's a number of initiatives, more to come. But we feel that we're -- we've got some opportunities that have yet to be tapped.

Operator

The next question is from Trey Grooms from Stephens Inc.

Trey Grooms - Stephens Inc., Research Division

Rick, one question for you on nat gas. Can you give us an update, kind of where you guys stand? I know you had a lot of your hedges, legacy hedges rolling off, can you just kind of give us an update on where all that stands now?

Richard H. Fleming

Sure. I'd be happy to, Trey. First of all, let me mention that, I think, you are aware we are using a combination of options and swaps as our hedging activity. Let me give you sort of how it breaks out in 2012. We have about 38% of our gas purchases locked in right now, pricing-wise at swaps. About 8% of that 38% is at those old legacy swap levels, which kind of date back to prior to the financial crisis. 8% of the buy is at higher numbers than market. But the good news there is that this is the last year of legacy swaps. 30% of what's been locked in is about $3 a dekatherm. Now if you step back then, what that means is that 62% of the portfolio right now is floating and will benefit if gas prices go down. But with the options we have which provide a cap, 75% of the portfolio is protected if there is a spike in gas prices. So we feel pretty good about it year-on-year, just where the market is today and how the hedge program worked out. We should have about $25 million less gas expense in 2012 than 2011. And then I'll just mention that some -- people often ask, "Well, how do you compare to the market right now with the cost of your hedges in the mix?" And right now, we're about $0.70, $0.68 over the forward curve right now. And if you compare to spot, we would be about, basically, $2.53 at spot. And our price right now is north of $3.60 on a blended basis. So that gives you a sense of how the program works.

Trey Grooms - Stephens Inc., Research Division

Okay, yes. That's all very helpful. And then just on the volume in the quarter. Jim, I think you mentioned that there was not any really measurable pre-buying, I guess, going on in the quarter. But I mean, volumes are very strong and I apologize if I missed something here in some of your prepared remarks. But just really trying to figure out, if there was no pre-buying, is it all weather-related like you mentioned kind of some benefit in January? Or can you just help us kind of reconcile what's going on with the volume in the fourth quarter, especially given your outlook for kind of a flattish year this year?

James S. Metcalf

Right, right, Trey. Really, the fourth quarter was the first time we saw maybe a little -- October typically is a strong month. We haven't seen a seasonality in our business for 4 years. So we have some good weather. But quite frankly, the success of UltraLight. That has been a great innovation for our customers. And we really -- it really outperformed our expectations throughout the year, it was about 25% of our overall volume, overall wallboard volume for the year. But in the fourth quarter, it was a higher percentage of volume. So it was weather-related and we -- our UltraLight business really took hold.

Trey Grooms - Stephens Inc., Research Division

All right. Great. And then I guess, when you're talking about the flat volumes for this year outlook, I guess, is that more of kind of an overall kind of industry kind of outlook, or not just necessarily specific to USG given the UltraLight product, which I'm assuming is going to continue to take some share?

James S. Metcalf

Yes. We -- yes, that is an industry demand number, where we look at a lot of different inputs. Everyone knows where housing is going to be. We're kind of at the low end of the range for housing. And we're seeing maybe a little, 1% to 2% uptick in commercial and R&R. 1% commercial, 2% R&R or just flip them. So really, the area that's going to have any type of positive movement, it will be R&R and that's very insignificant. We would rather plan for flat demand as an industry demand. And we aren't waiting for the market to return to profitability. And what we did is as a management team is as the market demand is going to be flat, we need to get operating profit as soon as possible, and we have to do it in this type of environment because no one knows how long the demand is going to be at this level. So we're planning to be -- to get this place lower our breakeven, and we've been committing to you each quarter that we're going to continue to lower that breakeven, and we want to do it in the context without any help from the market. I'll use Rick Fleming's term, it's called self-help.

Operator

The next question is from Bob Wetenhall from RBC.

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

Jim, you have used the language, prices have increased significantly, and I was hoping you could provide a little context. Is that high-single digits or low teens? Could you give us a little color?

James S. Metcalf

Bob, I'm kind of smiling because I can't give you a projection. But I would say significantly, and you can see where our pricing has been going throughout the last couple of years. So early returns are positive. We've had -- our customers have the prices locked in. We're out of the job quote business and stay tuned for the first quarter results. We'll be able to let you know that. But I will tell you this, we are pleased with where we are in January.

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

That's really helpful. For Rick, a little housekeeping. What was cash flow for operations for the full year? And I know you guys are trying to move heaven and earth to get to breakeven profitability. How much leverage is there in SG&A this year? Can you go from $300 million to $290 million? Or what kind of pull do you have on that given your lift and shift efforts?

Richard H. Fleming

Yes, sure. Well, first of all, the cash usage for the full year was $256 million. The biggest component of that was the cash interest, which as you know is about $195 million less the interest income. The overall burn in the fourth quarter was reduced substantially to $26 million, part of that was working capital liquidation. But nonetheless, that compares to $48 million burn in the third quarter. So we're pleased with that performance. I do ought to caution people that the first quarter of the new year is always the heavy quarter in terms of cash usage as we rebuild working capital. In some years, sometimes we have almost 40% to 50% of our cash usage for the full year in the first quarter. So just as you think about seasonality, please keep that in mind. On the issue of the SG&A target, we really have a lot of internal dialogue around that and we'll be setting that target as part of the study. So I'm not going to give you a number right now. But I did indicate that we, right now, are back to 2002 SG&A levels. Gosh, we'd actually like to bring that back to something earlier than 2002, and we think we have opportunities to do it. So you can look at our history and you can probably get a sense of what we're shooting for.

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

Fair enough. And if I can just sneak one question in to what Jim was saying about flat outlook for volume for the industry. Do you see any capacity coming out this year?

James S. Metcalf

Just speaking from our standpoint, Bob, we're always looking at our logistics model and where we can take either capacity out or how our overall supply -- or excuse me, our shipments look. I will tell you that this is coming -- the market right now, it's a very uneven market. We're busier in some parts of the country, particularly in the Northeast than we are in the far west. So right now, our logistics is balanced for what we have in the market. We are not planning on taking any capacity out at this point. We do always have a contingency plan. If the market goes down, which we need to be prepared for that, we would have -- we would know what capacity we would take out. But it's not of a significant amount.

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

Do you see your competitors taking out capacity?

James S. Metcalf

You're just going to -- you're going to have to ask them.

Operator

The next question is from Dennis McGill from Zelman & Associates.

Dennis McGill - Zelman & Associates, Research Division

Just quickly I guess. Can you just remind us what your capacity utilization rate was for the fourth quarter?

James S. Metcalf

We were just under 50%.

Dennis McGill - Zelman & Associates, Research Division

Okay. And I guess, bigger picture here. You generate more revenue from ceilings than you do from wallboard, and you had some pretty solid growth figures there both internationally and domestically. So I was hoping you can maybe talk a little about what you're seeing on the volume side, specifically volume for ceilings, both here and abroad?

James S. Metcalf

The Ceilings business as we've said, we're very pleased with the results. We've been going through a pretty tough commercial market the last 4 years. But as we talked in previous calls, Dennis, that we really refocused our organization on the repair and remodel segment on the big-box segment. And I'm really proud of the work that's been done with our sales professionals throughout North America and the world. Really, the key to ceilings and the operating profit that you're seeing is staying ahead of the steel increases on our grid business. Everything -- there hasn't -- from a volume standpoint, it's been flat at best. Ceiling, tile, grid and I mean, up a little here and there. But really, the key is, as long as we can stay ahead of raw steel increases and getting the margin on grid, that is really the key to our Ceilings business both here and internationally. We don't have a large footprint in Europe, so that does not going to have a big impact there. Really, in our Worldwide Ceilings business is really our North American Ceilings business and what we're doing in the far east. So there's great opportunities for us with our joint venture in Beijing. We have some really exciting plans for our Ceilings business over there. But the key is, we're still expecting volumes with commercial and even commercial R&R volumes, they're still going to be relatively flat from an opportunity standpoint.

Dennis McGill - Zelman & Associates, Research Division

The fourth quarter or the revenue growth was entirely steel pricing or there was some volume on one side or the other?

James S. Metcalf

Pretty much it was grid pricing and not a lot of volume.

Operator

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

John F. Kasprzak - BB&T Capital Markets, Research Division

You guys made comments about the market being flat this year, but there do seem to be some signs of a little better activity in terms of housing, some of the homebuilders orders have been up lately. Are you still seeing a flat market despite that just because it's early in the year or are you just not seeing, really, any pickup yet? Can you give us some color on the kind of full year outlook?

James S. Metcalf

We've had numerous discussions about that internally, and we've been 0 for 4 on where we think the markets been the last 4 years. So we are going to take a very pessimistic approach on demand. And we're surprised a little bit, it's not going to be -- you're not going to see demand tick up to any great extent. If you look at the metrics, for every 100,000 housing starts, there's about 800 million feet of overall industry demand. So kind of pick your number on housing, and use that every 100,000 starts, if you think housing is going to be up 100,000 or so, it's about 800 million. And that's for the entire industry. So we don't see any signs -- there may be a little bit of positive signs out there from a housing standpoint, but until we get some job creation, we just don't see it in housing. And really, our biggest footprint is repair and remodel. And there are some positive signs, particularly in the big-box retailers. We're seeing some positive comp store sales there, which is very exciting for us. But again, we're still in a pretty soft market here over the next 12 months.

Operator

The next question is from Mark Weintraub from Buckingham Research.

Mark A. Weintraub - Buckingham Research Group Incorporated

Historically, there's often been fairly big differences regionally what's going on pricing-wise, et cetera. Now you've obviously come into this year with a whole different approach to the market, getting with the job quote, et cetera. Is it also different in as much as there is much more of a single national way of going about things, or are regional differences still present in the way they historically were?

James S. Metcalf

Well, as I mentioned, demand is always going to come back or we're seeing it come back in a very regional approach. You're still going to have your issues in Florida and Nevada and Arizona from a demand standpoint. But we sit down with each one of our customers directly. And one of the great things about that is with our national and nationwide footprint of sales professionals, we can go out and have those individual conversations with the customers. So it is a regional business, but we're coming at this from a nationwide standpoint. We're out of the job quote business, that's a national policy. We have one price in the market, that's a national policy. And the third area, we have a significant increase, and that's a national policy, but it's handled customer by customer.

Mark A. Weintraub - Buckingham Research Group Incorporated

Okay. And second, on the UltraLight, where you discussed about the success in that, that's terrific. What I struggled a little bit is, if I look at your overall shipments, they haven't outpaced the industry. And what do you -- so obviously, something else has offset the gains you've been making in UltraLight. Have you effectively been gaining UltraLight with your existing customer base but not so much getting new customers? And maybe, when you talk about 4Q looking better, are we just beginning to see you have success with new customers? Maybe a little bit more color, if you could, to explain why the success in UltraLight at least up until now hasn't translated into overall market share recovery.

James S. Metcalf

Well, UltraLight has been a -- it's part of our value proposition of margin improvement, not market share. And UltraLight, if you look at our fourth quarter volume, it was over 50% of our half-inch volume. But there are some segments and there are some customers that we quite frankly, pulled away from. And it was unprofitable business or it didn't align with our value proposition. So UltraLight growth really started accelerating in the second half of the year. If you look at our overall volume as a company, we were down as a company in the first half of the year, with a slight comeback, as Rick said, we were basically flat from a shipment standpoint. UltraLight, and I've said this in previous calls, that the success of UltraLight, you're going to see our realized selling price go up when there's not a price increase. So if you look at the third Q average price, which was around $111, and you look at the fourth Q average price, the majority of that price lift was selling more UltraLight at a premium. So this is not a market share grab, this is a value proposition for us. And we're replacing higher-margin products for lower-margin segments. Along with this, we're being very surgical of who markets UltraLight. We want to market UltraLight with our customers that share our value proposition, that will go into the market and sell UltraLight at a premium. So not every customer in the market will be buying UltraLight. We have a policy similar to what we do with ceiling tiles. We sit down and if the 2 companies share value proposition, then we will be providing them UltraLight. So stay tuned. It is -- again, it's a product that our customers are asking for and what's nice about it, our customers are selling it at a premium.

Mark A. Weintraub - Buckingham Research Group Incorporated

Okay, great. I do, I look forward to further conversations on it. And just one last real quick one. Pension, is that why the book value went lower beyond just the earnings? And can you guys give us an update on where the underfunded status is at the end of the quarter?

Richard H. Fleming

I'd be happy to and you've touched on an issue that we think a lot about. But let me mention that our pension plan was fully funded as of June 30 on a PPA basis and also on an ABO basis. And then we had Operation Twist and the drop in rates in the second half of the year, particularly in the fourth quarter. So not only USG but Pension America has been impacted by the -- in particular, the fed policy. Clearly, the year wasn't the greatest investment year. We didn't earn our 7%, but we weren't dramatically below 0% either. So the return was not the lion's share, but it's really the interest rate situation that drove the calculus on the pension liability. Just to give you the numbers. If you did an ABO calculation at year end, we are just about 80% funded using that metric. If you did a PBO calculation, which takes in account salary increases not yet granted, but that's how the accountants think about it, it would have been 72% funded. These are accounting metrics. The key thing for funding purposes however, is the PPA calculus and there -- -- because you do get some limited interest rates moving, meaning that the drop in rates in the second half of the year didn't have its full impact as it does in the accounting mark-to-market, we would have been north of 90% funded and without excluding, once again, would have been about 80% funded. So interest rates go down, interest rates go up. We expect that some of that, will over time just be adjusted by market action. But to give you a sense of how we're thinking about the cash increases or pension funding going into 2012, we'll probably take what have been about a $40 million cash contribution for the domestic plan and move it to $50 million, just given the movement in rates. And then worldwide, we have another $16 million, so probably about $66 million of pension contributions for the global enterprise in 2012. And we'll be recalibrating that guidance as we get the final numbers for the year. But -- and give update at the first quarter, but that's our current thinking.

Mark A. Weintraub - Buckingham Research Group Incorporated

Very helpful. And just last, do you happen to have real handy the -- what the underfunded total? I know it's all accounting, but what the underfunded total was at the end of the year?

Richard H. Fleming

Sure. Let me get that for you. Bear with me a second. It was, per the accounting calculation, negative $369 million. That compared to $158 million last year, so you can see what the interest rates did.

Operator

The last question would be from Todd Vencil from Sterne Agee.

L. Todd Vencil - Sterne Agee & Leach Inc., Research Division

On the joint compound, the lightweight joint compound that you mentioned, can you talk about what your share is in the joint compound market? And is that a market share play or is that a profitability play as well?

James S. Metcalf

I think you are talking about our joint treatment. We have a very significant market share, which we don't disclose in joint treatment. But it is higher in some areas of the country, particularly in the Northeast. So in the Northeast, it's very hard to find a bucket that doesn't have our green lid. So no, this is really adding on to our platform of innovation and really listening to our customers about what they need and that the next step change. And they're very concerned about productivity, labor rates are quite high and to help our customers become more profitable, this is a product that they have asked us to come up with. And it took some time to do, but our people at research worked very hard with the field of coming up with the product that is significantly lighter and has great performance characteristics. The way it performs from a glide standpoint, which is one of the terms our applicators use is -- has been -- the early trials have been very, very significant. And it is sold as a price premium. So this is to continue the leadership of our joint treatment share, which I said is significant. And we do not want the rest on the laurels that we have a large market share and we're going to be fine. So this continues to differentiate us through innovation.

Ken Banas

Thank you all for your questions. Jim, I think you have some closing remarks.

James S. Metcalf

Yes. And thank you, I appreciate all the questions and interest you have on USG. And as we've talked a little bit this morning, we truly believe that we're entering 2012 with very modest expectations as far as the market conditions are concerned. Our primary U.S. market is still going to be soft. We're looking at industry shipments that are basically half of where they were 5 or 6 years ago. The actions that we've taken though throughout this recession, we believe, have strengthened our core businesses, we've significantly lowered our breakeven and most importantly, we're positioning USG as a stronger company. We can see improvements throughout the company, and we've touched on a few of those this morning. Our SHEETROCK Brand UltraLight has outperformed all of our expectations, accounting for over 25% of the entire wallboard volume we shipped in the United States. Our Ceiling business continues to post excellent results. Worldwide Ceilings increased operating profit by over 20% in 2011. And as Rick had indicated, USG Interiors recorded its highest operating profit in more than 10 years. The restructuring at L&W's is producing positive results. We still have a loss, we are not happy with the losses but the losses have been reduced for 7 consecutive quarters, and we still have some work to do but we do have a line of sight on profitability for L&W.

And then finally, USG Mexico. Their operating profit improved over 45% in 2011. So we're starting to see some significant results. But these are just a few of the many accomplishments that you've seen in the difficult market. As I've mentioned, our management team and our professionals throughout the corporation, throughout the world, are very aligned, very focused, on profitability growing USG. We remain confident that by executing the strategy that I articulated earlier of strengthening the core, diversifying the earnings and differentiating through innovation, we will return USG to profitability and generate attractive returns for our shareholders.

Thank you very much for your time and attention this morning, and we will talk to you next quarter.

Ken Banas

A taped replay of this call will be available until Friday, February 10. Information is available on usg.com. This concludes our conference call. Thank you all very much.

Operator

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

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