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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

Michael Rehaut - JP Morgan Chase & Co, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Kathryn I. Thompson - Thompson Research Group, LLC.

Garik S. Shmois - Longbow Research LLC

James Barrett - CL King & Associates, Inc.

Trey Grooms - Stephens Inc., Research Division

Joshua Pollard - Goldman Sachs Group 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

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

USG (USG) Q1 2012 Earnings Call April 17, 2012 11:00 AM ET

Operator

Welcome to the USG Corporation First Quarter 2012 Earnings Conference Call. My name is Monica, and I will be the moderator for today's call. [Operator Instructions] Please note that this conference is being recorded.

I will now turn the call over to Ken Banas. Mr. Banas, you may begin.

Ken Banas

Good morning, and welcome to USG Corporation's First Quarter 2012 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 then review the financial results for the quarter for the corporation and the business segments. We'll then open the call for questions and conclude with a few comments from Jim. [Operator Instructions] Jim?

James S. Metcalf

Thank you, Ken, and good morning, and thank you for joining us. As always, we appreciate your interest in USG. Today, I've several areas I'd like to discuss with you, starting with an executive management transition that's currently underway. Rick Fleming, who's been with USG for more than 30 years, has elected to retire later this year. Rick has served as our CFO for the last 20 years and has done a brilliant job developing financial strategies in all kinds of markets, from rapid growth to sharp contractions. I'm sure many of you this morning who know Rick share my admiration for his sharp intellect, calm demeanor and his thoughtful personality. Speaking for everyone at USG, Rick, I'd like to say you'll be greatly missed.

While we'll all miss Rick, we're very excited to welcome Matt Hilzinger, who will become our CFO on May 1. Matt comes to us from the Exelon Corporation where he was Chief Financial Officer. Matt is a very experienced financial executive who I'm confident will make great contributions to USG in the years ahead. Many of you already know Matt, and we're planning our Investor Relations schedule to create opportunities for you to see him again. I feel very fortunate to work with 2 of the top financial leaders around.

Now turning to operations. We had some encouraging trends in the first quarter. Operating safely, focusing on our customers and lowering our breakeven have been some of our key actions. We recorded an operating profit in the quarter, which I've said on previous calls is our main focus, even with little help from market demand. Operating profit is just the first step towards positive earnings and cash flow. And one quarter certainly doesn't make a trend, but I feel this is a very important milestone for us. Our people at USG, throughout manufacturing, distribution, sales and all the staff units have worked very, very hard to get to this point. And I'd really like to take this time to congratulate every USG person on their efforts.

There are a number of areas that contributed to our improved performance. Our market-leading lightweight products led by SHEETROCK Brand UltraLight Panels and our new UltraLight joint treatment are performing very well, profitably growing the category and helping our customers with innovative new products.

Another contributor to the first quarter results was our new pricing strategy that eliminated wallboard job quotes. It also established a single price for the year, which gave greater price certainty to our customers. Both U.S. Gypsum and L&W Supply achieved improved margins in this category.

In addition, we believe the market in the U.S. improved modestly, led by Residential Repair and Remodel, which was up approximately 10%. Now this segment is where we are well positioned with our big-box customers, and our shipments improved compared to both last year and the fourth quarter. These results continue to support our focus on innovation and providing our customers with value-added solutions.

Other areas of the company had solid performances as well. L&W Supply continues to makes great strides, improvements coming from all product categories. The significant organizational changes that were implemented last year are proving to be very, very effective. L&W is focused on the commercial contractor, providing value on core products like steel, installation and ceilings and a sharp focus on margin improvement through efficiencies in the operations. I'm very confident that L&W is on the right track.

Our Ceilings unit has been a bright spot throughout the recession and performed well in the quarter. With the strategy of margin improvement and shifting our sales focus from new commercial work, which has been relatively flat, to repair and remodel has been very successful for our Ceilings business. In addition, the Ceilings unit has focused on high performance panels, which differentiates us in the market and adds to both revenue and profitability.

Moving beyond Ceilings, our other units had solid performance, including Substrates and Surfaces. One highlight for our Surfaces businesses is our national rollout of our new lightweight joint treatment, which is 40% lighter.

All international operations are off to a good start in 2012, Canada; Mexico, Europe and Latin America were all profitable at levels comparable to last year.

In addition to the operating highlights in the quarter, we continued to derisk our balance sheet. We executed 2 financial transactions to improve our near-term liquidity and position for the future. We raised $250 million and used a portion of that amount to repurchase some of the bonds that mature in 2014. Rick will go into detail in a moment, but our goal here is to refinance a substantial portion of the 2014 with a longer maturity and a lower coupon. All-in-all, a successful transaction will further increase our financial flexibility.

So in conclusion, the first quarter was a solid start to 2012, but we are still operating a very weak market condition. Our focus continues to be on our strategic priorities that we've talked to you in previous quarters, 3 areas: strengthening the core business, which is North American manufacturing and distribution. Strengthening the core, we're showing progress with operating profit in the quarter; second, diversifying our earnings. Diversifying our earnings through product adjacencies like SECUROCK substrates and commercial roofing; third, differentiate through innovation. We've been doing this by extending our success on another new product, UltraLightweight joint treatment.

Clearly, this is one of the best quarters we've had in a long time but I'll tell you, we still have work to do. But we're on the right track, and we're on the right track with our plan to win.

Now I'd like to turn it over to Rick who will give you some detail on the quarter.

Richard H. Fleming

Thanks, Jim, and thank you for those very kind remarks, and good morning to all of you on the call. As Jim mentioned, I'll recap our first quarter results and provide some additional details on interest expense, taxes, capital expenditures, debt and liquidity.

First quarter 2012 net sales were $812 million, up 12.6% from the first quarter of last year. Our first quarter operating profit was $27 million, which included $2 million in restructuring charges for U.S. Gypsum related to severance costs associated with last year's fourth quarter, voluntary workforce reduction, as well as miscellaneous exit costs related to production facility shutdowns in prior years. This compares to an operating loss of $58 million in the first quarter of 2011. This $85 million improvement year-on-year is due in part to improved wallboard gross profits, which benefited from higher wallboard prices, lower unit cost and higher volume this year versus the first quarter of last year.

Also, L&W improved its operating loss by $16 million this quarter versus the first quarter of last year due to better wallboard spreads, higher non-wallboard product sales and reduced operating expenses.

And USG Interiors had a $5 million improvement in operating profit due to both top line growth and margin improvement. In addition, overhead was down $4 million due in large part to our efforts to improve efficiencies and reduce costs.

Finally, restructuring and asset impairment charges was $7 million less than the first quarter of 2012 versus the same quarter in 2011.

So given all the above, our incremental operating profit in the first quarter of 2012 versus the first quarter of 2011 was $85 million on $91 million of increased sales, resulting in an incremental margin of 93%, including restructuring charges, and 86%, excluding restructuring charges.

First quarter 2012 net loss after-tax was $27 million or a $0.26 per share loss. This compares to a first quarter loss last year of $105 million or a loss of $1.01 per share. I'll now provide a little more detail on our first quarter segment results.

In our North American Gypsum segment, net sales increased 16.8% to $486 million for the quarter, and operating profit was $32 million versus an operating loss last year of $29 million. These results reflect an improvement in U.S. wallboard volume, prices and costs, as well as a $5 million reduction in restructuring charges.

Our U.S. Wallboard business shipped 1.16 billion square feet in the quarter, an increase of 6% compared to the fourth quarter of last year. The weather was mild in the first quarter this year, and we also benefited from increased market acceptance of USG SHEETROCK Brand UltraLight Panels. UltraLight Panels were 41% of U.S. Gypsum's wallboard shipments in the first quarter of 2012 versus 38% in the fourth quarter of 2011. Average selling prices in the first quarter were up year-on-year, with an average realized price for the 2012 first quarter of $130.43 per MSF, compared to $109.15 per MSF in the first quarter of 2011.

As you can see, the new pricing strategy has been highly effective, and the full expiration of the 2011 job quotes during the remainder of this year is expected to continue to positively impact wallboard prices. We remain committed to this new pricing approach.

U.S. Gypsum's operating profit improvement in the first quarter of 2012 also benefited from higher sales and gross profits with joint compound and DUROCK. In fact, joint compound gross margins in March were the highest since October 2009 due to higher volume, higher prices and lower costs. Also, SHEETROCK UltraLightweight All Purpose Joint Compound is just now rolling out nationally, and this new product introduction should further add to our positive momentum in this product category during the balance of 2012.

Our Building Products Distribution business continues to make strides towards profitability. Net sales increased to $270 million for the first quarter of 2012, an 11% increase year-on-year. The operating loss in this year's first quarter decreased to $6 million from $22 million one year ago. As a result, L&W's operating loss continued to improve year-on-year for the eighth consecutive quarter, excluding onetime litigation settlements.

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 functions from the operations at the branches. We are pleased with L&W's progress, and we expect to see continued improvement.

The increase in sales at L&W in the first quarter of this year was driven by higher wallboard prices and by increased sales of their non-wallboard products. Wallboard volume was down year-on-year by 3.1%. But this is offset by a 15.2% improvement in wallboard price. Price increases above cost increases have boosted L&W's wallboard spread, resulting in very positive year-on-year comparisons. And construction metal products and ceiling products had sales increases of 15.8% and 7.7%, respectively in the first 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 first quarter despite the continued soft market conditions for new commercial construction. First quarter net sales for Worldwide Ceilings increased by $6 million to $183 million, and the first quarter segment operating profit was $29 million, a $3 million increase from last year's operating profit of $26 million.

And importantly, the largest business unit in this segment, USG Interiors, continued to have strong earnings. And these results were driven by strong grid margins due to both manufacturing efficiencies and strategic pricing actions that offset steel cost increases, as well as higher tile margins due to price improvement.

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 first quarter of 2012, SG&A was $81 million versus $85 million last year. And as a percentage of net sales, SG&A was 10% in the first quarter of 2012 compared to 11.8% in the first quarter of last year. The improvement in the first quarter of 2012 reflects the voluntary workforce reduction we implemented late last year and lower retiree medical and long-term incentive plan expenses. We continue 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'll turn to interest expense. Interest expense is $52 million, the same as last year's first quarter. For all of 2012, we expect that our P&L and cash interest expense will be $215 million and $205 million, respectively, taking into account our recent bond issuance and the retirement of our 9.75% bonds due in 2014 that were tendered. Regarding the recent bond tender offer, we also take a special charge in the second quarter of $18 million with the early extinguishment of the $118 million of the 2014 bonds that were tendered.

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 tax provision rate in the first quarter of 2012 was approximately 8%.

Looking ahead to the full year of 2012, we currently anticipate that our tax provision, which relates primarily to foreign taxes, will be about $14 million to $18 million both on a book and cash tax basis depending upon the mix of worldwide income.

Turning now to capital spending. Capital expenditures totaled $14 million in the first quarter, and we are forecasting about $75 million of capital spending for the full year of 2012. With our newer low-cost capacity in place, and our order 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 than last year 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 approximately $60 million of loans and investments in foreign joint ventures, and $7 million of this amount has already been completed. As previously announced, we expect to fund a substantial portion of the joint venture expenditures through surplus asset sales and other divestments.

Regarding our cash and debt situation, on March 31, cash, cash equivalents and marketable securities, excluding $1 million of restricted cash was $608 million compared to $651 million at the end of the fourth quarter. We have nothing borrowed on our revolving credit facility. When you add in the borrowing capacity on our credit lines, we have total liquidity as of March 31, 2012, of $827 million compared to $834 million at year-end 2011. Total debt, as of March 31, was $2.3 billion, the same as the end of last year. This level of debt does not reflect our recent $250 million financing and repurchase of $118 million of our bonds due in 2014 in our tender offer, as this transaction did not close until April 12.

In addition, we continue to have a number of initiatives around working capital management and further surplus asset sales. We closed a $10 million sale of surplus real estate in the first quarter. And as noted, we are working on further potential surplus asset sales and other divestments.

Let me conclude by saying that we are extremely pleased to have achieved an operating profit in the first quarter of 2012. This is our first quarterly operating profit since the third quarter of 2007 and is evidence that our restructuring actions are bearing fruit. Now our attention turns to achieving positive cash flow and net earnings. As such, our intense focus on profit margins, cost and cash continues.

Finally, I'd like to say that it has been my privilege and honor to have been the CFO of this fine company for almost 2 decades. Our outlook is bright, and I'm extremely pleased that Matt Hilzinger is my successor.

At this time, we'll be happy to answer any questions you may have. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Rehaut of JPMorgan.

Michael Rehaut - JP Morgan Chase & Co, Research Division

Rick, best of luck. It was a pleasure working with you. First question on the North American, and particularly, the U.S. Gypsum company margins. Great results, obviously, much better than we were looking for and probably the Street overall. I was hoping to get a sense for -- in terms of thinking about that improvement, on a year-over-year basis, if you're able to kind of give us a sense, how much was from pricing and volume versus other operational or efficiency type of improvements, and if we can expect those to be sustainable going forward?

James S. Metcalf

Michael, thank you for the question. We're really proud of the first quarter results because this is across-the-board. We had a volume lift, and that's really attributed to UltraLight. Our strategy, as we've talked in the past, has been to grow the business through value creation and not price. So innovation’s very important. We obviously were very pleased with the lift we got on pricing. As you know, we have -- we're going to have one price for the year and get out-of-the-job quote business. And we've done a phenomenal job, and I'm very proud of our manufacturing team from running these plants, these very low-cost, high-efficient plants, very, very well. So it's really price, volume and cost, but we've also, on the North American Gypsum, we were tackling and continue to tackle lowering our breakeven. So it's really across-the-board from the back office, to volume price and cost. And if you look at the North American results as well, as Rick talked about in his prepared comments, our joint treatment business was strong, our DUROCK business was strong. So really, it was across-the-board, and our focus -- as I said, one quarter doesn't make a trend, but we're going to continue to add value for our customers, continue to lower cost and get price appreciation as aggressively as we can.

Michael Rehaut - JP Morgan Chase & Co, Research Division

Well, I appreciate that. Is there any way to just give us a little bit more, on a granular basis, what were the -- how much each of those buckets contributed to the improvement in terms of price, volume and operational or efficiency improvements?

James S. Metcalf

Well, the 2 big buckets, obviously, the first bucket is price and the other bucket is cost. And as you know, we don't disclose our cost. And you have -- we had a little bit of a volume lift. But really, it was the spread on the margin on the cost and the price. You saw our price. We ended the quarter just north of $130.

Richard H. Fleming

Michael, it's Rick. I would simply add, and I don't want to give you too much granularity here on the cost side, but let me just say, we're very proud of the fact that in the equation, in the calculus for this quarter, is the fact that our fixed costs in the making of wallboard were down 20%. I think that's evidence of the overall work we've been doing to reduce fixed costs.

Michael Rehaut - JP Morgan Chase & Co, Research Division

I appreciate that. Second question on the Ceilings, also a nice upside, breaking out in the USG Interiors over 19%. Is that something that you see sustainable? Were there any kind of onetime benefits or sort of a positive price versus material cost type of spread? Or how should we think about that going forward?

James S. Metcalf

For the Ceilings business, and we've been pretty consistent over the last, really through this recession as we have a focus on the Commercial Repair and Remodel business, focus on the big-box. But also, it is a margin improvement. And really, it's staying ahead of your steel costs. We really focused on what's happening with raw steel and making sure that our pricing in the market is ahead of that. But quite frankly, in this last quarter, it was our margin improvement on ceiling tile. We're continuing to get price improvement on ceiling tile, but the same thing as we talked about on the fixed side that Rick alluded to on the wallboard side, we're really focusing on the efficiencies of our ceiling tile business. We're also focused, Michael, on the high-end performance areas. Those are the high-end, non-commodity tile, which have a larger margin and -- because those are more customized ceilings. So our ceiling strategy will continue to be margin improvement, not market share. We're very focused on providing value to our customers and focusing on our distribution. So we're -- we'll continue to be pleasantly surprised. And the Ceilings business has been a great business unit through this terrible recession, and we're expecting continued positive results there.

Operator

Our next question comes from Dan Oppenheim of Credit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

I was wondering, in terms of the L&W business -- good to see the continued efforts there, how much of the restructuring and the efforts that you're doing there are coming through in terms of sort of in the run rate of results right now? How much do you think is still to come? When do you think we'll see that just in terms of a little more color on that?

James S. Metcalf

I'll make a couple of comments and Rick will give you some specifics. But when we stepped back 18 months ago, we really turned the L&W organization upside down. We looked at how we go to market, where pricing authority is. As Rick alluded to, we separated sales from operations. We paired our branches. We took out approximately 110 branches. But most importantly, we're thinking differently about the business. It is a -- we're focused on margins. We're focused on where our value is. And our value at L&W is a commercial contractor and providing service, stocking large commercial jobs. We aren't just a wallboard distributor. We have 7 core product areas. The performance, really, in the first quarter, the positive performance in L&W was margins improvement spread on wallboard. They got tremendous amount of price improvement on wallboard in the market. But it's also the other areas: it was steel; it was insulation; it was ceiling tile, to really focus on those areas. We're continuing to lower the breakeven of L&W. As you can see, a $6 million loss in the first quarter, and we've had consecutive run. But we feel that the leverage at L&W is going to be tremendous when the market starts to turn.

Richard H. Fleming

Yes. And I think Jim summed it up very well. It's particularly noted, I think, that L&W did not get a volume lift in wallboard in the first quarter. It was all price-out and spread improvement on the wallboard side. We did get a volume lift on ceilings and on construction metals. So in that regard, we feel pretty good about the results. It's more balanced in the P&L than it perhaps has been historically. There is more heavy lifting to do. We're not effectively at our goal yet of getting L&W in the black. But plans are in place. We're marching toward that goal and more to come.

Operator

Our next question comes from Kathryn Thompson of Thompson Research.

Kathryn I. Thompson - Thompson Research Group, LLC.

The question is on pricing. Is it a correct assumption that you have legacy job quotes in the next -- during Q1? And that you didn't see the full impact to pricing in the quarter because of this? And along with that, when do you think these legacy jobs quotes will roll off more meaningfully if there are legacy job quotes in Q1?

James S. Metcalf

Yes, Kathryn, there -- that is correct. We do have legacy quotes in the market. If you recall, we announced our no-job-quote policy late third quarter, early fourth quarter. So we quoted large commercial jobs basically 3 quarters of last year. So there are -- those legacy quotes will start coming off as we roll into -- further into this year, and we would expect by probably end of the third quarter, most of those will be extinguished.

Kathryn I. Thompson - Thompson Research Group, LLC.

Great. And final question is could you give a little bit more color on wallboard market share gains in the quarter? It looks like you may have gained some share according to our checks. How much is new product versus anything else that we should take into consideration?

James S. Metcalf

Well, I just want to just make a really key point here. Our goal is to grow our business through value creation and not price. And as you've heard our strategy the last few years, we're always balancing price and volume. So what we're looking at is any type of share gains that you will see is really in a couple areas. First is UltraLight. 41% of our overall shipments were UltraLight. And that is, as part of our strategy, is differentiated through innovation. And we believe we have a product -- we know we have a product that our customers are very, very excited about, so UltraLight. The second area is we are strongly positioned with the big-box retailers. We have a strong position there. And if you look at the part of the market that's growing at this point, it’s that residential repair and remodel. The comp store sales at both the large big-box retailers are very, very strong. And we have a very strong position there. A third area is we're very well positioned in the Northeast. And the Northeast is one of the stronger areas. And our company is positioned very, very well, not only nationally, but we have a strong position with one of our new plants in Washingtonville, Pennsylvania. So we're pleased with the -- our volume increase. But at the end of the day, this is about margin improvement. We aren't out of the woods yet. Operating profit is great, but we're on the path that this company's had positive net earnings, and do that by growing our spread and our margins.

Operator

Our next question comes from Garik Shmois of Longbow Research.

Garik S. Shmois - Longbow Research LLC

Congratulations, Rick, on your retirement and best of luck. I just have a question; just have a follow-up on the previous question, just to dig in a little bit deeper on what contributed to the volume lift in wallboard. And I guess, I'm looking at L&W, you mentioned the volumes were down in the quarter about 3%, but your volumes out of U.S. Gypsum were up 17%. Just trying to understand the discrepancy a little bit more. Jim, you mentioned there was UltraLight contributing to that, big boxes, some geographic positioning contributing to it. But I'm just curious, if you could talk maybe a little bit more as to what contributed to the discrepancy? And then maybe as a follow-up, if you could talk about inventories at L&W and if there was any inventory build in the quarter distribution.

James S. Metcalf

Yes, really, the difference -- L&W the volume being down about 3%, margin's up, is really the repositioning of L&W to commercial business. As we all know, the commercial business is flat at best. There's about a 12- to 18-month lag in the business. And along with that, part of the strategy is L&W has given up market share to improve margins. And that is a -- it's very new in the last 12 months. That's why you see the results coming through, and it's really the focus on the areas where they provide value. So the residential and R&R business is not a big component of L&W's portfolio. If you look at the volume increase at U.S. Gypsum, it is attributed really to 2 areas, it's UltraLight and our position in the big-box retailers and it's also other independent customers who want UltraLight. We have a great product here and this is a differentiating product. We haven't done it by price. There are customers -- and our strategy is not just to sell the big-box retailer in L&W. There are very, very good, strong independent distributors out there that understand our value, that really want a product that they can take to their contractors and differentiate. And quite frankly, with the rollout of UltraLight 5/8 30 and 5/8 X, it provides us an entrée for some of our other customers to get into some commercial work. So we're really pleased with being able to expand our customer base, but to do it not on price, but to do it on innovation and a value-added product.

Richard H. Fleming

And let me just mention on L&W working capital, our focus on their performance is not just on the P&L. They've done a terrific job improving their balance sheet. Their DSO year-on-year is down roughly 4 days, from 55 days to 50.9. And then secondarily, their inventories were only up $7 million, but their churn was better at $7.1 million.

Garik S. Shmois - Longbow Research LLC

Okay, that's helpful. And just a quick follow-up, do you have any approximation as to how much of your volumes went into repair and remodel versus the new residential versus commercial construction in the quarter?

James S. Metcalf

It really didn't change. Repair and remodel residential, as a market, was up about 10%. But our portfolio, basically, is repair and remodel, both commercial and residential is just north of 50% of our revenue. So it probably didn't change -- slightly for the quarter. The other thing is, we did have a mild weather, and in areas that the last year, where we're positioned very strong in Northeast, basically, we lost 6 days in the month of February. We couldn't ship anything. So -- but really, if you're trying to correlate a big delta in the first quarter, it might have been slightly repair and remodel. But this is the season. There is some seasonality in the big box. The first quarter is a strong quarter for big-box building materials. And then in the second quarter, it will taper off. So we're expecting volumes to taper off in the second quarter of our position in the big box.

Operator

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

James Barrett - CL King & Associates, Inc.

Rick, congratulations on your pending retirement. And I do have a question for you. Your March 20 press release indicated the company made $5.7 million in Jan-Feb, company earned $27 million in the quarter. Should I extrapolate that earnings on a GAAP basis were $21 million in March? And was there anything in that number that's noteworthy?

Richard H. Fleming

Jim, the math is the math. And you are, obviously, calculating the fact that we had positive net earnings in March. We are cautious, and we're basically saying one month does not the year make, but that's the math.

Operator

Our next question comes from Trey Grooms of Stephens Inc.

Trey Grooms - Stephens Inc., Research Division

Congratulations, Rick. Could you -- is there any way to kind of quantify or give us some idea kind of how to think about the impact that these longer-term kind of legacy contracts might have had on pricing in the quarter? And as the year kind of rolls -- or as these contracts kind of roll off through the year, any way to kind of think about the magnitude of change that we could see as a result of that?

Richard H. Fleming

Well, Trey, I'm always very consistent about giving you forward-looking price. But the kind of -- I'll give you -- each quarter will -- they'll start rolling off. It's not a large percentage. We think we'll see some lift, but we're -- this was a very significant change in the industry. We felt that giving one price to our customers, it provides them certainty. It takes out a lot of efficiencies. And quite frankly, it took out some bad habits that I think are positive for our business. So we think we'll see some lift going forward, but I'm not prepared to comment on putting that in the model at this point.

Trey Grooms - Stephens Inc., Research Division

Okay. Other question, I guess, is just kind of on UltraLight. 41% of shipments now are UltraLight. Do you know where that was one year ago, the percentage of shipments?

James S. Metcalf

It was probably, I'm guessing it was probably about half of that.

Richard H. Fleming

Yes. For all of 2011, it was 25%; fourth quarter, it was 38%; now, 41%.

Trey Grooms - Stephens Inc., Research Division

Okay. And as far as -- on UltraLight, and when you guys, you obviously announced price increases January 1, and I'm assuming that, that was -- you said it was one price for the year. But I'm assuming that with different products, that might have differed some as far as the price increase. When you look at UltraLight, is it still a premium over your -- just your typical SHEETROCK? Or has that premium kind of stayed the same or has it changed any with the recent price increases?

James S. Metcalf

What we did at the beginning of the year is we advised all of our customers directly what their prices were going to be. And we took our prices up on each product category significantly, and you can see that in the results. UltraLight is still a premium over 0.5 inch. We're very committed that it's a 2-SKU strategy. There are some customers that prefer to buy the, I like to call it the SHEETROCK classic. But there is so much value add to the UltraLight, not only the 0.5 inch, but we're getting growth on our 5/8 30 and our 5/8 FIRECODE. And we're basically rolling that out as we speak. And there is some – there is price premium over the traditional 5/8 product as well. So a long answer to your question, yes, 2-SKU strategy over the 0.5 inch and 5/8 products. Those were priced appropriately at the beginning of the year. And quite frankly, we've had -- we've been pleasantly surprised on the customers that have come to us and said they would love to purchase the UltraLight portfolio, the value-added portfolio, because they see what it does to help their customers.

Operator

Our next question comes from Joshua Pollard of Goldman Sachs.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Have you seen any of your competitors, either in manufacturing or distribution, begin to compete on price to gain market share? And can you also describe why L&W prices were up 15% versus to closer to 20% price increase that you guys got on the manufacturing side?

James S. Metcalf

Well, we don't comment on competitive pricing. We feel that the job quotes -- we are very firm on job quoting. That's very -- that policy is not going to change. We are not going to go back to job quoting. And we talk about -- we don't match any pricing out there. We price very independently. And we feel right now that we believe our pricing strategy is working. It is -- it has taken hold. And really, you can see it in the results. L&W, if you look at their -- you're looking at it at percentage, but their raw dollars from where they purchase, they get significant increases and they improve margins. So we're quite pleased with the margin improvement at L&W. They have given up work. The results are there. You can see their volume’s down 3%. And we're prepared to give up work where customers don't want to pay for the value-added product of L&W. So L&W absolutely is not on a market share grab. It is about, as Rick said a few minutes ago, L&W will get profitable. We're very focused on that, and we won't be pleased until they get there.

Richard H. Fleming

Yes, and I think just to underscore what Jim said on the L&W pricing. Keep in mind, their price is much higher because they sell to contractors. So you can have the same dollar increase, but you do it as percent of that higher price, you'll have a lower percentage than what the Gypsum Company would get.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Got it. The other question I wanted to see if you guys could answer for me is around capacity over the course of a downturn. You guys have been kind enough to sort of outline for us what capacity has been added or taken out of the industry. Can you talk about what, if any, plans you guys have for adds this year? I've heard about a plant in North Carolina by one of your competitors slated to come on this year. Can you guys just talk about what the capacity additions and subtractions have been over, let's call the last 3 to 6 months, and what capacity utilization is for the industry?

James S. Metcalf

Well, let me be perfectly clear, we will not be adding capacity. We are still in a very soft market. Capacity utilizations have not come out. The most recent numbers we have is the industry is still running just north of 50. There, if you look at some effective capacities, the effective capacity in the Northeast for us is higher because we're busier in the Northeast. But we will not be bringing, at this point, any idle capacity back. The industry is still running in the high $17 billion, low $18 billion range. And this market is not appropriate from our standpoint to add any capacity. We -- to bring capacity back on, it would be very old capacity, inefficient capacity. And we've invested, over the last 10 years, over $1 billion in very low-cost, high-efficient capacity. And the key is, and Rick shared the numbers in his talking points, is the leverage that USG has of that incremental dollar coming back into our current network, that's going to be our strategy as we roll out over the next year or so. If you're looking at capacity reductions, we have taken out just north -- or just south of 4 billion feet. The industry took out just shy of 10 billion feet. So you're looking at capacity, the total capacity in the industry is around 31 billion feet, and you're still running a market of around 18 million feet. So still very, very soft, that's why we're being very cautious on looking ahead. And one quarter doesn't make a trend. But we will not be adding any capacity in this market.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

What -- are your competitors?

James S. Metcalf

You would have to ask them.

Joshua Pollard - Goldman Sachs Group Inc., Research Division

Okay. And if I could just sneak one last one in, how are you all thinking about pricing for 2013? I'm sure we're not far off of your customers asking the questions. We've obviously seen what some of your competitors have done. But what are you guys thinking for 2013, prices as plus 25%, what you guys are looking for?

James S. Metcalf

It's too early. We're -- we'll be talking to our customers as we did later on this year, but I will tell you it'll be significant.

Operator

Our next question comes from Bob Wetenhall of RBC Capital Markets.

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

Maybe a little forward-looking, what's the likelihood of L&W reaching breakeven this year?

James S. Metcalf

Bob, I'm smiling because you know my answer. My answer is it is ASAP. So however you want to define that. We've done a lot of heavy lifting there. We have -- they're a great part of our portfolio. We're getting doggone close, $6 million in the quarter. As Rick said, we still have some things we need to do there. The leverage there is tremendous. We're doing some things right now in the back office that will help our efficiencies. Margin improvement on the product side is very, very important. And we're really focused with customers who appreciate the L&W value. So hang in there. We are – we’ve got our sleeves rolled up and I'm not going to be pleased until it gets there, but we are getting doggone close.

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

Were you surprised by how good that division performed this quarter?

James S. Metcalf

No, we have -- as I said last quarter, we have a clear line of sight on -- we have some very specific initiatives, and I'm very confident the direction they're going. So I was pleased.

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

That's great. And you guys have done a great job of reducing the production cost, and I was hoping you could just provide an update on incremental margins, particularly in the Wallboard business. Rick had mentioned that fixed costs are lower by 20% year-over-year. And typically, I think you guys have stated publicly before that roughly incremental margin’s around 60%. And is that still the case or is that improving given the cost reduction efforts?

James S. Metcalf

Well, we showed those incremental margins in our last 3 recessions, and I think it was low at $0.35 and a high of $0.55, $0.60. And when we showed those numbers, Bob, that was only U.S. Gypsum Company. And at those -- at that time, we did not take the amount of cost reductions that we've taken out. And you've seen our numbers. We've taken out about $450 million of cost. And that included L&W. So the numbers in the first quarter, we were -- it was $0.86, I think Rick shared with us, and that included L&W. So historically, it's $0.35 to $0.55. We aren't making a projection, but there is a tremendous amount of leverage in this business, and we've taken costs out. But I want to assure you what we've done -- and we've talked about what we've done, but we are continuing, as we speak, at this moment, is lowering our breakeven. I do not want to relax because the business is starting to improve about continuing to look at how we can be more efficient in our back office, leveraging global supply chain, which we're doing a great job but we have a long way to go and really, looking at ways that we can provide value to our customer and be more efficient on the non-value added side. So that breakeven, this management team is going to continue to push that as low as we can, so that leverage that you saw in the first quarter is not a onetime event.

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

Yes, sounds like you're on the right track with that. Just switching gears to SG&A, your sales are up a lot. Can you keep SG&A in the $300 million, low-$300 million range or should we expect that to move up?

Richard H. Fleming

We're really going to try very hard, as Jim said, to make further improvements in SG&A. We're in the midst right now of a back-office efficiency project that we think will be additive to our savings in that area. Secondarily, we also are looking at our overall organizational structure, and in particular, making sure it's aligned properly with our strategy. So we see other opportunities that we can tap as we get further down this path. I would like to say that at some point, and I just want to be very clear on this, we will be adding back SG&A not in the form of bad cholesterol or in the form of good cholesterol because we want to advance our strategy, particularly in growing some of the emerging markets and you need feet on the Street. So that's longer-term in our thinking. Weed and seed is what we call it internally. But certainly, in terms of the back-office efficiencies, we have more progress to be made.

Operator

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

Dennis McGill - Zelman & Associates, Research Division

I just wanted to talk a little bit about volumes and how you think about residential versus nonresidential. When you -- I think you started the call saying you saw some modest improvement in demand, but then when you were going through the volumes in the distribution business, it sounded like nonresidential and also in the Ceilings business is fairly stable, maybe modest growth in volumes. And when you look at your wallboard volume being up 15% last quarter, 17% this quarter and that's a little over 50% of that would be residential. Can you just talk generally about what you're seeing in residential volumes, first in wallboard and then, I guess, overall within the business?

James S. Metcalf

Dennis, the residential volumes are still weak. You saw the housing start number that came out this morning. We -- our value is -- residential is an important part of our business. It's only about 20%, and our volume increases have come through the growth of UltraLight, we grew our portfolio and our position with some of the big-box retailers who have grown faster than the market. So the repair and remodel is over 50% of our business. If you look at L&W, their focus is residentials, lower on the priority list. It's more new commercial and commercial R&R. So that's why you see the differences there. But really, if you look at 41% of our shipments were UltraLight, and a lot of those shipments were people who weren't buying UltraLight before, and they're willing to pay for a product that they think gives them value. So we're very pleased with our positioning. We think residential's probably going to come back last. And we think the way we positioned the company the last 3 years with a focus on repair and remodel, both commercial with our Ceilings business, residential with our Gypsum business and then new commercial with L&W, we think we have the markets that are going to be showing the first amount of growth as we come out of this recession.

Dennis McGill - Zelman & Associates, Research Division

Let me ask a different way because I don't know that, that ties with some of the numbers. You said earlier that residential remodeling was up 10% year-over-year. You said non-res volumes are weak and that they're up modestly. At least through the distribution business and that's focused on non-res, so it should be representative of the market. If you forget about UltraLight, forget about the type and just focus on its end use between residential and non-res, it would imply that your residential volumes are up a lot more than the 15 or 17 for the whole segment. So you said -- I know you said it's weak, but let's forget about the end use between remodel and new and just focus on residential. How much would you say residential volumes are up year-over-year?

James S. Metcalf

5%.

Dennis McGill - Zelman & Associates, Research Division

5%?

James S. Metcalf

5%.

Dennis McGill - Zelman & Associates, Research Division

How -- so what's accounting for the other growth if you're up 17% overall?

James S. Metcalf

Our big-box retail business and UltraLight and our regional portfolio. We're very strong in the Northeast, and if you look at where our plants are, our business is very strong in the Northeast. Those are the 3 areas.

Dennis McGill - Zelman & Associates, Research Division

But you said big box was up 10% year-over-year earlier?

James S. Metcalf

No, I didn't. I said repair and remodel was up -- residential repair and remodel as a market went up 10%.

Richard H. Fleming

Dennis, just to make sure we all have the same numbers, new residential for the company is about 23%, for wallboard it's about 30%.

Dennis McGill - Zelman & Associates, Research Division

Okay. So how much is new residential wallboard volume up in the first quarter year-over-year?

James S. Metcalf

I said about 5%.

Dennis McGill - Zelman & Associates, Research Division

Okay. We can follow up offline.

Operator

Our next question comes from Jack Kasprzak of BB&T Capital Markets.

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

I wanted -- not sure I heard a comment correctly you made regarding further price increases. Have – and I guess, I'll just ask the question, have you guys announced any price increases for 2013 yet?

James S. Metcalf

No, we have not.

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

Okay. And second question on L&W, you made a lot of comments about it. But to get it to breakeven, will you need some help from the housing market? I mean is there a level of housing starts that you think we need to have to get L&W to breakeven?

James S. Metcalf

We look at the total opportunity of wallboard demand. As we said, housing is not a measure of impact for L&W's results. But there is -- when you start seeing some demand increase, there is a little bit in part of a psychological improvement. So there's not a breakeven. So we don't need housing starts to be at a magical 800,000 starts. We've really lowered the breakeven at L&W, and it's really the positioning they have in commercial R&R and new commercial. So residential -- I mean, we want residential to come back, but it doesn't have to come back to get L&W to breakeven.

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

So just real quick. I mean are you guys -- you guys seem to be saying pretty clearly at this point, your improvement in the first quarter, which was substantial, obviously, really happened without any help from the new residential market, in general. I mean is that basically a fair statement?

James S. Metcalf

That is a very fair statement. And if you had listened a couple of quarters ago, we said that we are very -- we're looking at very modest 2012. In fact, we were probably at the low end of the spectrum of where we thought demand was going to be, and I would rather miss it on the low end. And our strategy has been is this company is going to be operating profit positive without any help from the market. We need to continue to take cost down and position our business. So any lift, we'll take any lift. But we just can't wait for the markets to come back, and we've continued to lower the breakeven. If you look at the total industry demand standpoint, this company, in the first quarter, was breakeven with industry shipments of 17 billion to 18 billion feet. So if you look at how the breakeven has been reduced as a corporation, with L&W being included, is if we have to operate in this environment and housing doesn't come back for 2 years, we need to be profitable.

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

But I guess the game changer was the price increase, which led volume this time versus previous cycles where volume came first and then you tacked on a price increase at higher utilization.

James S. Metcalf

I think that -- our new pricing strategy definitely helped, but let me just back up. If you go back one year ago, with us introducing something extremely new to the market, and I hate to keep harping on this, but if you talk to our customers, you'll see what a game changer UltraLight was. Where you can provide a value-added product with improved margins for our customer. Our customers sell UltraLight at an improved margin. That was the first step. Then the second step was, okay, with that in our hip pocket, how do we change the way that products are priced? And we felt that the job quotes policies that we had, we wanted to change. But with that, our customers wanted some certainty. So getting rid of job quotes were very important. UltraLight was important. And then giving our customers one price for the year on a significant increase. It was almost a three-step plan. Each one of those independently, probably wouldn't have got us here, but we thought it was a great 1, 2, 3 step.

Operator

Our last question comes from Todd Vencil of Sterne Agee.

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

Rick, congratulations. Can you -- and I know this has sort of been touched on, but I don't think it's been asked quite this way. Can you talk about how much of an impact the job quotes, number one, and secondarily, higher diesel and freight costs may have had on the reported mill met in the first quarter?

James S. Metcalf

Yes, that's a great question. The job quotes still -- that had an impact in the first quarter. The first quarter had the largest impact of job quotes. And as I said, they will start rolling off as we get later on in the year. But you hit the nail on the head. The diesel price did affect our pricing probably by $2 or so.

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

Okay. Any way to quantify the job quotes?

James S. Metcalf

No.

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

Okay. Can you talk about what percentage of the business that United States Gypsum was under job quotes in the quarter?

James S. Metcalf

No, we don't disclose that, but it was a percentage that again will diminish as the quarter and as the year goes on.

Richard H. Fleming

And just offsetting by the way, higher diesel was lower natural gas, so that was a very positive factor in the quarter.

Operator

That concludes your questions. I will now turn the call back over to Ken Banas for any closing remarks.

Ken Banas

Jim, I think you have some closing remarks?

James S. Metcalf

Yes. Thank you, and I appreciate all the questions and the support over the last 17 quarters. This is, as I said earlier, one quarter doesn't make a trend. But we do feel much better about our position now, and obviously, than we did this time last year. We're very confident that the actions, and a lot of the hard work and a lot of the tough decisions that we had to make about taking plants out and reducing staff and all the tough decisions that were made here, have improved the operations and really strengthened this company. As we talked in the Q&A about the leverage in this company, taking those -- making those very tough decisions really positioned us as we look forward. We can see positive results throughout the entire company. But as I said, we're very pleased to achieve an operating profit in the quarter, but we aren't going to take anything for granted.

We must continue to look at ways to lower our breakeven. As I mentioned earlier, achieving and maintaining operating profit is really just the absolute first step towards positive cash flow and net earnings. We're going to continue to focus on the same things that have enabled us to get to this point. Operating safely, focusing on our customers and helping our customers grow and helping our customers grow through innovation. We appreciate your time today, and we look forward to talking to you again next quarter. Thank you.

Ken Banas

Thanks, Jim. A tape replay of this call will be available until Friday, April 27. Information and access, that tape replay 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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