Executives
James R. Bencomo - Director of IR and Pension Investments
William C. Foote - Chairman and CEO
James S. Metcalf - President and COO
Richard H. Fleming - EVP and CFO
D. Rick Lowes - Sr. VP and Controller
Analysts
Kenneth Zener - Merrill Lynch
Michael Rehaut - JP Morgan
Mark Weintraub - Buckingham Research
Jim Barrett - C.L. King & Associates
Mike Wood - Banc Of America Securities
Garik Shmois - Longbow Research
Albert Kabili - Goldman Sachs
USG Corporation (USG) Q3 2007 Earnings Call October 23, 2007 11:00 AM ET
Operator
Good morning ladies and gentlemen and welcome to the USG Corporation Third Quarter 2007 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Mr. James Bencomo, Director of Investor Relations and Pension Investment. Mr. Bencomo you may begin.
James R. Bencomo - Director of Investor Relations and Pension Investments
Thank you and good morning everyone. Welcome to USG Corporation's third quarter 2007 earning conference call and live webcast. We will be using a slide presentation in conjunction with our call today. It is available by going to the Investor information section of our website, www.usg.com and clicking on the link to the webcast.
Before we proceed, let me also remind you that certain statements in this conference call may contain forward-looking statements under Securities laws. These statements are made on the basis of management's current views and assumptions about business, market and other conditions and management undertakes no obligation to update these statements. The statements are also subject to a number of risk factors including those listed at the end of today's press release and actual results may be different from our current expectations.
Earlier today USG reported third quarter 2007 net sales of $1.3 billion and net earnings of $7 million, diluted earnings per share were $0.07 and these results largely reflect the effects of lower shipments in selling prices for gypsum wallboard caused by the sharp contraction in the housing market we have seen this current year.
With me today to discuss these results and our outlook are Bill Foote, USG's Chairman and CEO; Jim Metcalf, President and COO; and Rick Fleming, Executive Vice President and CFO.
Bill will begin by commenting on USG's performance this past quarter and our business strategy, followed by Jim who will discuss the operating results in our core businesses. Rick Fleming will finally conclude our prepared remarks by covering consolidated financial results including capital spending, cash and debt management. We'll then open up the call for questions and conclude with a few comments from Bill.
Also present for the Q&A portion of our call will be Rick Lowes, Senior Vice President and Controller.
Our goal is to be completed within about an hour. So let's get started. Bill?
William C. Foote - Chairman and Chief Executive Officer
Good morning everyone and thank you for joining us. As always we appreciate your interest in our company and welcome opportunities like this to comment on our financial performance and share our thoughts with you about market conditions.
As we expected, the adverse market conditions and trends we discussed on our last conference call on July, have continued and some cases have deteriorated even further than most market observers anticipated. Frankly, that's the nature of cycles.
That's why my management team and I are focused on managing the company to optimize performance in two different time frames. In the near term we are working closely with our customers to satisfy their needs. At the same we are aggressively adjusting our operations to maximize efficiency during the severe downturn in the housing market. Things may get worst before they get better and we will be prepared if they do.
However, we are not losing set of a longer term opportunities we see. We are making strategic capital investments, some of which have just been completed and are beginning to have a positive impact.
Other projects will both reduce cost in the near term and benefit us even more when the market returns to grow. I would like to describe how we are managing our both time frames. Demand for wallboard, our largest business is derived from three sources, the new housing market, the residential, repair and remodel market and the commercial construction market. Let me talk... comment about each of those segments.
New housing now represents about 40% of the demand for wallboard. The down turn in the housing market is well documented. It's in the news on a daily basis. Housing starts have fallen from an annualized rate of 2.1 million units as recently as last summer to about 1.2 million units in September, the lowest level in 14 years. And there is a lot of uncertainty about the outlook. The National Association of Realtors has revised its forecast down 10 times this year.
Last week Treasury Secretary Paulson said the housing recession poses a significant risk to the U.S. economy and French Chairman Bernanke has said the contraction housing is likely to be a significant drag in growth in the current quarter and into next year.
The new housing market is clearly in a steep recession that is going to continue for some time to come. The residential, repair and remodel market which represents about 25% of our wallboard sales has been fairly resilient in the first part of the year. But it too has begun to weaken. Both Lowe's and Home Depot have been reducing sales forecast this year and we are experiencing lower sales volumes through the retail home improvement channel. It is possible that demand from this part of the market will remain static or decline a little next year.
Commercial construction, the third component of wallboard demand, has remain relatively strong. Representing 33% of demand it is dependent upon favorable office and retail vacancy rates, job growth and institutional building like schools that often follow housing.
The forecast we follow suggest another year or so of growth. The good news here is that unlike residential there is not been a lot of over building, if a slowdown occurs it should be a modest one. So as you would expect with the weakness in two-thirds of our unused markets, there has been a real pressure on the demand for wallboard and as demand falls price declines follow it.
Industry wallboard shipments are down about 15% in the first nine months of this year compared to the first nine months of last year. Industry utilization rates are down below 80% from nearly 100% last summer. In light of these conditions, prices have been trending downward. From our peak level of $188 per 1000 in the third quarter of last year average prices have declined to $122 per 1000 in the third quarter of this year.
Okay, that's enough bad news. In times like these we feel we can really excel and outperform the competition. Let me talk about some other things that give me reason to be optimistic about our position and our longer term prospects. Most importantly is our team, it's an experienced team. On average we have over 20 years in the business. We have all seen these down trends before and we know how to manage through them.
Notably we gain market share in the third quarter too recapturing share points that we had sacrificed last year and early this year is part of our process for managing prices at the beginning of the decline.
Further our plans are outperforming the competition. We operated at 80% of capacity in the third quarter while the industry operated at 75%, and we are moving aggressively to calibrate our operations to market conditions.
We have closed or idled almost 2.6 billion feet of wallboard capacity, that's more than 20% of our total. We are removing all high cost capacity and running our lowest cost capacity as much as possible. In the most recent quarter, our low cost capacity ran at 95% and our highest cost capacity that was still running around at 49%. We have other costs... cut cost in other areas well including significant reduction in salary in our lead positions. And we continue to identify areas where we could become even more cost effective.
Longer term these cycles eventually do come to an end. While wallboard prices declined again in the third quarter, the rate of decline was slower than in earlier parts of the year. We also starting to see both manufacturing and distribution competitors remove capacity or outlets from the market. The industry still must absorb new capacity addition in an obliviously weak situation. So I am not saying we are at the bottom. We were certainly beginning to see some signs necessary for stabilization in the market.
Thirdly our solid balance sheet has gotten even stronger positioning us to manage the company through this downturn and prepare for the inevitable upturn. We have the resources to invest in long-term of the business. We are building new plants in key markets and expect to see strong deal flow, and attractive pricing for acquisitions in our distribution business, a business that we have successfully grown through acquisition in recent years.
We are aggressively managing things we can control. Our relationships with customers, our cost, our capacity and staffing. Our efforts are being rewarded in the marketplace with share gains, operating efficiencies and higher utilization rates. At the same time, we are making important strategic investments that will benefit us in the near term and even more in the long-term. That's our plan. It's one that's proved successful in past cycles and one we are confident will help us create values in this current cycle.
Now let me turn it over to James Metcalf, President and Chief Operating Officer, who will review the results for the quarter. Jim?
James S. Metcalf - President and Chief Operating Officer
Thank you good morning to everybody. As you all know, you can't pick up a newspaper without seeing one story about the housing market. Most economists are calling this the worst housing market since the early 1990s. I have been in the business more than 25 years and I agree that this is a very challenging market. But not all the news is bad. We have product lines in areas of our business with solid performance, even in a tough market. And most importantly, USG had inhered strengths that will enable us to mange through this downturn and position the company for growth, when the market rebounds. And I want to reiterate, the market will rebound.
Our strengths include great brand names like SHEETROCK, DUROCK and DONN ceiling grid. Our outstanding relationships with growth customers in retail, specialty distribution and the buying groups. We had a terrific distribution business, L&W Supply that has grown by getting bigger through acquisitions, as well as getting better by improving its value proposition.
We also have a balance sheet to become opportunistic in this very tough market. Now let me review each of our core businesses and how we are managing through the current market, while improving operations in making key strategic investments. First I would like to start with our wallboard business, North American Gypsum. It should come as no surprise that our wallboard business is being significantly impacted by housing. Volume, prices and profitability have been under pressure as a result of the housing market.
Our North American Gypsum business includes operations in United States, Canada and Mexico. Each one of these countries and markets has a unique market dynamic which is all been effected by the U.S. housing market. North American Gypsum's net sales were $698 million, with an operating loss of $2 million in the third quarter. This is a huge change from the third quarter of last year, when we had peak wallboard prices, near record volumes and a very solid market.
The biggest impact has been in our domestic wallboard business, United States Gypsum. Third quarter net sales were down 26% and the business reported an operating loss of $14 million. All of the key operating metrics were impacted by the downturn in housing, volume, price and costs. The Gypsum industry, as Bill indicated, shipments were down in the third quarter, 11% compared to USG shipments down 10% for the quarter. Our competition ran their plants at 75%, compared to the USG network running at 80%. And as Bill mentioned, we ran our low cost lines at 95% capacity utilization. The market dynamics that I have described, lower demand in capacity utilization have put extreme pressure on price.
Our average price per thousand of wallboard was $122.68 for the third quarter compared to $142 in the second quarter and $164 in the first quarter of this year. For the pricing trend in the third quarter was down, we are encouraged by the fact that the rate of decline has slowed.
I mentioned earlier that there are some bright spots in our results for this quarter. One of those is the performance of our surfaces and substrates businesses. First, our substrates business, which includes our DUROCK and FIBEROCK products, had a solid quarter. Sales, pricing profitability, all increased compared to the third quarter of last year, and our manufacturing costs were down. And our surfaces business, which includes our market leading joint treatment products, we achieved price improvement compared to last year and grew our market share.
As I mentioned, each country in the North American business has unique dynamics. In Canada the housing market is in solid shape, but CGC was impacted by import and export dynamics and a weak U.S. dollar. Canadian Gypsum's wallboard production that's exported to the U.S., is being adversely impacted by the U.S. housing market. The exchange rate has also made it attractive for U.S. manufacturers to export into Canada. In Mexico, our sales increased by approximately 10%, but, wallboard price was under pressure, because of new competition, and reduced U.S. exports, again affected by the U.S. housing market.
Before I turn to L&W Supply, I would like to describe for you, some of the actions we're taking, both short-term, to position us for our long-term growth goals. Since the housing downturn began in middle of last year, we have aggressively been removing capacity from our manufacturing network. We've removed approximately 2.6 billion square feet of capacity in the last five quarters, including our most recent announcement of our New Orleans line, which will be idled this December. We will continue our DUROCK operations at New Orleans to service the Gulf States. This is an area we remain committed to service with our most modern plans from Bridgeport, Alabama and Norfolk, Virginia.
New Orleans is similar to our other high cost plants that we've closed or idled in Detroit, Jacksonville and Santa Fe Springs, California. We are taking these old, high cost plants out of the network to take advantage of our more modern low cost capacity.
It is critical that we remain the lowest delivered cost manufacturer in the trough and in all points in the cycle. During the third quarter, we shut down our old plat in Norfolk, which was built in 1956. We've replaced it with a new line and the same location that will manufacture wallboard at more than half the cost of the old plant. This is a great example of our strategy. We also opened a new plant in Mexico, in the state of Colima that is servicing Western Mexico and Latin America.
Our new joint treatment plat in Baltimore will provide our market leading product to key customers in the Mid Atlantic area at the lowest delivered cost. These new operations improve our customer service, our cost position and position us in all points in the cycle. In addition to optimizing our operations, we need to size our business to reflect the realities of this current market as well as taking out approximately 7% of total industry capacity, we've eliminated 1100 positions corporate wide. Adapting our operations is an ongoing process. We are prepared to do more as market conditions warrant.
Now, I would like to discuss our distribution business, L&W Supply. L&W is impacted by many of the same market dynamics that are affecting our wallboard business, but not necessarily to the same degree. There are two primary reasons. First, less than half of L&W's sales are derived from wallboard.
Actually in the third quarter of this-year, wallboard was approximately 41% of total sales. Second and most importantly in this housing crunch, is a greater percentage of L&W sales devoted to the commercial market. L&W reported quarterly sales of $614 million and an operating profit of $22 million, both of which were down from last year's record performance. Wallboard shipments were only down 5% and L&W has done an excellent job maintaining margins in most product lines.
We are very pleased with the contributions from two of our most recent acquisitions, California Wholesale Material and All Interior Supply. Together these two acquisitions contributed over $150 million in profitable sales during the quarter. Both of these companies brought strong positions in servicing the commercial market, one of many factors that made them attractive to us.
These acquisitions contributed to a 22% increase in sales of complimentary products during the quarter. In total L&W's same store growth was 3% in these product categories. We are keenly focused on L&W's cost position, just as we are in the wallboard business. We continue to prune and consolidate operations, wherever possible, to match market conditions, as well as acquire best practices from our new acquisition partners. This trough in the market will also bring unique opportunities, so we can continue to grow L&W's supply, as the largest specialty dealer in North America.
Next, I would like to turn to our ceilings business. USG's ceilings had a strong performance and was a bright spot for the quarter. Total sales in our worldwide ceilings business increased by $16 million compared to last year reaching $207 million. Profitability increased as well by $5 million to $23 million.
The performance was strong in our domestic ceilings business USG Interiors where we reported increases in both sales and operating profit. Third quarter sales of a $136 million represented an 11% increase over last year. Our profitability improved as well increasing 55%.
We have been very focused on growth with key customers improving profitability in the channel and have been working very hard to realize price improvement especially with the grid business, with steel costs have risen dramatically in the last year.
In the ceilings business we will continue to partner with our distribution, contractor and architecture partners to grow our ceilings business with superior service and product innovation.
Before I turn the speech over to Rich Fleming, I would like to quickly summarize each of our businesses and most importantly how we are responding. Shipping volumes and prices have been declining all year in the Gypsum wallboard business. But we are encouraged that the rate of price decline has slowed during the third quarter. We have operated out plans at high utilization rates versus our competition and have grown our market share.
Our other businesses, substrates and surfaces have had solid performance during the quarter. We are very pleased with the success of L&W Supply of getting bigger and getting better. The two most recent acquisitions made important contributions to our results and both business are being assimilated smoothly into our network. We hope to find more acquisition opportunities in this soft market.
Our Ceiling business had a solid quarter, it surged the commercial market which has performed much better than the residential market. We have a firm foundation in the business and we are position to grow. We have moved quickly and aggressively to size our operations to market conditions.
We have more arrows in the quiver and we will do more if it become necessary. And I want to emphasize, we have not lost sight of our long-term growth strategy. We are making capital investments now despite the soft market conditions and these investments will benefit us when the market re-bounce.
Our manufacturing assets continue to improve as we replace high cost capacity with new state of the art assets, in key locations near the growth markets. We have a keen focus on our ceilings business servicing the commercial market and we have been able to successfully expand our distribution business, further extending our reach and our market presence.
Now let me turn over to Rick Fleming to review more detail the numbers and our financial strategies. Rick?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Thanks Jim. As mentioned, I will provide some details on our third quarter financial results including capital spending, cash and debt management.
Third quarter 2007 net sales were $1.34 billion down 10% from the third quarter of 2006 net sales level of $1.48 billion. Operating profit $25 million include a charge of $3 million for restructuring costs related to staff deductions announced earlier this year. Last year's third quarter operating profit was $258 million including $17 million increased earnings from the reversal on asbestos reserves.
Third quarter 2007 net earnings were $7 million including a $3 million after-tax charge to write-off deferred financing fees and the previously mentioned $2 million after-tax charge for the restructuring program.
Results in the quarter also included an unfavorable tax adjustment of $6.7 million resulting from the correction of the deferred cash balance of prior years. Net earnings were $153 million from last year's third quarter including $10 million in after-tax income from asbestos reserve reversal, and a $5 million after-tax charge for post-petition interest and fees.
Turning to EPS, average diluted earnings per share was $0.07 for the third quarter based on average diluted share outstanding of 99.2 million. As noted above, the third quarter adjustments for taxes, incurred financing fees and restructure charges included an EPS total $0.12 per share.
Last year's third quarter EPS was $1.71, this decline in earnings largely reflects the downturn in new housing construction and the resulting lower levels of pricing and demand for our SHEETROCK brand gypsum wallboard.
Before I leave the P&L, let me fill in some details on the charges taken in the third quarter. $3 million restructuring charge for work force reductions was allocated among the business units as follows: $1 million is at the US Gypsum Company, $1 million is at the gypsum segment of CGC, Inc., and $1 million is at USG Interiors, USC International and corporate. The write-off of deferred financing fees is related to the refinancing in September of our five-year $500 million bank term loan, I'll discuss these refinancing in more details in a few minutes.
I also mentioned that there was $4 million in amortization expenses reported during the third quarter related to a reclassification from goodwill to amortizable intangible assets associated with the CALPLY and AIS acquisitions. At the business unit level, this is reflected in the operating profit for L&W Supply.
Now turning to some additional financial highlights of our consolidated results. Selling, general and administrative expense or SG&A totaled $90 million in the third quarter, a decrease of $30 million or 13% from a year ago primarily due to a lower level of accruals for incentive compensation and the effect of recent cost reduction efforts. As a percent of net sales SG&A was 6.7% compared with 7% for the third quarter of 2006.
Current spending levels are running about 15% below 2006 levels and as Bill and Jim indicated we're continuing to identify areas where we can become even more cost effective.
Interest expense for the third quarter was $22 million including a $4 million write-off of deferred financing fees. Interest expense was $60 million in last year's third quarter. The earlier period included $8 million proposed petition interest and fees on pre-petition obligations. At our current levels of debt, the run rate for our annual P&L interest expense was about $74 million per year, net of capitalized interest of about $20.4 million per year.
Effective book tax rate on earnings is about 30% for the third quarter of 2007. The third quarter effective tax rate was lower due primarily to the mix of worldwide income. At this time we also anticipate a similar rate for the fourth quarter of 2007 depending once again on the mix of worldwide income and further reviews of our state tax valuation allowance.
Regarding our cash and debt situation, our cash balance as of September 30th was $353 million compared with $565 million on December 31, 2006 and $380 million as of June 30, 2007. Cash declined $27 million during the quarter due to capital spending levels that exceed our cash net earnings and then net release from working capital. I will discuss capital spending in more detail in a moment.
Total debt was $1.2 billion as of September 30th unchanged from the end of the second quarter, but down substantially compared with $2.5 billion as of December 31, 2006. Since the end of last-year we have paid-off our $1.065 billion tax bridge note and paid down our outstanding term debt by $200 million.
As I mentioned earlier that we have refinanced $500 million of floating rate five year bank term debt during the quarter with the same amount of new tenure 7.75% senior notes. Since our emergence from bankruptcy last year, it has also been our objective to track a solid capital structure using longer dated debt. The first step included $500 million of 6.3% 10-year senior notes issued last November. With this latest financing we now have $1 billion of senior debt at a blended rate of about 7% that is not due until 20/16 and 20/18 as well as $239 million of industrial revenue bonds with rates of 5.5% to 6.4% and an average maturity of 23 years.
As of September 30, 2007 the unused borrowing capacity net of outstanding letters of credits and our revolving credit facility totaled $572 million and when combined with cash on hand totaled ready... currently payable to USG of about $925 million. This substantial equity should provide us with a financial flexibility to deal with the current challenging market conditions and enable us to take advantage of the strategic opportunities that often appear during the settings.
Regarding capital spending, capital expenditures totaled $117 million in third quarter, compared to $87 million in the same quarter last year. This increased level of spending reflects the funding of a number of strategic investments including our Norfolk, Virginia and Washingtonville, Pennsylvania wallboard plant, and a new paper mill that helps sustain USG's competitive leadership and ability to grow with its customers. CapEx for all 2007 excluding acquisitions is now expected to be approximately $450 million, given the pace of spending on these major initiatives.
We are in the midst of budgeting for 2008, so I do not have a precise forecast for next year but CapEx should be notably lower, as the number of major projects will be completed during 2008. Before I conclude my remarks, I would like to take a minute to elaborate on profitability of our domestic wallboard business, United States Gypsum Company.
As all of you know, we work hard to achieve and maintain the lowest average delivered cash cost in the industry. In their remarks Bill and Jim both described some of the ways we are doing that.
In the third quarter, our domestic gypsum business posted a modest operating loss of $14 million, the average price per 1,000 square feet of wallboards in the quarter was $122.68. You should not conclude that our marginal cost is at or close to $122. Here is why. There are number of costs that are within our domestic gypsum business, that impact operating profit, but are not directly related to the cash manufacturing cost of wallboard. For example, by half of our total consolidated appreciation expenses allocated to the United States Gypsum Company and this is a quarterly non-cash charge. Also a significant portion of the $90 million of consolidated selling, general and administrative expense for the quarter that I previously discussed, relates to United States Gypsum Company.
Finally, I have a number of miscellaneous cost items that are outside the four walls of the plant that are allocated in large parts in cost of sales of United States Gypsum Company, such as our state-of-the-art ERP system that we call LinX as well as our business in Cuba called new business ventures and hedge an effectiveness associated with our natural gas hedging program. All these items tend to obscure the delivered cash cost performance of our wallboard business, but these items add values and they help to make us leader in the industry. Some of these costs are ongoing and others are not. An illustrative example is the spending on our ERP system, which is almost complete. Spending on LinX has been about $200 million to date with approximately $23 million spent so far this year.
The implementation of the financials, supply chain and manufacturing costs module of this system will be included this year and LinX HR would be the only module that continues into 2008. Finally, I should note that these miscellaneous costs are not exempt from our cost control initiatives. We are examining them closely too. So in conclusion, I would like to add to Bill's and Jim's comments that USG is intensely focused over an operational excellence and selective strategic growth. Operational excellence is our ticket to the dance, because it allows us optimize our costs and customer service performance during all points of the cycle. At the same time, our selective strategic investments and low cost manufacturing and distribution capacity uniquely position us to captured the next upturn in business whatever may come. And after 33 years in the business, I can tell you with confidence that it will come. And now Bill will offers some final thoughts.
William C. Foote - Chairman and Chief Executive Officer
Well we will do Q&A first. Operator why don't we open it up for questions and answers?
Question And Answer
Operator
Thank you. We'll begin the question and answer session. [Operator Instructions]. We have our first question from Ken Zener from Merrill Lynch. Please go ahead.
Kenneth Zener - Merrill Lynch
Good morning.
William C. Foote - Chairman and Chief Executive Officer
Good morning Ken.
Kenneth Zener - Merrill Lynch
I appreciate your guidance about the difference about your reported cost and your cash cost. I just wanted to go into that a little more if we could, I guess how much of benefit did you get because the way I calculate the U.S. gypsum business, it looks like the cost was about the same you mentioned about a 6% increase, which I assume largely came from paper from the paper input side?
D. Rick Lowes - Senior Vice President and Controller
Yes that's right. A big part of our increase was... it's Rick Lowes by the way... was actually from two items, waste paper which is up 25% quarter-to-quarter, that's third quarter of last year versus third quarter of this year. Energy was still up, it was up about 13% from third quarter to third quarter again. And then we had lot of inflation on the raw materials, those are the three big components in our cost structure.
Kenneth Zener - Merrill Lynch
Okay I guess now how come given the headwind, I mean with your high cost now running at 49% utilization I think that's what you said. Why wouldn't we see a greater decline in your production cost considering your running, your high cost plants at about 95% which is half the cost of those high cost plants that aren't being utilized, is great?
James S. Metcalf - President and Chief Operating Officer
Kenne this is James Metcalf. As Rick said we have double-digit increases in paper starch natural gas. So that gives us a tremendous amount of headwind. But adding... bringing in the new capacity, taking out the old capacity as well as running the higher cost capacity at lower rates, it gives us about a 3% decrease in cost. So if putting that all into it... our cost from the beginning of the year have trended down but as you said there's some pretty big double-digit headwinds on raw materials.
Kenneth Zener - Merrill Lynch
Right. So I guess if I look at this, I know you know this is something I asked... was asking like last quarter on this ERP which was only... which is 23 million year-to-date, do you appreciate that in your ongoing R&D for lowering energy in the past hedges. I mean should we you know if... holding your input costs the same, what do you think the operating cost structure will be... look like in the fourth quarter, assuming you keep running your plans at the current utilization rates?
D. Rick Lowes - Senior Vice President and Controller
We anticipate that our costs will continue to trend, they have been all year which is going down, a lot of these other costs as Rick alluded to are rolling off and you mentioned hedging effectiveness. That's been about $12 million charge this year. That will roll us in the fourth quarter. So we basically anticipate further cost reduction throughout the year.
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Right. And Ken it's Rick Fleming. As mentioned, the LinX project will greatly decline going into 2008 and we should not loose sight of that as we bring up the new plants Norfolk, Washingtonville, Pennsylvania and also [ph] Stockton. There will be further... and I want to emphasize substantial network cost reductions that accrue when those plants startup.
Kenneth Zener - Merrill Lynch
Yes just kind of your costs just seem so high and it really baffles, it certainly baffles me. I guess the question on this unfavorable tax adjustment, it looks like if there was a 6.7 million unfavorable effect, would you have actually had a next -- a net tax benefit, if you would added this back in on your... how does that exactly work out, I was kind of confused?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
That would have been correct. There would have been actually a net tax benefit. It has to do with the mix of worldwide income and the adjustment by the way was in a very technical area to our foreign operations, South Africa and Bermuda and it just had to do with the interpretation of deferred tax associated with those particular countries.
Kenneth Zener - Merrill Lynch
You'd have had a favorable tax... you would've had positive tax on positive earnings. Okay.
Richard H. Fleming - Executive Vice President and Chief Financial Officer
And that's just a function of once again of the mix of worldwide income, the various jurisdictions in which we do business.
Kenneth Zener - Merrill Lynch
Okay. Thank you for your time.
William C. Foote - Chairman and Chief Executive Officer
Thanks Ken.
Operator
: We have our next question from Mike Rehaut from JP Morgan. Please go ahead.
Michael Rehaut - JP Morgan
Hi thanks. Good morning.
D. Rick Lowes - Senior Vice President and Controller
Good morning Mike.
Michael Rehaut - JP Morgan
The first couple of question just on the USG side, you have mentioned that sales declines had... the declines had... have a slowing pace throughout the quarter, I think you were kind enough to say like in the first quarter it was roughly... costs were flowing at roughly $6 a month, and the second quarter was more like $7. I was wondering if you could give me an idea how those costs were throughout the quarter and at what pace are you seeing wallboard fall as we are now at the... that you saw at the end of the month?
William C. Foote - Chairman and Chief Executive Officer
Like you are talking about prices.
Michael Rehaut - JP Morgan
Yes wallboard.
William C. Foote - Chairman and Chief Executive Officer
[Multiple Speakers] cost?
Michael Rehaut - JP Morgan
Sorry, wallboard prices?
William C. Foote - Chairman and Chief Executive Officer
Yes Jim could you...
Michael Rehaut - JP Morgan
Reselling prices.
James S. Metcalf - President and Chief Operating Officer
Yes, in the first quarter our realized selling price was approximately $164, that went down to $141 in the second quarter. And as we mentioned we are at $122.68 in the third quarter of this year.
Michael Rehaut - JP Morgan
Right, but I was referring to... you had mentioned that the pace of the declines had slowed during the third quarter and with 1Q falling at about you had said $6 a month per MSF, 2Q is actually little bit faster at $7, I was wondering if you can share roughly what the rate was at the end of the third quarter to give us some perspective?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
We are not going to comment on the month or the quarter ending price, but the rate decline in the quarter was greater at the beginning than it was at the end.
Michael Rehaut - JP Morgan
Okay. In terms of the higher costs, you said it was up about 6% year-over-year, but yet you said waste paper was up much more than that, energy up much more than that. So, what was driving the deceleration perhaps in the year-over-year growth of course and I think earlier in the year costs were up 10% to 12%.
William C. Foote - Chairman and Chief Executive Officer
Well what we did as we mentioned earlier we have our raw material cost at double-digits, but as we accelerated our... we shut down our plants, we took out Santa Fe Springs, we took out our other capacity Detroit and that helped offset some of that raw materials. So it did stabilize, we got it also into the selling season where we ran our low cost plants at a higher rated capacity and as I said earlier if that was... that helps the network by about 3%.
Michael Rehaut - JP Morgan
Okay. So that 6% is net of those effect?
William C. Foote - Chairman and Chief Executive Officer
Correct.
Michael Rehaut - JP Morgan
Okay. Last Question, you have mentioned earlier on, some of the actions that you have taken and some of the competitors out there in terms of taking out capacity either, kind of shutting it down temporarily or on a more permanent basis. I was wondering if you could recap, of the 2.6 billion square feet that you have taken out, what... how much of that is permanent versus temporary and if you could highlight to your knowledge some of the competitors' actions, in a likewise perspective? But what's been done on a permanent basis in particular if any?
James S. Metcalf - President and Chief Operating Officer
The plants we have closed are Santa Fe Springs, Jacksonville, Norfolk, the old Norfolk and Detroit. If you add those four plants that's approximately 1.1 billion feet. We have announced and we will be closing our line in New Orleans in December. That takes the total up to approximately 1.3 billion feet. Now what is been announced with our competitors, National Gypsum, has announced two other plants, one in Tampa, Florida and one in Ohio, that's about 600 million feet. And at this point those are the only announced closures that we have seen; there have been some rumored closures, but we don't comment on rumored closures.
Michael Rehaut - JP Morgan
So if the 1.3 billion and the 600 million from National Gypsum, do you consider all those permanent or temporary or how do you view those?
William C. Foote - Chairman and Chief Executive Officer
Mike, the ones that Jim mentioned are closed facilities for us on top of that you need to add in another 1.3 billion for curtailments. We believe National Gypsum's 600 million is permanent.
Michael Rehaut - JP Morgan
Great. Thanks very much.
Operator
We have our next question from Mark Weintraub from Buckingham Research. Please go ahead
Mark Weintraub - Buckingham Research
Thank you. First could you update us on your expected timing for the Pennsylvania, for the California and also St. John's, and also what your estimated costs for those projects are now, whether that changed at all given the pretty dramatic rises in construction related material such as... that might be impacting the costs?
James S. Metcalf - President and Chief Operating Officer
This is Jim Metcalf again. Our Washington Pennsylvania plant is slated for mid next year 2008. The plants in New Brunswick which we are partnering with Irvine will be slated towards sometime in the first quarter of 2008, and Stockton is a late 2009 early 2010.
Mark Weintraub - Buckingham Research
And can you just quickly review what your updated thoughts on capacity and costs for those facilities are?
James S. Metcalf - President and Chief Operating Officer
The manufacturing cost or the cost to build?
Mark Weintraub - Buckingham Research
Both, but I was talking about the cost to build.
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Yes. We will... I can update you and it will be in our 10-Q which we will be filing very soon, but Washingtonville is going to be a cost net of approximately $210 million to complete that facility. Oswego which is our paper mill will be a cost of approximately $110 million. I guess the other one is Stockton and that's still consistent with our previous announcement that will be above $220 million to complete.
Mark Weintraub - Buckingham Research
Okay, great.
Richard H. Fleming - Executive Vice President and Chief Financial Officer
And by the way, the one with AWL in Irving, that is no cost to us. That is a sales and marketing agreement we have with them. So that is in our capital project for us.
Mark Weintraub - Buckingham Research
And is that still... it that 1 billion... the Pennsylvania, is that a billion square foot facility?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Yes.
William C. Foote - Chairman and Chief Executive Officer
Yes it is.
Mark Weintraub - Buckingham Research
Okay great. And then lastly I realize you are still on the budgets for next year. You previously though had said that you would expect CapEx to be a little bit above DD&A in '08, I think in the last conference call. Is that still a good starting place or is that under reconsideration?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Well our policy objective for '08 and this is not a forecast but we will be officially having our CapEx in line with our EBITDA, and so that's why we are working through the overall levels. And once again I don't want to imply that that's a forecast of EBITDA but in general we want to be up... self-funding our CapEx.
Mark Weintraub - Buckingham Research
Okay. And then, just you mentioned a couple of times how your outperforming the competition. I am just curious what metrics are you focused on when you are measuring your performance relative to the competition? And how do you get access to that information?
William C. Foote - Chairman and Chief Executive Officer
There is a industry association called the Gypsum Association, we all contribute our data to... we don't know everyone's portion of that but we know our portion of it. And from that we can derive market share and capacity utilization numbers and it's on that basis that I made the comments at the beginning that we would recover the share, had share gains in the third quarter. We had consciously been reluctant to chase the market early in the recession to... and as we get deeper into it adjusted in and gain back our share and we also know capacity utilization quite clearly and operating five points higher than the competition. So there's good data on all of that.
Mark Weintraub - Buckingham Research
It's specific to capacity utilization as opposed to financial metrics, margins or returns.
William C. Foote - Chairman and Chief Executive Officer
It's shipment data.
Mark Weintraub - Buckingham Research
Got it. Okay.
William C. Foote - Chairman and Chief Executive Officer
It's industry shipment data.
Richard H. Fleming - Executive Vice President and Chief Financial Officer
We also are very aggressively surveying our customers. We track our invoice accuracy, on time delivery and we track that versus our competitive peer group. So we think it is very important when we say that we are the leaders, it's what our customers rate us as being the leaders in their key areas as well.
Mark Weintraub - Buckingham Research
Thank you.
Operator
We will have our next question from Jim Barrett from C.L. King & Associates. Please go ahead.
Jim Barrett - C.L. King & Associates
Good morning everyone.
William C. Foote - Chairman and Chief Executive Officer
Good morning Jim.
Jim Barrett - C.L. King & Associates
Bill could you talk about... you obliviously... you made several mentions of acquisitions. Can you sort of give us your current outlook on that, when would you expect multiples to compress if they haven't already and could you sort of give us a sense as to the deals you are looking at currently, how competitive is the interest in those fields versus a year or two ago?
William C. Foote - Chairman and Chief Executive Officer
Jim, we don't comment on specific multiples but trends rather.
Jim Barrett - C.L. King & Associates
Right.
William C. Foote - Chairman and Chief Executive Officer
And the deal flow has remained pretty strong with a rapid change in the market that we're being very careful in our negotiations and due diligence. So there's nothing eminent, but we would expect over the course of next 12 months that there will be things that come together. Multiples had expanded as it had in the entire M&A market off of peak earnings and we don't have any recent transactions to quote in the last two quarters. But the modeling we are doing would suggest that those are now coming back into more traditional norms.
Jim Barrett - C.L. King & Associates
And in round numbers what considering your outlook for the market what level of resources would you envision putting in this direction you have $925 million liquidity, how much would you envision comfortably spending in that area?
William C. Foote - Chairman and Chief Executive Officer
I am not going to give you a gross number. But most of these deals are going to be small to medium size deals. There could be a couple of opportunities the size of CALPLY which would be if they were to become available would be quite strategically important to us. So that there could be one or two more sizable ones and as you point out we have the fire power to do it. But that would be the exception, not the rule.
Jim Barrett - C.L. King & Associates
Okay. And then secondly you reduced head count by 1100 heads.
William C. Foote - Chairman and Chief Executive Officer
Yes.
Jim Barrett - C.L. King & Associates
As we enter the next upturn how much of those head count reductions would you envision being permanent, obviously excluding acquisition?
William C. Foote - Chairman and Chief Executive Officer
I would estimate that a third to half are permanent, the productivity of these new low cost plants is dramatic. In the case of L&W we will need to add back head count for delivery operations but, the salaried... the staffing in headquarters and administrative levels would be permanent and in the case of high cost plants, the new plants produce twice as much... two to three times of Wallboard with same or less manning, so there is clearly operating leverage right there.
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Jim, it is Rick Fleming. I just mentioned that our ERP system as we get it fully implemented is giving us opportunities to process... reengineer some of our administrative functions.
Jim Barrett - C.L. King & Associates
Okay, well thank you both.
William C. Foote - Chairman and Chief Executive Officer
Thank you Jim.
Operator
We have our next question from Dan Oppenheim from Banc of America Securities. Please go ahead.
Mike Wood - Banc Of America Securities
Hi this is Mike Wood on for Dan.
William C. Foote - Chairman and Chief Executive Officer
Hello Mike.
Mike Wood - Banc Of America Securities
Hi. You had mentioned in the earlier comments balancing the short term with the long-term and it sounded like the outlook was for the potential remodel could weaken a bit further, the remodeling related sales and that the starts... it seemed to me like you are talking could be bottoming based on your outlook. Is that a fair assessment of kind of how you are looking at the market and if we were to see another leg down in Wallboard consumption cost 10% or 15% further how would you shift the strategy in reaction to that?
William C. Foote - Chairman and Chief Executive Officer
Well, first of all, we are not calling the bottom, but we see the signs, beginning signs of the conditions necessary to reach the bottom. We guys watch it very closely and you do some terrific research. Our sense is that in this range of a billion to... 1 million to 1.2 million, we will find that floor. If we are on, we will continue adjusting our operating model we ... Jim commented earlier on the closures and we do... we can tier all of our capacity, we tier or rack and stack it and there are other plants that are on the margin and we would continue throttling back. And the goodness is we have new low-cost capacity in every region of the country and can lean on that more and more and as we indicated the operating cost of those is half the higher cost capacity.
So, we will continue flexing. But it is not our expectation that there's another major leg down that it's our sense that we are nearing the bottom and will probably bumble along. We haven't called it yet but received the signs and people are finally adjusting prices to clear inventory, cutting back productions or closing distributions and those are all necessary ingredients to find the floor.
Mike Wood - Banc Of America Securities
Great. And if I look at your capacity utilization, you low and high cost plants, in order to back into the overall company's capacity utilization rate, I get a waiting roughly 70% would be low cost capacity and 30% being high cost capacity. Is that accurate, is that kind of how you think of the plants... the distribution?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
We actually tiered in the three buckets, I gave you the ends of the spectrum, the low cost capacity is running about 95%, the medium cost around 75% and the high cost at about 49%. And we haven't really had major cut backs in the high cost only from 100 to 95, 5%, but the high cost lines have comeback and cut back dramatically.
James S. Metcalf - President and Chief Operating Officer
We run about 15% of our network right now at the high cost lines and reasonably do that as we still look at delivered by delivered cost, and there are also some plans that we make specialty products, you have to remember the commercial market is still strong. We are a player in commercial high rise construction which takes a lot of the specialty board. So there is the need for some of the higher cost plants. But as Bill indicated if the other shoe would drop here that's up, those plants would be shifted to the medium and to the low cost line.
Mike Wood - Banc Of America Securities
Okay, Thank you
Operator
We have our next question from David Macgregor from Longbow Research. Please go ahead.
Garik Shmois - Longbow Research
Hi, good morning, this is Garik Shmois for David. I am just wondering if you could talk a little bit more about commercial construction in the near term, here it's still stronger. But how much visibility do you have both in Europe Wallboard business for commercial constructions as well as ceilings?
William C. Foote - Chairman and Chief Executive Officer
We track commercial constructions very closely as we do new housing, and the commercial construction last year was up about 5% to 6%. It does on the ceilings business have approximately 18 month lag to it since ceilings are one of the last product you put in the building, this year commercial constructions just bumped in along about even versus last year. So again you fast forward 18 months, you are not going to see an uptick, it's going to be a solid market but we've had a couple of years of growth that we are starting to feel now. But this year commercial construction, and we look at the square footage and we break it down by different segments office, schools, healthcare and we have some calculations to how much product it takes. So we can be pretty close in what the opportunity is for both Wallboard and ceiling tiles. So the market's solid but the watch word is this year it's a flat market compared to last year.
Garik Shmois - Longbow Research
Okay, thank you for that. And just quickly on your L&W closures. Where were they? Were they more originally concentrated?
William C. Foote - Chairman and Chief Executive Officer
We had some closures in the Midwest. There was some locations that were not profitable and the way the market was... the market dynamics we felt that it would be better to consolidate locations, we did some consolidations out west with the recent acquisition of CALPLY and what we've looked at is if we can service the markets, since the market has been reduced with a fewer locations and still take care of our customers, we will do that. We have not exited any markets but most of those closures are basically consolidations in the major metropolitan areas.
Garik Shmois - Longbow Research
Okay, how many closures have you made this year so far and where are you sitting at after the CALPLY acquisition?
William C. Foote - Chairman and Chief Executive Officer
How may... I am sorry?
Garik Shmois - Longbow Research
How many closures have you made this year?
William C. Foote - Chairman and Chief Executive Officer
L&W we have made four.
Garik Shmois - Longbow Research
Okay, so all of them occurred this quarter?
William C. Foote - Chairman and Chief Executive Officer
They have occurred actually the last two quarters.
Garik Shmois - Longbow Research
Okay, thank you very much.
William C. Foote - Chairman and Chief Executive Officer
This is Bill Foote, we're an hour right now. We will take three more questions which unfortunately will leave a few folks in the queue, we will call you... those who we don't get to, we'll call back. But we will take three more which will if we can indulge the other listeners for another 5 to 10 minutes. We appreciate it.
Operator
Thank you we have our next question from Al Kabili from Goldman Sachs. Please go ahead.
Albert Kabili - Goldman Sachs
Good morning guys.
William C. Foote - Chairman and Chief Executive Officer
Hi Al.
Albert Kabili - Goldman Sachs
Most of my questions have been answered but quickly on the new capacity additions next year, have you identified plants that you would be closing in conjunction with those additions to keep your capacity utilization in line?
James S. Metcalf - President and Chief Operating Officer
Yes we have, good example is our new Norfolk plant which we have the new plant next to the old plant. The new plant is starting up as we speak and we are taking that capacity out. Our Washingtonville and our Irving alliance obviously will put pressure on some of our other plants. We do not announce those, obviously we want to keep... we want to make sure that we are going to do the right thing from an employee relation standpoint. But we do have a plan that old capacity and that's our strategy comes out when we add our new low cost capacity.
Albert Kabili - Goldman Sachs
Okay got it. So we shouldn't infer though that when Washingtonville comes on line there is some identified reductions out there.
James S. Metcalf - President and Chief Operating Officer
Yes.
Albert Kabili - Goldman Sachs
Okay. And I know for competitive reasons you don't give your exact costs but in terms of your high cost capacity I mean how close are we here in terms of pricing before high cost capacity becomes unprofitable on a cash basis. I mean how much left is there for declines?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
When we look at the breakeven for the industry is anywhere between $115 and $125, a lot of it has to do with the delivered cost. You can have a very high cost plant, but it's servicing a major metropolitan area with very low transportation cost, you can still... you can still make some money. So it's... you just can't look at the ex-factory cost, you have to look at the delivered cost in the major market. But if you want to just look at the metric figure about a $120.
Albert Kabili - Goldman Sachs
What seems is about where we are close to today...
William C. Foote - Chairman and Chief Executive Officer
We are there and we should... we've seen a couple from one competitor we would expect as we get into the fourth quarter and the first quarter next year that we will see more.
Albert Kabili - Goldman Sachs
Okay. And then last question on the cash flow even despite the positive working capital we are still cash flow negative in the quarter with the CapEx and I know you are not commenting fully on your CapEx budget next year as it hasn't been finalized. But, I mean it seems to be very hard to get to current levels positive free cash flow with including CapEx next year. Could you comment on that?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
It is Rick Fleming. We are working through the plant construction program, you have seen the apex of the spending as we speak because we have four major facilities being effectively dealt with right now. If we go into '08 Norfolk is pretty much behind us and Stockton hasn't yet kicked in. So you are going to start to see the CapEx come down notably as I mentioned in 2008 and it is our policy objective to have it self-funded.
I think it is very fair to say though that the CapEx program will take the lion's share of the cash flow for the next year as we look to the plant construction program longer run of course then we will be in a very positive cash position once these plants start up.
Albert Kabili - Goldman Sachs
Okay. Thank you
Operator
We will have our next question from Thomas Riegel from Sphereline Capital [ph]. Please go ahead.
Unidentified Analyst
Hi, thanks for taking my question. I am trying to understand on the pricing side when do you expect or what sort of industry dynamics are necessary to regain pricing power from that after utilization standpoint, if you could maybe...
William C. Foote - Chairman and Chief Executive Officer
You are to see our price... obviously price will bottom out and you are going to see a bumping along the bottom as we indicated earlier. But the magic number as you start seeing capacity utilization getting up to the mid to high 80's, you can start getting some leverage and then 90% you get a tremendous amount of leverage. But you don't have to get to 90%. You can start operating... you see utilization rates into the 87% to 88% range, you can start getting some traction.
Unidentified Analyst
So. And you said earlier right now the industry is 75% roughly?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
The industry is at 77%, we're at 80% and our competitors are at 75%.
Unidentified Analyst
Got it. So it's about 10%,15% growth?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Right.
Unidentified Analyst
Perfect. Thanks a lot.
Operator
We have our last question from Bob Thompson from Advantage Capital [ph]. Please go ahead.
Unidentified Analyst
Hi guys, thank you very much. Just a couple of questions, how correlated is the relationship of housing starts to gypsum prices?
William C. Foote - Chairman and Chief Executive Officer
Well, as I indicated in my opening remarks there are three major end use markets, new residential construction is about 40% repair and renovation of existing residences, which is driven by re-sales is about 25% from the balances made up by new and remodel renovation of commercial structures. So it's the largest single segment and on the margins, given the dramatic decline in housing from over $2 million starts last-year to 1 to this-year and the numbers that Jim just mentioned on capacity utilization, where we have price leverage starting in the high 80s and we have the opposite below that. We've had a... shipments were down over 15% this year and so we have... on the other side of that pricing phenomenon.
James S. Metcalf - President and Chief Operating Officer
Yes I would simply add one metrics that we showed people is 500,000 housing starts is equal to about 800 million of industry demand.
Unidentified Analyst
Okay. What... you had talked about at one point that your... that gypsum always showed an operating profit due to variable costs. Are we in a scenario where that might not be the case, say in the next quarter or two?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Well this is Rick Fleming. We are not in a position to give you a forecast, I think the numbers speak for themselves, but as mentioned we are taking action to reduce our cost, as we speak even further than we have already.
Unidentified Analyst
Okay and can you over the... what was that the liquidity what did that consist of again?
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Well it's the... we have a $650 million revolving credit facility, if you take out letters of credit, there is 570 million of liquidity there plus the cash balance and that gets you to $925 million of total liquidity.
Unidentified Analyst
Okay. And then the last question, what... can you comment on where the price of gypsum is today?
William C. Foote - Chairman and Chief Executive Officer
We have a policy to not give out current pricing and as you can appreciate that's a competitive issue that we don't share on a real time basis in this kind of forum.
Unidentified Analyst
Okay, thank you very much.
William C. Foote - Chairman and Chief Executive Officer
Thank you, unfortunately we... there are few folks left in the queue, we will call you back. I think we know how we can reach you. Let me just say a couple of things in closing. I was in New York last month, speaking in investor conference and perhaps some of you were there to... perhaps some of you that were on call today attended that conference, I will tell the audience that day that I would an unvarnished look at the market and how we're responding to it. That what Jim, Rick and I have tried to do here today. The housing market is in a really severe recession, it's one of the worst markets we have seen in a long time. I hope, we have demonstrated that we have the experience, the expertise and the advantages in a business to manage through this to be opportunistic and to build the company for the future. My team and I feel the upside has never been greater, we have proven strategies for success, we're preparing to rapidly grow our value when conditions improve and we're moving forward.
Thanks for your calls today and if you have follow-up questions, please let us know. We look forward to seeing you soon. Thank you, bye-bye.
Richard H. Fleming - Executive Vice President and Chief Financial Officer
Thank you.
James R. Bencomo - Director of Investor Relations and Pension Investments
Let me just conclude by giving out my phone numbers if you did want to reach me directly, it's 312-436-4125, and also just like to mention that there will be a tape replay of this call available shortly. The dial-in number is 1888-843-8996 and the pass code is 19408422 that will be available for a little less than a week. And that concludes our conference call. Thanks again for joining us.
Operator
: Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may all disconnect.
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