USG Corporation (USG) – Time to Climb this Wall?
USG Corporation is a leading building products company, with a focus on manufacturing and selling gypsum wallboard, wallboard surfaces/substrates and ceiling tile/grid (Segment breakdown shown below). According to the US Gypsum Association, USG is the largest gypsum wallboard manufacturer in North America, with roughly 26% market share. The company is also the second largest North American producer of commercial ceilings, with market share around 35%. In the last quarter, USG reported Gypsum total sales were $767M vs $747M from a year ago, while Ceilings came in at $135M vs $132M from a year ago.
Back in late September, the company announced that its current Chairman, President, and CEO James Metcalf would retire effective 10/31/2016 and be replaced by Jennifer Scanlon, the Executive VP, President-International and President – L&W Supply. Earlier this week, JPMorgan held investor meetings in which they spoke very highly of the company’s new CEO. They said Ms. Scanlon is well-versed in USG’s core U.S. Gypsum and Ceilings businesses, despite more recent positions heading International and L&W. JPMorgan believes this is due to Scanlon’s long history at the company in several other roles, including being a management consultant before her joining USG in 2003, to being Director of Supply Chain and CRM which featured the rollout of its Oracle ERP system across roughly 70 North American plants, to being CIO in 2007, to also Corporate Strategy in 2008 and 2009 where she helped devise the company’s current three-pronged strategy of strengthening the core, diversification and innovation.
The company’s cash priorities going forward seem to include funding USG’s Advanced Manufacturing program, maintaining a strong balance sheet, considering return of capital to shareholders as well as bolt-on acquisitions, ideas that Jefferies analyst Philip Ng wrote about in a research note in late September. The most important use of cash is likely to be for its Advanced Manufacturing Program. With the cash, advanced manufacturing is expected to drive down manufacturing costs using technology to increase efficiency, which will enable margin expansion in its Gypsum and Ceilings businesses. Here is the breakdown from their October investor presentation:
In late August, the company announced that it was selling its L&W Supply unit to ABC Supply for $670M. Following the completed sale at the end of October, USG said that it can maintain its overall wallboard market share without material price disruption. While the company expects its share of L&W wallboard to decline over time (JPMorgan believes 6-12 months is a reasonable timeframe) from roughly 90% to a level more similar to its other wallboard distributors, USG intends to carefully manage the recasting of this volume across the balance of its distributors (both existing and potentially new). More importantly, given its strong product portfolio, quality and price premium, USG is expected to maintain its overall wallboard market shares on a net basis after the transition is complete. Moreover, the company expressed optimism that, amid this transition and shift of market share, competitors “will not aggressively use price to win new business,” given the potential negative repercussions in terms of its competitors’ customers seeking similar prices as well as the benefits of stable to positive pricing for the distributors themselves.
Lastly, another interesting point JPMorgan made after its investor meetings was regarding rival ceiling company Rockfon and how they are not expected to have a material impact on the ceilings segment. For those that do not know, Rockfon is a leading provider of acoustic stone wool and metal ceiling solutions and suspension systems. Rockfon’s new ceiling tile line at its Mississippi plant is expected to open in the first half of 2017 and add roughly 2-3% of capacity to the ceiling tile industry, USG continues to expect at most a minimal impact to its own business, due to the exclusive relationships it maintains with its distributors. Moreover, the company noted that Rockfon is currently only manufacturing one type of product line, as compared to USG’s broad product portfolio. As a result, while the company expects Rockfon to win some direct to contractor business as well as potentially sell in to some non-USG/AWI distributors, USG does not anticipate the new plant having a material impact on its business.
