Building materials manufacturer USG reported earnings about two weeks back, and the recent posting of the conference call transcript makes this an opportune time to catch up since the notes I put out from USG's earnings last quarter.
Although average realized wallboard prices continue to improve, volumes and utilization rates continue to fall. USG's capacity use rate during the 4th quarter was just 51%.
Wallboard demand is driven primarily by housing starts, with a lag of slightly over a quarter. What does the housing start situation look like?
Ok, worse than ever before. How about permits for new construction - is there a pulse?
To translate a rule of thumb, an annual increase in housing starts of 100,000 equates to an increase in existing capacity utilization of about 230 basis points. Industry capacity right now is around 35 billion square feet, and 2009 wallboard volumes are estimated to be just less than 21 billion square feet.
As discussed last quarter, this is really a case of a supply/demand imbalance swinging the wrong way for USG – and specific credit market conditions are accelerating problems. Although this was not expressly voiced, my feeling is that USG executives expect to be giving the same difficult outlook as 2010 approaches.
The one bright spot in 2008 – the international ceilings business – has finally cracked, with the declining rate of sales accelerating into the end of the year.