Special Report : US Gypsum Regroups to Cut Costs, Find New Markets

The following material is excerpted from a presentation Mr. Morgan gave recently to representatives of the financial community. Introduction 1982 was a period of challenge for United States Gypsum Company because of reduced market opportunity. Housing starts for the first 10 months averaged a seasonally adjusted annual rate of 1 million units, 9% below the comparable 1981 period when housing starts were the lowest in 35 years. Industry gypsum board shipments declined 9% from the already low levels of the same period in 1981. US Gypsum met the challenge with stringent cost reduction programs and aggressive action in the marketplace. In late 1981, anticipating market deterioration, the company's management adopted strategies to focus on two shortterm objectives: • Adjust operations to perform profitably in view of limited opportunities through more efficient operations and asset management. • Continue to strengthen U.S.G.'s resources and ability to take advantage of important market opportunities as the economy improves through selective expansion of production capacity in key growth markets. Concentration on these two objectives resulted in a nine month performance in 1982 that, while certainly not satisfactory by company standards, compared very favorably with that of principal competitors in terms of net earnings, margin on sales, and return on average stockholders' equity. To counteract limited market opportunities, U.S.G. focused on productivity improvement, cost reduction, expense control, and maximization of market penetration. Energy Use Improving performance encompassed all segments of operations. For example, efficient use of energy was a significant factor despite lower operating rates at most plants. Overall, in the third quarter of 1982 versus 1972, the company used 27% less energy per unit of production, a savings of $15 million in that quarter alone. These continuing improvements helped to partially offset constantly rising energy costs. A number of operations achieved superior results in the first nine months of the year compared with the same period in 1981. For example, gypsum board plants in Jacksonville, FL, and Sweetwater, TX, recorded 8% and 7% reductions, respectively, in energy use per unit of production. Paper mills in Oakfield, NY, Galena Park, TX, and Kansas City, MO, each reduced energy use more than 12%, while the Greenville, MS, ceiling products facility achieved a 16%o reduction. Safety Safety is another important element that received increased attention. U.S.G.'s safety performance over the past five years has consistently improved. In 1981 it was five times better than that of the gypsum industry; nearly 10 times better than all industry as measured by the National Safety Council; and almost 20 times better than all US manufacturing as recorded by the Bureau of Labor Statistics. In addition to human concerns, this excellent record results in significant dollar savings that directly affect company results. In 1981, U.S.G.'s pre-tax savings in claims, premiums, and related expenses were about $20 million compared to the industries in which it competes. For the first half of 1982 performance improved further, with a cumulative lost workday incidence rate per 200,000 man-hours worked of only 0.27, an all-time record. Expense Control Careful control of inventories and receivables also received special attention. As of Sept. 30, 1982, inventories were 29%, or $44 million, below the level of Sept. 30,