USG Corporation Q1 2018 Earnings Conference Call & Webcast April 25, 2018
Safe Harbor This presentation contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 related to management s expectations about future conditions, including but not limited to, delivering a solid 2018 and positioning 2019 as the breakout year of our strategy, margin expansion, advanced manufacturing returns, the execution of our strategy and its results, achievement of our 2020 financial targets, 2018 financial and end-market outlooks, high-growth markets and growing free cash flow. Actual business, market or other conditions may differ materially from management s expectations and, accordingly, may affect our sales and profitability or other results and liquidity. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date and we undertake no obligation to update any forward-looking statement. Actual results may differ materially due to various other factors, including: economic conditions, such as employment levels, the availability of skilled labor, household formation, home ownership rate, new and existing home price trends, availability of mortgage financing, interest rates, deductibility of mortgage interest and real estate taxes, consumer confidence, job growth and discretionary business investment; competitive conditions and our ability to maintain or achieve price increases; the loss of one or more major customers, including L&W, and the increasing number of our customers with significant buying power; increased costs, or decreased availability, of key raw materials, energy or transportation; unexpected operational difficulties or catastrophic events at our facilities; our ability to successfully operate the joint venture with Boral Limited, including risks that our joint venture partner, Boral Limited, may not fulfill its obligations as an investor or may take actions that are inconsistent with our objectives; exposure to risks of operating internationally; our ability to innovate and protect our intellectual property and other proprietary rights; our ability to make capital expenditures and achieve the expected return on investment; a disruption in our information technology systems; compliance with environmental and safety regulations or product safety concerns; the outcome in legal and governmental proceedings; the ability of a small number of stockholders to influence our business and stock price; our ability to successfully pursue and complete acquisitions, joint ventures and other transactions to complement or expand our businesses; significant changes in factors and assumptions used to measure our defined benefit plan obligations; our ability to return capital to stockholders; the occurrence of an ownership change within the meaning of the Internal Revenue Code; our ability pursue strategic opportunities without increasing our debt and leverage ratio; the effects of acts of terrorism or war upon domestic and international economies and financial markets; and acts of God. Additional information concerning these and other factors may be found in our filings with the Securities and Exchange Commission, including the Risk Factors in our most recent Annual Report on Form 10-K. 2
Q1 2018 Earnings Call Agenda First Quarter Highlights Jennifer F. Scanlon, President and Chief Executive Officer First Quarter Results Matthew F. Hilzinger, Executive VP, Chief Financial Officer Questions & Answers Closing Remarks Jennifer F. Scanlon, President and Chief Executive Officer 3
Executive Summary 1 Strategy is Well Underway and Seeing Great Progress 2 Foundational Quarter Impacted by Timing of U.S. Wallboard Price Increase and Harsh Weather; In Line with Expectations 3 April Wallboard Shipments Up 12% Sequentially Thus Far; Remain Encouraged with Pricing Stability in All Channels 4 Conviction Remains Strong on Delivering a Solid 2018 and Positioning 2019 as the Breakout Year of our Strategy 4
Strategy Execution Well Underway Transformed Company with Logical Portfolio in a Supportive Environment Strategy Focused on Margin Expansion Balance Sheet that Supports our Strategy Adj. Net Sales 1 +4% Y-o-Y, despite Wallboard Pre-buy and Weather o U.S. Ceilings Adj. Net Sales 1 +26% Y-o-Y (+14% w/o Ceilings Plus) o U.S. Performance Materials Adj. Net Sales 1 +8% Y-o-Y March Seasonally Adjusted New Housing Starts at 1.32 million Q1 CCI highlights Contractor s Confidence in 2018 Commercial Markets +9% Sequential Price Increase on U.S. Wallboard; Highest U.S. quarterly wallboard price in 12 years Improved Pricing Across All Divisions Advanced Manufacturing: $4M 2 of incremental EBITDA in Q1; program on track for incremental $25 million EBITDA in 2018 Strategic capital to lower cost position and fuel future growth $62 Million of Share Repurchases Completed in Q1 Leverage Ratio 1 of 2.2x Deployed $52 million of Capex primarily for growth and Advanced Manufacturing projects Specialty Ceilings adds $2 Million of adjusted operating profit in Q1 led by USG Ceilings Plus Strategic Progress Towards Achieving our 2020 Financial Targets 1. See reconciliation to GAAP results in the Appendix. 2. $4 million of total EBITDA savings in Q1 equates to $3 million of operating profit and $1 million of depreciation. Over the life of the program, $7 million of EBITDA savings has been generated, which equates to $5 million of operating profit. 5
Q1 2018 Highlights Q1 2018 FINANCIAL RESULTS Q1 2018 IN LINE WITH EXPECTATIONS Adjusted Net Sales 1 $767 $796 U.S. wallboard price increases 9% sequentially and 1% year over year across all channels Adjusted Operating Profit 1 + 4% Q1 2017 Q1 2018 $97 ($29) Segment Adjusted Operating Margins 1 $68 Q1 2017 Q1 2018 Adjusted Diluted Earnings Per Share 1 $0.37 ($0.05) $0.32 Q1 2017 Q1 2018 U.S. wallboard volumes decline 12% year over year: Estimated 9% due to timing of wallboard price increase Estimated 1% due to harsh weather U.S. Performance Materials commences strategic investments to expand capacity, lower cost position and accelerate adoption of new products U.S. Ceilings adjusted net sales 1 increase 26%: Price and volume improvement across grid and tile Expanded Specialty portfolio led by USG Ceilings Plus USG Boral equity income decreases $4 million due to higher input costs U.S. Wallboard & Surfaces 540 bps 11.4% U.S. Performance Materials 590 bps 1.1% U.S. Ceilings 160 bps 16.3% USG Boral 260 bps 10.8% 1. See reconciliation to GAAP results in the Appendix. 6
Consolidated Financial Results $ Millions (except EPS) Q1 2018 Q1 2017 Net sales $786 $767 Gross profit $139 $159 SG&A $93 $75 Operating profit $46 $84 Other income, net 2 $3 $6 Net interest expense ($13) ($19) Income tax expense ($9) ($29) GAAP net income $37 $55 Diluted EPS $0.25 $0.37 Adjustments 1 $9 --- Adjusted net income 1 $46 $55 Adjusted diluted EPS 1 $0.32 $0.37 OTHER NON-GAAP METRICS: Adjusted Net Sales 1 $796 $767 Adjusted SG&A 1 $84 $75 Adjusted operating profit 1 $68 $97 Adjusted EBITDA 1 $121 $151 1. See reconciliation to GAAP results in the Appendix; 2. 2017 amounts have been recast to reflect adoption of new postretirement plan accounting standard. Included in Other income, net are interest expense and amortization of actuarial gains/losses, which are required to be presented below operating profit. 7
U.S. Wallboard & Surfaces Wallboard average realized selling price up 9% from Q4 2017; up 1% year over year Wallboard volume down 12% due to: Timing of price increase shifted volumes into Q4 2017; responsible for an estimated 9% decline in volumes Estimated 1% due to harsh weather, which delayed jobs across country Wallboard costs increase by $14 million $5 million for labor costs to retain production staffing levels on lower Q1 volumes positioned to meet growing demand levels in April+ $3 million for planned start-up costs for modernized line in Florida $3 million for input and inbound freight cost inflation Surfaces: $4 million of lower profit due to: Lower volumes due to weather delays primarily in Northeast Higher cost due to increased resin spot price for pails 2% price increase in joint compound offsets volume and cost Q1 2017 Adjusted Operating Profit 1 $79 Wallboard Price $2 Wallboard Cost ($14) Wallboard Volume ($13) Surfaces ($4) Advanced Manufacturing $2 SG&A ($1) Q1 2018 Adjusted Operating Profit 1 $51 $ Millions Q1 2018 Q1 2017 Variance Net Sales $441 $469 ($28) Operating Profit $49 $79 ($30) Operating Profit Margin 11.1% 16.8% (5.7%) Adjusted Net Sales 1 $447 $469 ($22) Adjusted Operating Profit 1 $51 $79 ($28) Adjusted Operating Profit Margin 1 11.4% 16.8% (5.4%) $2 million cost reduction due to Advanced Manufacturing Highest Quarterly Wallboard Price in 12 Years 1. See reconciliation to GAAP results in the Appendix; 2017 amounts have been recast to reflect adoption of postretirement plan accounting standard. 8
U.S. Performance Materials Adjusted net sales 1 increase 8% year over year Average realized selling price increases on USG Durock brand cement board and Securock brand roofing products pricing initiatives $3 million of higher costs driven by: $2 million of higher input costs due primarily to higher input and transportation costs $1 million of plant start-up costs for the Building Envelope and Structural product categories $4 million increase in planned SG&A to drive further growth Increased marketing and technical sales personnel to accelerate adoption of new products Q1 2017 Adjusted Operating Profit 1 $6 Price $2 Cost ($3) Volume --- SG&A ($4) Advanced Manufacturing --- Q1 2018 Adjusted Operating Profit 1 $1 $ Millions Q1 2018 Q1 2017 Variance Net Sales $92 $86 $6 Operating Profit $1 $6 ($5) Operating Profit Margin 1.1% 7.0% (5.9%) Adjusted Net Sales 1 $93 $86 $7 Adjusted Operating Profit 1 $1 $6 ($5) Adjusted Operating Profit Margin 1 1.1% 7.0% (5.9%) Price Improvement During Initial Investment Stage 1. See reconciliation to GAAP results in the Appendix; 2017 amounts have been recast to reflect adoption of postretirement plan accounting standard. 9
U.S. Ceilings U.S. tile up $1 million Price up 2% due to improved product mix and price improvement from July 2017 price increase Volume up 7% driven by improvement in all channels U.S. grid up $2 million Price up 4% due to May and Nov 2017 price increases Cost up 4% due to steel cost inflation Volume up 8%; estimate that organic growth drives half the increase and pre-buy ahead of announced price increases drives half Specialty up $2 million primarily due to USG Ceilings Plus Incremental adjusted net sales 2 $14 million for the quarter $3 million increase in planned SG&A to drive further growth principally for Ensemble Ceilings System Q1 2017 Adjusted Operating Profit 1 $20 Tile Price $1 Tile Cost ($1) Tile Volume $1 Grid Price $2 Grid Cost ($1) Grid Volume $1 Advanced Manufacturing $1 SG&A ($3) Specialty, net of SG&A $2 Q1 2018 Adjusted Operating Profit 1 $23 $ Millions Q1 2018 Q1 2017 Variance Net Sales $138 $112 $26 Operating Profit $19 $20 ($1) Operating Profit Margin 13.8% 17.9% (4.1%) Adjusted Net Sales 1 $141 $112 $29 Adjusted Operating Profit 1 $23 $20 $3 Adjusted Operating Profit Margin 1 16.3% 17.9% (1.6%) Improved Price and Volume Across Tile and Grid Products 1. See reconciliation to GAAP results in the Appendix; 2017 amounts have been recast to reflect adoption of postretirement plan accounting standard. 2. Specialty adjusted net sales excludes the $1 million for non-cash purchase accounting amortization. 10
USG Boral TOTAL (100%) USG BORAL JV RESULTS On a constant currency basis 2 : Net sales expand 2% to $281 million Net income decreases $7 million to $18 million BUSINESS HIGHLIGHTS Plasterboard price up 5% and volumes are flat Sheetrock NextGen Technology conversion increases 800 bps Continued growth in adjacent products: Ceiling tiles up 9% Steel studs up 7% TOTAL (100%) USG-BORAL JV RESULTS $ Millions Q1 2018 Q1 2017 Variance Total JV Net Sales $287 $276 $11 Total JV Operating Profit $28 $35 ($7) Total JV Operating Profit Margin 9.8% 12.7% (2.9%) Total JV Adjusted Operating Profit 1 $31 $37 ($6) Total JV Adjusted Operating Profit Margin 1 10.8% 13.4% (2.6%) Total JV Net Income $19 $25 ($6) USG'S 50% PORTION OF USG BORAL RESULTS Q1 2017 USG's Share of Equity Income $13 Foreign currency --- Core earnings ($4) Q1 2018 USG's Share of Equity Income $9 Margin compression due to higher input costs, most notably waste paper, steel, energy and gypsum, which was met with price increases in key markets Inflationary Input Costs Contract Operating Profit Margin 1. See reconciliation to GAAP results in the Appendix. 2. Current period results translated at the quarter-to-date average foreign currency exchange rates for the period ended March 31, 2017. 11
Consolidated Cash Flow $ Millions 3 months ended March 31, 2018 3 months ended March 31, 2017 Cash flow from operations (CFFO) ($16) ($29) CAPEX $52 $39 = Free cash flow 1 ($68) ($68) Cash flow (used for)/provided by other investing activities 2 $4 ($2) Repurchase of common stock ($62) ($25) Cash flow used for other financing activities ($3) --- Effect of exchange rate on cash ($5) $4 Discontinued operations $1 $5 Decrease in cash and cash equivalents ($133) ($86) March 31, 2018 March 31, 2017 Cash, cash equivalents and marketable securities $356 $434 Total liquidity $548 $559 Total debt $1,089 $1,089 Total adjusted net debt 3 $1,322 $1,173 Leverage ratio 4 2.2 1.8 1. Non-GAAP metric. 2. Consists primarily of purchases and sales of marketable securities. 3. See reconciliation to GAAP results in the Appendix. 4. Net adjusted debt / adjusted EBITDA. See Appendix. 12
2018 Financial Outlook SG&A Input Costs Interest Expense Capital Spending Adjusted SG&A 1 expected around $355 million due primarily to investments to support strategy Expect 3-5% baseline gross inflation in manufacturing costs Includes synthetic gypsum expected to be up about $10 million due to higher transportation costs Net interest expense expected to be $60 million Expect full year capital spending around $250 million: ~$90 million for Advanced Manufacturing, ~$95 million for growth investments, ~$65 million for maintenance Does NOT include Advanced Manufacturing EBITDA savings or all other cost reduction initiatives Reaffirming Outlook Shared on Q4 Earnings Call (February 1, 2018) Management s expectations as of the date of this presentation. 1. See reconciliation to GAAP results in the Appendix. 13
2018 End Market Outlook New Residential Starts: Around 1.25 million from 1.20 million Nonresidential Starts: Low-to-mid single digit growth Repair and Remodel: Mid single digit growth USG Ceiling Volumes: Low single digit growth USG s portion of USG Boral adjusted net income expected to increase in the low to mid single digit percentage range Management s expectations as of the date of this presentation. 14
USG Investment Thesis Transformed company operating in a supportive macroeconomic environment Logical, focused portfolio with leading positions in high growth markets across divisions in North America, Asia and Australasia New strategy focused on customer needs, manufacturing cost reductions and price optimization to enable margin expansion throughout the cycle Strong balance sheet and projected growing free cash flow will enable capital allocation flexibility and EPS growth Experienced and passionate management team executing a clear strategy expected to drive superior performance and increase shareholder value 15
Appendix
Non GAAP Financial Measures In this presentation, the company s financial results are provided both in accordance with accounting principles generally accepted in the United States of America (GAAP) and using certain non-gaap financial measures. In particular, the company presents the non-gaap financial measures: adjusted operating profit, adjusted operating margins, EBITDA, adjusted EBITDA, adjusted net income, adjusted net sales, free cash flow, adjusted average diluted common shares and adjusted earnings per diluted share, adjusted SG&A, leverage ratio, adjusted net debt and impacts of foreign currency on current period results using prior period translation rates, which exclude certain items. The non-gaap financial measures are included as a complement to results provided in accordance with GAAP because management believes these non-gaap financial measures help investors ability to analyze underlying trends in the company s business, evaluate its performance relative to other companies in its industry and provide useful information to both management and investors by excluding certain items that may not be indicative of the company s core operating results. Adjusted operating profit on a consolidated basis includes the adjusted equity method income from USG Boral and USG s income from other equity investments and adjusted EBITDA on a consolidated basis includes the company s share of USG Boral s adjusted EBITDA because management views USG Boral and its other equity investments as important businesses. Further, management believes it is appropriate to exclude the indicated items from USG Boral equity income because the resulting USG Boral adjusted equity income can be used to evaluate the financial performance of USG Boral. In addition, the company uses adjusted operating profit, adjusted operating margins and adjusted net income as components in the measurement of incentive compensation. The non-gaap measures should not be considered a substitute for or superior to GAAP results and may vary from others in the industry. For further information related to the company s use of non-gaap financial measures, and the reconciliations to the nearest GAAP measures, see the Appendix. 17
Adjusted Operating Profit Reconciled to GAAP Operating Profit $ Millions Q1 2018 Q1 2017 Change Reported GAAP Operating Profit (Loss) U.S. Wallboard and Surfaces $49 $79 ($30) U.S. Performance Materials $1 $6 ($5) U.S. Ceilings $19 $20 ($1) Canada $2 $2 Other $4 $1 $3 Corporate & Eliminations ($29) ($24) ($5) Total $46 $84 ($38) Adjustments to GAAP Operating Profit (Loss) U.S. Wallboard and Surfaces Adoption of revenue standard $2 U.S. Ceilings Adoption of revenue standard $1 $2 $1 U.S. Ceilings Transaction costs $2 $2 U.S. Ceilings Non-cash purchase accounting amortization $1 $1 Corporate & Eliminations Transaction costs $2 $2 Corporate & Eliminations Contractual legal judgment $5 $5 Total $13 $13 Adjusted Operating Profit (Loss) Non-GAAP measure U.S. Wallboard and Surfaces $51 $79 ($28) U.S. Performance Materials $1 $6 ($5) U.S. Ceilings $23 $20 $3 Canada $2 $2 Other $4 $1 $3 Corporate & Eliminations ($22) ($24) $2 Other Adjustments Equity income from UBBP $9 $13 ($4) Total Adjusted Operating Profit $68 $97 ($29) 18
Quarterly Summary by Business Unit $ Millions Q1 2018 Q1 2017 Change ($) U.S. Wallboard and Surfaces adjusted operating profit 1 $51 $79 ($28) U.S. Performance Materials adjusted operating profit 1 $1 $6 ($5) U.S. Ceilings adjusted operating profit 1 $23 $20 $3 Canada adjusted operating profit 1 $2 $2 --- Equity income from USG Boral Building Products $9 $13 ($4) Other adjusted operating profit 1 $4 $1 $3 Corporate and eliminations adjusted operating loss 1 ($22) ($24) $2 USG Consolidated Adjusted Operating Profit 1 $68 $97 ($29) U.S. Wallboard and Surfaces DD&A $23 $22 $1 U.S. Performance Materials DD&A $2 $3 ($1) U.S. Ceilings DD&A $4 $4 --- Canada DD&A $2 $2 --- Other / Corporate DD&A 2 $2 $1 $1 USG Consolidated DD&A $33 $32 ($1) U.S. Wallboard and Surfaces adjusted EBITDA 1 $75 $102 ($27) U.S. Performance Materials adjusted EBITDA 1 $3 $9 ($6) U.S. Ceilings adjusted EBITDA 1 $27 $24 $3 Canada adjusted EBITDA 1 $4 $4 --- USG's share of USG Boral Building Products adjusted EBITDA 1 $21 $24 ($3) Other / Corporate adjusted EBITDA 1 ($9) ($12) $3 USG Consolidated Adjusted EBITDA 1 $121 $151 ($30) 1. See reconciliation to GAAP results in the Appendix. 2. Depreciation, depletion and amortization for Corporate and Eliminations excludes amortization of debt discount which is included in interest expense. 19
Adjusted Net Sales Reconciliations $ Millions Q1 2018 Q1 2017 Change Reported GAAP Net Sales U.S. Wallboard and Surfaces $441 $469 ($28) U.S. Performance Materials $92 $86 $6 U.S. Ceilings $138 $112 $26 Canada $111 $96 $15 Other $60 $56 $4 Eliminations ($56) ($52) ($4) Total $786 $767 $19 Adjustments to Net Sales U.S. Wallboard and Surfaces Adoption of revenue standard $6 $6 U.S. Performance Materials Adoption of revenue standard $1 $1 U.S. Ceilings Adoption of revenue standard $2 $2 U.S. Ceilings Non-cash purchase accounting amortization $1 $1 Total $10 $10 Adjusted Net Sales Non-GAAP measure U.S. Wallboard and Surfaces $447 $469 ($22) U.S. Performance Materials $93 $86 $7 U.S. Ceilings $141 $112 $29 Canada $111 $96 $15 Other $60 $56 $4 Eliminations ($56) ($52) ($4) Total Adjusted Net Sales $796 $767 $29 20
Adjusted SG&A and Adjusted Net Income Reconciliations $ Millions (except EPS) Q1 2018 Q1 2017 GAAP Selling and Administrative Expense $93 $75 Contractual legal judgment ($5) Transaction costs ($4) Adjusted Selling and Administrative Expense $84 $75 Q1 2018 Q1 2017 GAAP Net Income $37 $55 Income from discontinued operations, net of tax ($1) Contractual legal judgment $5 Transaction Costs $4 Adoption of revenue standard $3 Non-cash purchase accounting amortization $1 Tax effects of adjustments 1 ($3) Adjusted Net Income $46 $55 1. See Appendix for detail regarding tax effect of individual adjustments. 21
Quarterly Adjusted EBITDA Reconciled to Operating Profit $ Millions U.S. W&S U.S. PM U.S. Ceilings Q1 2018 Q1 2017 Canada UBBP GAAP Operating profit/(loss) $49 $1 $19 $2 ($25) $46 $79 $6 $20 $2 ($23) $84 Interest expense, net ($13) ($13) ($19) ($19) Other income, net $3 $3 $6 $6 Income tax expense ($9) ($9) ($29) ($29) USG's equity income from UBBP $9 $9 $13 $13 Income from discontinued operations, net $1 $1 Net (loss) income attributable to USG $37 $55 Less: Income from disc ops, net of tax ($1) ($1) Add: interest expense, net 1 $13 $13 $19 $19 Add: income tax expense 1 $9 $9 $29 $29 Add: depreciation, depletion, and amortization 2 $23 $2 $4 $2 $2 $33 $22 $3 $4 $2 $1 $32 EBITDA $72 $3 $23 $4 ($11) $91 $101 $9 $24 $4 ($3) $135 Add: share-based compensation expense 1 $4 $4 $4 $4 Add: ARO accretion expense $1 $1 $1 $1 Add: Adoption of revenue standard $2 $1 $3 Add: Transaction costs $2 $2 $4 Add: Non-cash purchase accounting amortization $1 $1 Add: Contractual legal judgment $5 $5 Less: USG's equity income from UBBP ($9) ($9) ($13) ($13) Add: USG s share of UBBP Adjusted EBITDA 3 $21 $21 $24 $24 Adjusted EBITDA $75 $3 $27 $4 $21 ($9) $121 $102 $9 $24 $4 $24 ($12) $151 Other/ Corp Q1 2018 U.S. W&S U.S. PM U.S. Ceilings Canada UBBP Other/ Corp/ Q1 2017 1. Interest, tax, and share-based compensation are not allocated to our reportable segments; therefore, these items are reflected in the column Corp/Elim. 2. Depreciation, depletion and amortization excludes the amortization of deferred financing fees which is included in interest expense and the non-cash purchase accounting amortization adjustment. 3. See reconciliation to GAAP results in the Appendix. 22
Adjusted Financial Results of USG Boral Building Products $ Millions Q1 2018 Q1 2017 Net Sales GAAP $287 $276 Operating Profit GAAP $28 $35 Adjustments: Income from equity method investments owned by UBBP $4 $3 Adjustments: Operating profit attributable to non-controlling interest, pre-tax ($1) ($1) Adjusted Operating Profit Non-GAAP $31 $37 23
USG Boral Building Products Adjusted EBITDA Reconciliation $ Millions Q1 2018 Q1 2017 GAAP Operating profit $28 $35 Income tax expense ($12) ($12) Income from equity method investments owned by UBBP, net of tax $4 $3 Net Income $20 $26 Net income attributable to non-controlling interest ($1) ($1) Net Income attributable to USG Boral Building Products $19 $25 Add: income tax expense $12 $12 Add: depreciation, depletion, and amortization $12 $11 TOTAL USG Boral Building Products Adjusted EBITDA $43 $48 USG s share of USG Boral Building Products Adjusted EBITDA $21 $24 24
Adjusted Diluted EPS Reconciled to GAAP Diluted EPS & Tax Effects on Net Income Q1 2018 Q1 2017 Income per average diluted common share GAAP $0.25 $0.37 Adjustments per average diluted common share: Income from discontinued operations Contractual legal settlement $0.03 Transaction costs $0.03 Adoption of revenue standard $0.02 Non-cash purchase accounting amortization $0.01 Tax effect on adjustments ($0.02) Adjusted earnings per adjusted average diluted common share Non-GAAP $0.32 $0.37 Average diluted common shares GAAP 143,808,354 148,730,354 Adjustment to add common shares that would be dilutive based on adjusted net income Adjusted Average diluted common shares Non-GAAP 143,808,354 148,730,354 Q1 2018 Q1 2017 Contractual legal judgment ($1) Transaction costs ($1) Adoption of revenue standard ($1) Total Tax Effects of Adjustments ($3) 25
Adjusted Debt Reconciled to GAAP Debt $ Millions March 31, 2018 March 31, 2017 Total short-term and long-term Debt GAAP $1,089 $1,089 Operating leases $108 $106 Postretirement benefit obligations $271 $202 Asset retirement obligations $94 $74 Accrued interest not included in reported debt $13 $14 Workers compensation/self insurance $14 $14 Excess cash 1 ($267) ($326) Total adjustments 2 $233 $84 Adjusted Net Debt $1,322 $1,173 TTM 3 2018 TTM 3 2017 Adjusted EBITDA $606 $658 Leverage Ratio 2.2 1.8 1. Excess cash is based on a 75% ratio of cash, cash equivalents, and marketable securities. 2. Represents adjustments to GAAP debt and unadjusted EBITDA to arrive at a proxy for adjusted debt and adjusted EBITDA as used by the ratings agencies. 3. TTM = Trailing Twelve Months 26
Quarterly Trailing Twelve Months Adjusted EBITDA Reconciled to Quarterly Operating Profit Q1 2018 Q2 2017 Q3 2017 Q4 2017 Q1 2018 TTM $ Millions GAAP Operating profit 2 $95 $91 $83 $46 $315 Interest expense, net ($19) ($14) ($13) ($13) ($59) Other (expense) income, net 2 ($2) $1 $5 $3 $7 Income tax expense ($20) ($27) ($162) ($9) ($218) USG's equity income from UBBP $14 $15 $17 $9 $55 Loss on extinguishment of debt ($22) --- --- --- ($22) (Loss) income from discontinued operations, net ($10) --- $1 $1 ($8) Net income attributable to USG $36 $66 ($69) $37 $70 Add/Less: loss (income) from disc ops, net of tax $10 --- ($1) ($1) $8 Add: interest expense, net $19 $14 $13 $13 $59 Add: income tax expense $20 $27 $162 $9 $218 Add: depreciation, depletion, and amortization 1 $31 $33 $33 $33 $130 EBITDA $116 $140 $138 $91 $485 Add: share-based compensation expense $5 $4 $5 $4 $18 Add: ARO accretion expense $2 $2 $2 $1 $7 Add: loss on extinguishment of debt $22 --- --- --- $22 Add: pension settlement expense $7 $3 $2 --- $12 Add: contractual legal settlement --- --- --- $5 $5 Add: transaction costs --- --- --- $4 $4 Add: adoption of revenue standard --- --- --- $3 $3 Add: non-cash purchase accounting amortization --- --- --- $1 $1 Less: USG's equity income from UBBP ($14) ($15) ($17) ($9) ($55) Add: USG s share of UBBP Adjusted EBITDA $27 $28 $28 $21 $104 Adjusted EBITDA $165 $162 $158 $121 $606 1. Depreciation, depletion and amortization excludes the amortization of deferred financing fees which is included in interest expense. 2. 2017 amounts have been recast to reflect adoption of postretirement plan accounting standard. 27
Quarterly Trailing Twelve Months Adjusted EBITDA Reconciled to Quarterly Operating Profit Q1 2017 Q2 2016 Q3 2016 Q4 2016 Q1 2017 TTM $ Millions GAAP Operating profit 2 $115 $91 $71 $84 $361 Interest expense, net ($37) ($37) ($29) ($19) ($122) Other income (expense), net 2 $9 $7 ($9) $6 $13 Income tax (expense) benefit ($34) ($18) $15 ($29) ($66) USG's equity income from UBBP $16 $14 $12 $13 $55 Loss on extinguishment of debt ($2) ($1) ($32) --- ($35) Income from discontinued operations, net $7 $6 --- --- $13 Gain on sale of discontinued operations, net --- --- $279 --- $279 Net income attributable to USG $74 $62 $307 $55 $498 Less: gain on sale of disc ops, net of tax --- --- ($279) --- ($279) Less: income from disc ops, net of tax ($7) ($6) --- --- ($13) Add: interest expense, net $37 $37 $29 $19 $122 Add: income tax expense (benefit) $34 $18 ($15) $29 $66 Add: depreciation, depletion, and amortization 1 $32 $32 $34 $32 $130 EBITDA $170 $143 $76 $135 $524 Add: share-based compensation expense $5 $5 $4 $4 $18 Add: ARO accretion expense $2 $2 $1 $1 $6 Less/Add: Little Narrows impairment ($11) $12 --- --- $1 Add: loss on extinguishment of debt $2 $1 $32 --- $35 Add: pension/serp settlement expense --- --- $17 --- $17 Add: 10 th floor exit cost --- --- $4 --- $4 Less: USG's equity income from UBBP ($16) ($14) ($12) ($13) ($55) Add: USG s share of UBBP Adjusted EBITDA $28 $30 $26 $24 $108 Adjusted EBITDA $180 $179 $148 $151 $658 1. Depreciation, depletion and amortization excludes the amortization of deferred financing fees which is included in interest expense. 2. 2016 and 2017 amounts have been recast to reflect adoption of postretirement plan accounting standard. 28
Adjusted Operating Profit Recast for Change in Employee Retirement Plan Accounting $ Millions Q1 2017 Reported Adjusted Operating Profit (Loss) Non GAAP Measure U.S. Wallboard and Surfaces $83 U.S. Performance Materials $7 U.S. Ceilings $21 Canada $2 Other $1 Corporate & Eliminations ($23) Equity income from UBBP $13 Total $104 Adjustments for Employee Retirement Plan Accounting U.S. Wallboard and Surfaces ($4) U.S. Performance Materials ($1) U.S. Ceilings ($1) Corporate & Eliminations ($1) Total ($7) Recasted Adjusted Operating Profit (Loss) Non-GAAP measure U.S. Wallboard and Surfaces $79 U.S. Performance Materials $6 U.S. Ceilings $20 Canada $2 Other $1 Corporate & Eliminations ($24) Equity income from UBBP $13 Total Adjusted Operating Profit $97 29
2018 SG&A Rollforward FY 2017 GAAP SG&A $298 Employee retirement plan accounting reclassification $7 Ceilings Plus SG&A $8 Pro-Forma FY 2017 SG&A 1 $313 General labor inflation (~2.5%) in 2018 $8 Increase in employee retirement plan expense due to lower discount rate $3 Investments to support strategy $31 FY 2018 Adjusted SG&A 1 $355 Transaction Costs (Integration, BU Realignment) $15 FY 2018 GAAP SG&A $370 Management s expectations as of the date of this presentation 1. Non-GAAP metric 30
Stockholder Rights Plan and Protective Amendment USG S STOCKHOLDER RIGHTS PLAN AND PROTECTIVE AMENDMENT RESTRICTS BENEFICIAL OWNERSHIP IN EXCESS OF 4.9% We have a stockholder rights plan that is intended to protect our substantial net operating losses, or NOL, carryforwards and related tax benefits. Under federal tax laws, we generally can use our NOLs and certain related tax credits to reduce ordinary income tax paid in our prior two tax years or on our future taxable income for up to 20 years, when they expire for such purposes. Our ability to use our NOLs could be substantially limited if we experience an ownership change, as defined under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, and the rights plan has been designed to help prevent such an ownership change. Under Section 382 of the Code, an ownership change occurs if, over a rolling three-year period, there has been an aggregate increase of 50 percentage points or more in the percentage of our common stock owned by one or more of our 5-percent stockholders (as determined under Section 382 of the Code). The rights plan provides that if any person becomes the beneficial owner (as defined in the Code) of 4.9% or more of our common stock, stockholders other than the triggering stockholder will have the right to purchase additional shares of our common stock at half the market price, thereby diluting the triggering stockholder; provided that stockholders whose beneficial ownership, as defined in Section 382 of the Code, exceeded 4.9% of our common stock outstanding on February 11, 2015 will not be deemed to have triggered the rights plan, so long as they do not thereafter acquire beneficial ownership of additional common stock other than in certain specified exempt transactions. The rights will expire at the close of business on May 31, 2019, unless earlier redeemed or exchanged. Our Board of Directors has the power to accelerate or extend the expiration date of the rights. The NOL protective provisions of the rights plan described above will be effective until the earliest of the close of business on (i) May 31, 2019, (ii) the date on which the Board determines that these provisions are no longer necessary for the protection of certain tax benefits because of the repeal of Section 382 of the Code, (iii) the first day of a taxable year as to which the Board determines that no tax benefits may be carried forward, or (iv) such other date as the Board determines that these provisions are no longer necessary for the preservation of tax benefits, which period is referred to as the Special Period. After the end of the Special Period, the triggering threshold for the rights issued pursuant to the rights plan will revert to 15% of our outstanding common stock and the definition of beneficial owner will revert to a definition that does not track Section 382 of the Code. At our 2016 annual meeting our stockholders ratified, on an advisory basis, the extension of the term of the rights plan and the NOL protective provisions described above. A Board committee composed solely of independent directors reviews the rights plan at least once every three years to determine whether to modify the rights plan in light of all relevant factors. This review was most recently conducted in November 2015, and therefore the next review is required by the end of 2018. Our Restated Certificate of Incorporation also restricts certain transfers of our common stock and includes provisions intended to further protect the tax benefits of our NOL carryforwards. Subject to certain limited exceptions, these provisions restrict any person from transferring our common stock (or any interest in our common stock) if the transfer would result in a stockholder (or several stockholders, in the aggregate, who hold their stock as a group under Section 382 of the Code) owning 4.9% or more of our common stock. Any direct or indirect transfer attempted in violation of these transfer restrictions would be void as of the date of the prohibited transfer as to the purported transferee, and the purported transferee would not be recognized as the owner of the shares attempted to be owned in violation of the transfer restrictions for any purpose, including for purposes of voting and receiving dividends or other distributions in respect of that common stock, or in the case of options, receiving our common stock in respect of their exercise. These transfer restrictions are effective until the earliest of (i) the close of business on May 31, 2019, (ii) the repeal of Section 382 of the Code if the Board determines that these restrictions are no longer necessary or desirable for the preservation of tax benefits, (iii) the close of business on the first day of a taxable year as to which the Board determines that no tax benefits may be carried forward, or (iv) such other date as the Board determines that these provisions are no longer necessary for the preservation of tax benefits. Pursuant to a Shareholder s Agreement reached in 2006, Berkshire Hathaway and certain of its affiliates may acquire beneficial ownership of up to 50% of our voting stock on a fully-diluted basis without triggering the ownership thresholds in our Restated Certificate of Incorporation or the rights plan, and may acquire beneficial ownership of more than 50% of our voting stock on a fully-diluted basis without triggering the ownership thresholds in our Restated Certificate of Incorporation or the rights plan through an offer to purchase all of our common stock that remains open for at least 60 days, in each case subject to specified exceptions. 31