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James Metcalf Wants to Make USG Less Cyclical

The USG chief executive discusses the wallboard maker’s future strategy, how he makes tough decisions and his father’s influence on him.

The night before USG Corp. CEO James Metcalf met Warren Buffett for the first time, he couldn’t sleep. “I was scared to death,” says Metcalf, who was then president of the wallboard maker. Buffett’s Berkshire Hathaway had bought $300 million worth of convertible notes from USG in 2008, when the company was reeling from the housing crisis. But Metcalf says the Berkshire chairman and CEO immediately put him at ease, offering up great ideas and asking spot-on questions.

These days Metcalf still can’t sleep before he sees Buffett, who is USG’s largest shareholder, with a stake of approximately 30 percent. But now it’s because of excitement. “You always get an invaluable nugget from him,” says Metcalf, 56. He admires Buffett’s accessibility — the legendary investor always takes Metcalf’s calls. He was shocked when Buffett once offered to drive him to the airport in Omaha, Nebraska, but he realized that the investor makes sure he gets out in the world and learns as much as he can from people.

Metcalf prides himself on his ability to field ideas from all over USG and from its customers, avoiding the isolation many CEOs face. “Even with the recent unrest in Thailand, where we now have operations, I went directly to the general manager, and he gave the perspective of what’s happening on the streets on the other side of the world,” Metcalf explains. “I wanted to hear it directly.”

The USG chief executive has spent his entire career at the Chicago-based company. After graduating from Ohio State University in 1980 with a BA in criminal justice, Metcalf — who grew up in Toronto, Ohio, the son of a steelworker — drove from Pittsburgh to Los Angeles to try to persuade a USG manager to hire him as a sales trainee. Even though the opening had been filled, Metcalf was determined, checking in every few weeks. After several months one of the trainees quit, and Metcalf got his offer.

He rose through USG’s ranks, holding positions in sales, marketing and strategy. In 1999, Metcalf became chief operating officer of L&W Supply Corp., USG’s distribution company; he became L&W’s CEO a year later. He was named president of USG’s building systems unit in 2004. Two years later he became president of the company. He says he’s never asked anybody to do anything he hasn’t done himself. “Some of the big changes we’ve made over the past five years, we’ve embraced in part because people knew I didn’t come parachuting in from a consulting firm with crazy ideas,” he explains. “I can shoot e-mails out to the field or to customers to see what’s really going on.”

New ideas have been essential for USG (whose initials stand for United States Gypsum), a 112-year-old company that is one of the largest makers of gypsum wallboard in North America and the U.S.’s biggest distributor of drywall and building products. That distinction put it at the center of the decades-long fight over asbestos, a fire-prevention material that was a minor ingredient in its wallboard but later proved to cause certain types of cancer. USG sought bankruptcy protection from asbestos litigation in 2002. It emerged from Chapter 11 in 2006, paying $4 billion to the plaintiff’s bar to settle all future claims. But the massive payment came 18 months before the worst housing crisis since the Great Depression. In 2008, USG sold $400 million worth of notes to investors, including Buffett’s Berkshire, to help keep itself afloat. The notes have since been converted to stock.

Metcalf took over as CEO on January 1, 2011, succeeding William Foote, who had run the company for 20 years and managed through the recession by cutting costs and closing less efficient plants. The company was suffering, with revenues in all three segments — housing, repair and remodel, and commercial construction — down by about half. When Metcalf took the top job, he had to think through the company’s core businesses, shed what wasn’t central and evaluate viable options for expanding and diversifying its revenue base. “I really appreciate the heritage of the company, but I knew I had to do something different so we could be more agile,” he says. By the first quarter of 2013, the company was profitable again; at a recent price of $31, its shares have nearly doubled since Metcalf became chief executive. Senior Writer Julie Segal recently met with the CEO at Institutional Investor’s offices. Metcalf talked about USG’s future strategy, how he makes tough decisions and his father’s influence on him.

Institutional Investor: USG has been through some tough times. What was it like during the depths of the housing pullback?

Metcalf: I was president in the middle of this “small D” depression. I’m really big on strategy and thinking a thousand days out. We put together a strategy team to say, “What do we need to do to differentiate ourselves? What is core?” We identified our North American manufacturing and distribution as core — that was the cash cow. But they were under attack because of the depression. So we idled high-cost plants and delayered the organization. It’s like going in and getting a physical, but then you have to put yourself through a plan.

What wasn’t core?

I first looked at Europe. We had a business there, but it didn’t have critical mass or a full product line. And we didn’t have the balance sheet to make a big acquisition. Lafarge, the cement company, was divesting its wallboard business, but the timing was bad for us. At the same time, Europe is aging quickly, and the macroeconomics didn’t excite me; we’re driven by household formation and the like. We decided we couldn’t win and sold our European assets in 2012. We took those resources and reinvested in the Middle East, Asia and Australia. Weed and feed, I call it. In that fast-growing part of the world, we could win. I wanted to think big, start out incremental and move fast. I still didn’t have a lot of resources. So we invested in Oman and started putting a footprint in India.

You’ve taken a unique approach to emerging markets by establishing joint ventures, including one with Australian building-materials maker Boral. Why?

These markets are very fragmented — great for diversifying our earnings but hard to get a foothold in. We just entered into a 50-50 joint venture with Boral, which gives us a 40 percent market share in 12 countries. Every country’s economy is a little different. Indonesia is extremely busy. Australia is flat. South Korea is a little bit like the U.S., up somewhat. Vietnam is emerging. China is China. But people ask how an American company can win there. What do we know about Vietnam? Well, now we have partners that have been there for 40 years, and they wanted us for our technology and our innovation.

Technology innovation isn’t the first thing that springs to mind when I think of USG.

Well, we are an innovator. Absolutely. We introduced a product here in the midst of the recession that took a third out of the weight of the product. If you look at plasterboard, it’s two sheets of paper with plaster of paris in the middle. We figured out a way to take out a third of the weight while keeping its strength intact. In the Far East, where it’s very humid, everything sags. Our partners wanted this innovation and paid us for it. In fact, the JV was kicked off when the CEO of Boral called me to ask how he could get UltraLight, as it’s called. UltraLight really strengthened our North American business. In New York City, where drywall hangers make $105 an hour, it’s also huge, as workers can do more in less time.

How does your company foster innovation and new ideas?

We have approximately 100 people in our research center. We also partner with universities, tapping into their Ph.D. programs. It’s called open innovation. We copied start-ups operating in Silicon Valley. We wanted new and different ideas. And from a financial standpoint, it variablized a fixed cost. If business gets better, we get more interns from the Ph.D. program. Business slows up, we get fewer. We did this through the recession because we had to create our own recovery. Our shareholders shouldn’t say, “Jim’s job is to wait for the recovery.” We wanted to create it.

So you want to make USG less cyclical?

Yes, otherwise shareholders say, “What’s management doing?” We diversified our earnings, adding 12 countries. We’re focusing on innovation and coming out with a new mousetrap, like UltraLight. The third area is we’re using technology to tie together our entire network. Our business is very regional; Texas might be busier than the Pacific Northwest. We run a network, so we’re always delivering at the lowest manufacturing and delivery cost. Now think of this. You take out a third of the weight; you get a third more on a truck. Our distributors need a third less equipment. UltraLight saves you fuel, is more sustainable and has a smaller carbon footprint. Everyone thought wallboard was a commodity, but we changed the rules.

Really, the key is having a strong balance sheet going into the next whenever that will be. We didn’t have the luxury this last time because we had to pay $4 billion to the plaintiff’s bar.

What other innovations is USG working on?

We’re thinking about adjacent products that fit into building science. We have products that we introduced during the recession that are on the outside — the skin of the building — not just in the interior. These help to keep a lot of the emissions of the office building from getting into the environment. We’re thinking of the system and how products work together — the science of the next high-rise. In emerging markets, real estate is so precious. Buildings have to go higher, and to go higher they have to be lighter.

How do you reduce costs and still grow?

My theme with the organization is being ambidextrous. Lower the breakeven, keep it low, and grow the business. We can’t go back to the way it was in 2006. Our breakeven then was shipping 26 billion feet of wallboard a year. We took it down to 17.5 billion; I said, “We’re keeping it there.” That gives you leverage.

What did the recession teach you?

Well, I think about our recent town halls. The theme was how big companies can out-innovate start-ups. We had Chunka Mui, who we’ve worked with for two years, as a guest speaker. His firm, called Devil’s Advocate, goes into companies and stress-tests their innovation strategies. We don’t compare ourselves to other building-products companies; we look at Amazon and Google. It sounds far-fetched, but why not? Innovation doesn’t just take place at a research center. Innovation is every person here.

How does being the son of a steelworker shape what you do?

First, I love talking to employees and telling them that no matter where they come from, they can be the CEO of this company if they want. I was with some new employees about three or four years ago, and they were working me on having “jeans Friday.” We weren’t giving any salary increases; we had laid off people. And they’re telling me, “You always wear a tie.” I said, “Let me tell you why I wear a tie.” My dad had me work in the steel mill every summer. I was a laborer, and boy, did I do some crap jobs. He said, “I want you to work here every summer so you get your tail back to college and you get a degree so you can have an office job and wear a tie.” That’s why I wear a tie. It’s not because I’m a stiff. It’s a symbol, and it’s a tribute to my dad. • •

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