A century ago, USG’s landmark product forever changed how buildings are built. It’s a legacy of innovation that inspires Scanlon—the company’s first female CEO—as she looks to the future of the industry.
- May 01, 2018
Though you might not realize it, you’ve likely encountered USG Corporation’s landmark product recently, maybe even today. In fact, it may very well be in the room where you’re sitting right now. That’s because the company’s drywall, flooring, ceiling, and roofing products are part of countless homes and buildings. As the creator of the iconic and ubiquitous Sheetrock brand of wallboard, Chicago-based USG has led the building-materials industry for more than 116 years, with a storied history of innovation and sales of $3.2 billion last year. It made panels for the 1933 Chicago World’s Fair. It helped build homes for American GIs returning from World War II. And in November 2016, Jennifer Scanlon, ’92, became the first female CEO in the company’s history.
“We are a transformed company,” Scanlon said, just days before leading USG’s first-ever Investor Day in New York City. “That transformation came in a number of ways—interestingly, from a lot of the initiatives that I led prior to becoming CEO.”
A Chicago-area native, Scanlon joined USG in 2003 after studying government and computer applications at the University of Notre Dame and holding roles at IBM and in operations consulting. In recent years, she has made USG more global and more responsive to its customers. She was named president of the international division in 2010, when it included only Canada, Mexico, Europe, and a small operation in Asia. She went on to lead the divestiture of the European business, and then assembled an Asian joint venture called USG Boral, with $1.2 billion of revenue in 2017.
Scanlon’s Booth education and quantitative skills gave her the necessary perspective for her next assignment, in 2015, as president of USG’s distribution business, L&W Supply Corporation. After being asked to conduct a strategic evaluation, Scanlon made a surprising move, advocating for the company to divest the business she was leading. USG sold L&W Supply Corporation in 2016 for $670 million, bringing in much-needed cash for new strategic initiatives. “It wasn’t until we sold L&W that we had what we consider a truly healthy balance sheet,” Scanlon said.
USG is a company accustomed to making hard financial decisions in order to survive. In the early 2000s, it was one of dozens of manufacturers that sought bankruptcy-court protection over asbestos claims. Then came the bursting of the housing bubble, devastating the construction industry that USG relies on as a primary purchaser of its wallboard and other building materials. In 2008, Warren Buffett’s Berkshire Hathaway shored up USG’s balance sheet by acquiring $300 million of convertible debt. Berkshire has since converted all of that debt into stock, making it USG’s largest shareholder. In March, the USG board unanimously rejected an unsolicited proposal to purchase USG by Gebr. Knauf KG, a Germany-based maker of building materials. [Editor's Note: See update at end of article.]
With a stronger balance sheet and a more encouraging outlook for construction, Scanlon has been focused on making USG a pure manufacturer, accelerating the development of innovative products, and finding new ways to help customers build quickly and safely. “We’re coming up with high-performing solutions that [architects and contractors] haven’t always had access to,” she said.
A lifelong Midwesterner, Scanlon is also helping the Civic Committee of the Commercial Club of Chicago position the city as an attractive base for technology companies.
Scanlon recently spoke with Chicago Booth Magazine, sharing her perspective on the booming global economy, efforts to get more women involved in manufacturing, and the crucial task of reducing carbon emissions.
We’ve focused on addressing three challenges for our industry: job-site efficiency, sustainability, and high-performing materials.
CHICAGO BOOTH MAGAZINE: The housing crash and 2007–10 financial crisis were traumatic for USG. What has the company done since then to protect against these kinds of downturns?
Scanlon: We looked at ways to ensure that we could flex up and down with the market, knowing that the construction industry is cyclical. We ended up outsourcing a lot of our transactional, non-customer-facing processes. That’s been really useful for us in a lot of ways. We have better data, so the global supply chain can negotiate better. We also have better processes so we’re not paying too early or too late. Working capital is much more balanced. These were some hard lessons learned, but ones that ultimately helped us get to where we are today.
Also, we are a lot smarter about the way we run our plant network. Our plants are very energy intensive—you run drywall through a kiln. It used to be that once you fired up that kiln, you did anything in your power to not turn it off. But with energy efficiencies and savings and different ways of thinking, now we can run a plant very effectively for three days or five days a week. We don’t need to run it 24-7 for 30 days at a time the way we used to.
CBM: How do you take a business with this much longevity and continue to push for innovation?
Scanlon: This is one of the most diverse teams that I’ve ever had the opportunity to work with. We have dozens of PhDs from all over the world—I think there are over two dozen languages spoken among our employees. We have food scientists who understand starch, which is a big raw material for us. We have a scientist who was in the cosmetics industry in Eastern Europe. When you think about it, she suits us really well. Drywall is a slurry that gets spread onto pieces of paper, and she’s helped devise new and better ways to spread this slurry.
We spend around 1 percent of revenue on research. About 40 percent of that is standard continuous improvement: improving quality or formulations in our products. The second category is what I like to refer to as the “all-new-and-improved.” This means division-driven initiatives like our Securock ExoAir 430 Air Barrier System. The third category, which I think distinguishes us from our competitors, is what we call “the big ideas.” There, we focus on addressing three challenges for our industry. The first is job-site efficiency, the second is sustainability, and the third is high-performing materials.
We’re bullish—very bullish over the long term. We are not even close to the 50-year average in housing starts or repair and remodel spending.
CBM: Many of your sustainability efforts address the threat of climate change caused by the rising level of greenhouse gases. Why is this important to you and important to the company?
Scanlon: Buildings emit 40-plus percent of carbon emissions, so anything you can do to improve the overall carbon footprint of the building is important. We were founders of the US Green Building Council, and we were involved in designing the LEED [Leadership in Energy and Environmental Design] ratings. Then the architectural industry came out with Architecture 2030, which laid down the gauntlet and said, by 2030, we want to see buildings reduce their carbon footprint by 50 percent. We debated, is this something that we think we can achieve? We agreed that we can.
CBM: You also have been trying to reduce water usage. Why is that a major initiative?
Scanlon: Just by the nature of what we make, water is a very important component. Gypsum has two molecules of water appended to it. To create drywall, you dry those molecules off, grind the result into a powder, add water back to it, press it between two pieces of paper, run it through a kiln, and dry the water out again. You go to places like California, you read about what’s happening in South Africa, you look at our Asian business—we came to the conclusion that we need to address the challenge of water. Is there a way to come up with a much more efficient mechanism to make drywall? We drove a lot of water out, but we’re not done yet.
CBM: How are you thinking about the macroeconomy, especially as your business is becoming more global?
Scanlon: We’re bullish—very bullish over the long term. We are not even close to the 50-year average in housing starts or repair and remodel spending in the United States. We’ve had a decade of building well below the 50-year mean, and our US population is growing. There’s been this logjam—I don’t know if it’s based on student debt or credit-card debt or a hangover from the recession, but it feels like it’s freeing up.
Last year, we started interviewing 200 commercial contractors four times a year for the Commercial Construction Index, a quarterly economic index in partnership with the US Chamber of Commerce. The Index is important in that it provides unique insights into the outlook for and confidence in the commercial construction industry. It measures what is going to happen by looking at the results of three leading indicators—backlog levels, new business opportunities, and revenue forecasts—to gauge how contractors feel about the future of our industry.
We learned that commercial contractors like to have 12 months’ backlog. They’re close enough to that that they feel comfortable. Yet they’re concerned about a skilled-labor shortage. That’s the one thing that I believe can temper the growth rate.
Editor’s Note: After this article was published, USG and Gebr. Knauf KG announced that Knauf will acquire all outstanding shares of USG in a transaction valued at approximately $7 billion. USG’s headquarters are to remain in Chicago, the announcement said.
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