Headwaters Incorporated Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Headwaters Incorporated (HW)

Headwaters Incorporated (NYSE:HW)

Q2 2013 Earnings Call

April 30, 2013 11:00 am ET

Executives

Tricia Ross - Vice President

Sharon A. Madden - Vice President of Investor Relations

Kirk A. Benson - Chairman and Chief Executive Officer

Donald P. Newman - Chief Financial Officer and Principal Accounting Officer

David S. Ulmer - President of Siding Division

William H. Gehrmann - Former President of Headwaters Resources Inc

Analysts

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

John Quealy - Canaccord Genuity, Research Division

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Philip Volpicelli - Deutsche Bank AG, Research Division

Seth B. Yeager - Jefferies & Company, Inc. Fixed Income Research

Operator

Ladies and gentlemen, welcome to the Headwaters Second Quarter Fiscal Year 2013 Conference Call on the 30th of April 2013. [Operator Instructions] I will now hand the conference over to Tricia Ross of Financial Profiles. Please go ahead, Madam.

Tricia Ross

Thank you. Good morning, everyone, and thank you for joining us for Headwaters Incorporated Second Quarter Fiscal Year 2013 Conference Call.

There are slides accompanying today's presentation that can be found on the webcast link at the Headwaters Incorporated website under the Events and Presentations link. Please go there to follow along with the slides. If you have any issues accessing the slides, please feel free to email me at tross@semprofiles.com and I also can email you a PDF copy.

I would now like to turn the call over to Sharon Madden, Vice President of Investor Relations at Headwaters.

Sharon A. Madden

Thank you, Tricia. Good morning, and thank you for joining us as we report Headwaters' fiscal 2013 Q2 results.

Kirk Benson, Headwaters' Chairman and Chief Executive Officer; Don Newman, Headwaters' Chief Financial Officer, will be heading the call this morning, along with Bill Gehrmann, who is President of Headwaters Resources and Heavy Construction Materials segment; and Dave Ulmer, who is President of Tapco International.

While listening to today's call, please remember that certain statements made during the call including statements related to our expected future business and financial performance may be considered forward-looking within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended. Forward-looking statements, by their very nature, address matters that are to different degrees, uncertain.

These uncertainties are described in more detail in Headwaters' annual and quarterly reports filed with the SEC. You can find Headwaters' annual report on Form 10-K, our quarterly report on Form 10-Q and other SEC filings readily available from the SEC's website, Headwaters' website or directly from the company.

I'll now turn the call over to Kirk Benson. Kirk?

Kirk A. Benson

Thank you, Sharon. We had a good March quarter. And excluding the revenue from Kleer Lumber, which we acquired in December, revenue grew in both our light and heavy construction materials segments. We were particularly pleased with the performance of our block products in the Texas market and our stone products because of its exposure to new residential construction.

Siding revenue was softer because growth in repair and remodel did not offset a more difficult winter in 2013 compared to 2012, but we are well-positioned for improvement in the repair-remodel end markets as revenue will increase as we move into the summer months. The nation continues to recover from the depressed level from new residential housing starts. In March, the seasonally adjusted annual rate of housing starts was above $1 million for the first time since June of 2008. Despite the improvement nationally, the unfavorable comparison of winter weather for last quarter negatively impacted unadjusted single-family starts in the Northeast, leading to less than 7% growth year-over-year versus a national growth rate of over 28%. In 2012, the inverse was true due to the mild winter weather as single-family starts in the Northeast grew 20% in the March quarter versus a national rate of 18%.

As you would expect in areas less affected by winter weather, we experienced revenue growth from improving end markets. We are well-positioned with both fly ash and manufacturing capacity to take advantage of increases in demand as our end markets improve. During the winter quarters, we effectively managed cost and we were able to realize some price increases. Effective cost management and price increases will be beneficial as volume levels improve during the construction season.

Our growth in adjusted EBITDA of 6% was primarily driven by price increases in both segments, volume in stone and block, and the addition of Kleer Lumber. The increases in adjusted EBITDA were offset by lower volume in fly ash and our energy segment performance. Excluding our energy segment, adjusted EBITDA would have grown 14%. The integration of Kleer is proceeding smoothly. Revenue was impacted by weather in the New England area, but overall performance was as we expected.

We are pleased with the addition of technical, sales and operational personnel at Kleer. We believe we are on track to achieve our projected synergies and move adjusted EBITDA into the 16% range as planned. We continue to make progress on our balance sheet. We repaid $15.3 million of our debt that would have matured in 2014. Even without including the current cash flow cycle, our cash on hand exceeds the amount of debt due next February. Although adjusted EBITDA from the first 6 months of the year is flat, we expect sufficient growth in the second half to put us in the forecasted range of $110 million to $125 million.

But now, I'd like to turn the time over to Don for a financial review of the quarter.

Donald P. Newman

Thank you, Kirk. Good morning, and thank you for joining us. Before discussing Slide 4, I wanted to mention that we intend to file our Form 10-Q later this week. My comments today will be directed to the slides that were sent out this morning, and to a lesser extent, the condensed consolidated balance sheets and statements of operations that were attached to the press release.

Starting with Slide 4, our second quarter revenue from continuing operations was $141 million, up $11.4 million or 9% from the prior year revenue of $129.6 million, which reflects growth from the Kleer acquisition, as well as organic growth. Second quarter adjusted EBITDA was $13.3 million, up 6% year-over-year. EBITDA in our core business, which excludes energy and discontinued operations, was up 14% year-over-year despite the severe weather conditions that were experienced in 2013.

Our year-to-date revenue from continuing operations is $290.6 million, up $23.5 million or 9% from 2012, reflecting 5% organic growth in our core segments. Even though 2012 was clearly a mild winter, our business performed well versus a very tough comp. We typically generate 70% to 75% of our earnings in the June and September quarter, but we're in a good position to see increased sales as the building season hits in the Midwest and Northeast. With that, we continue to be on track to generate a net profit for full fiscal year 2013.

Let's move on to Slide 5 for a closer look at the quarter's financial results. Light building products revenue increased $10.5 million including the Kleer acquisition. Organic growth in light building products in the quarter was primarily in stone and in block. Our siding business saw its sales decrease year-over-year as a result of the more severe snow conditions and lower average temperatures in 2013. Heavy construction materials revenue increased $2.8 million or 5% as price increases and revenue from new service contracts served to offset lower marketing volumes impacted by winter weather conditions. Energy technology revenue was down $1.9 million year-over-year due to timing of customer shipments.

Gross profit was $32.4 million, a 3% increase from the prior year. Gross margins were 23% in the quarter, down from 24.3% last year. Margins were negatively impacted by sales mix and a $600,000 acquisition accounting adjustment related to Kleer. We expect sales mix to return to a more typical profile as we go through the building season. SG&A increased $900,000, largely due to adding Kleer SG&A to our cost structures. Compensation tied to cash-settled SARs impacted by stock price increased year-over-year. However, that expense was largely offset by decreases in other compensation areas.

Adjusted EBITDA from continuing operations totaled $13.3 million, up from $12.5 million in 2012. Interest expense decreased $2.4 million as a result of debt repayment activity. Because we expect to generate net income for the full fiscal 2013, we recognized the tax benefit related to the current quarter's loss. In 2013, we expect to record income taxes at an effective rate of approximately 14% due to state income taxes in certain jurisdictions and to a small federal alternative minimum tax. We ended the quarter with more than $200 million of pre-tax NOLs and nearly $25 million of tax credits. That will shelter significant income from continuing operations in the future. We closed the sale of our coal cleaning plants in January, and we recorded a $3.1 million book gain on the sale during the quarter. We expect to collect approximately $10 million of cash for the sale of the coal cleaning business over the next 3 quarters.

Now let's move to Slide 6 and talk about the year-to-date financial results. Revenue from continuing operations year-to-date increased $23.5 million or 9% year-over-year to $290.6 million. Light building products revenue increased $13.9 million, including revenue from the Kleer acquisition. Year-to-date, organic growth in the light building products has been seen from the stone and the block businesses primarily, due to a combination of their end market and geographic exposures. The siding business saw its revenue decrease year-over-year largely due to winter weather conditions in the second quarter, as I've mentioned. Heavy construction material revenue increased $7.8 million or 7% as price increases and revenue from new service contracts served to offset lower marketing volumes, which were impacted by winter weather conditions.

Energy technology revenue increased $1.9 million year-over-year due to customer outages in 2012. Gross profit year-to-date is $69.7 million, a 6% increase from 2012. Gross margins are 24% year-to-date, down from 24.7% in 2012. The modest decline in margins reflects sales mix in the light building products business and also margins in our heavy construction materials segment being impacted by revenues associated with new service contracts and the expiration of a contract in 2012 that was highly profitable.

SG&A increased $4.1 million year-over-year, largely due to adding Kleer SG&A to our cost structures and to acquisition-related costs associated with the Kleer acquisition, as well as to compensation tied to stock price. Adjusted EBITDA from continuing operations totaled $33 million, which is up slightly from 2012 despite the challenging weather conditions this year. Our net losses have been trimmed 68%, down from $44.3 million last year to $14.1 million in 2013, as we've improved the operating income, reduced interest expense and sold nonstrategic businesses as we progress toward what we expect to be a positive bottom line in 2013.

Now let's move to Slide 7 and spend a few minutes discussing debt. Our debt position continues to improve. During the quarter, we repurchased $15.3 million of convertible notes, bringing the remaining debt maturing in February 2014 to under $40 million. Our liquidity remains above $100 million and we expect to generate approximately $40 million of free cash flow in fiscal 2013. We closed the current quarter with a net debt to adjusted EBITDA ratio of 4.7:1 and continue to progress in our goal to maintain reasonable levels of financial leverage across the cycle.

Starting on Slide 8, Dave will cover light building products.

David S. Ulmer

Thanks, Don, and good morning, everybody. On Slide 8, you can see revenues from our light building products segment for the quarter grew $10.5 million to $84.8 million, an increase of 14% compared to the second quarter of fiscal year 2012. Excluding the acquisition of Kleer, revenues increased 3.2% for the quarter.

Weather paid a large factor for the quarter in 2012. In 2012, we had a mild winter that pulled forward demand into our second quarter. With our product lines being placed on the exterior of the home, weather patterns are an important factor on when they are purchased.

We are pleased with the growth of organic revenues year-over-year given the difficult comp to last year's second quarter. One major reason for the growth is the strength of new housing starts. According to the Census Bureau, non-seasonally adjusted single-family housing starts for the 3 months ended March 31, 2013, were 28% higher than housing starts for the 3 months ended March 31, 2012. For our fiscal year-to-date, single-family starts are also up 28% as the growth in single-family starts has been more consistent than the volatile multifamily start numbers.

Economists continue to be optimistic as they forecast 2013 for both new housing starts and remodeling. In addition to our positive exposure to new residential end markets, our block product group has been positively impacted by the strength of the market in Texas. The growth in Texas has and will lead to the building schools, commercial and institutional projects and residential projects that positively impact our results.

Weakness for the quarter came from our siding product group, which was negatively impacted by unfavorable weather conditions and the lack of material growth in repair and remodel end markets. As Kirk touched on earlier, the integration of Kleer is progressing as planned and we continue to be excited about the new products that provides Headwaters.

Now let's discuss margins. Gross profit and adjusted EBITDA margins both declined for the second quarter when compared to last year. The largest factor was sales mix. Revenue growth was led by the addition of Kleer and improved performance from our block product group, which both have lower margins than our other light building products groups. Kleer performed in line with expectations given their end market exposure and excluding the onetime acquisition-related charge that negatively impacted gross margins but was an adjustment to EBITDA. Margins for Kleer will improve as we integrate it fully into the siding group.

We also experienced some material and transportation cost pressure in the quarter, but we feel these pressures are manageable and some have already declined off their elevated levels. Year-to-date revenues for the light building products segment have increased $14 million or 9%, while adjusted EBITDA is up $0.5 million to $23.5 million. Slide 9 illustrates what we've already discussed. Revenue growth grew over last year in the first and second quarters as adjusted EBITDA saw a growth in the first quarter but was essentially flat for the second quarter.

Now, I'll turn the presentation over to Bill.

William H. Gehrmann

Thanks, Dave, and good morning, everybody. On Slides 10 and 11, you can see that revenue for the March 2013 quarter in our heavy construction materials business was $54 million compared to $51.2 million for the March 2012 quarter, resulting in a 5% year-over-year increase.

Headwaters' plant services provide site services to many of our utility clients. Site service revenue was up year-over-year for the March quarter, primarily due to new service contracts, and accounted for approximately 34% of our overall revenue for the quarter. Since these services typically have lower operating margins in our product sales, the larger mix of services in the December and March quarters contribute to a lower overall EBITDA margin for the segment.

We also saw a return to the normal seasonality of our product sales as we experienced a more normal winter weather pattern in most parts of the country. This resulted in a 6% year-over-year decrease in the tons of high-value fly ash shipped for the March 2013 quarter, driven by reductions in the Midwest and Northeast. Cement shipments for January and February were up 2%, led by Texas, Florida and the Western U.S., which were up 12%, while the rest of the country was down 7%.

As the construction season progresses, our fly ash shipment will expand, and we anticipate that our total fly ash shipments for 2013 will exceed 2012. During the quarter, we realized a net 5% year-over-year price increase for high-value fly ash.

Gross profits for the March 2013 quarter increased 7% to $10.6 million compared to $9.9 million for the March 2012 quarter. Adjusted EBITDA for the March 2013 quarter increased 8% to $6.9 million compared to $6.4 million for the March 2012 quarter. In the March quarter, we implemented a cost reduction plan to remove $4 million of annualized cost from the business. Those reductions come from a combination of rightsizing our equipment fleet and headcount to our current service requirement, and streamlining our management and support.

The U.S. EPA is proposing a rule aimed at curbing wastewater discharges from coal-fired and nuclear power planted. Instead, it is looking to align new standards with the proposed fly ash disposal regulation. The EPA indicated that information under review could provide strong support for a conclusion that regulation of coal combustion products disposal under record Subtitle D would be adequate. While we have felt positive for some time as the direction of the EPA was away from Subtitle C designation, this is the first formal statement. The idea of viewing the wastewater regulations and the solid disposal regulations together is a positive direction for CCP disposal.

Also, in April, the U.S. House Subcommittee on environment and the economy held a hearing on draft legislation to establish national standards for the disposal of fly ash. Legislative language that basically mirrors last year's Senate bill is expected to be introduced in the house soon. Winter electric generation has allowed us to inventory fly ash supply, and higher year-over-year natural gas prices have resulted in an improved supply outlook for us as we begin to move into the construction season. As I indicated before, we anticipate an increase in high-quality fly ash tons sold.

I'll now turn the call back over to Kirk.

Kirk A. Benson

Thank you, Bill. As you can see on Slide 12, our revenue on our energy segment declined by almost $2 million, having a negative impact on consolidated adjusted EBITDA. The decline is primarily related to the timing of orders. There is also a refinery turnaround planned in the June quarter that could continue to impact timing.

As you look at Slide 13, you can see the negative impact on consolidated EBITDA was approximately $1 million.

Turning to Slide 14, we continue to affirm our guidance of $110 million to $125 million of adjusted EBITDA in 2013. There are obvious caveats related to the guidance, but with the pickup in revenue from our siding group and continued strong sales of block and stone, we should perform well in the June and September quarters.

I'd now like to turn the time back over to the operator for the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Al Kaschalk from Wedbush.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

I guess I'm going to first start on the light building products. Two things. One, Kirk, can you share what you have seen on the R&R market here as we turned into third quarter? I know weather has been an impact, but there seem to be some positive sightings and some tone, certainly in the release, that would suggest that there's some tailwind here or at least some buildup in strength in that market.

Kirk A. Benson

Yes, I think that it's hard to tell during the winter months. So that's the first comment, is the winter months, particularly in the upper Midwest, Northeast, tends to mask what's going on with fundamental demand. So you always have that caveat coming out of the March quarter. And that said, I think that we would be surprised if we don't have an increase in sales in the June and September quarters compared to last year in our repair and remodel market. I mean we're not expecting like double-digit growth or anything like that relative to repair and remodel. But there is the -- I think that there's a fairly good chance that we'll have a positive year-over-year comp in the repair and remodel markets. And of course, we've got Dave. Dave is the President of our siding group, and so he is very close to our customers in the repair and remodel side. In fact, Dave's prior position was our lead sales person. So he has very close relationships with a number -- with all of our wholesale distributors. So Dave, do you feel the same way about the repair and remodel markets going into the June and September quarters?

David S. Ulmer

I do. I feel positive that -- and customers are generally feeling positive about what's going on. They -- it's been harder to get our hands around it because of the weather, as you said, Kirk, and the new housing, it's easier to see and easier to track sometimes than some of those remodeling numbers. But customers have -- we've started to see a surge in activities from them and inventory and those kinds of things, which means they feel good about what they're seeing in the market as we start in the Midwest to see spring even though other areas are ahead of us already.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

And just a follow-on to that, is there a way -- can you call out the margin impact from mix? And then second, the elevated cost, I don't -- material on transportation, I don't know if that's something that will be collected here going forward or if it's lost, but certainly, it would suggest potential price increases given some of your elevated cost. Or were those was strategic decisions? But if you could partial out maybe the shortfall in margin in the segment relative to your expectations of both mix and cost.

Kirk A. Benson

Yes, I don't think that the transportation costs and even raw material costs were material. The most significant impact on our margins was sales mix. And so I think if -- and there's 2 things going on with sales mix. One is the addition of Kleer Lumber. And so the adjusted EBITDA from Kleer Lumber is below our expectations of where it will be as we get our synergies put in place and as we expand its top line through additional distribution. So we're comfortable and where we are at, it's exactly -- it came up very, very close to where we expected it to be. And with the synergies that we're putting in place, we think it will be, with those improvements, where we expected it to be in 2013. So it's very much on track. But that mix does have a little bit of a negative impact on overall EBITDA margins. So there is that aspect. And then the other aspect is that you -- we had a decline in volume in the siding group, primarily because of the winter weather. And so there's those 2 things going on in sales mix by the -- those are the 2 things that primarily drove the impact on margins. So I think if the -- if we had not had the winter weather impact, we would have overcome the margin related to Kleer and our EBITDA margins would have been better in the March quarter than they were last year. And so you're probably talking at least 100 basis points impact in margins based on mix.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

And finally, if I may, I'll sneak 1 in here. On the heavy building side, it looks like you had a fairly strong pricing quarter. And I was wondering if we could comment on that, and then secondly, the tons that were sold in the quarter?

Kirk A. Benson

Yes, I'll share with you my thoughts and then Bill can add color to that. I think that most of the price increases are set in the spring and early summer months. And so what we saw in the March quarter was approximately a net price increase of 5% in the March quarter of 2013 compared to 2012. And so what's happening right now is Bill's folks are working on the price increases for the summer 2013 that will go on through the 12/31 and the March quarter of 2014. And so it's an indication that the price increases that we put in place in last year, in 2012, stuck, and that we were able to achieve those price increases. So we feel good about the 5% net price increase in the quarter. And given the pricing environment with the portland cement, we also think that there is the opportunity going into the construction season to have some price increases for the remainder of 2013, and then into the March quarter of 2014. So we feel pretty good about that. I think from a volume perspective, the impact is almost entirely related to weather because of what happened in the upper Midwest and Northeast. And so we're anticipating that our total volume for the year 2013 will exceed 2012. And we feel very good about how we're positioned with our heavy segment. So Bill?

William H. Gehrmann

Yes, just...

Kirk A. Benson

Add color to that.

William H. Gehrmann

Yes, just a little more color. As Kirk said, typically, at the end of the calendar year, we start to implement price increases. And those will go into effect all the way into May and June. So we're starting to see those take place. We monitor those pricing targets at the 80-plus sites that we sell product out of. It looks like we're on track. So as Kirk mentioned, I think there is some continued upside in our pricing, and obviously, we'll aggressively go after that as we get into the construction season. So we feel pretty good there. As far as the volumes go, obviously, the year-over-year reduction is attributed to the return to a more normal winter. And that impact comes from 2 different reasons. One, obviously, a normal winter. We're going to see reduced ready-mix yardages put out there. The other piece to that is mix designs change in the winter for concrete setting up in colder temperatures. And typically, a winter mix design will have a little less fly ash in it. So you had 2 contributors there, Al. But as Kirk pointed out, we feel good about our volumes moving forward, fully expect 2013 to exceed 2012. As we talked to our customers throughout the country, they're beginning to feel very positive about the outlook. And for the first time in a while, we're actually hearing them talk about backlogs of work as they move into the construction season. So yes, we feel pretty good.

Operator

The next question comes from John Quealy from Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

Kirk, if we look at the back half of the year, if you can sensitize expectations in the model with me for a second. Last year, light building products was fairly muted growth, 5% and 6% in the back half of the year by quarter. CC -- sorry, heavy construction was much better, 15% on average. Can you sensitize your $110 million to $125 million, what you need to see in those 2 lines in the back half of the year to get either the low end or the high end of the guidance? Or what should we think about here as we get to the important Q3 print?

Kirk A. Benson

I think that the -- from a top line perspective, I think we're generally on track to achieve what we need to, to drive our EBITDA growth. A lot of the EBITDA growth in the back half of the year is going to be reflected in the financial statements of the SG&A line as opposed to the top line. I think that the top line growth is going to be positive and certainly, going to move us in the right direction. But I think we're going to have some -- from a comparison perspective, I think we're going to have some -- you're going to see improvements in the SG&A part of the business. I think Don should add additional color to that response.

Donald P. Newman

Let me see if I can take a run at this and give you some perspective. Last year in the second half, I think we generated something in the neighborhood of $58 million to $60 million of EBITDA. And when you think about that number, that was -- that included about $15.5 million of above target compensation. And although we'd expect some of that above target to repeat this year because the stock prices obviously performed well, let's just take that $15.5 million as an adjustment when you think about last year to this year. That means that last year's second half results would be in the $73 million to $75 million EBITDA range. Does that make sense so far?

John Quealy - Canaccord Genuity, Research Division

Sure does, yes.

Donald P. Newman

Okay. So you think about our guidance this year at a $110 million to $125 million, let's pick the midpoint of $117.5 million just to make the math kind of hold together a little bit. Year-to-date, we recognized about $33 million of that $117.5 million in this example, which would mean that in the second half, we'd expect to generate $84.5 million. So $84.5 million versus $73 million to $75 million last year. So there is a significant year-over-year increase, which I think is what you're talking about, right?

John Quealy - Canaccord Genuity, Research Division

That's correct.

Donald P. Newman

And so when you start thinking about the components that bridge that, a couple of things come to mind. First, Kleer. Kleer, we've said that we would expect to generate something in the neighborhood of about $5 million of EBITDA in this year of ownership. Last quarter, we obviously picked up some of that. But I would expect for the balance of the year, we'd be in the neighborhood of about $4 million of Kleer EBITDA this year that we didn't have last year. Another thing that comes to mind is what Bill just brought up, which was the fact that his team has brought to the table some cost savings and efficiency initiatives that should add something in the neighborhood of a couple of million dollars year-over-year to what we had last year versus this year. So between those 2 wrapped up my head, there's about $6 million. Then you think about the remainder, it's in a $5 million range. And you think about what's happened in end markets last year to this year, and what I would say just not having much time to think about other bridge items, if you think about if all of that $5 million needed to be covered by end market recoveries, I think that that's not a crazy number when it comes to thinking about our business and us now getting into the more profitable portion of our year Q3, Q4.

Kirk A. Benson

And I think 2 things that are going on that are kind of very interesting. One is the increase in demand in the block business in Texas. And the thing that is very positive is that even though the EBITDA margins in our block product group are lower than the margins in stone and siding, because of the increased demand, we're able to get better utilization of our fixed cost and our manufacturing capacity. And what that does is even though those margins are lower, it still drives those margins up. And so if you look at the activity in January, February and March, we're moving in the direction that the margin trend is back to where we were in 2011, when we peaked in the block group in margins. And so that's very positive as far as the improvements in the end markets because you can see the margin improvement in the block product group as a result of that top line growth. And that bodes very well for the next 6 months as far as exceeding our internal expectations, which is the direction that, that's moving. The other thing that's happening because of the residential exposure to the stone group and stone -- in 2011, we made some very significant cost improvements in our structure in 2011. That led to improved margins in 2012. And what's happening now is that based on that improved cost structure, we're seeing top line growth because of the exposure to the residential construction. And so what's happening there is we're having a little bit of margin expansion there as well. And so for the second half of the year, we feel very good about stones' contribution to our forecasted EBITDA.

John Quealy - Canaccord Genuity, Research Division

And just in terms of the weighting, Q3, Q4 on EBITDA, generally 50-50, 60-40. What do you think about this year? Any changes materially in that mix?

Kirk A. Benson

I think it probably is in the 50-50 range. What happens historically is that the light products group, their EBITDA peaks in the June quarter and then trails off a little bit in the September quarter. The opposite is true for the heavy side. You have -- it peaks in the September quarter. And so you base it. But -- and the variation isn't extreme. And so you end up with about a 50-50. But you've got a little bit of different mix going on between light and heavy between the June and September quarters. But it's about 50-50.

Operator

The next question comes from Dan Mannes from Avondale.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

A couple of quick follow-up questions. First, as you talk about the weather, can you maybe give us a little bit of a walk through maybe the months of the first quarter and then April? My impression is historically, March is kind of the key quarter for the March quarter, or the month of March is the key month in the quarter for both ash shipments, as well to some degree on light building product side. Can you talk about how March played out and maybe then transitioned out into how April looks so far?

Kirk A. Benson

So of course, Dave works mostly with our siding product group, and so let me respond on the light side as to what happened during the quarter and then Bill can talk a little bit about the heavy side. What you just said is absolutely true. You go until about the middle of March and then you start to see activity pick up. What happened this year in the block, and that's really what happened in this quarter in block and stone, is that stone had a -- stone was really -- they had a positive comp compared to last year because of exposure to new residential markets, and I think we saw that come through in the stone group. And what we have seen as we moved through March and into April is that continue trend. So that's one of the reasons that we feel pretty good about the next 6 months from a stone product group because you can see that, you can see that positive year-over-year continuing into April. The block group is a little bit different because it's not -- they've got some exposure to new residential construction, but what's driving their numbers is some additional revenue that we picked up at Lowe's and that does have, it has some commercial impact. But also it has -- it's more of the new residential construction. So we have a little more exposure there, but we've picked up some additional revenue from Lowe's. And then the other thing that's happening is -- that were so successful, public school bonds. We're seeing commercial activity improving. I think the commercial activity is improving in a response to the demographics and to the improved residential construction as Texas continues to grow. So we're seeing increased commercial, institutional, and then as I said, we had this little pickup in business from Lowe's. So I think that -- and so, Dave, why don't you talk about just a little bit on what you're seeing on the repair and remodel side, and what you're seeing as we've gotten through March and into April on the siding group? And then Bill can respond for ash.

David S. Ulmer

Yes, I mean you don't want to continually go back to weather. But leaving March, obviously, was a good thing because we had so much snow and so much bad weather. But like Kirk said, we are in the midst of rebounding strongly in April and seeing all indications that we are going to exceed last year going forward. And we -- as we said, everything is positive looking into remodeling markets. They're positive looking at the inventory the customers are bringing in, and we have every expectation that we're going to exceed what was done last year at the end of the June quarter by the simple fact that where we're pointing to now and the consistency in the strength of orders and the feedback that we're getting from customers about jobs.

Kirk A. Benson

Yes. So Bill, why don't you talk a little bit better about fly ash.

William H. Gehrmann

Yes, Dan, as far as the volume trends, we've actually seen a positive year-over-year comp trend from it was fairly consistent from January to February to March. We felt good about that. It's compared to cement, which actually had a negative trend from January to February. So we feel good about our positive trend there. Moving into April, we feel good about the continued trend. We have a little winter hangover in a few spots, but excluding that, yes, we feel good, and we mentioned it several times previously on the call. We feel very good about the outlook for our 2013 volumes when compared to 2012.

Daniel J. Mannes - Avondale Partners, LLC, Research Division

Sounds good. One quick follow-up for Bill on the EPA, on the water discharge. How do you think this plays out as it relates to sort of the co-proposal? I mean does this come back? Does this change the way it plays out? Or I don't know if you can give us your crystal ball in terms of what EPA does next as it relates to the specific coal ash regulations.

William H. Gehrmann

Kirk, you may want to provide a little color on this. It's -- we actually discussed that a little bit this morning, Dan. And we mentioned, we feel it's beginning -- we're seeing the EPA begin to send the message. But it's difficult, that they've been wrestling with the regulation of CCPs now for 20 or 30 years. But we do view this as a positive move. And there's just so many moving pieces with various regulations impacting utilities that this is just a small piece in the overall regulation. So it may be a little too early to tell where it exactly fits in and how quickly it may move from here.

Kirk A. Benson

But from our perspective, this was -- I'm looking for the superlative word to use.

William H. Gehrmann

Positive signal?

Kirk A. Benson

This was -- I mean, it was great. To get the EPA to say what they said was the most important development in this issue in the last 4 years. And whether they're going to be able to complete the regulations by the court imposed deadline in 2014, that's what Bill is saying, we don't know. But what we do know is that in the last 6 months, we sensed a turning point. And I mentioned that on the last conference call that you can't -- it's not -- it wasn't anything other than attending dozens of meetings on this issue in D.C. What you felt was that sometime last fall, late summer, last fall kind of timeframe, that this issue turned and it turned in our favor. And so to have the EPA be explicit with the caveats that they have. And so you can't declare absolute victory on this issue. But what you can -- but you can -- because there's caveats with what the EPA's language that it used. But there -- this is absolutely the most positive thing that has been said on this issue in the last 4 years, and it is a very strong indication that we'll end up with Subtitle D regulation. Whether it happens in 2014 or not, that's what Bill is alluding to, we don't know. And the EPA has been very methodical in going through this process. And so we can't predict the timing of final regulations. But it's such a powerful message that they sent that the most likely outcome is a Subtitle D regulation. I mean we feel very, very good about the statement that was made by the EPA.

Operator

The next question comes from Philip Volpicelli from Deutsche Bank.

Philip Volpicelli - Deutsche Bank AG, Research Division

My question is with regards to light building products and the pricing that you're seeing in the different pieces. Could you just discuss what you're seeing for stone, siding and block pricing?

Kirk A. Benson

Yes, I think that on -- the stone pricing has been, through the down cycle, has been very stable. And we've been able to maintain this -- we have these -- we have 3 products, the good, better and best market segmentation strategy. And we have -- we've maintained those price points. And so we've not been aggressive in raising prices, but what we've been able to do successfully is to grow our business at all 3 price points. And that, we feel very positive about that from our stone perspective, particularly with the way that the market has evolved, and we feel strongly that we have the highest quality product from an aesthetic point of view in the marketplace today. And we've been able to maintain the price associated with that aesthetic quality. From a block perspective, we have given the increase in demand and the change in the market there. We have been able to increase our pricing in the block group. And so I think that from a stone perspective, we have been stable to slightly up in pricing. We've gotten just a little bit of price increase. The block group, we're talking more in the 5% kind of price increase in the block group. And the siding product group, we put some price increases in place last year that have stuck in the marketplace. And so we don't have any immediate plans for dramatic price increases in the siding group. But that could change with market conditions. But Dave, why don't you add a little bit to the -- to your perspective from the siding group?

David S. Ulmer

Okay. We -- The first thing is we are having on some of our -- now, I wouldn't say on some of the -- not on the core building products items, but we are having some increases on some of our product categories. But what we've -- we had 2 price increases. While 1 affected the end of last year, previous to that, we had another 1. So we had 2 in a 12-month period of time. Raw materials were starting to spike a few months ago, and we thought we may have to have more price increases. But we've actually, as I said in my part of the presentation, we've started to see raw materials, the cost drop back down from what those levels were. So at this point, it does not look like we need to have further increases with where costs are. But if they go up again, then we have to address it.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay, great. And how big was the siding volume decline year-over-year? Can you quantify that?

David S. Ulmer

The -- it was -- I mean, it's like a couple of percentage points is all that it is. So it's not particularly significant. Nevertheless, it was enough to drive the mix and the impact on adjusted EBITDA. I think that it's in the, like a 3 -- from a revenue perspective, I think it was in the $3 million range, something like that.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay. And then the last question for me. Obviously, you guys had the maturity of the 2.5% notes in February 14, and you've got plenty of cash on the balance sheet to satisfy that. Are you looking at other tuck-in acquisitions with the additional cash you expect to generate the second half of the year, something the size of Kleer? Is there anything else out there?

Kirk A. Benson

There are -- there's opportunities for us, yes. I think we feel very good about what we did with Kleer, and I think we have sufficient cash to do a small acquisition if we were -- if we found there are some. And so if we are able to bring a tuck-in acquisition to the table, then we would be inclined to do that. But that said, if we were able to find 1, get it negotiated at a pricing that would be clearly accretive and using the cash off our balance sheet, that would be an accretive thing to do. It actually would be hard to do an acquisition that would not be accretive relative to using cash off our balance sheet.

Philip Volpicelli - Deutsche Bank AG, Research Division

Yes, that makes sense. How much liquidity do you guys feel you need so to kind of back into what you could be able to spend on an acquisition?

Kirk A. Benson

And Don is going to respond to this as well, but we're over $100 million. And I think we're probably $30 million or $40 million more liquidity than we need.

Donald P. Newman

Yes, so I would say something in that neighborhood. We've got a revolver that's in our back pocket that we try to be pretty conservative in the use of, and then we'll maintain adequate cash above that. So something in the range of what Kirk said is pretty rational.

Operator

The final question comes from Seth Yeager from Jefferies.

Seth B. Yeager - Jefferies & Company, Inc. Fixed Income Research

I guess most of my stuff has been answered. Just around -- just a couple of cleanup items. For the restructuring that you guys had noted as far as headcount reduction or what it may have been in the heavy materials business, I didn't see that with any material add backs in your adjusted EBITDA for the quarter. Was that subsequent to quarter end? Or were there any cash severance charges or anything that you guys took?

Donald P. Newman

So this is Don, I'll take a shot at that. We actually didn't have any significant costs to capture those efficiency savings that Bill took in his business. So that's why you didn't see any significant add backs. Did I miss anything on that, Bill?

William H. Gehrmann

No, no. There was some related severance, but we took that in the quarter.

Donald P. Newman

Yes, it was very modest though.

Kirk A. Benson

So there were some expenses. But it -- we try to not note -- we try to not have adjustments to EBITDA unless they're larger numbers.

Donald P. Newman

We don't want to nickel and dime the results when it comes to adjustments. We want to make sure it's material and important information to the market.

Seth B. Yeager - Jefferies & Company, Inc. Fixed Income Research

Yes, it now makes sense, I appreciate that. And then just as -- thinking about Kleer, I mean it's smaller in terms of the overall size of the business. But just CapEx or overall capital requirements for that business, expansion plans going forward, anything that we should sort of think about with that particular business at it starts to ramp up?

Kirk A. Benson

Yes, I think our plans would be that we may need to do some expansion in the 2014 timeframe depending on how successful we are in growing the top line. And then that's in the range of like $3 million to $5 million when we do that expansion. But it's either 2014 activity, probably starting in 2014 with 2015 use of the expanded capacity.

Donald P. Newman

And then from a working capital demand standpoint, Kleer is actually a very efficient organization. So there's not a significant working capital demand related to that business.

Seth B. Yeager - Jefferies & Company, Inc. Fixed Income Research

Okay. And just last one on the fly ash business. It looks like overall pricing is starting to accelerate with some of the weathers out there on the cement side. I mean are you guys -- it sounds like you're going to start to be able to capture some of that pricing on the fly ash as well. How should we think about just the overall marketplace for you guys? At what point does it make sense to pull back a little bit to try to maybe grab a little bit of market share there? And just any thoughts around that?

Kirk A. Benson

You think that the -- as we indicated, now is the -- just between now and June is when a lot of the price increases go into effect. And because of the relative pricing between portland cement and the fly ash, what happens with portland cement provides some cover for the price increases in the fly ash business. And so I think we want to take advantage of that opportunity for those price increases, and we try to -- there is a lot of -- there is competition based on price, and that's -- it's a regional kind of phenomenon and you have to respond to that -- to the competitive pressures based on price. But generally, we prefer to compete on other characteristics of our business and not as much on price. So if we can compete on service, on availability, on quality, those are the areas that we would prefer to compete on rather than price. You agree with that, Bill?

William H. Gehrmann

Yes, exactly. We will continue to try to leverage our pricing increases and regards to market share, we have opportunities to pick up market share, but that, in the short-term, is going to be dictated on supply issues out in the marketplace, and we will obviously try to leverage our multiple supplies in the sales territories. But our big push will continue to be leveraging our price increases, and we see our volumes start to go up.

Sharon A. Madden

Operator, with that, we will go ahead and end the call. Thank you for joining us.

Operator

This concludes the Headwaters Second Quarter Fiscal Year 2013 Conference Call. Thank you for participating. You may now disconnect.

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