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Headwaters Incorporated (NYSE:HW)

Q3 2013 Earnings Call

July 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

Murphy K. Lents - President of Eldorado Stone

William H. Gehrmann - Former President of Headwaters Resources Inc

Analysts

John Quealy - Canaccord Genuity, Research Division

Philip Volpicelli - Deutsche Bank AG, Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

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

David A. Daglio - The Boston Company Asset Management, LLC

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Headwaters' Third Quarter 2013 Earnings Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, July 30, 2013. I will now turn the conference over to Tricia Ross of Financial Profiles. Please go ahead.

Tricia Ross

Good morning, everyone, and thank you for joining us for the Headwaters Incorporated Third 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, please feel free to email me at tross@finprofiles.com, and I can also email you a 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 Q3 results. Kirk Benson, Headwaters' Chairman and Chief Executive Officer; and Don Newman, Headwaters' Chief Financial Officer, will be conducting this morning's call, along with Bill Gehrmann, President of Headwaters Resources and Heavy Construction Materials segment; and Murphy Lents, President of Eldorado Stone.

While listening to today's call, please remember that certain statements made during the call, including statements relating 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 these reports 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 enjoyed the quarter, largely consistent with expectations, realizing revenue, operating income and adjusted EBITDA growth. The key highlights for the quarter included: first, our stone product line is growing with expanded margins, reflecting that exposure to new residential construction, and importantly, this growth is accelerating into July; second, our regional block product line is growing due to the strong economy in Texas including residential landscaping, through Lowe's, and the renewal of school construction, but it does have lower margins than our stone and siding accessories business.

Fly ash's seasonal upturn was muted due to colder, wet weather in the northern half of the United States, and what this does is it pushes the upturn in volume into July. And that is exactly what we are seeing so far this month. Our siding accessories growth has been much slower than our light building products due to its high exposure to repair and remodel and, to some degree, the cool spring in the Midwest and Northeast. Our overall exposure to our 3 largest end markets in light building products is approximately 45% repair and remodel, 28% new residential and 25% commercial and institutional.

Stone has the greatest exposure to new construction and is growing faster than siding accessories. We have improving margins in stone, which tends to bring our overall margins in light building products higher, but the margin improvement is offset by lower margins in block and in our new trim board product.

Siding accessories are still predominantly into repair and remodel market and represent some of our higher-margin products. We are seeing steady sales, but growth is clearly lagging behind new residential construction. We believe that the upward trend in home prices, continued job growth and the lack of housing supply will help to drive siding remodel jobs.

We believe that the macro factors, including positive changes in population growth and employment, drives family formation and, consequently, new housing demand and will ultimately lead family formation back to the $1.2 million range and total housing demand into the $1.5 million median range. Consistent with most housing forecasts, we anticipate that we're in the early stages of a long-term up cycle that will result in the industry returning to historical levels.

Our revenue growth of 21% in light building products came primarily from organic growth in our block and stone product lines, combined with the acquisition of our trim board product. Light building products EBITDA grew by 26%. On a consolidated basis, adjusted EBITDA grew 32% in the quarter compared to last year. And after adjusting for compensation tied to stock price, our trailing 12 months adjusted EBITDA was $111 million, which puts us in the range of our EBITDA guidance.

We continue to strengthen our balance sheet, including $24 million in debt repayments in the quarter and improving our net debt-to-adjusted EBITDA ratio to 4.3 from a high of 6.7. We are entering the positive portion of our 2013 cash flow cycle, and our cash balance continues to grow. Our improving balance sheet will position us to take advantage of growth opportunities in the up cycle.

So now, I'd like to turn the time over to Don to discuss the financials.

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 operation that were attached to the press release.

Starting on Slide 4. Our third quarter revenue from continuing operations was $197 million, up $21.4 million or 12% from prior year revenue of $175.6 million, which reflects growth from our acquired trim product line, as well as 6% organic growth in our core businesses of light building products and heavy construction materials. Third quarter adjusted EBITDA was $37.9 million, up 32% year-over-year. Third quarter operating income was $23.2 million, up 46% year-over-year. Earnings per share for the quarter was $0.15 per share versus a loss of 21% -- $0.21 per share in Q3 of 2012. Year-to-date, operating income is $28.1 million, an increase of 52% year-over-year, as revenue increased 10% over 2012 revenue levels. We remain on track to generate positive net earnings in fiscal 2013.

Let's move to Slide 5 for a closer look at the quarter's financial results. Light building products revenue increased $20.9 million or 21.5%, which includes $10.2 million of revenue from our recently acquired trim products business. Organic growth in light building products in the quarter was primarily in stone and block. Our siding accessories business saw its sales increase at a slower pace than other product lines due to unfavorable weather conditions in the upper Midwest and Northeast, as well as the limited recovery in the repair and remodel end market. Heavy construction materials revenue was up modestly from 2012 level as price increases helped to offset lower marketing volumes impacted by weather conditions in the Midwest and Northeast, as well as lower revenue from site services. Energy Technology revenue was consistent with 2012 levels.

Gross profit was $58.5 million, a 12% increase from the prior year. Gross margins were 29.7% in the quarter, which is down slightly from 29.8% last year. The minor margin decrease was due to sales mix, partially offset by cost efficiencies. SG&A decreased $1.5 million due to lower compensation expense, offset by SG&A related to the trim product acquisition. Adjusted EBITDA from continuing operations totaled $37.9 million, up 32% from $28.7 million 2012.

Interest expense decreased $4.9 million as a result of accelerated amortization debt -- amortization of debt issued cost and debt discounts related to the 8.75% note exchange in 2012, as well as debt repayment activity. Income taxes increased year-over-year due to positive income in 2013 and Q3 2012, including a favorable tax reserve adjustment. We ended the quarter with more than $200 million of pretax NOLs and nearly $25 million of tax credits that will shelter significant income from cash taxes into the future.

We recorded income from discontinued operations in 2013 of $1.8 million, which included an income tax benefit of $2.7 million and a $1 million gain associated with receipt of contingent sales proceeds, partially offset by valuation reserves associated with certain assets. 2012 included a $13 million impairment charge.

Now let's move to Slide 6 and talk about the year-to-date financial results. Revenue from continuing operations year-to-date increased $44.9 million or 10% year-over-year to $487.6 million. Light building products revenue increased $34.7 million or 14% over 2012, including $18.3 million of revenue from the acquired trim board business. Year-to-date, organic growth in light building products has been from the stone and the block businesses due to a combination of end market and geographic exposures.

The siding business saw its revenues decrease slightly year-over-year as a result of a combination of unfavorable weather conditions, as well as the limited recovery in the repair and remodel end market. Heavy construction materials revenue increased $8.2 million or 5.4% as price increases and revenue from new service contracts served to offset lower marketing volumes impacted by the unfavorable weather conditions. Energy technology revenue increased $2 million year-over-year due to customer outages in 2012.

Gross profit year-to-date is $128.2 million, an 8% increase from 2012. Gross margins are 26.3% year-to-date, down from 26.7% in 2012. The modest decline in margins reflects sales mix in light building products. Also, margins in our heavy construction material segment were impacted by revenue associated with new service contracts and the expiration of a contract in 2012 that was highly profitable.

SG&A increased $2.6 million year-over-year, largely due to SG&A related to the acquired trim board business and its related acquisition cost, partially offset by lower variable compensation. Operating income has increased from $18.5 million in 2012 to $28.1 million in 2013. Adjusted EBITDA from continuing operations totaled $70.9 million, which is up $9.3 million from 2012, a 15% increase, and that's despite the challenging weather conditions this year.

Let's move on to Slide 7 and spend a few minutes discussing debt. Our debt position continues to improve. During the quarter, we repurchased $24.3 million of convertible notes, bringing the remaining debt maturing in February 2014 to $15.6 million. Our liquidity remained strong, and we expect to generate approximately $35 million of free cash flow in fiscal 2013. We closed the current quarter with a net debt-to-adjusted EBITDA ratio of 4.3:1 and continue to progress in our goal to maintain reasonable levels of financial leverage across the cycle.

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

Murphy K. Lents

Thanks, Don. Good morning, everybody. On Slide 8, you can see revenues from our light building products segment for the quarter increased by $21 million to $118 million, an increase of 21% over the same quarter last year. Revenues increased 11% for the quarter, excluding our newly acquired trim board product line.

Revenues continue to benefit from growth in new housing starts. Non-seasonally adjusted single-family housing starts for the 3 months ended June 30, 2013, were 14% higher than housing starts for the 3 months ended June 30, 2012. For our fiscal year-to-date, single-family starts are up 23%. Our 28% exposure to new residential construction in light building products would imply revenue growth year-to-date of 6%, and our revenue growth has grown 7% year-to-date. So our growth corresponds well to our end market exposure.

Our block product group has benefited from the strength in Texas and Louisiana residential markets, but more importantly for it, the commercial and institutional markets are rebounding from soft sales over the last 2 years. Texas is the fastest-growing state in the nation in both jobs and housing. This growth has historically led to significant construction of schools and other institutional projects, as well as commercial buildings, all of which have long been the core of our regional Block business. We've benefited from our solid position in this great market and expect to continue to do so.

We experienced lower-than-expected margins in our block product group in the quarter as we ramped up new product lines. At the same time, demand for our core products increased rapidly. The main factors were overtime for labor and higher transportation costs as we shifted product between regions to meet demand. As we balanced production at this higher level, we expect efficiency improvements that will lower our overall costs. Additionally, we're instituting price increases in some product lines, which, with improved cost performance, should result in higher margins. We're very excited about the opportunities over the next year in this product category, given revenue growth and the opportunity for margin expansion.

Our siding group sales growth was negatively impacted by cold and wet weather conditions in the Northeast and the North Central regions. This also impacted our recently acquired trim board business. The repair and remodel end market is an important one for our siding group, and to date, growth in this market has been very slow. We do expect repair and remodel end markets to improve as home prices continued to increase, housing sales increase and the economy improves.

The increase in light building product revenues led to a 26% improvement of adjusted EBITDA for the quarter, improving from $20.7 million in 2012 to $26 million in 2013. Our trim board acquisition and improved performance in the block and stone groups led revenue growth. Since both our trim board product and the block products have lower-than-average margins, this change in sales mix resulted in approximately 150-basis-point reduction in gross margin. Nevertheless, adjusted EBITDA margins still improved to 22% for the quarter, up from 21.3% in 2012.

Trim board performed in line with expectations, and margins improved as we continue to integrate it into the siding group. Year-to-date revenues for the light building product segment have increased $35 million or 14%, while adjusted EBITDA is up $6 million year-to-date to $49.5 million.

Slide 9 summarizes this discussion. Revenues have grown in each of 3 quarters this year, and adjusted EBITDA returned to growth in the third quarter after being essentially flat for the second quarter.

Now I'll turn the presentation over to Bill.

William H. Gehrmann

Thanks, Murphy, and good morning, everyone. On Slides 10 and 11, you can see that revenue for the June 2013 quarter in our heavy construction materials business was $75.1 million compared to $74.7 million for the June 2012 quarter.

Headwaters Plant Services provides site services to many of our utility clients. Site service revenue was slightly down for the June quarter and accounted for approximately 25% of our overall revenue for the quarter. While these services typically have lower operating margins than our products sales, they are not as seasonal. As construction activity increases in the September quarter and product revenues expand, site service revenue should be an even lower percentage of our overall revenue in the September quarter.

The winter overhang in the upper Midwest and Northeast resulted in a year-over-year decrease of 4% in our shipments of high-quality fly ash. Cement shipments through May are up 2.8%, led by combined 10% increase in Florida, Texas and California, while the rest of the country was flat. We anticipate seeing a positive year-over-year trend in high-quality fly ash shipments for the rest of the year, as the weather-impacted areas of the country improve.

The year-over-year average net price increase of 4% slightly offset the volume decrease, resulting in a slight percent year-over-year increase in product revenue. Gross profit for the June 2013 quarter increased 3% to $20.5 million compared to $19.9 million for the June 2012 quarter, and gross margin improved 70 basis points to 27.3%.

Operating income increased to $12.8 million compared to $11.8 million for the June 2012 quarter. Adjusted EBITDA for the June 2013 quarter increased 7% to $16.1 million compared to $15 million for the June 2012 quarter. Adjusted EBITDA margin increased 140 basis points year-over-year. These improvements were driven by reductions in our cost structure and an improvement in our overall operational efficiencies.

We continue to be encouraged by the statement by the U.S. EPA in April that the alignment of the new affluent guideline limitations with CCP disposal rules could provide strong support for a conclusion that regulation of coal combustion residuals under RCRA Subtitle D would be adequate. We look forward to the EPA developing appropriate regulations over the next 12 months, consistent with its current thinking.

Last week, the U.S. House of Representatives passed H.R. 2218, the Coal Residuals Reuse and Management Act of 2013 by a bipartisan vote of 265 to 155. Both the regulatory approach contemplated by the EPA and the legislative approach passed in the house will be supportive of beneficial use of fly ash. We anticipate an ultimate positive conclusion to the issue surrounding the disposal of fly ash.

I'll now turn the call back to Kirk.

Kirk A. Benson

Thank you, Bill. Turning to Slide 12. Our remaining energy asset consist of proprietary technology that is used to catalytically upgrade low-quality heavy oil. We were successful several years ago in marking the technology for use in a large European refinery, which has now been using the technology in its operations, treating approximately 42,000 barrels per day of heavy oil. Consequently, the technology is now recognized as a proven technology in refining industry.

This month, we negotiated 2 new agreements with refineries that process 50,000 barrels per day of heavy oil. The agreements provide for a testing period with our technology, which may lead to their acceptance and use of our product commercially in the latter half of 2014. The 2 agreements could nearly double the revenue.

We're very excited, also, about joint marketing agreement that we've entered into with Axens, a major supplier of technology in the heavy oil operating processes at refineries around the world. This gives us an increased access to the heavy oil market, which is rapidly expanding. We expect that the total volume of heavy oil treated and processes that could use our technology will double over the next 5 years.

We are the clear industry leader in the application of liquid catalyst heavy oil upgrading. And the market acceptance, combined with the market growth, provide us with a positive opportunity to create value for shareholders.

For the third quarter of 2013, revenue from continuing operations in our energy segment was $3.9 million compared to $3.7 million in 2012. Adjusted EBITDA was $300,000 in 2013 compared to a loss of $600,000 in 2012.

Commenting on Slide 13, until we establish a wider customer base, revenue and EBITDA will continue to vary in -- from quarter-to-quarter due to refinery turnarounds and the timing of shipments. But generally, we should show relatively consistent annual revenues and earnings as we proceed to increase our customer base.

Concluding on Slide 14, we believe that our adjusted EBITDA will be within our range for 2013. As we've indicated previously, our guidance is dependent upon stock price performance because we have compensation tied to changes in the stock price. Trailing 12 months adjusted EBITDA, eliminating changes resulting from the increase to the stock price, was $111 million, and we expect it to increase in the September quarter.

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

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of John Quealy from Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

Just a couple of quick questions. In terms of the fly ash business, I know weather and some other issues impacted it this quarter. My understanding is, normally, the September quarter is a bigger quarter anyway for ash. Can you quantify what you think the movement was from Q2 to -- excuse me, Q3 to Q4 on ash in terms of revenues?

Kirk A. Benson

In terms of volume, we were down 4% volume for the quarter. And what, of course, was happening in the northern part of the country, particularly in the Midwest, is that these construction projects that were delayed will be pushed into the September quarter. And that's what we're experiencing in July is that volume has increased in the northern part of United States. So from a revenue perspective, we're probably in the $1 million to $2 million revenue range, maybe a little bit higher than that.

John Quealy - Canaccord Genuity, Research Division

Okay, that's helpful. And then over to the light building products side, can -- you talked about -- we talked about sidings for a little bit. In the repair, remodel, I guess, there's sort of some cross-currents of trends going on there. But, Kirk, can you talk about the siding category? The siding category seems to have tougher time versus roofing and stone and all other sorts of builder materials. But talk about some of the secular shifts, if there are any, in siding and how you see that playing out with clear.

Kirk A. Benson

I think we're -- because it's an important end market exposure for Headwaters, the repair and remodel market -- and it's important not just from a top line revenue perspective, but it's also quite important because many of our higher-margin products are in the repair and remodel end market. And -- the large ticket repair and remodel projects have been lagging other remodel expenditures. The repair and remodel opportunities are tied to increases in housing prices, to confidence about the economy, job growth. And to the extent that homeowners will stay in their existing home but feel comfortable to incur capital expenses to improve their home, that's what's going to drive our particular repair and remodel expenses -- or revenue. And so I -- we think that there is a built-up opportunity in repair and remodel, and a lot of that is driven by the relationship that homeowners have to their investment in their home. The secular changes that have been taking place, the conversion to -- away from wood in the trim board product, the conversion to fiber cement, all of those -- those changes will benefit our trim board investment in cellular PVC. So we were impacted by the colder weather in the Northeast because that's primarily where the -- where our trim board product sales are located. But we think that, that continued secular change away from wood siding and wood trim board products will be very positive. The other thing that we're doing is that we are expanding -- we're expanding our relationships with better -- with -- our trim board product with our 2-step distributors outside of the Northeast. That was one of the synergies that we have identified in the trim board acquisition. And so that's starting to pick up some momentum, and we think that that's also going to end up having a positive impact on our revenue. So to summarize, we think that there's a buildup of opportunity in repair and remodel, because of the correlation to home prices and because of the general housing market, and then we should be able to take advantage of these secular changes as well.

John Quealy - Canaccord Genuity, Research Division

And so would clear be outperforming right now versus the legacy Tapco and other siding-related products?

Kirk A. Benson

No. We're not seeing an outperformance on the top line, and again, part of that is -- was the weather impact in the June quarter. So we're seeing a very consistent revenue trend right now with our clear product, with our other siding-type products. But we think a lot of that was impacted by weather during the quarter, and we're also -- it takes some time to get the distribution expanded outside of New England. And that's what we're working on. I think we're finding opportunities there. But you really aren't going to see that until -- you're not going to see a lot of that until 2014.

John Quealy - Canaccord Genuity, Research Division

Okay. And then lastly, Don, stock comp year-to-date, is it $4.5 million? And if so, what do we expect for the full year in that implied EBITDA guidance?

Donald P. Newman

So stock comp year-to-date is about $5 million. And I think we talked before about sensitivities around increases for every $1 of stock price. We would expect to see something in the $1 million to $1.5 million range impact on our expense.

Operator

Your next question will come from the line of Mr. Philip Volpicelli from Deutsche Bank.

Philip Volpicelli - Deutsche Bank AG, Research Division

I've got a couple of small questions, but I guess each are pretty important. In light building products, you mentioned that there will be price increase on your block group. Can you give us a sense of what the magnitude is for that?

Kirk A. Benson

In the 5% range.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay, great. And then when you look at the HCAT wins, those are great 2 new additions. Are they new customers? Is it the same customer with 2 new refineries? And did the Axens, and forgive me for pronunciation there, joint venture helped you in getting those new wins?

Kirk A. Benson

Two new customers, and Axens was helpful on one of the 2. And we think that there will be additional benefits from the Axens relationship on new customers going forward.

Philip Volpicelli - Deutsche Bank AG, Research Division

Great. And I don't think you guys disclosed capital expenditures for the quarter and also revolver availability. Could you give me those 2 housekeeping?

Kirk A. Benson

The revolver availability really hasn't changed from prior quarters. So there is -- we discussed that a little bit in the press release.

Donald P. Newman

Yes. And revolver availability, I think, was in the $47 million to $50 million range. And from a CapEx standpoint, about $8 million in CapEx for the quarter.

Philip Volpicelli - Deutsche Bank AG, Research Division

Perfect. And then the last one. The free cash flow guidance in the 2Q slide, it says $40 million of free cash flow. And then the 3Q slide, it says $35 million. What's changed to bring that number down a little bit?

Kirk A. Benson

I think it's really a range as much as anything, is a range of $35 million to $40 million. I don't think anything particularly have happened relative to free cash flow. I think that we've tried to be consistent in discussing a range, and so it's -- the range is the $35 million to $40 million.

Operator

Your next question comes from the line of Al Kaschalk from Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

I wanted to ask about raw material and inflation costs, what may have impacted the quarter or not. Could you talk about that?

Kirk A. Benson

I think there was -- overall, there was a minimal impact on the quarter relative to inflation costs associated with raw materials, so very, very little impact on a consolidated basis. The place where we are seeing some impact is in cement costs in our regional block business. But by and large, there was minimal impact in the quarter.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Bill commented about a 4% price net in his business. Was that consistent with your expectations? And given some of the dynamics on -- from weather impacting, what should we expect for the balance of '13 and then to '14?

Kirk A. Benson

We've been experiencing a 4% to 5% price increase compared to prior year, and I think that's -- it's been relatively consistent on a net basis at that level. Bill, do you want to talk a little bit about what you would anticipate going into the September quarter?

William H. Gehrmann

Yes. It's -- we are to stay within that range, hopefully, based on product mix to the higher part of that range is -- especially in the upper Midwest, typically, we recognize some high-margin sales up there. So we'd expect to see those continued trends into the September quarter. And then moving forward, it looks like the cement industry, its floating price increases out there, and we anticipate continuing to do the same thing on our high-quality fly ash.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Bill, do you have entry period or the ability on pricing to go back to the customer base, or are these a little bit of a lag in terms of what you're realizing in the quarter?

William H. Gehrmann

There's a little bit of a lag. Typically, price increases are implemented in 2 ways, more of a seasonal adjustment to our ongoing customers, a ready mixed customer would be one. And then we typically have project-by-project opportunities, large-scale DOT bid work, those types, and that gives us a little chance to be a little more reactive based on pricing trends for other materials, aggregates and cement.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Great. And then Kirk and maybe Murphy, but when we think about this R&R market, and then maybe it's the perceived headwind relative to some expectations here, but if I recall correctly, you -- on the accessory side, you have a very short manufacturing window. In other words, from order to delivery, it's -- I thought was sub-72 hours. Can you comment on -- is the demand basically for -- or any type of material growth in demand, now a '14 story? And is your '13 third -- fourth quarter visibility kind of in check with what you saw here in Q3?

Kirk A. Benson

Yes. We're not seeing any particular upward trend based upon increased demand. So we would anticipate that September quarter would be a continuation of what we saw in the June quarter with the -- with also the understanding that the June quarter was hurt a little bit by the weather conditions in the Northeast. But generally, that's -- we're seeing a continuation of those same trends. And so it does tend to get one to believe that, 2014, you'll start to see more of those large ticket repair and remodel jobs implemented.

Operator

Your next question comes from the line of John Baugh from Stifel.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Yes. I was just really trying to follow-up on that last question on the R&R as it relates to the light building products. So it really -- you really didn't see any, excluding weather, pickup in June, July in the total demand across the country or non-weather affected areas?

Kirk A. Benson

No, we're not.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then on the HCM side or on fly ash or on product sale, could you give us a feel for what you expect, I don't know, maybe the second half of the calendar year volume to be into the national cement market and how Headwaters would compare with that and whether or not it would be better than that number because of some weather catch-up and then talking about those absolute numbers?

Kirk A. Benson

I mean, the one thing that makes it a little bit difficult to compare our fly ash sales with the national cement number is that the national cement number is greatly impacted by 3 primary locations: Florida, Texas and California. We don't have any sales or -- we have basically no sales in the Florida market, and the Florida market has been one area where cement sales have been increasing rapidly. So that has an impact on the comparison of our fly ash sales with the cement sales. I think that we clearly are going to have a very strong September quarter. So from a volume perspective, because of what happened in the upper Midwest, I think that's -- that is going to drive a strong September quarter. If some -- I'm speculating on what cement shipments could be like, but we feel very good about where we are going to be positioned relative to volume into the September quarter.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then could you comment -- should we see, assuming weather is good, a substantial improvement in the December quarter year-over-year based on what happened a year ago and what seems to be developing so far year-to-date?

Kirk A. Benson

If you exclude weather from the response, we should have a strong October. October makes or breaks the December quarter, and so the construction activity, when you have a slow spring, generally gets stretched out into October. So if you -- if weather holds, then we should have a good 12/31 quarter because we'll have a strong October. And October, of course, is very dependent upon weather. But just from a demand perspective, we should have a very strong October, which should lead to a strong December quarter.

Operator

Your next question comes from the line of Dan Mannes from Avondale.

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

I'm going to follow up on the questions on the construction materials. I definitely hear your comments about the national numbers on cement being a little bit misleading, given your lack of exposure to Florida. But you do have pretty good exposure to Texas and California. And I guess I'm still a little bit surprised you're not able to get a little bit more leverage, given the strength in those 2 markets, even with some weakness in the Midwest. Are you kind of saturated in those 2 markets in terms of fly ash inclusion, or is there opportunity even -- to even send more to those markets?

Kirk A. Benson

Of course, the Texas market is where we have a great deal of supply, and so we're a homegrown product in Texas. And I think with the growth of the economy in Texas, our shipments are relatively strong in the Texas market. What offset that was the weakness in the upper Midwest. And that's what -- so when you look on the national numbers, that's the primary reason for the comparison with the portland cement shipments and why our overall shipments have been lower than the cement shipments. So we feel good about shipments into California and our sales in the Texas market as well. So Bill comment a little bit about -- on how you view the California market, though?

William H. Gehrmann

Yes. We keep hearing from our customers there is backlog in California. We feel good about that market then continue -- we expect to continue to see our shipments tick up into that market. Going back to the Texas market and the overall Gulf Coast, we've been strong year-over-year. As we've discussed previously, you've got to factor in the fact that some of the increase, especially in the Texas shipments, are oilfield related, which is in a direct correlation overall. But for what we can back out that then goes into the oilfield to increase activity there, we feel pretty good about the way we're tracking year-over-year in Texas and along the Gulf Coast.

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

All right. A separate question on construction materials. You mentioned that it seems like some headwinds maybe from the roll off of a pretty strong contract on the service side, do we -- or first of all, when do you lap that? And then secondly, are there any more sort of large or above -- I don't want to say above market, but notably profitable contracts that might roll off, that could create headwinds over the next couple of quarters?

Kirk A. Benson

Bill, I'm not aware of any contracts that would roll off in the next couple of quarters. Any come to mind?

William H. Gehrmann

No. We've had one on the product revenue side that basically rolled off, and it is not showing in the comp as of our Q2. We had one site service contract that essentially ended December 31, and that's been showing up in the comp then. So that rolls off at the end of the December quarter for our FY '14.

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

Got it. And then the last question on construction materials. We saw -- I think FirstEnergy came out there, planning to shut down a fairly sizable plant in their fleet. I guess as you continue to see some of that activity, has it continued to pace with your expectations, or have you seen any, at least, planned closure activity that's maybe deviated from your expectations?

William H. Gehrmann

From what's been announced, we haven't seen a lot of deviation. Obviously, as we've shared in the past our current supply situation, and we projected that out to what we think the mass impact will be going into 2016. We still continue to feel very comfortable that we have a lot of headroom in our supply compared to the height of our annual sales, which occurred in FY '07. We -- specifically speaking to that announcement, we did have truck- and rail-served markets out of there. We have backups for both of those, and we continue to evaluate and work to increase our off-season storage capabilities, which will help in cases like this also.

Operator

And your next question comes from the line of David Daglio from The Boston Company.

David A. Daglio - The Boston Company Asset Management, LLC

My questions have been asked and answered.

Operator

And your final question will come from the line of Al Kaschalk from Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Kirk, just to maybe help clarify, for some of us anyways, the HCAT business. When we think about '14, before these new contracts come online, should we think, from an operations standpoint, that, that's neutral, in other words it's flattish on the EBITDA in terms of contribution? Or is there some benefit in '14 to the overall business?

Kirk A. Benson

If things go well, there could be a slight uptick in, like, the fourth quarter of 2014. So -- and so there could be a slight improvement in -- towards the very end of the fiscal year, but that will be the quarter where we will have our orders start to come through.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. But the revenue or the existing contracts sort of today's quarter's run rate of $3 million to $4 million, that revenue should be there between now and the next 3 to 4 quarters.

Kirk A. Benson

Yes. That should be consistent with next year.

Operator

And we have no further questions at this time. I'd like to hand it back to management.

Sharon A. Madden

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

Operator

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.

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