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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 Headwaters Siding Division

William H. Gehrmann - President of Headwaters Heavy Construction Materials

Analysts

Rob Hansen - Deutsche Bank AG, Research Division

John Quealy - Canaccord Genuity, Research Division

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

Taryn Kuida - Wedbush Securities Inc., Research Division

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

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Headwaters Incorporated (HW) Q1 2014 Earnings Call February 4, 2014 11:00 AM ET

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Headwaters Incorporated First Quarter 2014 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Tuesday, February 4, 2014. I would now like to turn the conference over to Tricia Ross of Financial Profiles. Please go ahead, ma'am.

Tricia Ross

Good morning, everyone, and thank you for joining us for the Headwaters Incorporated First Quarter Fiscal Year 2014 Conference Call. There are slides accompanying today's presentation that can be found on the webcast link at the Headwaters Inc. website under the Events & Presentations link. Please go there to follow along with the slides. If you have any issues, please feel free to e-mail me at tross@finprofiles.com, and I can also e-mail you a PDF copy.

We would also like to briefly mention that Headwaters will be holding its Analyst and Investor Day on Friday, March 7, 2014 in New York City. We would love to see you there. If you are interested in attending, please reach out to myself or Sharon Madden. More details will be coming in the following days.

With that, I would now like to turn the call over to Sharon Madden, Head of Investor Relations at Headwaters Incorporated.

Sharon A. Madden

Thank you, Tricia. Good morning and thank you for joining us as we report Headwaters fiscal 2014 Q1 results. Kirk Benson, Headwaters' Chairman and Chief Executive Officer; and Don Newman, Headwaters' Chief Financial Officer, will be conducting this morning's call. And they will be joined by Bill Gehrmann, who is President of Headwaters Resources and Heavy Construction Materials segment; and Dave Ulmer, President of Tapco International.

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 Headwaters' annual report on Form 10-K, quarterly report on Form 10-Q and other SEC filings that are readily available from the SEC's website, Headwaters' website or directly from the company.

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

Kirk A. Benson

Thank you, Sharon.

So please turn to Slide 3. One of the factors that was very encouraging in the quarter was our topline organic revenue growth, both in light building products segment and in our heavy construction materials segment. In light building products, we produced 9% organic growth, and all of our product groups grew year-over-year. Heavy construction materials grew by 5% organically.

Adjusted EBITDA in our 2 core segments grew by 26%, and most of the growth was associated with organic revenues and other cost savings. The strongest area of growth was in our stone group because of its exposure to new residential construction.

Our acquisitions were both positive, but they provided incremental growth to very strong organic activity. Revenue in our trim product line, which we have now owned for over a year, grew 11% year-over-year, and we have increased margins in the trim board product line substantially through cost savings, and increased revenue and the December quarter was ahead of plan. We believe that we will be able to continue improvement in 2014 through expanded distribution and continued cost improvements.

Heavy construction materials realized approximately a 4% net price increase year-over-year, and also performed some high-margin service work during the quarter. Adjusted EBITDA margins were up over 280 basis points, a significant drop-through from revenue to adjusted EBITDA. Our contribution margin was a little higher than expected for the quarter due to the price increases and a revenue mix favoring product sales.

Both core segments were impacted by the winter weather. Fewer tons of ash were sold in the northeast through the midwest, particularly in December. The weather also had a negative impact on our siding accessory group because of its geographic strength in the Northeast and Midwest. The weather is continuing to be challenging through January in those markets. Despite the challenging weather, the business has performed better than planned, and we were particularly pleased with the organic growth.

Moving to Slide 4. Relative to our balance sheet, it is important to note that we remain committed to de-leveraging, as measured by net-debt-to-adjusted-EBITDA. Our goal is to be at 2.5 to 3.0. And given our trajectory, we would have easily been in that range in 2014. In December, we borrowed $150 million to finance transactions similar to our trim board acquisition, and that is adjacent products in core markets sold to our customer base. Additional acquisitions, however, will slow the improvement in adjusted EBITDA, leverage ratio and may extend the trajectory to be in the 2.5 to 3.0 range. It depends upon the timing and pricing of the acquisitions and how the business performs.

We closed the acquisition of Entegra Roof Tile, a niche roofing business that sells concrete roof tiles in the Florida market. The transaction fits our model of high-margin niche products with good market share, and the products are primarily sold to our core customers. Several other transactions are working our way through diligence and negotiations.

You may have noticed that we received an indication that the EPA is prepared to pursue RCRA Subtitle D, classifying fly ash, as it has been classified historically, as a solid waste, consistent with the Clinton administration and consistent with the scientific analysis. Regulatory uncertainty has been with us for several years, and the decision by the EPA is certainly welcome. It feels very good that we can finally put the classification issue behind us.

I would now like to turn the call over to Don Newman to talk about our financial results.

Donald P. Newman

Thank you, Kirk. Good morning, and thank you for joining us.

Before discussing Slide 5, 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.

Revenue from continuing operations for the quarter was $165.6 million, up $16 million, or 11% from the prior year revenue of $149.6 million. The 11% overall growth in revenue includes a 7% organic growth rate from our core Building Products and construction materials segments, in addition to growth from the core product line -- excuse me, the trim board product line that we acquired in 2013 and the December Roof Tile acquisition. Adjusted EBITDA from continuing operations for the quarter was $24.3 million, an 11% increase from the prior year adjusted EBITDA of $21.9 million.

Operating income for the quarter was $7.6 million, a 27% increase over 2013. Adjusted earnings per share improved $0.02 per share, increasing from a positive $0.05 per share in 2013 to $0.07 per share in 2014.

Let's move on to Slide 6 for a closer look at the quarter's financial results. We saw a number of positive trends in our core business segments in the first quarter, including revenue growth and margin expansion which served to lessen the negative impacts of difficult weather in the Northeast and Midwest.

Consolidated revenue from continuing operations increased to $165.6 million, a $16 million or an 11% increase from 2013, despite a decrease in our non-core energy sales. Revenue from our core light building products and heavy construction materials segments increased 14%, including 7% from organic growth. Year-over-year revenue growth from acquisitions totaled $10.1 million in the quarter. Light building products revenue increased 21% to $93 million, compared to $76.7 million in 2013. Organic growth in light building products was 9% for the quarter, as all 3 major product groups experienced positive growth. The stone group had the highest rated -- highest rate, due largely to its exposure in new residential construction. Heavy construction materials revenue increased 5% to $71.5 million, compared to $68.2 million in 2013. Revenue increases reflect fly ash net price increases of approximately 4% year-over-year. Non-core energy business offset growth in our core segments. Sales of HCAT were down $3.6 million year-over-year. The decrease is largely due to timing of product shipments in late 2013 and early 2014.

Consolidated gross profit was $40.9 million in the quarter, a 10% increase from the prior year gross profit of $37.2 million. Gross profits in our core light building products and heavy construction material segments actually increased 16% year-over-year. While overall gross margins were consistent year-over-year, margins in our core building products and construction materials businesses actually increased 60 basis points to 24.6%. SG&A increased $1.9 million year-over-year, largely due to operating costs in acquired businesses and to a customer development cost related to the HCAT business.

Operating income, as I mentioned, increased 27% to $7.6 million this quarter, compared to $6 million last year.

Income taxes relate primarily to state income taxes. We ended the quarter with approximately $190 million of pretax NOL carryforwards and $26 million of tax credits. Those will shelter significant future income from cash taxes. Those NOLs and tax credits remain fully reserved on our balance sheet.

Discontinued operations reflect results for coal cleaning. We recorded a $700,000 gain for the quarter, reflecting approximately $4.7 million for payments from the buyer, including $2.7 million of deferred purchase price payments and $2 million related to certain receivables. Partially offsetting these payments were adjustments made to certain contingent liabilities that we carry related to the coal cleaning business. Additional adjustments to the gains and losses from the sale of the coal cleaning business may be recognized in 2014, as the contingencies are resolved and as amounts are collected from the buyer.

Now let's move on to Slide 7. This slide reflects our quarterly revenue and adjusted EBITDA. It highlights the seasonality in our business, with a substantial portion of our earnings being generated in our fiscal Q3 and Q4.

Now let's go to Slide 8 and discuss debt. We placed $150 million of 7.25% senior unsecured notes during the quarter, using approximately $62 million of the proceeds to purchase an 80% interest in the coal -- the Roof Tile business and pay it cost associated with the debt issue. We closed the quarter with a net debt-to-adjusted EBITDA ratio of 3.6:1, reflecting the $150 million of new notes and the purchase of the Roof Tile ownership interest.

We remain focused on our strategy to lower our net debt-to-adjusted EBITDA ratio to a range of 2.5x to 3x.

We are anticipating a strong 2014, as reflected in our updated guidance. Our ending 2014 net leverage ratio will be impacted by that performance, by acquisitions we may make, including their timing and their multiples, and it will be impacted by the pace of end market recovery. Given the right circumstances, it is possible that we could be at the high end of our goal range for net debt-to-adjusted EBITDA on a pro forma basis by the close of 2014. However, it is possible that achieving that goal will be a 2015 event.

Starting on Slide 9, Dave is going to cover light building products.

David S. Ulmer

Thanks, Don, and good morning, everybody. On Slide 9, you can see revenues from our light building products segment for the first quarter increased by more than $16 million to $93 million, an increase of 21% over last year in spite of negative winter weather conditions.

Revenue increased 9% organically, year-over-year, after excluding acquisition-related sales from trim board and roof tile. We are very pleased with our organic growth, which we experienced in each of our major product groups, led by architectural stone. Winter weather had the most significant tempering effect on our siding accessory products.

Revenues continue to benefit from growth in new housing starts. Non-seasonally adjusted single-family housing starts for the 3 months ended December 31, 2013 were 11% higher than housing starts for the 3 months ended December 31, 2012 and calendar year 2013 was 18% higher than calendar year 2012. Economists projects similar growth for 2014, bringing total housing starts to above $1 million, still well below mid-cycle levels. The increase in light building products revenues led to a 29% improvement of adjusted EBITDA for the quarter, increasing $3.5 million to $15.4 million. Adjusted EBITDA margins improved 110 basis points during the quarter. These improvements are consistent with our 2014 plan. It is important to note that we anticipate cement and resin price increases later in the year. As a result, we are already raising prices in the Texas market for our block products, and we are evaluating price increases in other markets.

Our architectural stone product group has significant exposure to residential construction, and continued its strong revenue growth in the first quarter. The increase in revenue led to improved margins due to our operating leverage. In 2014, we are focusing on gaining market share through major homebuilders that we believe will have an interest in using our low-priced entry product and the potential for upgrades to our Eldorado Stone brand.

Our good, better and best strategy continues to serve us well in the marketplace. We are also starting to get some traction in our efforts to expand the use of our stone product in the backyard uses like outdoor kitchens and extend the Eldorado brand to other outdoor living products. As you know, outdoor living products is a robust, multi-billion-dollar market that is expected to grow at a healthy rate in the coming years, and we are positioning ourselves to participate in that adjacent opportunity.

Commercial and institutional markets in Texas and Louisiana continue to have a positive impact on our block product group sales. Texas' strong growth economy should translate to construction of schools and other institutional projects, as well as commercial buildings, all of which have long been the core of our regional block product group. We benefited from our solid position in this great market, and expect to continue to do so.

We experienced production inefficiencies in our block product group in fiscal 2013, as demand increased and we introduced several new product lines. As a result, we experienced lower-than-expected margins in 2013. As discussed last quarter, we have put measures in place to improve margins and cash flow in 2014. For example, we have terminated our third-party carrier and have expanded our internal trucking to cover nearly all of our trucking needs. We started to see improvement in the first quarter, as adjusted EBITDA margins expanded year-over-year. As Kirk touched on earlier, we completed the acquisition of 80% of Roof Tile in December. The impact to the quarter was minimal due to the timing of the acquisition. Entegra Roof Tile is a leading manufacturer of high-quality concrete roof tiles and accessories that are sold primarily into the Florida market. This acquisition fit well into Headwaters' strategy to pursue niche building products, where we can enjoy strong market share and adjusted EBITDA margins. We saw slight improvement in our sliding -- siding group revenue as repair and remodel end markets continue to lag, but margins were impacted by higher material and labor costs. We expect repair and remodel to improve as home prices and sales continue to increase and the economy improves.

Now let's move to Slide 10 and talk about the trim board product line. We're very pleased with the progress we've made integrating and expanding the trim board product line we acquired last year. When we acquired Kleer Lumber last January, we had a very clear two-prong strategy: one, increase sales through leveraging our extensive distribution network and clear the independent lumberyard channel; and two, improve margins through leverage, efficiencies and cost reductions. After our first year of ownership, we have been successful in achieving that strategy. We have started to have success in increasing distribution to our core customer base. For example, we recently gained Boise Cascade, a national distributor, in select, strategic locations, and expect the full impact to trim board to be between $4 million and $6 million of incremental annual revenue growth in 2015 when the relationship is fully implemented.

Note in the adjustments to EBITDA disclosed in the press release, that we had some one-time buyback costs associated with new distribution. Trim board revenue growth for the year was 11% year-over-year. In addition, we had a smooth integration into the siding group and realized the cost synergies we had targeted. We have improved the EBITDA margins by achieving our 2013 cost synergy goal, and we have identified additional cost synergies that were not in our original plan, which we will realize in 2014. Slide 11 summarizes this discussion. Revenue grew during the quarter, making it the 10th straight quarter of revenue growth year-over-year. Adjusted EBIT also increased in the first quarter. Now I'll turn the presentation over to Bill.

William H. Gehrmann

Thanks, Dave, and good morning, everyone. On Slide 12, you can see the revenue for the December 2013 quarter in our heavy construction materials business was $71.5 million, compared to $68.2 million for the 2012 quarter, resulting in a 5% year-over-year increase. Headwaters' Client Services provides site services to many of our utility clients. We had incremental service revenues associated with short-term service projects of existing sites, which resulted in fly year-over-year revenue for the December quarter, accounting for approximately 31% of our overall revenue for the quarter. Since these services typically have lower operating margins than our product sales, the larger mix of services in the December and March quarters typically contributes to the lower overall EBITDA margin for the segment. We also saw an earlier winter and wet weather in several parts of the country. This resulted in slight decrease in the tons of high-value fly ash shipped for the December 2013 quarter, driven by reductions in the upper Midwest and Northeast, while remaining flat along the Gulf Coast.

During the quarter we realized a net 4% year-over-year price increase for high-value fly ash. Gross profit for the December 2013 quarter increased 15% to $16.8 million, compared to $14.6 million for the December 2012 quarter. Gross margin increased 200 basis points year-over-year. Adjusted EBITDA for the December 2013 quarter increased 23% to $13.3 million, compared to $10.8 million for the December 2012 quarter. Adjusted EBITDA margin increased 280 basis points year-over-year. Operating leverage, combined with our ongoing continuous improvement initiatives, is evident as revenue of 5% resulted in adjusted EBITDA growth of 23%.

In a consent decree dated January 29, 2014, the EPA agreed by December 19, 2014 to sign for publication in the Federal Register a notice taking final action regarding EPA's proposed revision of RCRA Subtitle D regulations pertaining to coal combustion residuals. We believe it is highly likely that fly ash disposal will be regulated under RCRA Subtitle D, resolving the issue as to whether fly ash disposal will be regulated under RCRA Subtitle C or D.

For 2014, the PCA is forecasting an 8% year-over-year increase in cement consumption. Total cement consumption in 2016 is anticipated to be approximately 106 million tons. We anticipate as demand approaches and exceeds U.S. capacity, we will experience an increase in demand for fly ash to supplement Portland cement. Early winter electric generation has allowed us to begin to inventory fly ash supply, and higher year-over-year natural gas prices should result in increased coal burned, and an improved supply outlook for us as we begin to move into the 2014 construction season later this spring. I'll now turn the call back to Kirk.

Kirk A. Benson

Thank you, Bill. Turning to Slide 14. I think the message relative to our energy segment is that our customers continue to use our material as part of their standard operating practices, and the change in revenue year-over-year relates to the timing of orders and the level of inventory at the customer site. We anticipate that the March quarter will reflect a normal order volume.

We completed a test at one of our prospective new client refineries, and feel comfortable that the test generally met our expectations. Our final report is due to the refinery by the middle of February, and then it could take up to 90 days or more for the refinery to complete its analysis. The equipment at a second refinery has been designed, and we expect the construction to be concluded in the June quarter and the test be run in the September quarter. We're also working with a third refinery that already has equipment in place and could begin using HCAT in the September quarter.

We have learned by experience that refineries are very slow to change and very slow to adopt new technologies. So the timing that I've outlined is always subject to possible delays.

The graphs on Slide 15 show the quarterly comparisons for the first quarter of fiscal year to the first quarter of -- first quarter of fiscal 2013 to the first quarter of 2014.

Turning to Slide 16. We're pleased to communicate an increase on our forecasted adjusted EBITDA range for fiscal 2014. Our new range is $130 million to $145 million, with the midpoint of $137.5 million. Of course, the caveats of weather, end markets and cost deflation apply to forecast. We have strong performance in the first quarter, and feel comfortable with the trajectory towards our forecast.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from the line of Rob Hansen with Deutsche Bank.

Rob Hansen - Deutsche Bank AG, Research Division

I wanted to see if you could touch on the increase in your guidance, and how much of that is just acquisition-related and how much of it is just having a very good quarter and a very confident in the outlook year?

Kirk A. Benson

I think we feel very good about the performance in the December quarter. By the way, I'd like to welcome you to the call. First call with us, and we appreciate you joining the call. So we feel very good about what happened in the 12/31 quarter. And we probably would not have raised our guidance because so much of our performance is in the June and September quarters. So even though the trajectory from the first quarter would have led us to an annual result that would have been in the upper range of our previous guidance, we probably would have waited to raise guidance until we saw what was happening in the spring. But we also did have the acquisition. And so when you combine the very strong performance in the 12/31 quarter with an acquisition that we think has very good growth prospects and very good EBITDA prospects for 2014, we feel comfortable in raising our guidance. So there's a -- still, the performance in the quarter really supported us in making this guidance adjustment early in the year, rather than waiting. So it was a combination of both, but the acquisition was very important to have us change guidance now rather than later.

Rob Hansen - Deutsche Bank AG, Research Division

Okay. And then in the heavy construction materials business, you gave some nice kind of regional commentary there. I just wanted to see how the performance stacked up more on kind of an end-market basis, looking at -- I imagine, obviously, new residential construction was fairly positive, but in terms of infrastructure and what not, as well.

Kirk A. Benson

I'll let Bill comment a little bit on the infrastructure, into what he's been seeing in our fly ash business. I think one of the things that we saw in the quarter was the strength in the architectural stone product, which has more exposure to new residential construction, and it does have exposure in the Northeast. We have a manufacturing facility in Pennsylvania that services the Northeast and Mid-Atlantic states. We also sell -- we have manufacturing facilities in Ohio and very strong presence with our Dutch Quality brand in the middle part of the country. So we were impacted in the Northeast and in the Midwest in our stone products, but we also have exposure into California and some of the southern states. And so we had very good growth in -- because of our exposure to new residential construction and because of the national exposure, some of the regions of the country were less impacted by weather. So we still performed quite well in our architectural stone product. Dave, why don't you comment on the impact of weather on Midwest and Northeast in our siding accessories? Because that's where our strength lies in siding accessories, and we had a greater impact there. And then Dave, you can comment about infrastructure.

David S. Ulmer

Yes, I mean, the -- obviously, our -- a lot of our core is in the Midwest and the Northeast and we are definitely impacted by weather there with the amount of snow and the amount of cold. There are just not people, there are not installation crews working on jobs and if there aren't those jobs that are going on during the winter, then distributors are not bulking up their inventory or keeping their inventory up as they normally would. And the other things that also happened is the -- this cold and the snow that has gone in has also infiltrated and gone into the far southeast as well with what went on, snow in Atlanta and ice. There's an ice storm going in on in the Southeast today. And that, all in, affects us as far as the jobs that are being done, work crews that are out there working. And then that affects backup to channel to distribution.

Kirk A. Benson

And those are primarily repair and remodel products. That's where the end market exposure is primarily, repair and remodel. But offset that a little bit in the quarter was we had some good growth in our trim board product line, as we mentioned in the script. So that offset a little bit of the softness caused by weather. But it's -- those are primarily repair and model product exposures. Bill, you want to talk about infrastructure?

William H. Gehrmann

Yes. Just a quick note. Rob, obviously, the residential piece of our business tracks regionally with the color that Kirk provided. But obviously, a large driver for the heavy construction materials group is infrastructure work. And we've seen a pretty good uptick in the activity in a lot of sites there. Not only the number of projects, but the size of the projects. So we're starting to recognize flow through from that and in some of those larger projects, it presents a nice backlog for us as we look forward.

Kirk A. Benson

And you can see that in January, the sales in the North East and upper Midwest, the tons in those markets are soft, whereas the tons in the West are tracking a positive variance year-over-year. So we're seeing the infrastructure activity, as well as the new residential construction activity in the West and in those markets that haven't been impacted by weather improving year-over-year.

Operator

Our next question comes from the line of John Quealy with Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

I have 3 questions. First, in terms of the gross margin line, if I read it correctly, there was some movement lower in the gross margins as a result of some of the expansions in trim board, as well as roof tile. Is that a step up inventory charge? Or is that just the changing dynamics of the gross margin line was the first question. The second question, in terms of the Boise Cascade win, was that a new product line, a relationship for Boise? Or did you unseat an incumbent or a different solution there? And then lastly, my third question, on the M&A pipeline, can you give us some sort of feeling about when you think you'd be able to announce the successful transaction in '14? Or how should we think about that?

Kirk A. Benson

Well, let's answer the questions in reverse order, John. So first, from an M&A perspective, we've got -- we have multiple transactions that we're working on concurrently. One of the things that gives us some comfort that we can do that is because we've got -- we have our 3 product groups in light and we have Bill running our heavy side. And so if we got that, we have that broad exposure of product offerings that allows us to move forward with transactions. If you had -- all of these transactions were focused in one management team, that would be more difficult to do. But because of the breadth of our product base, we're able to pursue multiple transactions. So I think that we're at the stage where we've done substantial due diligence on several transactions. So we're nearing the end of the diligence phase. We have -- we're engaged in negotiating a definitive agreement with multiple transactions. So I think that there's -- we would anticipate that we would be able to conclude the negotiations with a definitive agreement to be able to move forward with several transactions. So that's -- we're quite excited about the opportunity that we have to do things that are consistent with our core and provide us with growth that isn't a leap from our core, but the things where we think we can get some synergies and where we can very easily integrate the transactions with lower risk.

The second question was on Boise Cascade. So I think that -- Dave, would you add some color to the questions, whether or not we displaced other people with the Boise Cascade win?

David S. Ulmer

Yes, the answer is in each of the branch locations that we had won that business, we did displace competition. Those are not new. The product category is not new to those branches.

Kirk A. Benson

So we're quite pleased with that opportunity. And we gave a range of $4 to $6 million. There isn't -- there is the potential, of course, for us to extend our displacement of competitors with additional branches in the Boise Cascade system. So -- and in addition to that, of course, Dave's working on other distribution opportunities for our trim board product because the trim board that we acquired is primarily in the Northeast, and so we've got an opportunity to move that product into some of our strength in the Midwest and some of the other -- some other geographies that Dave is working on to expand trim board distribution. Then the third question was the change in our gross margin. There were a couple of things that were going on from a consolidated basis. We had a drop in revenue in -- at HTI, that's our -- the energy segment, and that had a negative impact overall on our consolidated gross margin. But then, we had the acquisition of the trim board and roofing, and Don's going to add a little bit of color to gross margin in the light building products segment.

Donald P. Newman

Yes. So, John, 2 things that serve to dampen our unadjusted gross margin. As Kirk had mentioned, we had about a $250,000 acquisition accounting adjustment related the roof tile acquisition. And so that would have been some headwind to margin percent, to the margin and to the margin percent. Also, when we captured the Boise business, there were some take-backs on inventory and we ended up recording a reversal of revenue and also some impact in our cost of goods sold, had a net effect of about $750,000 bad guy towards gross margin. When you look at our gross margin, you see the effect of that roughly $1 million of drag. We do adjust for those 2 items when it comes to our adjusted EBITDA. So you don't see that effect in the adjusted EBITDA margin.

Operator

Our next question comes from the line of John Baugh with Stifel.

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

A couple of questions. First, Bill, I think you commented on the PCA forecast and I think you said 8%. A couple of things. Is that volume or revenue forecast, number one. And then, I know you don't really participate in the energy or wet cement, could you comment on how you may or may not track PCA this fiscal year?

William H. Gehrmann

Sure, John. The PCA is forecasted volume, not revenue going towards your first question. PCA, obviously, we track ourselves against them nationally and then regionally. The big cement consuming regions of the country, the big 3 are Texas, Florida and California. We have very strong presences in Texas and California, not so much Florida. So we lost that. But watching them trend over the last 3 months, and I have not reported December yet, so we haven't seen those numbers. I think we're trending very similar to them. Does that answer your question?

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

Yes. And then, on the pricing there, was that -- was the increase in effect for the quarter? Or just talk about pricing for fiscal year and product sales for fly and cement.

William H. Gehrmann

Yes, sure. I think we've got a very good track record in our year-over-year comps as we look up in quarterly. We watch to see what the cement industry is doing. They currently have $3 to $8 price increase is floated out there for the April timeframe going into this year's construction season. So we think that continues to give us upside, pricing upside, and we hope to take advantage of those opportunities.

Kirk A. Benson

And so what we're doing, John, is we're looking at the pricing that was in place at 12/31/2013 for that quarter compared to pricing that's in place for 12/31/2014 and we have a 4% increase in the pricing year-over-year. That number's being developed.

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

Okay. And then, could you, Kirk, or someone else, just quickly walk through, not individually, product line by product line, but maybe on a bigger picture basis. You mentioned several price increases in raw material increases. Short of -- are the pricing you're anticipating outside of what we just discussed on fly ash incremental or just offsets to raw material pressures? Any color there?

Kirk A. Benson

Well, so on the one place where we are currently engaged in price increases is in the -- our regional block business in the Texas market. We are anticipating a cement price increase later in the year. But when you -- what we -- because that's primarily institutional, commercial sales. We're committing a price being in advance when you actually ship the product. And so we are anticipating that cost increase that's going to come in the -- later in the spring. So we're raising prices now so that when we ship those products, that price increase will already be in place. And it's because of the time between when you commit to the time when you ship the product. And those price increases are holding. So we feel very good about being able to maintain the prices with the increases in them. The -- we were unhappy with our margins in 2013. And so we've taken that into account as we tried -- set these prices going forward. And I think that we did see a margin expansion in the 12/31 quarter and we think, as these price increases are affected in -- later in the spring, that they will -- they'll be able to offset the cost but there might be a little bit of margin expansion associated with price increases, as well.

Operator

Our next question comes from the line of Al Kaschalk with Wedbush.

Taryn Kuida - Wedbush Securities Inc., Research Division

This is Taryn filling in for Al. One question, just in terms of the EPA commentary. Do you expect this to drive the marginal customer off the sideline or does it -- or do you think it will take a little bit more just time?

Kirk A. Benson

Taryn, we'd like to welcome you to the call, too. I think that the EPA decision is -- will lift the uncertainty around fly ash. It took -- we've been working with the EPA now for 4, 5 years, and the -- and there has been a cloud of uncertainty around the disposal of fly ash. One of the things that we understand is going to happen is that the EPA is going, at some point in time, in fact, we think it's going to be fairly soon. The EPA is going to release a methodology that they have developed for the analysis of the use of fly ash in a different set of products. And that methodology is -- will allow people to determine whether or not there's any impact from the use of fly ash. We believe that when the EPA chooses to release that methodology, they will also release their own studies of the use of fly ash in concrete and drywall. And we further believe that that's going to be very positive. So we've got -- you really have -- they haven't released that yet but we do think that it's imminent. It's going to be released in the near-term. And so you'll end up with 2 very positive statements about fly ash. You'll have the disposal regulations under Subtitle D and then you'll have the methodology and the application of methodology for the partial replacement of Portland cement and concrete. And those combined, those 2 very positive announcements will lift the uncertainty around the use of fly ash as a replacement for Portland cement and concrete. So we think that the marginal buyers that, for example, the Los Angeles Unified School District had stopped using fly ash because of the potential of a Subtitle C designation. So buyers, like the unified school district, Los Angeles, could very well come back into the market and use concrete with fly ash as a partial substitution for Portland cement. So we feel very good about it. We think that we might begin to see some of those marginal purchasers of concrete come back into the marketplace.

Taryn Kuida - Wedbush Securities Inc., Research Division

Perfect. That's helpful. And secondly, what do you attribute the better-than-expected internal plan performance within light building products to? Is it mix, volume, price or it's a combination?

Kirk A. Benson

So I think the -- we had good organic growth in the -- we had good, strong organic growth in architectural stone because exposure to new residential construction. That was an important factor. We had good organic growth in our trim board with the expansion of distribution. So that was positive. And then we had organic growth in our regional block business. So those 3 areas where we got that organic growth, the architectural stone, the trim board and the block.

Taryn Kuida - Wedbush Securities Inc., Research Division

Okay. And then, how would you describe the inventory in the channels today? How would you describe the customers' buying habits? Is it fewer large quantity orders or frequent low quantity orders -- low quality orders?

Kirk A. Benson

I think Dave mentioned that the distribution -- this will be primarily 1-step distributors for roofing, siding and windows. Those -- that set of distributors have not increased their channel inventories. And you can -- you would see that happening as they saw the winter weather. So they would want to reduce their inventories knowing that the sales in the near-term are going to be impacted. So I think Dave mentioned that. And so I think that's consistent overall with what we're seeing is that there -- that we're seeing very little increase in our sales related to inventory levels in the distribution channels.

Operator

Our next question comes from the line of Dan Mannes with Avondale.

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

First question, on the construction materials business, you mentioned having some kind of high-margin service work during the quarter. Can you maybe scope that out for us and how abnormal that is? Or is that stuff that maybe you're going to look to continue throughout the course of this year?

Kirk A. Benson

Yes, it's something that we all -- we've got folks in place. And so when you have existing sites and then a utility wants us to do incremental site work, that's a very positive thing. And so -- because you already got the equipment in place and so you don't have a lot of incremental fixed cost associated with that, both incremental, same-site services. So it's a very good thing when that occurs, and it's going to occur sporadically but Bill, why don't you share some cost -- share some color with Dan on that.

William H. Gehrmann

Yes. Dan, obviously on a lot of our sites, we offer total ash management program, so we're not only marketing fly ash but were also providing site services to them. So when these types of opportunities come up obviously, we're very competitive because we have people in place. So in Q1, we had a lot of these nice projects spread across the entire business. And as Kirk pointed out, we were able to use existing equipment and manpower there so we got a nice contribution flow-through on that. And we typically see that throughout the course of the year and we would anticipate to see more opportunities like that in the future.

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

Abnormally large amount and how much did that impact the quarter, I guess? Because it looked like, Bill, your business looked like it had a pretty strong quarter. And I'm just wondering, how big a contribution this was? And I was just kind of thinking through if I want to expect it.

Kirk A. Benson

I mean, it was larger than we expected and so, we -- as we have given guidance, we've -- the guidance we've given is that the service revenue is going -- was going to be lower in 2014 than 2013 because of the change in projects. And what happened was that this incremental service made up that difference. So we ended up being flat on the revenue line in 12/31 quarter. If it weren't for that incremental revenue, we wouldn't have been flat in the 12/31 quarter. So it was -- it made up that difference in revenue. And it was a good margin revenue, too, because you didn't have to add any fixed cost. So it was -- if we ended up being flat for the year, which I'm not suggesting that we're going to be because this is -- it -- these incremental projects are up and down. But if we were flat for the year, then it would be in that probably 4% range for the year as the kind of revenue that you would be picking up from incremental projects.

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

Got it. That's really helpful. Just then real quick on the cost side in light building products, you've obviously mentioned some of the volatility you're seeing perhaps in resin prices and it sounds like you're at least contemplating raising pricing for it. Can you maybe remind us how much exposure you have, what percentage of COGS is either by the individual product lines or in aggregate?

Kirk A. Benson

Yes, I think on the -- if you look at the percentage of revenue, our -- some people look at the percentage of revenue and some people look at the percent of cost of goods sold, but on the percentage of revenue, I think the material costs run in the 35% range, something like that.

Donald P. Newman

No, something probably in the 40%.

Kirk A. Benson

Okay, 35% to 40% for material costs.

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

And how material is resin of that 35% to 40%.

Kirk A. Benson

Well, that's -- what we're talking about is the resin-based product. So some of it's polypropylene, some of it's PVC. So it's different resin. But that 35% to 40%, those are -- that's the resin material costs we're talking about of the siding accessories part of the business.

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

Got it. And then the second thing, I guess. Can you just walk through to the extent you guys do decide to put through some pricing increases to offset that. What if any lag would you expect to occur -- incur?

Kirk A. Benson

Well, one of the things that we learned the last time we went through this is that a lag in price increases is not a good thing. And so you end up with -- when you buy the material and then you have raw material inventory, you run it through your work in process, you put it into your finished good and then you sell that inventory. When you go through that cycle, you're probably 4 months or so in that cycle. And so you want to make sure so that's basically the -- if you had a price increase, you could have a price increase that will take into account that lag. But that -- we want to be really careful and we want to be assertive about that. That's why Dave is currently looking at the opportunities to try to capture some of those price -- cost increases. Dave, why don't you share with everyone what you're doing to try to make sure that we take into account that lag and that we're acting in a timely basis?

David S. Ulmer

Well, we're trying to make sure that, first of all, that you have a more nimble set -- more nimble on your inventory that you're not hanging onto as much of raw good in the event that there is an increase in those type of things. So we're looking at what we're bring in, what we're going out, what's getting put into inventory. Because you have to be aware that there will be a, as we talked about distribution, there will be a spring load-in, it's just a matter of when that load-in occurs. And so we're looking at those market dynamics and our internal inventory, and then we're also looking what the resin markets are doing. You can't necessarily look at -- just look at oil prices and say, okay, resin prices are going to follow. There's more to it than that and -- but we have to look at where it goes. Take the timing, inventory, throughput and those things into consideration and then look at the market dynamics that are out there. The -- I guess, the good news in the whole scenario is, if raw materials are affecting us, they're affecting everybody else, as well. And so we just have to look at all those things and make decisions that are best for our business.

Donald P. Newman

Dan, this is Don. I want to be real clear, too, on the metric that we gave you. It's raw materials are typically in the range of 40%, 45% of COGS, not of sales. So I just want to make sure that we're on the same page with that metric.

Kirk A. Benson

Yes, because I was talking about as a percentage of sales and Don...

Donald P. Newman

Was talking about the percent of COGS, didn't want to screw up your model.

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

No, that's really good. And I guess, then, lastly from -- this is primarily just on the siding. You're not going to have nearly as much resin exposure on the other product lines?

Kirk A. Benson

No.

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

Or any? So in reality, it might be 10% of your total revenue for the light building product segment?

Kirk A. Benson

The siding accessories represents over 40 -- that's about 40%, 45% of revenue on the light building products segment.

Operator

Our next question comes from the line of Seth Yeager with Jefferies.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

When we look at the proceeds that you guys raised for M&A, some of the EPA regulatory overhang goes away for fly ash. Is that a business that we should think about you looking to expand? Unfortunately, it's one that, I think, is less understood by investors or has more perceived risk but there's a lot of tailwinds going on there that generates a lot of cash. I guess, just what are the opportunities there? It looks like Lafarge appears to be selling almost everything in the U.S. that isn't nailed down. So with you guys being the largest in the U.S., should we think about that as opposed to the LBP side?

Kirk A. Benson

Yes, we think that the heavy construction materials business is -- a couple of characteristic. It was less volatile on the down cycle than our light building products segment. And so it maintained its EBITDA and its free cash flow generation with less cyclicality than light building products. So that was a very positive attribute of our heavy business. There's a couple of tailwinds that are very positive for us. One is that as the cement industry is coming into compliance with air quality rule into 2015, they've had to increase their cost structure, they've had to make a significant investment in capital. And so price increases are very important in the portland cement industry and that gives us an opportunity to continue to raise prices. The other thing that happened in the last up-cycle of 2004, 2006 or so, is we didn't have enough portland cement capacity in the United States. And so we had to import 25 million, 30 million tons of portland cement to make up for demand. And so what happened was the substitution rate of fly ash for portland cement increased during that period of time. So now as we're starting to see, you look at the PCA forecast and I think we talked about 116 million tons in 2016, that number clearly exceeds U.S. capacity. So you've got U.S. capacity for portland cement is actually going to be declining because of these air quality rules. And so you've got capacity going down at the same time that demand is going up. And so we think that, that is a very powerful tailwind that's going to make the -- our position in the fly ash business a very positive factor in over the next 24, 36 months. So with that background, the bottom line is that, yes, we're interested in expanding that business. It's low CapEx, high cash flow. It's got some very positive tailwinds that should propel growth in both the top line and EBITDA. So we're very interested in expanding the business and we're looking at a couple of small transactions that could expand our fly ash business.

Sharon A. Madden

Thanks, Kirk. Operator, with that, we'll go ahead and end the call. Thank you, all, for joining us.

Operator

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation, and you may now disconnect.

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