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Headwaters Incorporated (NYSE:HW)

Q2 2014 Earnings Call

April 29, 2014 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 Headwaters Stone 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 & Company, Incorporated, Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

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

Philip Volpicelli - Deutsche Bank AG, Research Division

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Operator

Good morning, ladies and gentlemen, and thank you for standing by, and welcome to the Headwaters Incorporated Second Quarter 2014 Fiscal Year Earnings Conference Call. [Operator Instructions] And as reminder, this call is being recorded today, April 29, 2014. I would now like to turn the call over to Tricia Ross with Financial Profiles. Please go ahead.

Tricia Ross

Good morning, everyone, and thank you for joining us for the Headwaters Incorporated Second Quarter Fiscal Year 2014 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 and the webcast. If you do have any issues, please feel free to email me at tross@finprofiles.com, and I can also e-mail you a PDF copy.

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

Sharon A. Madden

Thank you, Tricia, good morning. Thank you for joining us as we report Headwaters' fiscal 2014 Q2 result. Kirk Benson, Headwaters Chairman and Chief Executive Officer; and Don Newman, Headwaters Chief Financial Officer, will be conducting this morning's call. They are joined by Bill Gehrmann, President of Headwaters heavy construction materials segment; and Murphy Lents, President of Eldorado Stone.

While listening to the call today, 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 statements 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.

With that, I will now turn the call over to Kirk Benson. Kirk?

Kirk A. Benson

Thank you, Sharon, and good morning, everyone. Turning to Slide 3, I'd like to begin the presentation. So following our December quarter, we continued to experience organic top line growth in spite of the very negative weather patterns impacting the Northeast and Midwest. We had total revenue growth of 11% and organic growth of 6%. The organic growth occurred in heavy construction materials through volume and price increases. Fly ash volume grew in areas outside of the weather-impacted Northeast and Midwest, so it's very encouraging to anticipate even stronger growth as the weather-affected regions start to demand more ash.

Organic growth in light building products was in our stone and block categories, as our siding products are more heavily oriented towards the Northeast, Midwest and Atlantic states and were significantly impacted by weather. Adjusted EBITDA in our heavy construction materials segment increased 25%, directly related to volume and price increases. Adjusted EBITDA in light building products declined slightly by $0.5 million. The decline in light building products adjusted EBITDA resulted from 2 factors: First, the weather-related decline in high-margin siding accessory revenue in the Northeast and Midwest resulted in a lower-margin sales mix; and the second reason was a strategic increase in sales and marketing expense in our stone group. The increase in stone sales and marketing expense is targeted towards specific activities designed to increase top line revenue growth. So Murphy will discuss the marketing efforts in more detail later in the presentation. So overall, given the weather-related challenges, the quarter was encouraging. We see some very positive trends in fly ash volumes and pricing, and stone and block sales.

April sales have been positive and trending higher than last year. In addition, our trimboard product line April sales, thus far, are ahead of last year, as we gain new distribution at certain Boise Cascade and Huddick [ph] sites. Those new sites should increase trimboard sales by 10% to 15% over last year and begin our diversification outside of the Northeast.

Our Florida roofing product line has experienced 23% growth during the quarter, as we benefit from an overall strong market in Florida. The only softness continues to be siding in the Northeast and Midwest, as sales are responding slowly to spring conditions. The conversations with our one-step distribution customers are encouraging. They believe underlying demand is improving, and the softness is weather related. So we are anticipating significant improvements in sales in the Northeast as weather continues to improve.

In short, we exceeded our internal expectations in the quarter even with the negative weather, and the positives drive us to affirm our guidance for the year at $130 million to $145 million with the midpoint of $137.5 million adjusted EBITDA. We've now completed 2 tuck-in acquisitions. Both are performing according to plan, generating top line growth and trending towards leadership economics consistent with our overall strategy. We currently have $85 million to $95 million of cash available to invest, and we moved 2 potential transactions forward. There are several additional transactions that we have identified as possibly fitting our strategy.

Finally, we remain committed to deleveraging as measured by net debt to adjusted EBITDA. Our goal is to be at a ratio of 2.5:3. And given our opportunities to acquire suitable bolt-on acquisitions, we feel very positive about being in that range in 2015.

So I'd now like to turn the call over to Don Newman.

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.

Despite tough winter weather, revenue from continuing operations for Q2 increased $15.5 million or 11% to $156.5 million from the prior year revenue of $141 million. The revenue growth in the quarter reflected 6% organic growth and 5% growth from acquisitions.

Adjusted EBITDA from continuing operations for the quarter increased 12% to $17.8 million from prior year adjusted EBITDA of $15.9 million. Year-to-date, revenue from continuing operations is $322.1 million, up $31.5 million or 11% from prior year revenue of $290.6 million. Our core light building products and heavy construction materials segments combine to generate 6% organic growth year-to-date. Year-to-date, adjusted EBITDA from continuing operations is $42.1 million, an 11% increase from prior year adjusted EBITDA of $37.8 million.

Let's move on to Slide 5 for a closer look at the quarter's financial results. Consolidated revenue increased $15.5 million or 11% to $156.5 million from 2013 levels. Revenue from our core light building products and heavy construction materials segments increased $14.4 million year-over-year, including 5% through organic growth.

Light building products revenue increased 11% to $94.1 million compared to $84.8 million in 2013. Organic growth in light building products was 2% for the quarter, as growth in stone, block and roofing more than offset declines in our siding business sales. The roofing and stone groups had the highest growth rates due to strong growth in Florida roofing and to stone's exposure to new residential construction.

Our siding business, which has significant exposure to the Northeast and Midwest, saw its revenue decrease year-over-year as severe weather negatively impacted construction activity. Heavy construction materials revenue increased 9% to $59.1 million compared to $54 million in 2013, reflecting both price and volume increases year-over-year.

Our non-core energy business saw its sales increase $1.1 million year-over-year due largely to timing of product shipments. Consolidated gross profit was $38.6 million in the quarter, a 19% increase from the prior year gross profit of $32.4 million. We saw our gross margins increase more than 160 basis points, including a more than 300-basis-point increase in our heavy construction materials segment margins.

SG&A increased due to operating costs associated with acquired businesses and acquisition-related costs, as well as increases in compensation expense and strategic marketing spend. Operating income swung from a loss of $1.1 million in 2013 to a profit in 2014 in what is typically our lowest-volume quarter of the year. Our consolidated operating margins improved year-over-year led by a 190-basis-point increase in heavy construction materials margins.

Income taxes relate primarily to state income taxes, as well as alternative minimal -- minimum federal taxes. We ended the quarter with approximately $203 million of pretax NOL carryforwards and $26 million of tax credits that will shelter significant future income from cash taxes. Those NOLs and tax credits remain fully reserved on our balance sheet.

Now let's move on to Slide 6 and talk about the year-to-date results. Year-to-date, consolidated revenue increased $31.5 million or 11% to $322.1 million from 2013. Revenue from our core light building products and heavy construction materials segments increased $34.1 million or 12% year-over-year, including 6% from organic growth. Light building products revenue increased 16% to $187.2 million compared to $161.5 million in 2013. Organic growth in light building products is 6% year-to-date as growth in stone, block and our roofing business more than offset declines in our siding business sales. Heavy construction materials revenue increased 7% to $130.6 million compared to $122.2 million in 2013, reflecting both price and volume increases.

Our non-core energy business saw its sales decrease $2.5 million year-over-year due largely to timing of product shipments, including the impact of shipments in late fiscal 2013. Year-to-date consolidated gross profit of $79.4 million, a 14% increase from the prior year gross profit of $69.7 million. And while consolidated gross margins expanded 70 basis points year-over-year, gross margins in our core light building products and heavy construction materials segments expanded 100 basis points.

SG&A increased due to operating costs associated with acquired businesses and acquisition-related costs, as well as to the -- to strategic marketing efforts and customer development costs related to the energy segment. Operating income increased 65% year-over-year, increasing from $4.9 million in 2013 to $8.1 million in 2014.

Now let's move to Slide 7. Our net debt ratio ticked up modestly during the quarter due to our seasonal working capital cycle and the acquisition of Sinew. Our cash balances typically decrease from December to March due to the slow winter construction months, which was the case this quarter as well.

Our trailing 12-month adjusted EBITDA improved approximately $2 million since the end of the December quarter, partially offsetting the impact of the seasonal cash cycle on our net leverage metric. During the quarter, we also repaid $7.7 million of our 2.5% convertible notes. Our next debt maturity is February 2016 when our $49.8 million of 8.75% notes are due.

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 for our light building products segment for the second quarter increase by more than $9 million to $94 million, an increase of 11% over last year in spite of the unusually harsh weather. Revenue increased 2% organically year-over-year after excluding recent acquisitions. The poor weather slowed our organic growth in the second quarter, particularly in our siding accessory business, which has considerable sales in the Midwest and Northeastern United States. This segment was also impacted by the lagging big-ticket exterior repair and remodel end market.

Our second largest end-market exposure on light building products is new residential, which slowed somewhat in our second quarter. Non-seasonally adjusted single-family housing starts for the 3 months ended March 31, 2014, were 2% lower than housing starts for the 3 months ended March 31, 2013. This is the first 3-month decline since November 2011. Economists have lowered guidance for the 2014 total housing starts to between 1 million and 1,100,000, which is consistent with our internal expectations during [ph] the year. Adjusted EBITDA for the quarter decreased $0.5 million to $11.1 million.

Changes in our sales mix were the largest factor in the decline. The winter weather in the Midwest and Northeast reduced sales of our high-margin accessory products, while our other products, which generally did show organic growth, carry somewhat lower margins. The combination resulted in lower margins overall. Although April sales are still slow in the Midwest and Northeast, we expect the sales mix to revert to normal later in the year.

The second largest factor impacting EBITDA margins was the strategic increase on our SG&A spend to support revenue-generating programs aimed at the recovering markets. These efforts include a variety of additional resources in the field, targeting new home construction, new consumer and trade advertising efforts, coupled with web-based programs to pull sales through our distribution and expanded efforts to support our growing outdoor product lines.

While it's early in the season, we're already seeing increased activity resulting from these programs beyond the usual seasonal uptick. Our architectural stone product group continued its revenue growth in the second quarter. We are focusing on gaining market share with major homebuilders using our good, better, best strategy, which continues to gain traction. Much of our increase in marketing spending is focused in the stone group, and April sales are trending upwards towards double-digit growth.

We're also seeing results from our efforts to expand the use of our stone product into backyards with outdoor kitchens and fireplaces, and to extend the Eldorado brand to other outdoor living products like our line of fire bowls. As you know, outdoor living 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.

Revenue from our block group -- product group increased due to its exposure to commercial and institutional markets in Texas and Louisiana. Texas' strong economy should continue to result from the 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.

Margin improvement continues to be a focus after margins declined in 2013. Trucking is a material cost, and we've been able to materially reduce this cost by bringing more of its function in-house. We expect margins to improve in the second half of the year, as ongoing process improvements take hold and trucking costs improve.

We completed our acquisition of 80% of the Florida-based Entegra Roof Tile in December. The business is performing as planned in the active Florida market. This acquisition fits Headwaters' strategy of pursuing niche building products with strong market shares and high adjusted EBITDA margins. Recently, we've been able to improve our stone product exposure in the Florida market with -- through our relationship with Entegra.

We acquired our trimboard product last -- line last January and have made successful strides in our two-pronged strategy of increasing sale through leveraging our distribution networks and improving margins through scale, efficiencies and cost reductions. 87% of our trimboard sales were in the Northeast. We added Boise Cascade in the December quarter and added Huddick [ph] in the March quarter. Both two-step distributors will help us diversify our sales outside of the Northeast. We anticipate a 10% to 15% increase in 2014 trimboard sales due to the expanded distribution.

Year-to-date revenues for the light building products segment had increased $26 million or 16%, while adjusted EBITDA is up $3 million dollars or 13% to $26.5 million. Slide 9 summarizes this discussion.

Revenue grew during the quarter, making it the 11th straight quarter of revenue growth year-over-year. Adjusted EBITDA decreased slightly in the second quarter, but we expect the critical 2 quarters to come to meet expectations and guidance.

Now I'll turn the presentation over to Bill.

William H. Gehrmann

Thanks, Murphy. Good morning, everyone. On Slides 10 and 11, you can see that revenue for the March 2014 quarter in our heavy construction materials business was $59.1 million compared to $54 million for the March 2013 quarter, resulting in a 9% year-over-year increase. We did begin to ramp up revenue from our Northeast fly ash source acquisition, but virtually all of our revenue was organic.

Despite the abnormal winter weather that was experienced in the northern half of the country, principally in the Northeast and Midwest, our volume of high-value fly ash sales was up 5% year-over-year for the March 2014 quarter. During the quarter, we also realized the net 3% year-over-year price increase for high-value fly ash. The market is continuing to strengthen into April. Headwaters client services provides site services to many of our utility clients. Site service revenue was up year-over-year for the March 2014 quarter driven by winter weather that caused an increase in coal-fired generation to meet heating demand and accounted for approximately 32% 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 contributes to a lower overall EBITDA margin that would occur without service revenues.

Gross profit for the March 2014 quarter increased 26% to $13.4 million compared to $10.6 million for the March 2013 quarter. Gross margin for the March 2014 quarter increased 300 basis points to 23%. Adjusted EBITDA for the March 2014 quarter increased 25% to $8.6 million compared to $6.9 million for the March 2013 quarter.

Adjusted EBITDA margin increased 180 basis points year-over-year. Operating leverage, combined with our ongoing continuous improvement initiative, is evident as revenue growth of 9% resulted in adjusted EBITDA growth of 25%.

Cement shipments for January and February were up 2%, and we expect further increases in shipments in March. Our fly ash sales will reflect the increase in demand for cement.

Through April, we are seeing positive year-over-year fly ash shipments. Most of the growth is in the southern part of the country, particularly Texas in the West, including California. In addition, we are seeing cement prices increase due to the tightening supply relative to demand. The tightening is occurring because of increased demand and because of new EPA regulations that will lead to retrofits and may lead to shutdowns of some cement kilns. The tightening of supply and the EPA-driven increased cost structure is driving cement plant manufacturers to raise prices. The upward price momentum should continue to benefit our fly ash sales and allow us to raise prices.

As we mentioned on the last call, in a consent decree dated January 29, 2014, the EPA agreed by December 19, 2014, to sign for publication and federal register a notice taking final action regarding EPA's proposed revision of record Subtitle D regulations pertaining to coal combustion residuals.

We believe that the EPA's statement makes it highly likely that fly ash disposal would be regulated under Subtitle D as a solid waste. The court recently rejected the consent decree because it provided for extensions of the deadline without the court's approval. The court has sent the decree back to revise the extension language.

On February 17, 2014, the EPA released an exhausted study reaffirming support for 2 major uses: fly ash in concrete and FGD gypsum in wallboard. In the release the EPA stated, "The EPA supports the beneficial use of coal ash in concrete and FGD gypsum in wallboard. The agency believes these beneficial uses provide significant opportunities to advance sustainable materials management."

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 outlet for us, as we begin to move into the construction season. Sales of high-value fly ash have been trending positively, and we anticipate year-over-year increase in the sales of high-value fly ash for 2014.

I'll now turn the call back to Kirk.

Kirk A. Benson

Thank you, Bill. Looking at Slides 12 and 13, we're finally getting some traction in the marketing of our HCAT technology. Our current contracts cover approximately 68,000 barrels per day at design capacity and generate approximately $12 million in annual revenue. We have licenses signed for an additional 81,000 barrels per day at design capacity. We need to complete trial runs for the new customers, and the ultimate amount of HCAT that is purchased depends upon a number of variables that could more than double the number of barrels that are treated with HCAT. There's approximately 306,000 barrels per day of new capacity that may come online in the 2016-2017 time frame. The new capacity is ideally suited to HCAT, and we are being engineered into some of the capacity. Our next growth step will be to get license agreements with this set of customers.

Turning to Slide 14. Even though it was a difficult winter, we feel good about the March quarter and the first 6 months of the year. Approximately 70% of our adjusted EBITDA is earned in the June and September quarters, so the summer construction season is critical to our forecast. We are performing on track with expectations through the first 6 months, and so we affirm our guidance of between $130 million and $145 million adjusted EBITDA for fiscal 2014.

So 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 does come from the line of Rob Hansen with Deutsche Bank.

Rob Hansen - Deutsche Bank AG, Research Division

I just wanted to kind of review what you said about April. I believe you indicated that it was up year-over-year, and I just wanted to see what kind of magnitude of an increase. And then I also wanted to see which segment had the higher growth. Was it in the light building products or the heavy construction materials?

Kirk A. Benson

So we're really pleased with what we're seeing in the April sales trends. In light building products, we're seeing significant growth in stone and block, still somewhat soft in siding. We attribute that to the weather in the Midwest and Northeast. So if you look at the increases in stone, for example, in April, we're experiencing double-digit increases. And the block, a little bit less than that but still quite strong. And as I said, we're still seeing a little bit softness in siding because of the weather-related Northeast and Midwest. The -- our new acquisition of the cement tile in Florida is probably growing faster than our other product categories. So that feels very good going into the summer construction season. If you look at our heavy construction side of the business, we're - you can -- we manage the business into -- in 3 regions, and we have a fair amount of detail of where the -- where our sales are coming from. And you can look at that detailed sales report, and you can see the softness in the weather-related sales in the Northeast and Midwest. But you can see some very significant strength in the central part of the southern half of the country, particularly at Texas. And we're seeing some double-digit growth in shipments. We're also seeing some growth in the Western part of the United States. It's not as significant as the Texas market, but we do have good margins in the West, in California particularly. And so it's always positive to see the West favorably shipping compared to prior year. But -- so we're seeing some double-digit growth into April, and that really makes us feel good about going into the construction season.

Rob Hansen - Deutsche Bank AG, Research Division

Okay. And just regarding the price increases in the heavy construction materials business. It seems like that was a little ahead of, at least, what I was -- what we were expecting. Is that because of the kind of mix in terms of the West and the South seeing a larger component of sales, and that's why you have the higher prices? Or if you'd seen the same type of sales growth across the whole country, would you have seen that similar price growth?

Kirk A. Benson

I think the -- we are again looking at our price increases from a very detailed perspective. We've got -- we manage over -- nearly 100 different sources of fly ash and sites, and so we're looking at these price increases on a site-by-site basis. I think that we -- even when we didn't have as significant of growth in the -- in Texas and in the southern region, we were still getting 3% to 4% price increases. So I think we felt pretty comfortable with the price increase strategy, and I think it's consistent with what is happening in Portland Cement from -- in following their price increases. Bill, why don't you add a little bit of color to that -- in response to that question?

William H. Gehrmann

Yes, sure. As Kirk said, we track pricing in a very detailed manner. Typically, price increases are implemented at different times, depending on the market. Typically, April is a time where we see a significant amount of our annual price increases go into effect, so we'll start recognizing those moving forward. And then in some of the markets where we moderate prices in November and December, we will see another price increase go into effect going into May and June. So we expect to continue to see this trend. So yes, right now I think we feel pretty good about our ability to raise prices based on the market.

Kirk A. Benson

It's one of the tailwinds for our heavy construction materials business because we are going to see a tightening of supply as Portland Cement demand picks up, and some of that is going to be replaced, of course, with imports as demand exceeds capacity. So what happened in the 2003 through 2005 time frame when demand exceeded supply was we had an increase in the substitution rate for fly ash and the ability to continue to raise prices. So we feel pretty good about that. And then you have the EPA adding cost to the production of Portland Cement, and so that gives additional pressure on the Portland Cement companies to raise prices. All of that should help us to continue this trend of price increases.

Operator

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

John Quealy - Canaccord Genuity, Research Division

A couple of questions, and I'm sorry if you had said this and I missed it. In Florida, in the cement tile business, I think you said 20% type of growth. Is that all organic, Kirk? Did they have some channel expansion in that business as well? Just on the business you bought back in December.

Kirk A. Benson

Yes, it's organic growth. I mean, we are -- we feel really good about the position that we have in the Florida market and the relationship that we have with contractors, and that's driving that organic growth. The other thing that was really quite positive is that we're starting to get -- because of the relationship with contractors, we're starting to get some opportunities to introduce some of our other products. And so we're starting to see the -- at least the opportunity to cross sell into the Florida market. So we're feeling very good about what's happening in Florida and feel very good about the order flow looking forward to the sales in this first part of the summer season.

John Quealy - Canaccord Genuity, Research Division

And the cross-sell opportunity, do you think it manifests itself this year in '14? Or do you think we have to wait a year to see it on the P&L?

Kirk A. Benson

I think it's probably going to take a year to make it -- to have any kind of material movement in the P&L. We might start to see some incremental sales, but I think that they'll be relatively small.

John Quealy - Canaccord Genuity, Research Division

Okay. On the heavy duty side, just one quick question. Any major exposure to energy future and the guys in Texas there that are restructuring that company in terms of contracts or receivables? Or how do you think of that in terms of disruption, if any, to the ash market?

Kirk A. Benson

Yes. We've been tracking this very closely for over a year. So this is something that we've known to the extent that anybody outside can know. We have anticipated the proceedings, and so we have been managing the business appropriately. And so we do not believe that we got significant exposure. They -- there are a couple of sites that are -- that do produce some high-quality fly ash, and so those sites are important to us. But we have very good relationships at the plant level, and we have been managing the business appropriately for the eventuality of the proceedings that was announced.

John Quealy - Canaccord Genuity, Research Division

Okay, perfect. And then last question, with the $85 million to $95 million of excess cash at 7.25%, it's about a penny and a half or so depending on the tax rate. Anyway, it's $0.05 to $0.06 a year of accretion potential when you announce a deal or a couple of deals to fill up that cash balance. You talked about a couple of more mature opportunities in the pipeline. Again, is this a handful of tuck-ins, Kirk? Is it potentially a bigger deal or 2? The numbers -- it looks like the numbers can be much better just by covering the cost of capital on this one.

Kirk A. Benson

We are -- we think that, that's all upside opportunity for us because we have the cash. We've identified a couple of opportunities, and we're talking tuck-in acquisitions. We're talking acquisitions in the $10 million to $30 million range. And we feel pretty comfortable that we're going to be able to invest those proceeds. And clearly, that will be accretive to our business as we invest those cash balances.

Operator

And our next question does come from the line of John Baugh with Stifel.

John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division

I was wondering on fly ash, the volumes were awfully good in light of the weather. Is there a way to look at weather-impacted areas and a forecast for how they may turn in June and September? Or is just the mix so good in the South Central region that there's really not a weather influence here?

Kirk A. Benson

Well, there is a weather influence, John. Our shipments would have been greater had it not been for the weather. So we have been influenced. But the strength of our business and the strength of our shipments and the way that we put together our supply sources and our interactions with the ready-mix customers, all -- that has overcome that -- the weather impact. And so our -- their strength has really put the impact of the weather behind us in a sense that we're continuing to grow in spite of the weather. If the weather had turned, and as it turns, we would expect additional growth.

John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division

Okay. And then as a follow-up on that, the pricing outlook for maybe at least the June quarter based on fly ash, can you give us any guidance on what you basically already implemented or are certain to implement in the next few weeks?

Kirk A. Benson

Yes. I mean, we've been pretty consistent with 3% to 4% net price increases. But Bill, do you see something different in April? Do you see any additional strength?

William H. Gehrmann

Well, I think that's fair. I think over the last 2 years, we've been in that 3% to 4% quarter -- year-over-year increase. We have seen some increased activity in DOT projects. Sometimes, those will have a little larger price, higher price than our typical day in and day out, so we may see some opportunity there. But yes, I think that 3% to 4% where we've been tracking for the last couple of years is reasonable to expect.

John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division

Great. And then if I could ask a question on trimboard. Would you care to quantify the March quarter and how much it was down? And you say you're in talks with distributors. They're positive about the year. I'm just wondering if we make it up in the next 2 quarters, what kind of delta we're looking at between what we lost and what we'll make up.

Kirk A. Benson

Yes. No, on trim, specifically, it's because of the concentration of the sales in the Northeast. We were down in sales. But it started to pick up, and it picked up for 2 -- primarily for 2 reasons. One is that we've got additional distribution. So there's a factor going on that in trim that's very positive for us because our goal -- if you look at like a Principia report or something, you look where trim is sold in the United States, you -- it's not 87% in the Northeast, which is where we started. It's more like 1/3 in the Northeast. And so we've got a tremendous opportunity to grow our trim sales as we move distribution out of that weather-affected area. And so what -- we -- if the, like, April sales are very positive, trending up above plan in April from -- and so we're quite a bit above prior year. And so as we said, we expect a double-digit growth in trim sales for the year, and April would support that kind of expectation.

Operator

And our next question does comes from the line of Al Kaschalk with Wedbush Securities.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

I'd like to hear a little more from Bill, given the strong performance about top line growth 9% and operating leverage of 25%. Maybe if there's a way to break that out. I don't know if it's price, volume and cost reduction, 1/3 each, but how about if we hear from Bill?

Kirk A. Benson

Do you like Bill's voice better than mine?

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Well, I figured I was going to ask for that detailed report and others will as well, so we look forward to hearing that. But I thought in the interim, we'd better hear from Bill.

Kirk A. Benson

You'd like to skip the middleman. One -- but I can't help myself. But one of the things that -- to consider is that we've got about a 45% contribution margin in heavy construction materials. So as you get the volume increase, you're going to get a pretty -- you're going to get -- that's when it's going to fall through. Of course, there are a lot of other variables going on, but we've been tracking this for a couple of years, and we've got a very strong contribution margin on those increasing volumes. And then of course, the price increase is going to drop straight through to the bottom line. That -- there are other variables that take place during the quarter, of course, that you might have a change of fixed cost or something that absorbs some of that drop. But Bill, why don't you go ahead and share with the group?

William H. Gehrmann

Sure. I think it's a mix of the 4 things, probably: the revenues with site service, product revenue, which is pricing and volume, and then, our ongoing continuous improvement project there. So site services has been a contributor to that revenue gain. We're seeing good contribution margins from that, and then, obviously, we've got good contribution margins from the product revenue. And the guys and teams have taken a lot of pride in our ongoing continuous improvement projects, and that's also a contributor to some of that margin expansion.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Well, it seems -- I appreciate that. It seems like the momentum in the softest quarter have plenty of room to grow in what are going to be your 2 strongest quarters. Is that fair?

Kirk A. Benson

Yes.

William H. Gehrmann

Yes. Do you want me to take that, Kirk?

Kirk A. Benson

Sure. Yes, I do.

William H. Gehrmann

Yes. I think based on the trends we talked about, that we're seeing in April, we'd agree with that. In talking with the areas in the operating region, they're seeing good backlogs on the product side. We don't expect to see the winter hangover as we obviously experienced last year, which gave us some supply issues towards the back end of Q4. So yes, I think we can continue to be quite optimistic based on the results of Q1 and Q2, and expect to see similar trends going into the next 2 quarters.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

And then maybe a 2-part question on light building products. First, could you share the -- maybe the order pattern or the commentary that you're hearing from the one-step channel in particular? And then second, I don't think these are related, but I can't help to ask. Softer quarter in terms of a seasonal trend, higher SG&A could generate maybe some more visibility, are we at a level here where this is a period spend? Or is there a campaign effort underway over the next 6 to 12 months where the marketing spend SG&A will be a little higher?

Kirk A. Benson

Murphy, I'll take the first part of that question and then come back to you on the SG&A spend and the marketing. So we -- in our conversations with the one-step distributors -- and these that we're talking about, the guys there in siding, roofing and windows. Those -- the one-step distributors are anticipating a very strong summer construction season. That's the feedback that we're getting from our core customers. They clearly were impacted -- and I'm talking about the Northeast and Midwest. They were clearly impacted by the weather and the -- if you look back at, I think, 2 years ago, we basically had a spring that was delayed by about 30 to 45 days. And what we ended up seeing 2 years ago was that the growth into the construction season was delayed by that 30- to 45-day period, but then it was relatively normal. And I think what we're being told is that we should expect a strong summer construction season, albeit it's very slow getting started because of the weather patterns in the Northeast, Midwest. Murphy, why don't you take the SG&A spend?

Murphy K. Lents

Yes. Well, the SG&A spend is -- I mean, this is actually the time in the market cycle when it really pays to spend some money on your sales force and on marketing. And we really put this plan together over a year ago and we're executing it now, and the early results are really what -- really are very encouraging. As to whether or not we continue this into next year is really going to depend on how successful the program is. If it generates the kind of revenues that we hope and expect it will, then, yes, I think we will continue at least some level of expenditure aimed at the same kind of paying. So I don't know if that's clear but...

Kirk A. Benson

Now I think one of the thing that's important is it's another category in which we have a very strong contribution margin. In fact, some of the stone contribution margin on incremental sales are some of the highest in the -- in our company. So if we can do this SG&A spend and generate these incremental sales, it should have the impact of improving our overall EBITDA -- adjusted EBITDA margins in the end. But we got to see.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

What -- so what dollar level of spend have you budgeted for this particular program in fiscal '14? Or preferably, how do you think about $1 of spend equals $1 of revenue or $2 of revenue? Or what's the conversion?

Kirk A. Benson

We would anticipate the spend being in the $1 million to $2 million range, and we would anticipate a very high conversion ratio of that spend into revenue.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. And then finally, we haven't heard much from Don. So Don, could you give us the CapEx and cash flow from ops for the period?

Donald P. Newman

Sure. CapEx for the quarter was about $9 million, and of course, this is our trough of our seasonal cash generation. So as you'd expect, our cash flow from operations would be low this quarter, and it was a negative $4.4 million.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

That's for the quarter, correct, Don?

Donald P. Newman

Yes, that's for the quarter.

Operator

And our next question does come from the line of Dan Mannes with Avondale Partners.

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

A couple of follow-up questions and hopefully I didn't miss this in your prepared comments. As it relates to the light building products segment, specifically on siding, I think you were talking in your Analyst Day and on the last quarterly call about potentially putting through some pricing to recover your, particularly, resin costs. Did that actually occur? Or is that something you guys are still evaluating?

Kirk A. Benson

It's something that we're still evaluating, Dan, because what's happened, particularly with polypropylene, is you -- we have experienced cost increases for polypropylene, but it seems to have settled and is now trending a little bit back down. And so we've done some price increases around the fringe. We've not done price increases into the core set of building product. We're -- we feel very comfortable that if we see additional pressure and depending upon the conditions in the marketplace, then we would be able to put a pricing -- a price increase in place. But it -- the costs seem to have stabilized and seem to be going -- trending back down a little bit.

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

Okay. And then real quick for Bill on the construction materials side. We've obviously seen some pretty good strength, at least, in cement shipments in Texas for some time. Can you talk at all, were you able to divert more product to that market? Or how were you able to continue to grow that market? Was it -- are you either gaining share or increased substitution? Or are you bringing product from elsewhere? Can you talk a little bit about how maybe you're penetrating that market even a little bit more now than maybe you have in the past?

William H. Gehrmann

Yes. Obviously, we've got a large amount of quality supply in the state of Texas. As you recall, about a year ago, a little over a year ago, we brought on another large source there. We've worked on market acceptance. So fortunately, no, we haven't had to divert fly ash into Texas from surrounding states. We do have quality supply there and continue -- as that market continues to grow, we continue to have a little headroom in that supply.

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

Okay. So you do still have some excess supply in that market?

William H. Gehrmann

Yes.

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

Got it. And then, I guess, on the pricing side on construction materials, would you say you're keeping pace with the market pricing for cement? Or are you still discounting slightly relative to the pricing you're seeing?

William H. Gehrmann

We're trying to maintain. We keep an eye on it. You'll see broad price increases that are floated out there. We pay a little more interest in what's actually taking place there, customer by customer. So yes, we are trying to track that and maintain with that cement pricing. Now as we continue to see impacts on cement demand, we'll continue to try to track that, take opportunity on the pricing side of that.

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

Okay. And one last final one, with the acquisition in the Northeast, it doesn't sound like that did much during this quarter, but can you give us an idea of maybe what percentage increase in terms of quality ash that gives you and how meaningful that could be in coming quarters?

William H. Gehrmann

Well, we made that acquisition midway through February. When we acquired that source there was 2 to 3 foot of snow on the ground, so we didn't see any meaningful impact in our year-over-year sales for Q2. We're seeing very positive trends into April as the weather begins to break there. In fact, it's tracking at or maybe a little above what we expected to be selling there at this time. But it's -- I think in the press release, we announced that, that provides us about an additional 150,000 tons a year, up into that Northeast market. And with our logistics system that's already in place, we're able to move that outside just the state of Pennsylvania. So I think we sold, what, almost just under 5.5 million tons of ash last year. So that ought to give you an idea, and we've shared headroom in supply. So I think that gives you an idea of what that additional 150,000 tons a year, what that does give us. But that Northeast market, obviously, is one that's been impacted previously and will continue to be impacted by math [ph]. So we feel very good about having a 150,000 ton of fly ash supply up in that Northeast market.

Operator

And our next question does come from the line of Philip Volpicelli with Deutsche Bank.

Philip Volpicelli - Deutsche Bank AG, Research Division

The SG&A marketing spend, that was $1 million to $2 million for the year? Or was that in the second quarter?

Kirk A. Benson

In the year.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay. And then with regard to the 3 new HCAT customers that are undergoing trials, how long do those trials last? Have you had any preliminary results or feedback?

Kirk A. Benson

We've completed our first trial at the -- the first of the 3 customers. That trial has been completed. During the quarter, we finished our final report and so that particular customer is now evaluating the result of the trial. We -- you'd never know how this is going to turn out because refineries are fairly complicated. But the trial went well. And so we're -- we submitted a positive final report relative to that first trial. The other 2 trials, the -- 1 of the refineries has the equipment in place, and so we think we'll start that trial. The trial probably starts in the September quarter. And the third customer has had -- the equipment has been manufactured and is being installed. And I think the installation and hookup will probably take place so that we can start that trial in a similar time frame. So these trials will probably not be completed by September 30, but will be completed by -- in the 12/31 quarter. We will submit some final reports to those refineries, and they'll make a decision on becoming longer customers. So we're feeling pretty good about all 3 of those refineries becoming customers in the end. I mean, their -- the technology now has been operating at a commercial level at Neste, and it's been built in basically to their standard operating procedures. There is really -- there really -- the commercial risk of whether or not this technology does what it's supposed to do is relatively small at this point. And so there are -- as I said, there's a lot of variables in these refineries as to how it applies in each specific refinery. But we feel very positive about the prospects.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay. And then one for Don. In the $130 million to $140 million EBITDA guidance for the year, how much cash-based compensation tied to stock price performance is included in that assumption?

Donald P. Newman

That really only includes the -- largely the stock-based compensation that's been booked year-to-date. There's a small amount of vesting that would occur in addition to that, but the bulk of the expense is going to be what has been booked to date. And you can see that in our press release as well.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay, great. And then last one on the acquisition, you guys mentioned that there's 2 that are moving forward. What does that mean, Kirk? Does that mean that we might hear about completion of those in the fiscal third quarter?

Kirk A. Benson

I think we've got an opportunity. You never know whether or not you're going to get it finalized. But the timing is such that they could be finalized in the June quarter.

Operator

And our final question does come from the line of Seth Yeager with Jefferies.

Seth B. Yeager - Jefferies LLC, Fixed Income Research

Just one question on the energy business. As you start to get some more customers onboard, you've discussed in the past, potentially selling this segment, just considering it's still a drag on cash flow. Could you just sort of discuss any timing for that? And have you had any preliminary talks with any interested parties?

Kirk A. Benson

I think the timing, as you know, has been in my comments that there's about -- we're now serving approximately 70,000 barrels per day, and the 3 customers' design capacity are over 80,000 barrels a day. So those 3 customers potentially could more than double the revenue. And then the new facilities that are being constructed, there's over 300,000 barrels per day. And so if you start to get some license agreements that dip into those -- and some of those facilities are larger. There are some that are 60,000, 70,000 barrels per day in a single facility. So if you get some license agreements with a couple of those, then you've got an opportunity to be able to sell a revenue stream and an EBITDA stream that has very significant growth built into those streams. So I think what we would be doing is we'd be looking at -- probably the earliest we would look to have conversations with the buyers, probably towards the end of calendar 2015. By then, we should have some of these -- some agreements with some of these refineries for that incremental 300,000 barrels per day. And I think that's the time that you could probably optimize a sale for Headwaters.

Sharon A. Madden

So with that, we will go ahead and finish the call. We'd like to thank you all for joining us.

Operator

Thank you. Ladies and gentlemen, that will conclude the conference call for today. We do thank you for your participation. You may now disconnect your lines at this time.

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