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Headwaters (NYSE:HW)

Q3 2011 Earnings Call

August 02, 2011 11:00 am ET

Executives

Donald Newman - Chief Financial Officer

William Gehrmann - President of Headwaters Resources Inc

Kirk Benson - Chairman and Chief Executive Officer

David Ulmer - President of Tapco International

Tricia Ross - Vice President

Sharon Madden - Vice President of Investor Relations

Analysts

Daniel Mannes - Avondale Partners, LLC

John Quealy - Canaccord Genuity

Unknown Analyst -

Seth Yeager - Jeffries & Company

Kevin Lee - Wedbush Securities Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Headwaters Incorporated Third Quarter Fiscal Year 2011 Conference Call. [Operator Instructions] Today's conference is being recorded, August 2, 2011. I would now like to turn the conference over to Tricia Ross of Financial Profiles. Please go ahead.

Tricia Ross

Good morning, everyone, and thank you for joining us for the Headwaters Incorporated Third Quarter 2011 Conference Call. There are slides accompanying today's presentation that can be found on the webcast link at Headwaters Incorporated under the Investor Relations section of Conferences and Presentations. Please go there to follow along with the slides. I would now like to turn the call over to Sharon Madden, Vice President of Investor Relations at Headwaters.

Sharon Madden

Thank you, Tricia. Good morning, everyone, and thank you for joining us as we report Headwaters' fiscal 2011 Q3 results.

Today's call will be conducted by Kirk Benson, who is Headwaters' Chairman and Chief Executive Officer; and Don Newman, who is Headwaters' Chief Financial Officer. Also joining us will be Bill Gehrmann, who is President of Headwaters Resources and Heavy Construction Materials segment; along with Dave Ulmer, who is President of Tapco International.

Before we get started, I'd like to remind you that certain statements made during this 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 SEC Act of 1934.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain. These uncertainties, which are described in more detail in Headwaters' annual and quarterly reports filed with the SEC, may cause our actual future results to be materially different than those expressed in our forward-looking statements, and could be a result of new information, further events or otherwise, except as what may be required by law. You can find Headwaters' annual report on Form 10-K, quarterly report on Form 10-Q and other SEC filings readily available from the SEC's website, from Headwaters' website or directly from the company.

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

Kirk Benson

Thank you, Sharon. Good morning, everyone. Thank you for joining us on our quarterly conference call. All of us on the call this morning would like to express appreciation for your interest in Headwaters.

The same for the quarter in construction materials was the April cold weather that pushed back the start of the construction season by at least 30 days. Examining the consolidated adjusted EBITDA of our heavy and light construction units, we had a negative variance compared to last year's adjusted EBITDA in the month of April of $5 million. But by June, we had a combined positive adjusted EBITDA variance, which was very small but nevertheless positive. Although there are multiple variables in the quarter impacting adjusted EBITDA, most, if not all, of our decline in light and heavy construction materials combined adjusted EBITDA to be attributed to the slow start of the construction season.

The other notable performance issue was the lack of revenue from our coal cleaning operations. Multiple events contributed to the overall decline including operational issues at the Cleveland Cliff's mine, changing facilities at Walter's [ph] site and a shortage of feedstock at the Utah facility. We anticipate some improvement in the fourth quarter revenue from coal cleaning. We do not believe the decline in coal cleaning will have an impact on our efforts to sell one or all of the coal cleaning facilities. There were no new issues with the operating model and the prospective purchases continue to do their work.

Reviewing Slide 2, we have repaid $6.9 million of our 14 3/4% convertible debt. A portion of the purchase was in the quarter and $2.4 million was repurchased in July. These repurchases will reduce future cash interest expense by over $1 million per year.

Our efforts last quarter to reduce cost are starting to show through lower SG&A in the current quarter. There were also savings in cost of goods sold, but the savings were offset by increased materials and manufacturing costs. But even with the increase in cost, we had an improvement in June's light building products' EBITDA margins compared to last year by 180 basis points.

The lack of imminent recovery in our end markets has caused us to reexamine our manufacturing capacity and SG&A support cost. We commenced in the quarter to create a plan for 2012 that should improve our free cash flow and accelerate the repayment of debt. We will begin implementing the plan in August and September.

After Don is finished a review of the financials, Dave Ulmer, President of Tapco, will talk about light building products and Bill Gehrmann will talk about coal combustion products and coal cleaning. Don?

Donald Newman

Thank you, Kirk. Good morning and thank you for joining us. Before discussing Slide 3, I wanted to mention that we'll be filing our Form 10-Q later this week. My comments will be directed to the slides that were sent out this morning and to a lesser extent the condensed consolidated balance sheet and statement of operations that were attached to the press release.

Year-to-date, the revenue, our revenue, is $454 million, a 1% decrease from the prior year revenue of $460 million. Year-to-date adjusted EBITDA is $50 million, down 21% from prior year EBITDA of $63 million. Revenue for the third quarter was $172 million, a 10% decline from $192 million in 2010. Adjusted EBITDA for the third quarter was $28 million, down from $36 million in 2010. We'll add color regarding the year-to-date and Q3 performance as we progress through the presentations.

Our liquidity remains strong with $35 million of cash and $53 million availability under the ABL revolver at the end of the quarter. The June quarter reflects the low point in our annual cash generation cycle.

We saw our cash balances increase roughly $15 million in July, despite repaying $2.4 million of subordinated debt during the month. Net debt to adjusted EBITDA was approximately 6.2:1 at the end of the current quarter, which is higher than the ratio at the end of Q3 2010 and last quarter. The increase from Q3 2010 reflects the senior debt refinancing, the lower seasonal cash balance and decrease in LTM-adjusted EBITDA.

In the past 90 days, we retired $7 million of face value 14.75% notes, at a cash cost of roughly $8 million. As you know, unlike the 16% notes, the 14.75% and 2.5% notes do not have a call provision. As a result, in the past quarter, we negotiated the purchase of non-callable notes when approached by sellers of the notes. The 16% notes can be called at par in June of 2012.

Our plan for reducing debt remains the same as discussed previously. Our goal is to reduce debt through the sale of non-core assets and through free cash flows. We continue to execute our plan to sell non-core assets including the coal cleaning portfolio, which Bill will talk about. Additionally, we continue to improve our cost structures and working capital management, all of which should improve free cash flow and will enable us to continue to pay down debt.

Let's move to Slide 4. Slide 4 reflects year-to-date earnings. Year-to-date financial results were significantly impacted by the non-routine charges in Q2. As you recall, the Q2 results included $127 million of special charges, including $69 million associated with the refinancing of the senior secured notes, $37 million of coal cleaning asset impairments, $15 million related to the Boynton litigation and $6 million of restructuring charges.

Year to date, our revenue was $454 million, a 1% decline from prior year revenues of $460 million. The $6 million decrease reflects a $3 million revenue decline for each of the heavy construction materials and light building products business lines.

Year-to-date gross profit was $91 million, down 19% from $112 million in 2010. The decrease in gross profit reflects the impact of higher raw materials and other costs, higher depreciation expense, restructuring activities, as well as lower revenue and sales mix. 2010 also includes $5 million of gross profit from the hydrogen peroxide joint venture which was sold in late 2010. Price increases have been instituted in light building products, which should largely offset the increases in commodity prices we've experienced in fiscal 2011.

Year to date, adjusted EBITDA is $50 million, down 21% from $63 million in 2010, which also reflects the impact of higher raw material costs and other costs, as well as lower revenues, restructuring activities and sales mix.

Now let's move to Slide 5 for a closer look at the third quarter results.

Revenue for the third quarter was $172 million, down 10% from $192 million in 2010. In last quarter's earnings call, we noted that April sales in our light building products segment were largely flat to March, which is unusual in our business. The spring construction season was slow to gain momentum this year due in part to inclement weather as well as a rash of tornadoes in Central U.S. In contrast, spring selling in 2010 was more vibrant due in part to the pending expiration of government home buyer incentive programs. Although the 2011 season got off to a slow start, by June sales had returned to a more normal, seasonal pace, with June 2011 sales exceeding June 2010 sales by roughly 4%.

Price increases implemented in Q3 added roughly $1 million of revenue or approximately 1% in the quarter. Overall, light building products revenue was down $3 million or 4% year over year.

Heavy construction materials was down $8 million year over year. Product sales were $47 million and site services were $15 million of revenue, down $3 million and $5 million, respectively, from 2010.

The current quarter's revenue reflects the impact of severe weather in April, flooding in June, as well as ample hydropower in the Northwest due to high water levels, which of course negatively impacted the supply of fly ash. Additionally, 2010 included $3 million of site services revenue for the Prairie State [ph] generating station project, which is anticipated to be commercial in the December 2011 quarter.

Last quarter, we noted a services customer had filed for bankruptcy protection. That plan was idled in Q3, but may be operational again in the December 2011 quarter.

Energy Technology revenue declined 9% largely due to coal cleaning. The decline was impacted by several items: First, we're shifting production from our Alabama 5 facility to our Alabama 7 facility, and the operational startup was not completed in Q3. Second, we had anticipated an increase in coal sales from the Pinnacle facility, but operating issues at the Cleveland Cliff's coal mine disrupted mine production and our ability to blend product with run-of-mine coal. Also, other coal cleaning plants were impacted in the quarter by lower recovery rates and a feedstock disruption at the Utah facility.

Consolidated adjusted EBITDA for the third quarter was $28 million, down from $36 million in 2010. I'll draw your attention to the bridge in the lower right corner of Slide 5. The bridge highlights some key drivers in the year-over-year decrease in EBITDA. Declines in corporate SG&A, compensation and professional services spend favorably impacted EBITDA roughly $3 million year-over-year. EBITDA for the light building products was negatively impacted roughly $1 million, due to revenue declines and was negatively impacted roughly $2 million due to increases in material and other cost. Decreases in Heavy Construction Material revenue negatively impacted EBITDA $5 million, and decreases in energy revenue, largely due to coal cleaning, negatively impacted EBITDA $3 million.

Additionally, 2010 energy segment results included roughly $2 million of nonrecurring favorable items.

Dave and Bill will talk more about these dynamics in their presentations, and starting on Slide 6, Dave will cover light building products.

David Ulmer

Thanks, Don. Good morning, everybody. As you can see on Slide 6, revenues from our light building products segment in the June 2011 quarter were $91.6 million, a decrease of $3.5 million or 4% compared to the June 2010 quarter. Revenue in the quarter started out slow in comparison to the prior year. I will discuss the revenue trend within the quarter on the next slide.

Revenue from our regional block and brick business was up 6% from the June 2010 quarter, while revenue from our national business was down 6%. The decrease in our national business, which is made up of our stone veneer and siding accessory product lines, was down from the prior year primarily as a result of severe weather conditions in April 2011 and continued softness in the new construction and remodeling markets.

Per the Census Bureau, the unadjusted total housing starts for the 3 months ended June 2011 were down 4% from the 3 months ended June 2010. Comparisons for 2011 through the June quarter have been difficult because of the 2010 government home buyer incentive programs. Year-to-date light building products revenue of $224 million was below June 2010 year-to-date revenue by approximately $3.5 million, the entire difference coming in the June quarter and, specifically, in the month of April.

Quarterly revenue in our regional concrete block category increased by $1.1 million year over year. This was the third consecutive quarterly increase for this product category, pointing to a stabilization of the Texas market. We are excited about our opportunities in the concrete block category, as the Texas market returns to a cycle of growth. New business recently developed with the big box companies and our new retail location for the sale of brick and stone veneer.

In addition, our vinyl siding tool category, which is heavily dependent upon remodeling, was up 3% year-over-year. Historically, remodeling has led the housing industry out of many of its past down cycles and it is expected that remodeling once again will play that role.

Gross profit margins for the quarter in the light building products grew -- decreased from 31% in 2010 to 28% in the June 2011 quarter, due to higher material, production and freight cost. Cost on our primary resin material increased roughly 15% year over year. Most of our other resin materials have also experienced similar cost pressures over the prior 12 months. We have been successful in mitigating some of the upward pressures through sourcing new suppliers, improving manufacturing processes and instituting targeted price increases. We will continue to pursue cost reductions in all of our raw inputs through improved sourcing and alternative materials.

Higher material, production, freight and other cost have had the combined effect of reducing our adjusted EBITDA by $2.5 million to $16.6 million in the June 2011 quarter. Adjusted EBITDA showed improvement in each successive month of the quarter. The June 2011 year-to-date adjusted EBITDA of $25.2 million decreased $10.5 million from the June 2010 year-to-date results primarily for the same reasons as previously noted.

During the second quarter, we announced a price increase to all of our siding accessory customers, which took effect in the early part of the quarter ended June 2011. As a result of continued cost pressures from our raw materials, specifically resins, we announced a second price increase in the June 2011 quarter, which will be effective in the quarter ending September 2011.

On Slide 7, you can see that our April revenue was severely impacted compared to 2010 due to the inclement April weather. However, revenue increased relative to last year in May and June. April's year-over-year revenue was down 13%, May's revenue was down 2%, but June's revenue was up 4% year-over-year.

Adjusted EBITDA for the quarter followed a very similar pattern. April adjusted EBITDA was 46% below last year, May was 4% lower, but June's adjusted EBITDA was 14% higher than last year.

Now turning to Slide 8, you can see each quarter, comparing 2011 to the prior year. We are clearly trailing last year in revenue and adjusted EBITDA, but our price increases and cost control measures should have a positive impact in future quarters.

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

William Gehrmann

Thanks, Dave, and good morning, everyone. Starting on Slide 9, revenue for the June 2011 quarter in our coal combustion products business was $62.4 million compared to $70.3 million for the June 2010 quarter. Headwaters' client services provides site services to many of its utility clients. These services include constructing and managing landfill operations, operating and maintaining material handling systems, and equipment maintenance. While these services typically have lower operating margins than our product sales, they are not as seasonal and are as not as impacted by declines in construction spending.

Site services revenue for the June quarter were down $4.6 million on a year-over-year basis. The decline was primarily due to the completion earlier in the year of work being done to install the material handling systems at Prairie State [ph] generating station in anticipation of commercial startup later in the year.

We anticipate that Prairie State [ph] will begin commercial operation in the December 2011 quarter, and we will begin providing long-term site services, so the decline in the June quarter is temporary. Also, as mentioned by Don, a client where we provide site services declared bankruptcy has idled the plan. Site services revenue was 24% of our overall revenue for the quarter.

Overall product revenues for the quarter were down 6% year over year. Flooding in the Midwest impacted our ability to transport fly ash to the market, and our supply of quality fly ash was negatively impacted by hydropower in the Northwest and utility maintenance issues in the Northeast. Product revenues also continue to be impacted by lower cement consumption in the 3 largest cement consuming regions of the United States, with the largest weakness coming from the California, Arizona and Nevada markets. We are beginning to see signs that we may be nearing the bottom of the fly ash market in California, and are cautiously optimistic that we may begin to see some market stabilization as we move into 2012.

Gross profit for the June quarter was $15.2 million compared to $19.1 million for the June 2010 quarter. The year-over-year drop in gross profit was driven by the impact of the abnormal weather, short-term disruptions as I have explained, and the loss of service revenue.

Adjusted EBITDA for the June 2011 quarter was $11.3 million compared to $15.7 million for the June 2010 quarter, again due to the decline in revenue related to flooding and the short-term disruptions and the site services client bankruptcy.

On Slide 10, you can see the quarterly comparisons of revenue and adjusted EBITDA. As I have said, the comparisons have been impacted by events at specific sites, such as the completion of work at Prairie State [ph] and the softness in end markets in the Western United States.

Moving to Slide 11, development of proposals by the U.S. Environmental Protection Agency to regulate coal ash disposal continues at a slow pace. More than 450,000 public comments on the proposals were submitted to the EPA during 2010. The significant portion of those comments, including comments from other federal agencies, oppose the Subtitle C approach because of the implied hazardous-waste designation under that subtitle could create barriers to beneficial use.

The EPA has since stated that the agency needs time to consider those comments and does not anticipate proposing a final rule before 2012 at the earliest and more likely in early 2013. The agency has also indicated that it may request additional comments on information received during the previous public comment period.

The House Energy and Commerce Committee approved legislation HR 2273 on a bipartisan basis to regulate coal combustion products. HR 2273 calls for national standards for the management of coal ash and creates a primary role for states to manage the disposal of coal ash with supervision from the EPA. It is anticipated that HR 2273 will be presented to the full House after the August recess, although the exact timing is unknown.

Moving to Slide 12, I will now update you on our coal cleaning business. June 2011 quarter revenues were $9.9 million compared to $18.3 million for the June 2010 quarter. The drop in revenues was primarily the result of the decrease in tons sold. Headwaters sold 271,000 tons of coal in the June 2011 quarter compared to 487,000 tons in the June 2010 quarter.

207,000 tons of the variance came from steam coal sales. The drop in steam coal sales was primarily due to reduced supply for the quarter at our Wellington plant and weather-related production issues due to tornadoes in Alabama and excessive rainfall at other sites. The average revenue per ton for the non-tolling [ph] coal sold in the June quarter was $36 per ton, an increase of $1 per ton year-over-year. Adjusted EBITDA was a loss of $2.2 million.

As we have discussed before, we continue to focus our sales efforts on the metallurgical coal market at all of the plants that have access to reserves that meet metallurgical coal specifications. We also continue to lower our ash content in order to improve quality and increase value.

During the quarter, a project involving the impoundment at Alabama 7 was completed, giving us more flexibility and allowing us to increase production. As we discussed on our last call, we have idled Alabama 5 and have started operating Alabama 7. Our production increased 25% from April to June at Alabama 7, and we expect to see a continued increase.

During the June 2011 quarter, we filled remaining orders in Alabama on some older priced contracts and we'll now be in a position to fill new higher-priced contracts. We continue to work closely with our site host to increase the value of our metallurgical coal product by blending it with the coals being produced by them. The completion of the overburden removal project in our Pinnacle plant has been slowed due to some engineering changes that have been made on that project, and we now anticipate completion of that project near the end of the fiscal year.

Our site host at Pinnacle is dealing with a problem at their mine that has limited the ability to blend our coal with their metallurgical coal. We are currently marketing our Pinnacle coal into other opportunities and sales remain firm with higher year-over-year pricing.

On the steam coal side of the business, we continue to reduce our cost structure. We are matching production to sales in order to manage inventory. We continue to look for opportunities to introduce new utility customers to our refined coal, so that we are positioned when the market for steam coal rebounds.

During the quarter, we were able to amend a supply agreement at Chinook that will increase the price in tons sold. We also expect to see an increase in the feedstock for the Wellington plant. Section 45 tax credits continue to be a focus of our steam coal operations. While the domestic steam coal market remains soft, we anticipate that the continued acceptance of our refined coal in the thermal markets will create additional sales opportunities. We remain committed to selling our coal cleaning assets and focusing on light and Heavy construction materials.

During the quarter, we have shown the facilities to multiple parties, some interested in 1 or 2 facilities, and we've had discussions with multiple parties that expressed interest in the entire 11-plant portfolio. We anticipate selling the facilities in due course and using the proceeds from the sale to reduce debt.

You can see the quarterly comparison of revenue and adjusted EBITDA on Slide 13. We do expect some improvements in the fourth calendar quarter in our coal cleaning business.

Now Kirk will discuss the overall energy segment beginning on Slide 14.

Kirk Benson

Thank you, Bill. The decline in revenue in the energy segment is mostly attributable to coal cleaning as Bill has discussed, although we did sell our South Korean hydrogen peroxide plant and the RINS ethanol credits expired. Our HCAT revenue increased enough to make up most of the loss in revenue from sale of the South Korean plant and the loss of the RINS credit. The decline in EBITDA is attributable to coal cleaning, sale of the South Korean plant and the expiration of the RINS credit. The revenue from South Korea and RINS credit were nearly 100% margin EBITDA, so the loss of revenue also impacted EBITDA in the amount almost equal to the revenue decline.

Coal sales represent high-margin EBITDA because of its high fixed cost structure and a corresponding high contribution margin. Some of the loss in EBITDA was made up by the increase in HCAT sales. HCAT sales grew from $3 million in June 2010 quarter to $5 million in the June 2011 quarter. We are in the process of seeking additional refining customers and currently have proposals outstanding to 2 different refineries. A number of other refineries are interested. However, looking forward, we don't anticipate large revenue increases in 2012 due to the time needed to negotiate agreements and put in the -- put in place the technology for the -- to run the -- to put in place the equipment to run the technology.

Slide 15 summarizes the revenue and equity by quarter for the energy segment. We expect HCAT revenue to be lower in the fourth quarter, but improvement from coal cleaning, and so there should be some overall improvement in the energy segment in revenue in the fourth quarter.

In summary, on Slide 16, we again affirm our adjusted EBITDA guidance at the low end of the range. We should have some benefits from our light building products price increases and reduction in costs that we have already put in place. Restructuring efforts will continue in the fourth quarter as we prepare for 2012 adjusted EBITDA improvements. We have reduced debt by almost $7 million, improving our free cash flow by approximately $1 million. We set aside cash to repay the $9 million of 16% debt in the June quarter of next year, reducing cash interest expense by $1.5 million. We'll continue to focus on the repayment of debt.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of John Quealy with Cannacord.

John Quealy - Canaccord Genuity

Relative visibility per the adjusted EBITDA guidance, did the weather cause some push outs that give you a little more comfort on Q4? Or is there something in the OpEx that helps increase visibility there?

Kirk Benson

I think there's a little bit of both going on. Before we got into the significant down cycle, what typically would happen is if you had a slow spring, you actually picked that up towards the end of the year, in the September quarter and October. So, I think we're expecting a little bit of that. But we're also focused on the cost structure. And as I indicated, we're going to be implementing some additional restructuring activities in the quarter that should lead to some improvement from -- in at least in September as we implement some of these cost-improvement activities in August.

John Quealy - Canaccord Genuity

And just maybe if you could give us a little more detail on restructuring, just sort of amounts, and when we should expect the improvements to flow through.

Kirk Benson

I think in the 9/30 quarter, we'll have some of the improvements from what we did in the March quarter. We estimate about $800,000 or so of improvement in the September quarter from those March activities. The activities that we're going to be engaged and implementing in August should have some improvement in September. It's probably in the range of $200,000 to $500,000. The bulk of those improvements will flow through into 2012 and we anticipate the improvements in 2012 will end up being material to our performance in 2012. We'll, of course, give you more input on those restructuring activities when we report the 9/30 quarter and when we get those activities implemented, then we'll have greater insight and more detail as to what those improvements could be in 2012.

John Quealy - Canaccord Genuity

Great, that's fair. And just lastly on the fly ash side, maybe you could touch on volumes, with weather and the hydropower issues. Would you say volumes have dropped here? How should we think about that looking forward?

Kirk Benson

I think one of the issues, like in the Northwest, was that there was a lot of snowfall. And that caused the reservoirs to be full and a lot of hydropower. When you have hydropower, it's less expensive than the marginal cost of coal-fired power. And so what happens is you end up with a shift to hydro and away from coal. And so that had an impact on us in the Northwest. Bill, do you would to add a little bit of color to that question?

William Gehrmann

Sure. In regards to the hydropower, John, as Kirk explained, snow created that situation. It's one of our larger supplies in the Northwest. Those units are now coming up as of last week, so we should see that supply back into the marketplace. We continue to have some mechanical issues in the Northeast. It's a utility there, and we're making arrangements to try to rail material from farther west of that into that marketplace, so -- and we've started to work around some of the flood-related problems in the Midwest through other railroads, rerouting and also moving some material by trucks to try to continue to supply those markets where we've had some issues based on transportation.

Operator

Our next question comes from the line of Kevin Lee with Wedbush Securities.

Kevin Lee - Wedbush Securities Inc.

Just had a question regarding the pricing environment. Obviously, I think coming out of Q1 you guys had already indicated that you guys were going to raise prices, specifically in LB, the light building products segment. But just given the end-market challenges, I mean, how are these pricing increases -- or how have they been received? Are you seeing any pressures from the respective end markets? Are you seeing any pushback? Any commentary around that would be appreciated.

Kirk Benson

One of the things that has been very helpful -- there are 2 things that are helpful to us relative to raising prices, and that is in many of our niche markets, we have a very strong market share. And so any time that you've got strong market share, that gives you a little bit of an edge as far as pricing is concerned. The second thing that's been very helpful is that other manufacturers and providers of building products have been raising prices. And so we haven't been alone in our efforts to raise prices at all. And so what we found is that our price increases have been favorably received in the marketplace. And as I said, we haven't been alone in those price increases. Dave, why don't you add some color to that answer?

David Ulmer

Yes, I think that's right, and I think we really have had very little pushback. We've presented them with market data that supported what we were doing and, as Kirk said, our peers who carry like products were going up and were having similar increases and we have implemented both of our increases and had very little pushback from the market on either getting them in place or even suggesting rescinding in any way at all.

Kevin Lee - Wedbush Securities Inc.

I guess my second question, I've seen the press release. You guys had indicated that the concrete business, mainly in Texas, was seeing some notable strength. But if you could comment specifically more on just the rest of the U.S. or other parts of U.S. where you guys are seeing some strength. Are you guys seeing any notable pickups in construction activity in other states or other regions?

Kirk Benson

I think one of the things that -- we are seeing some improvement in Texas market. So I don't know if it goes as far as -- it's not something that -- and we were up by 6%. So we're not up like 15% or 20%, but we are seeing some improvement in that regional market. One of the things that's been interesting to me is that several of our product groupings are oriented towards remodeling. And we did see some improvement in our tool product, which is 100% remodeling. But the other thing that -- for a long time, we haven't seen any real improvement in some of our shutters, mounting blocks and gable vents that we know are specifically oriented to the remodeling market. And that's where we've actually started to see a little bit of year-over-year improvement. And so that's -- it isn't -- a lot of that, of course, is in the Midwest, Northeast. But it's -- I think that has been one change that is positive and something that we haven't seen for a long time. Dave, want to add to that?

David Ulmer

Well, just tools -- when Kirk mentions our tool business growing, had good year-over-year growth, that is really, for us, a very positive indicator of -- when contractors buy tools, they're not reselling them to a homeowner. They're using them. So they're investing in their business. So that's been a strong indicator. A little bit of an upsurge in the shutter, vent, block market and also, our foundry siding product has shown some fair increases year-over-year than other products. So we've started to see some of the specialty markets move and that's been -- for us, we've seen it in the Midwest, Northeast and Southeast, is where most of those products are purchased.

Kevin Lee - Wedbush Securities Inc.

Okay. And lastly, just one housekeeping issue. Could you guys provide the numbers for the cash flow for ops investing and the financing for the quarter?

Kirk Benson

In the 10-Q.

Donald Newman

Yes, that was not attached to the press release but you'll see it in the Q that we'll file later this week.

Operator

Our next question comes from the line of Philip Volpicelli with Deutsche Bank.

Philip Volpicelli

Would you be willing to give us some, I guess, ranges or quantify the price increases that you put through in May and have scheduled for July 1?

Kirk Benson

I think that what we -- what Don has indicated is that we have about $1 million of incremental revenue for the price increase through the June quarter. And the price increase for the July would be -- is comparable to the June price increase. Now the June price increase was only in place, I think, for 2 of the 3 months, so it should be a little bit higher. But you basically double down on that price increase for the September quarter.

Philip Volpicelli

And if you achieve both, that will offset the 15% increase in resin cost.

Kirk Benson

It will come very close to offsetting that.

Philip Volpicelli

And then with regard to the sale of the coal cleaning assets, can you give us an update? Last time, I think, you were in discussions with multiple parties. Can you just update us as to where you are?

Kirk Benson

I think what's happening is that we're -- the parties are -- they're coming to the end of the due diligence process. And so they've identified some of the remaining diligence, and Bill is setting up meetings with some of the site hosts. So that's basically done at the end of the diligence process when you're actually getting access to the site hosts. It's comparable in a different kind of transaction where you're introducing a prospective purchase or 2 to your customer base. And that's a similar kind of activity that's now starting to take place.

Philip Volpicelli

Kirk, would you say that you still expect to close this by the end of the year? Or is it a fiscal 2012 event?

Kirk Benson

It depends of course on how quickly things get negotiated. I think, we clearly have the diligence done, but we still have -- it's difficult to predict because of the negotiating the final document, and we only have 2 months left before the end of this fiscal year. So it could slide over into the 12/31 quarter.

Philip Volpicelli

Yes, okay. And then on the fly ash part of the business, it doesn't make sense that with fly ash being so much cheaper than cement that you're seeing a gain in share there. or are there just structural impediments in terms of different DOT requirements for a certain amount of cement versus fly ash in their concrete?

Kirk Benson

We have -- in our shareholder presentation, I think on our website, there is a slide. About halfway through the presentation, there's a little graph that shows the penetration of fly ash into the concrete market. And one of the things that is very positive about -- there's not many things positive about a recession, but one of the things that is positive about the recession is the ready mix guys basically increased the substitution rates because fly ash, as you said, is less expensive than Portland cement. So you'll see on that graph that the slope of the increase in penetration have increased since 2007. And so that rate is increasing and we're up now to about 17%, is the substitution rate. So it's moving in the right direction.

Philip Volpicelli

Does that allow you to raise prices on fly ash? Or is it still very competitive or too competitive?

Kirk Benson

The -- that of course is more of a regional kind of a question and even sometimes a local question, and so it really depends upon the supply and demand in the -- in a fairly local or regional area. Bill, why don't you comment on our pricing with fly ash?

William Gehrmann

Yes. Kirk, I think you were exactly spot on. It's a local issue and it's going to be dependent on the quality of ash, quality of one supply versus the other and the amount of supply and the logistics. So it is something that we just look at marketplace by marketplace.

Operator

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

Daniel Mannes - Avondale Partners, LLC

A couple of quick follow-up questions. First, on the restructuring activities, you've kind of gone down this road a couple of times before. Obviously you've taken a lot of cost out of the system. I guess this is a 2-part question. One is, how much cost is really left to pull out given all that you've done already? And two, is this -- are you may be taking a deeper review and maybe thinking about rationalizing your business mix even a little bit more, beyond just potentially divesting of coal cleaning?

Kirk Benson

On the second part first is we're not looking at any divestitures outside of the energy segment. And so we are very comfortable with our light and heavy construction materials portfolio. As far as the first question goes, relative to our cost structures, there is no question but it becomes more difficult to take cost out of the business. But, I think that we are -- we're basically -- we continue to get better at managing our business. And so what we've done is we've looked at areas, looked at cost of goods sold and in SG&A, and what's happened as our business has -- as the revenue has declined -- and the revenue decline started in 2006, so we've been into this down cycle and then kind of flat for 5 years. And what happened is we've had a significant reduction, and we haven't reduced some of our cost structures proportionately with the decline in revenue. Most folks predicted, of course, that there would be an up cycle. In fact, the predictions were that you would have an up cycle in 2010, then people predicted 2011. And so you want to be very careful, that you don't put your business in a position where you can't benefit from that up cycle. We've been very cognizant of that, but it's also a fair statement that we still have some adjustments that we can make to size our business relative to our revenue. And so we've been taking a very close look at manufacturing footprint, at the -- at our SG&A and also looking at the -- our processes of getting products to the market. And we adopted lean approaches a few years ago, but what often happens when companies adopt lean is you end up -- you come -- you get some improvements and then you hit a wall. Well, we kind of hit that wall in 2010, and now we've taken another look at some of these process improvements. So what you -- so there's 2 major areas in the restructuring -- 3: one is making sure that we're rightsized; two is making sure that our manufacturing footprint is appropriate; and third, look for other places, process improvements and further movement of lean processes into our systems.

Daniel Mannes - Avondale Partners, LLC

Okay. To go back to your answer to, I guess, the second question, which you answered first. In terms of the energy segment, you implied that perhaps any of that could be divested given the long time frame on getting HCAT installed. Any new thoughts on potentially divesting or finding some way to monetize that business.

Kirk Benson

Yes, I think what's going to happen in HCAT is that we now have a successful application of HCAT at Neste. We've got a second refinery that is using HCAT on a fairly consistent basis. We've got proposals out to 2 additional refineries, and we have interest from another half-dozen refineries. Now, the timing that -- when you take in terms [ph] the timing, even if someone said today they wanted a negotiate an agreement with us, you've got several months of negotiating as far as the agreements are concerned. And then you've got about 6 to 9 months of putting the equipment in place. And so I don't think you're going to see a significant change in revenue in 2012. But what will happen is, of course, successfully getting several of these contracts signed over the next 15 months. Then when you talk about trying to monetize that asset, you're talking a significantly different scenario. And so our view is that the time to look at monetizing the HCAT asset is towards the end -- probably the end of calendar 2012.

Daniel Mannes - Avondale Partners, LLC

So hopefully -- and by that point, hopefully, you'll have already divested of coal cleaning.

Kirk Benson

Yes, absolutely.

Daniel Mannes - Avondale Partners, LLC

Okay. Real quick on what I'll call implied Q4 guidance, your low end of the range at $85 million puts you at $35 million for the fourth quarter, so up about $7 million from what you did in the third. How much of that is improvement in light versus heavy? And how much of that is improvement in coal prices on the energy segment? I don't know how we should sort of -- oh, and how much of it is better cost? I'm not sure how to think through where the improvement's coming from.

Kirk Benson

Well, I wanted to say one of the easiest -- one easy way to look at that is we dropped $5 million of EBITDA in April because of the slow start to the construction season. So you need to pick up $7 million and there's $5 million. Now, there's of course a lot of factors going on in the quarter that make a difference. Generally, what happens is the light building products has a -- the light building products peaks in the June 30 quarter typically. And the heavy construction materials peaks in the September quarter typically. But if you -- and so you've got a little bit -- there's a little bit of seasonality difference between the 2 areas. In order to hit that pickup of $7 million of EBITDA, we need to not have another April type month because we did drop -- we dropped about $5 million in April. So that's one of the things that's important to hit that number. The -- I think a second thing is that the fly ash business needs to have its typical peak in the September quarter. And the final thing is we can't have another coal cleaning quarter like we had in June. I think the April pickup of about $5 million and the -- an improvement in coal cleaning is probably -- is important to hit that $7 million. And of course, operationally, you'll have a full quarter for both price increases will be in place, and you'll also have some additional cost savings activities towards the end of the quarter.

Daniel Mannes - Avondale Partners, LLC

I guess on the other hand, in the Q3, weren't -- were some of the cost savings related to whether reversal, bonus accrual or anything like that, that might not carry forward into 4? Or am I misreading that?

Kirk Benson

No, I think that's correct. And so that goes the other way. So I think you're absolutely right.

Daniel Mannes - Avondale Partners, LLC

Okay. And then the last thing, just on coal cleaning. I listened to Bill's comments both on the old contracts at Walter [ph] rolling off and then secondly maybe some newer contracts at Chinook. I know you're talking about a soft coal market, but those met and steam coal prices are substantially above the $36 you're selling at. I'm just wondering, are we getting anywhere closer to a time frame when we start seeing you realize better pricing, which hopefully smoothes the eventual sale of the business? I mean is that's going to be next quarter? Or is it just going to be a marginal step-up?

Kirk Benson

My response is you'll see a marginal step-up. But, Bill, correct me if that's not correct.

William Gehrmann

Yes, I think it'll be a marginal step-up. One of the things also, Dan, when we talk in regards to Pinnacle with the issues that they're having there, it basically force us to build a little inventory too. So we've got some inventory upside as we've developed some other sales opportunities. But on the met side, we've been through the calculation in regards to how we get from our pricing and how we report it, now the seaborne pricing, and we're booking revenues a little differently, especially at Pinnacle as we explained on the last call. So we do have some upside in pricing, and we are gaining on that as we speak.

Operator

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

Seth Yeager - Jeffries & Company

Just a couple of quick follow-ups. For the vinyl siding, you had mentioned it was up about 3% year-on-year, and I apologize if you mentioned this. How much of that was volume versus the pricing, just on a percentage basis?

Kirk Benson

So I think that this -- the pricing is really -- as Don indicated, the pricing had impact about $1 million in the quarter. So that would also be true year-over-year. That's because that would be the pricing increase. So the other changes would be volume-related. Dave, do you want to add some color to that answer?

David Ulmer

Well, I think, most of it in June, maybe a little bit more in June was -- most of it was price increase. There was a little bit of volume increase in June. For July, most of the increase was pricing. So out of the 2 months, you had a little bit that was volume increase, most of it being pricing.

Seth Yeager - Jeffries & Company

Okay and that's sort of stays at -- sorry, go ahead.

David Ulmer

No, I just said for the year. Go ahead.

Seth Yeager - Jeffries & Company

Oh, okay. And then so just sequentially through the quarter, it sort of stepped up just marginally each month from a volume standpoint?

David Ulmer

Basically, yes.

Seth Yeager - Jeffries & Company

Okay. And then just looking at your guidance, taking the low end less cash interest and CapEx, just back of the envelope gets me to roughly free cash flow neutral. So just given your comments around de-levering from free cash flow, does that imply that you anticipate generating cash through the back half through working capital? And what sort of magnitude do you anticipate for the full year?

Donald Newman

Q4 is typically our -- kind of our strongest cash-generation quarter. So thinking back to last year, I think the Q4 cash generation was -- and you could do the math too if you go back and look at the results from last year, but I believe it was north of $40 million in terms of cash generation in the quarter. We would expect that we would see some working capital takeout during the quarter. I mean we do in Q3 build accounts receivable, start to collect those accounts receivable into Q4. In terms of just ongoing free cash flow generation, from a base case standpoint, what you would expect at an EBITDA level of what we're talking about with our guidance, you would expect working capital movements aside, a free cash flow in the $15 million to $20 million range, if you will, for this business.

Seth Yeager - Jeffries & Company

Okay and then just a follow-up from that. Are you guys -- are there any restrictions on repurchasing your newly issued senior secured notes at a discount in the open market?

Donald Newman

So there -- we do have the ability to buy back some of that debt. It depends upon -- if the proceeds are from an equity offering, we can buy back at 107, I believe. We also have the option to buy up to 10% per year at 103. But clearly, our focus at the present time would be toward our subordinated debt. We have the ability to -- under our ABL as well as under the senior financing, to pay our sub debt that's outstanding. That sub debt will be maturing in 2014 for the 14 3/4% and 2 1/2% and as I think I mentioned, we can call our 16% in mid-calendar 2012 at par. So that would clearly be the area of focus for us from a debt management standpoint.

Operator

Our final question comes from the line of Brian Dale [ph] with Bleacher & Company [ph].

Unknown Analyst -

Just a couple of quick follow-ups on the fly ash side of the business. During your commentary on the supply constraints given the hydro generation, if it had been a normal year, would there have been demand for that supply of fly ash? And if you actually had access to it and, I guess, asked another way, are you seeing now -- was there a backlog building? And are you seeing some of that start to alleviate now and kind of flowing into the fourth quarter?

Kirk Benson

Bill, why don't you just -- why don't you take that one?

William Gehrmann

Yes, typically in regards to the hydropower offset there, that's a high-quality supply for us. So, yes, we feel that we would have sold most of that into the marketplace.

Unknown Analyst -

Is there a backlog now? It sounds from your comments that the hydro is starting to slow down a little bit. So if you're getting more access to that, will we see some of that volume pick up in the fourth quarter?

William Gehrmann

Yes, that volume will pick up. We anticipate selling everything that, that plant can produce into the marketplace. So we would expect it to track like a normal Q4. In regards to a backlog, from a supply issue, typically, if we can't supply fly ash, either they're going to look for another supply or going to produce straight sack cement ready-mix concrete. So unless it's a backlog related to weather that sets the final delivery of ready-mix concrete back, we would lose some of those, but -- so we did lose sales when we didn't have supply available and couldn't make up for it from other locations. But there's enough demand out there right now for this specific supply where we anticipate selling it all.

Unknown Analyst -

Got you. And one other -- one final one. Given -- as we progress I guess some of the new EPA rules for a lot of the coal units, Casper [ph] being handed out now and including Texas there, do you foresee any issues on any of the plants that you receive fly ash from being shut down, or that supply going away?

Kirk Benson

I think that we're generally comfortable with the high fly ash -- high-quality -- the facilities that produce a high-quality fly ash. They're not going to be negatively impacted. So I think we're just going to be fine from a supply perspective.

Operator

Thank you. At this time, I would like to turn the conference back to management for closing remarks.

Sharon Madden

Thank you. With that last question we'll go ahead and end the call, and we'd like to thank you all for joining us today.

Operator

Ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today's conference, please dial 1 (800) 406-7325 or (303) 590-3030 and enter the access code of 4461048 followed by the pound sign. Thank you for your participation. You may now disconnect.

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