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Executives

Tricia Ross - Vice President

Sharon A. Madden - Vice President of Investor Relations

Kirk A. Benson - Chairman and Chief Executive Officer

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

David Ulmer - President of Tapco International

William H. Gehrmann - President of Headwaters Resources Inc

Analysts

Philip Volpicelli - Deutsche Bank AG, Research Division

John Quealy - Canaccord Genuity, Research Division

B.G. Dickey - Stephens Inc., Research Division

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Seth Yeager - Jefferies & Company, Inc., Research Division

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

Unknown Analyst

Headwaters (HW) Q1 2012 Earnings Call January 31, 2012 11:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Headwaters Inc., First Quarter 2012 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded, January 31, 2012. 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 first quarter fiscal year 2012 conference call. There are slides accompanying today's presentation that can be found on the webcast link at the Headwaters Incorporated website under the Investor Relations section under the Events, Conferences and Presentations link. Please go there to follow along with the slides. If you have any issue, please feel free to email me at tross@finprofiles.com, and I can e-mail you a copy.

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

Sharon A. Madden

Thank you, Tricia. Good morning, and thank you for joining us as we report Headwaters' fiscal 2012 Q1 results. Kirk Benson, Headwaters' Chairman and Chief Executive Officer; and Don Newman, Headwaters' Chief Financial Officer, will be conducting the call this morning along with Bill Gehrmann, who is President of Headwaters Resources and Heavy Construction Materials segment; and Dave Ulmer, who is President of Tapco International.

Before we get started on this call this morning, I would like to remind everyone that Headwaters is sponsoring its 10th Annual Investor Day Conference here in Salt Lake City on March 1 and 2. For more information, please feel free to contact me through our corporate offices and I would be happy to supply you with additional information.

While listening to the call, please remember that certain statements made during the call including statements relating to our expected future business and financial performance, may be considered forward-looking within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended. Forward-looking statements by their very nature address matters that are, to different degrees, uncertain. These uncertainties are described in more detail in Headwaters' annual and quarterly reports filed with the SEC. You can find Headwaters' annual report on Form 10-K, our quarterly report on Form 10-Q and other SEC filings readily available from the SEC website, Headwaters website or directly from the company.

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

Kirk A. Benson

Thank you, Sharon. I'd like to welcome everyone to the conference call this morning. We're happy to report that we've experienced the strongest December quarter since 2008. Gross margins are up 160 basis points and operating expenses are down nearly 9% or 230 basis points lower as a percent of sales.

Adjusted EBITDA increased nearly 50% year-over-year with light building products adjusted EBITDA up by a very healthy 71%. There are 2 major drivers for the improved performance over the prior year. First, we implemented a restructuring plan as part of our continuous improvement efforts, the benefits of which are now flowing through the P&L resulting improvements to gross margins and lower operating expenses. The result is a material improvement in adjusted EBITDA up about $7 million in the quarter resulting in additional free cash flow and improved risk metrics. Second, we're starting to see some sustained support to our top line. Whereas, we've been flat to down for the last 3 years in light building products, we're beginning to see a sign of a slightly improving performance on our revenue line. Albeit it's at a 5% rate it's the fastest quarterly growth that we've experienced since 2006. Our highly-leveraged operating model results in substantial increases in adjusted EBITDA and free cash flow, as we start to experienced topline growth.

So far the weather has favored sales in January and we hope that the trend on the top line will continue into the second quarter. Our trailing 12-month adjusted EBITDA from continuing operations is on track to achieve our guidance range of $85 million to $95 million for fiscal year 2012. And this guidance range is after the sale of the Blue Flint Ethanol facility, and so it is the guidance from our continuing operations. We sold our investment in ethanol for $18.5 million. We'll reinvest the proceeds and assets to benefit the company freeing up additional cash to pay down our subordinated debt.

In the December quarter, we repaid $7.5 million of our 2.5% convertible debt and then in January, we followed on with another $7.7 million of debt reduction in our high coupon debt. The combined debt reduction will reduce interest expense on an annualized basis in the amount of about $1.3 million. Our total interest expense reduction over the last year is now in excess of $11 million annually.

We're excited about the first quarter results. It's a great start to the year and gets us out of the gate well ahead of expectations. I'd now like to turn the time over to Don for a discussion of the quarterly financial results starting on Slide 3.

Donald P. Newman

Thank you, Kirk. Good morning, and thank you for joining us. Before discussing Slide 3, 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 statement of operations that were attached to the press release.

As noted, we did sell our 51% interest in the Blue Flint, our ethanol LOC joint venture, effective January 1, 2012 for $18.5 million. While Blue Flint was a well-performing investment for Headwaters, returning $18.5 million on a net cash investment or approximately $9 million, the sale of Blue Flint is not expected to have a significant negative impact on Headwaters' ongoing cash flows. This is due to Blue Flint historically using the majority of its cash flow from operations to pay down its project level debt. We recognized a noncash book loss of approximately $6 million related to the sale reflecting the difference between the sale proceeds and the carrying value of the investment in Blue Flint. That loss, as well as equity earnings from Blue Flint, are now included in other income expense. The accounting rules do not allow for discontinued operations treatment for an equity method account -- equity method investment such as our investment in Blue Flint. To improve visibility into the operating results of our core business, we have excluded equity earnings from Blue Flint from our current, as well as historic adjusted EBITDA. As a result, you will be able to see the earnings generated by our core businesses excluding Blue Flint.

First quarter revenue from continuing operations was $137 million, an increase from the prior year revenue of $136 million. First quarter adjusted EBITDA from continuing operations is more than $20 million, a 49% increase from prior year EBITDA of approximately $14 million. Our margins expanded year-over-year as cost initiatives started in latter fiscal 2011 had their planned effect.

Gross margins increased 160 basis points and adjusted EBITDA margins increased 475 basis points with cost improvements in raw materials, facilities and labor. We'll add color regarding the performance of the quarter as we progress through the presentations. Our liquidity remains strong with $42 million of cash and $37 million availability under the ABL revolver at the end of the quarter.

Let's move on to Slide 4. While consolidated revenue was up slightly year-over-year, light building products saw a 5% increase in sales, which more than offset a $2 million decrease in HCAT sales. Light building products revenue increased largely due to volumes and increases in average sales prices, while HCAT sales were lower due to a customer turnaround in the current quarter. The $6 million improvement in adjusted EBITDA can be seen in broadening gross margins for both the light building products and the heavy construction materials, as well as a $3 million decrease in SG&A.

We talked at length during the Q4 call in November about a series of restructuring activities that have been initiated by the company. The restructuring activities consisted of: workforce reductions; facility closures and consolidations, as well as operating efficiency improvements; and sourcing initiatives. We still expect the restructuring activities undertaken in 2011 and Q1 of 2012, will result in an annualized operating income benefit of approximately $14 million, of which, approximately 65% will be realized in fiscal 2012. The benefits are largely cash related.

Interest expense decreased more than $4 million year-over-year largely due to the debt repayments and to the 2011 senior debt refinancing. Debt repayments through January and the senior debt refinancing have enabled us to reduce our annual cash interest costs by approximately $11 million to roughly $36 million.

Discontinued operations reflects the results for coal cleaning. The loss for the quarter includes approximately $5 million of noncash charges in large part related to recognizing reclamation obligations, which are backed by deposits made by the company in prior periods. We continue to make operational changes to the plants to improve cash performance while the sales process continues, and should see improved cash flows in the second quarter. Dave, Bill and Kirk will take -- will talk more about these dynamics in their presentations.

On Slide 5, we can see the quarterly year-over-year comparisons of revenue and adjusted EBITDA. Let's move to Slide 6 and spend a few minutes discussing debt. Our debt position has improved during the last 2 quarters, as we've increased our trailing 12-month adjusted EBITDA from a low point of $74.5 million in the June 2011 quarter to $84.4 million at the end of the December quarter. We closed the quarter with a net debt to adjusted EBITDA ratio of 5.7:1 after reaching a high point of 6.7:1 in the June 2011 quarter.

On a pro forma basis, if you were to include the $18.5 million of Blue Flint sales proceeds and the net debt to adjusted EBITDA calculations as of December 31, the ratio would decrease to 5.5:1. The face value of subordinated debt is $128 million after the debt payment made in January. Our goal is to reduce debt through the sale of noncore assets and through free cash flows. We continue to evaluate and execute our plan to sell our noncore assets including the coal cleaning portfolio. Additionally, we continue to improve our cost structures and working capital management, all of which should improve free cash flow and enable us to continue pay down debt.

Starting on Slide 7, Dave will cover light building products.

David Ulmer

Thanks, Don, and good morning, everybody. As you can see on Slide 7, revenues from our light building products segment in the first quarter were $73.3 million, an increase of $3.6 million or 5% compared to the December quarter last year. The 5% boost in revenue was the largest year-over-year quarterly growth rate since June of 2006. Growth occurred in all major product lines but particularly, in our siding and architectural stone product groups. We successfully maintained pricing in our stone and block product groups and successfully instituted a price increase in the second half of fiscal 2011 for our ancillary siding product to offset increases in raw materials and labor costs.

According to the Census Bureau, non-seasonally adjusted housing starts for the quarter ended December 31, 2011, were 23% higher than the housing starts for the quarter ended December 31, 2010. In addition, according to the leading indicator of remodeling activity issued by the Joint Center of Housing Studies of Harvard University, remodeling activity for the calendar year 2011 was approximately 1% higher than calendar year 2010. We are cautiously optimistic of seeing revenue increases for our fiscal year ending September 30, 2012, and are confident that we have sufficient manufacturing capacity to meet those demands.

Gross profit margins for the quarter in light building group increased from 23% in the first quarter of fiscal 2011 to 25% in the December quarter this year due to the restructuring initiatives implemented in the second half of fiscal 2011 and higher average sales prices.

The revenue increases and restructuring initiatives had a favorable impact on our adjusted EBITDA providing growth of 71% year-over-year for the first quarter. Adjusted EBITDA increased by $4.7 million to $11.3 million in the first quarter of fiscal 2012. The 600-basis-point improvement in adjusted EBITDA margin was the result of the improved gross margin, as well as a decline in our SG&A costs. We will continue to look for ways to improve margins and operating efficiencies.

The architectural stone group has initiated its rebrand strategy to better serve the market, minimize channel conflict and to best utilize its SG&A structure. The stone group is also seeing favorable sales growth from the recently-introduced fireplace surround program. Our foundation products continue to run at all-time high levels due to the drought conditions in the Texas market. We are scheduled to begin production this month of our new polished block product and we have received several orders prior to that launch. We've also expanded our block business with lows by getting additional SKUs into the product offering at those stores currently being serviced.

In the siding group, we have recently completed the consolidation of our Michigan production facilities to save costs and better utilize efficiencies, and have negotiated an agreement for locking raw material pricing for a portion of the year. We have also realized market share increases by gaining the business from competition in the specialty siding and roofing categories.

Now turning to Slide 8. As already discussed, you can see that the first quarter was better than last year in both revenue and adjusted EBITDA. Looking forward to the second quarter, our January sales are currently trending above plan and due to actions taken to improve margins and reduce SG&A costs, we believe that we have -- that we will have a positive comparable in our second quarter as well.

Now I'll turn the presentation over to Bill.

William H. Gehrmann

Thanks, Dave, and good morning, everyone. On Slide 9, you can see that revenue for the December 2011 quarter in our coal combustion product business is $63.1 million compared to $63.2 million for the December 2010 quarter. Overall, product revenues for the quarter were up 6% year-over-year.

Product revenues continue to be impacted by lower cement consumption in 3 -- in the 3 largest cement-consuming regions in the United States with the largest weakness coming from markets in the West.

However, we continue to see signs that we may be nearing the bottom of the fly ash market in California, and our western region posted a positive year-over-year volume increase for the first time since the December 2007 quarter.

Headwaters' client services provides side services to many of its utility clients. These services include: constructing and managing lands of operations; operating and maintaining material handling systems; and equipment maintenance. While these services typically have lower operating margins than our product sales, they're not as seasonal and are not as impacted by declines in construction spending. Site service revenue for the December 2011 quarter declined by $2.5 million compared to the December 2010 quarter.

The year-over-year decrease is due to construction revenue from the installation of material handling systems at Prairie State in the December 2010 quarter. Prairie State began operation in the December 2011 quarter and we began providing long-term site services. We also began providing long-term site services at Virginia City, another new plant. Both of these sites should be fully operational by the end of the June 2012 quarter. Site services revenue accounted for 27% of our overall revenue for the quarter.

Moving to Slide 10. Gross profit for the December 2011 quarter was $16 million compared to $14.9 million for the December 2010 quarter. The increase in gross profit on year-over-year flat revenue is a result of our ongoing continuous improvement efforts and the shift in product mix. Adjusted EBITDA for the December 2011 quarter was $13.3 million compared to $11.8 million for the December 2010 quarter.

Moving to Slide 11, as we mentioned on the previous call, on October 14, the U.S. House of Representatives passed legislation designed to protect coal ash beneficial use and strengthened coal ash disposal regulations without a hazardous waste designation for the material. HR 2273, the Coal Residual Reuse and Management Act, was approved by a bipartisan vote of 267 to 144. Less than a week later, a group of 5 Democrats and 5 Republicans filed a comparable bill in the United States Senate. Supporters of Senate Bill 1751 are seeking additional sponsors. These bills provide a rational balanced approach to managing the disposal of coal combustion products and are supported by a wide range of stakeholders.

On January 18, environmental special interest groups filed a notice of intent to sue the U.S. Environmental Protection Agency, seeking to force a deadline on the EPA for promulgation of the final regulation. All stakeholders except environmental activist groups, support a balanced reasoned approach to coal ash disposal regulation without a hazardous waste designation. Headwaters favors the elimination of any RCRA subtitle C option as soon as possible and encourages the EPA to act appropriately. The EPA is conducting a risk evaluation and capsulated beneficial use of coal ash that should be completed in the late spring of this year. We anticipate that the EPA will confirm its long-term support of the environmental benefits associated with the use of fly ash as a substitute for Portland cement.

I'll now turn the call back to Kirk Benson for comments on our energy technology segments. Kirk?

Kirk A. Benson

In our energy technology segment on Slide 12, HCAT is running as planned at the Neste refinery and is being used by a second refinery. HCAT is performing as we have planned and is creating value as heavy oil conversion has improved with reduced fouling.

Revenue in the first quarter was lower primarily because Neste was performing a plant turnaround early in the quarter and had ample inventory on hand to supply its needs. The turnaround was completed and shipments resumed in January.

We signed a $1.5 million solvent refined coal contract to produce a metallurgical coal enhancer from low ranked coal. We're working with a major South Korean company on the development of a 2 million-ton per year facility that will improve the performance of lower quality coals to enable the coals to be used in metallurgical applications.

Slide 13, which now reflects HTI exclusively, shows the decline in revenue and EBITDA year-over-year primarily because of lower HCAT shipments in the December quarter.

Slide 14 highlights our outlook for 2012. Our trailing 12-months adjusted EBITDA for continuing operations at December 31 improved from $77.7 million in September to $84.4 million, reflecting the improvement in the December 2011 quarter EBITDA of $6.7 million.

Looking forward, our March 2011 quarter was quite difficult, as we experienced cost increases in several different areas. In March 2012 however, we anticipate that our restructuring activities will more than offset last year's cost increases, and we will have an increase in trailing 12-months EBITDA.

Actual for the December quarter combined with this forecast for the following 9 months place us at or past the midrange of our $85 million to $95 million guidance, and allows us to affirm our 2012 forecast for adjusted EBITDA from continuing operations. We also continue to expect to generate free cash flow of between $20 million and $30 million from continuing operations prior to our restructuring costs.

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

Question-and-Answer Session

Operator

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

Philip Volpicelli - Deutsche Bank AG, Research Division

My question is regard to the price increases that you implemented in light building products. Can you give us a little color on are they sticking? Are there any plans for additional increases? Or are you comfortable with the levels you're at now?

Kirk A. Benson

I'll start with the second half of the question, which is that I think we're pretty comfortable with the levels that we're at. The -- We've instituted the price increases to cover some of the costs that we experienced in beginning in the December 2010 quarter and going into the March 2011 quarter. We're pretty comfortable with our pricing. And we've been able to hold, to holc those pricing levels. Dave, why don't you had a little bit of color to that?

David Ulmer

I agree, Kirk, in that we are confident that our price increases have stuck in and will stick in the market place. We're not concerned with them going away at this point and we're comfortable where the levels are right now and don't see a need to have any further increases at this time.

Philip Volpicelli - Deutsche Bank AG, Research Division

And then with regard to the raw material prices that I think you said were locked in, can you give us a sense how that compares year-over-year or if there's any advantage to the raw material prices you've locked in?

Kirk A. Benson

We've been able to lock in our prices a little bit lower year-over-year. And so we would expect a -- some improvement in raw material pricing in the March quarter.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay. And that's above and beyond the costs savings actions that you took?

Kirk A. Benson

Yes.

Philip Volpicelli - Deutsche Bank AG, Research Division

Right. Actually one last one. On the point in litigation, can you update us on where we stand with that? I know you've appealed the judgement, you've reserved for it with a letter of credit, what's the next step there?

Kirk A. Benson

We're in the process of developing the briefings related to the appellate action.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay. And in that, is there any time frame around that?

Kirk A. Benson

We don't control the timing, of course, because it's at the appellate court level. We would think that towards the end of -- end of the summer would probably be some time when there would be some activity from the appellate court -- end of the summer into the fall. But again that's a timing we don't control.

Operator

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

John Quealy - Canaccord Genuity, Research Division

Just a couple of questions. Going back to the light building products, you talked about the price increases. Can you talk about any dealer activity? Did you have any particular selling activity, Kirk, that added dealers or with an incentive to boost that volume number? Could you give us some more characterization there?

Kirk A. Benson

Yes. One of the things that I would like to do is give a little pitch for Sharon's analyst conference that's coming up soon because one of the things that we're going to do is discuss the improvements we're making to our core businesses, our core product activities. And so with that renewed focus I think there's opportunities in our network of distributors and there's probably some opportunities given the slight improvement at least in our outlook relative to sales. It's a great time to be able to increase revenue from those, from the existing customer network, existing distributors. And so I think Dave is of course leading this effort and has an excellent relationship with our distribution system. He was the -- before taking Jack Lawless' place, he was in charge of our sales and marketing for our siding group. And he's -- one of his real strengths is the relationship with the distribution system. So why don't you follow up, Dave, with just a couple of some of the success activities that you have, that you've been able to implement during the last quarter?

David Ulmer

Okay. We've picked up some market share wins specifically on our foundry and inspire categories. We picked up new distribution on foundry with a strong customer -- Harvey industries in new England. Picked up their siding business from a competitor and we've picked up several roofing customers that have been due to the fact, some our efforts and some of our competitors have gotten out of the product categories that we've served and that's helped us quite a bit. With retailers and wholesalers in specifically the foundry and inspire product categories.

John Quealy - Canaccord Genuity, Research Division

Okay. That's helpful. And then moving to heavy duty, service revenues were about 27%. It looks like in the release and in the slides, you're seeing some new projects -- service projects are kicking off. Can you talk to the relative size or at least quantitatively, what we should be thinking about service revenues throughout the next calendar year here?

Kirk A. Benson

One of the things that -- we've had a negative comparable primarily because the 12/31/2010 quarter was the end of the construction period on the Prairie State facility. And so that revenue drops off, and so it won't be in the comparable maybe a little bit, I guess, in the 3/31 quarter. But by enlarge, that drops off, and so what we should start seeing is some improvement in the year-over-year comparison in service business. Do you agree with that Bill?

William H. Gehrmann

Yes.

Kirk A. Benson

And to add a little more color. I appreciate that. Actually...

William H. Gehrmann

I didn't know if you were going to continue but...

Kirk A. Benson

No.

William H. Gehrmann

Yes, to give you a feeling, I think we've talked a little bit more in detail about Prairie States in the past, but when that -- those units at that plant site are fully commercial, which they're working towards in regards to -- from a volume perspective that would probably be our largest site services contract at the moment. Behind that we've also shared on a previous call that we've entered into agreement with Dominion at their Virginia City power park. That site is starting to ramp up there too. And from a volume perspective, though it's not near the volumes that we will see at Prairie State, it is still a significant site services opportunity for us.

John Quealy - Canaccord Genuity, Research Division

And then the last question, just sort of an ancillary opportunity I guess in heavy-duty. But I know you guys work I think up in the Bakken in helping some stabilization or some pumped water. But also in the Marcellus there's obviously a whole bit of activity around processed water and frac water stabilization. Kirk, can you comment on the relative opportunity or risk that you see there because it certainly seems like fly ash designate would be a very favorable opportunity assuming the EPA comes back with the D title.

Kirk A. Benson

Yes, one of the things that's happening and what we're seeing, we're seeing more direct activity in the North Dakota oil boom than we are at the moment in Pennsylvania area. Although, we think that the Pennsylvania Marcellus Shale could present us with an upside opportunity. What's happening is that the demand in North Dakota has increased fairly dramatically. That's allowed us to sell our ash at a higher price because of the demand. It's also causing us to shift some of the movement of the ash. So for example would be taking ash from the Colbert station of North Dakota, selling that ash into the stabilization market for oil drilling and then servicing the Minneapolis markets from other ash sources. It's one of the real positive that Bill has developed in this business over the last several years. We have over 30 distribution centers and what we're able to do because of our breath in supply is we're able to move ash from one destination -- from one supplier to another. So for example, we'll be able to supply Minneapolis out of supply from a different location and then put our North Dakota ash into the higher priced, higher margin oil stabilization business. So it's really a testament to the system that Bill has developed over the years in being able to match the supply with demand. And we're seeing some upside in particularly that opportunity.

Operator

Our next question comes from the line of Trey Grooms from Stephens Inc.

B.G. Dickey - Stephens Inc., Research Division

This is actually B.G. Dickey in for Trey. Just a question on your housing-related businesses. It sounds like things are better getting a little bit better there based on your comments this morning. But do you see the top line improvement in that core -- in this core businesses and the margin expansion that you've put up in the quarter as sustainable? Or are other kind of more temporary factors such as stable weather, helping to drive some of that improvement?

Kirk A. Benson

One thing that's interesting to me is if you look at the 12/31/10 quarter compare it with 12/31/11, the weather in the quarter was relatively comparable year-over-year. In -- October is a very important month in the quarter and you basically make or break the quarter in the month of October. So October of 2010, the weather was somewhat mild and we had a very good October in 2010. That whether repeated itself in 2011. And so weather really wasn't that much of a factor in the 12/31 quarter because it was relatively comparable year-over-year. So our improved performance is not tied to weather in the 12/31 quarter. Our improved performance is really based upon the marketing -- the sales and marketing gains that Dave alluded to in our foundry product, our roofing product. And we had a 6% increase in our shipments in ash in the heavy construction materials business. And so it's, that part of the year, the first quarter was not -- we weren't really benefited by weather. Now going into January. January has been very mild. So as we indicated that the trends that we saw in, at least the top line trends that we saw in the 12/31 quarter, are continuing into January. I can't speak is to whether or not we'll be overly benefited from the weather in the month of January because I think January was more mild in '12 than it was in '11. So there's probably a little bit of and if you -- when we get into the 3/31 quarter, we might see a little bit of extra benefit from weather. But the other changes that we've made in the business, we improved efficiencies, those improvements are continuing and are not temporary and they're not weather-based.

B.G. Dickey - Stephens Inc., Research Division

Okay. That's helpful. And then I think you may have touched on this, but maybe just a point of clarification regarding the restructuring activity in the light building products segment. I believe you said that you're expecting around $14 million in annual savings. There was about 65% to be realized in F'12. But could you provide us with a break down there of the savings, the split between the SG&A and COGS? And then what that mix might look like going forward?

Kirk A. Benson

Don might be able to add a little bit to this. I think if you generally look at what happened in the 12/31 quarter, it's a split between SG&A and cost of good sold. So we had about 160 basis point improvement and in cost of goods sold. And then 400 basis points in SG&A. So it's basically that's roughly a 1/3 in costs of goods sold and 2/3 in SG&A. But that's just a rough estimate, I mean, that could vary a little bit, of course, as we move into the March quarter.

Donald P. Newman

Yes, I think when you look at the overall and once all -- if you look the full population of $14 million or so of savings, what you would see is SG&A would be in the neighborhood of $6 million to $7 million of that. So it ends up being close to a I guess a 50-50 split between the COGS and the SG&A. The staging on it is a little bit different but ultimately when the full $14 million comes in, you'll see something in the $6 million to $7 million on SG&A.

Operator

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

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Could you Kirk, maybe touch on and with the team there in terms of the order patterns that you're seeing particularly on light building products, how do you feel the channel is for your specific customers? And then the same, I guess, in terms of Bill's business on the fly ash in terms of increase in demand in terms of the near -- next couple of quarters?

Kirk A. Benson

I think that we have, of course, today's the last day of January and as I mentioned before, we may be benefiting from the mild weather in January. But we weren't benefiting from that mild weather in the 12/31 quarter and we had some positive trends on the topline. And so those positive trends are continuing into January as Dave said, particularly in our specially siding products and our roofing products. But we're also seeing a little bit of strength in more of our core building products -- the shutters, aligning blocks, gable vents -- those type of products, going into January. And so I think we have, at least through January 31, we have every reason to be optimistic about at least a slight increase in the top line. Dave, why don't you follow up on that question a little bit and add a little bit of additional color?

David Ulmer

Yes. I would say specifically that our calls that we receive and orders that we receive into our group are up and are tracking actually a little bit up from where the actual -- up more than the market is up. Our calls and orders are up probably 25% for the quarter ended in December. So the calls have been good and as Kirk said we didn't get the benefit from the weather. The other advantage that we do have that points being able to sustain what we have been doing is that the new housing start number is up and we always have a lag behind that for our specific products and the remodeling numbers are up from where they were in prior years. So additional calls, additional orders and an upswing in what the experts are saying on the markets, point to more activity and hopefully some sustained growth.

Kirk A. Benson

On the heavy construction side, the thing that was most impressive to me is for the first time since for several years, the Western region had positive year-over-year tons shipped. And so that -- and that reflects at least a stabilization in these Western markets, which is very positive. And then we picked up some additional supply in the central region. So we had some wins giving us additional access, supply and that in turn, resulted in an increase in the number of tons sold in the central region. So Bill, why don't you add to that.

William H. Gehrmann

I think you covered it. As you said, we've seen what we feel for now several quarters and stabilization in the Western part of the United States. And we have had some wins on supply in the central region. In honesty we've needed those as Kirk talked about some of the oilfield opportunities that would've actually potentially created some supply constraints but the folks out there in the field have been able to picked up some additional supply as sources may not be suitable necessarily as high quality fly ash replacement for portland cement but quite suitable for use in some of these oilfield activities. So we picked that up, as we said, because that we're having to use our logistics system to reallocate supply to meet specific needs based on ash quality. And we feel very comfortable that we're getting close to increasing our supply of quality fly ash used for cement replacement. And then beyond that -- beyond the volume side, obviously as we get into this first quarter it's typically when we're able to implement our price increases for the year. So we ought to see a little additional bump from that also.

Kirk A. Benson

One thing that really is exciting to us or after going through as many years as we have with the revenue declines, our operational model is quite highly leveraged operationally. So we end up with a contribution margin above 40%. So as you start to see a little bit of strength in the top line, the leverage when it gets down to operating income and adjusted EBITDA is very positive. And so it's something of course as your management team, it's something that we really look forward to because we've had to deal with that operating leverage from a negative perspective as revenues declined. That's had an extra impact on our free cash flow and adjusted EBITDA. But as we start to see a little bit of more comfort in the top line, that operating leverage turns into tremendous positive for Headwaters. And so it just levers down to the free cash flow and to adjusted EBITDA. So hopefully what we're seeing is more than just like in January, it is more than just a mild January, we'll actually maybe see a few percentage points increase in the revenue line as we move forward into the year.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

So if I may try and summarize it, it sounds like the volume trends are positive relative to your expectations contributing to the top line growth and your pricing has somewhat caught up and stuck that you're covering some prior inflated costs. And going forward, you're going to have to manage the cost equation through price increases to add more to the just the volume growth helped by the horrible last couple of quarters. Is that fair?

Kirk A. Benson

It's -- The only thing that I would add to what you said was that I'm not sure we're focused on -- Bill said, we're going to have a -- this is an opportunity for us to have a little bit of price increase in the fly ash side of the business, and I think that was Bill's comment, so that's fair. I don't think we're anticipating price increase on the light building products side. We will continue to find opportunities to increase our efficiencies, as we maintain focus on margins going forward. So a little bit of help on the price side with the heavy construction materials business. But the continued focus on margin improvement will also be cost-oriented on the light building products side, as well as on the heavy side.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. And just to try summarize that, or focus. On the light building products side though, you've continued to sound like there's some forward exposure as costs maybe pick up or could pick up that we'll still have this trailing recovery in terms of your ability to pass those through to your customers. Is that still a good tack?

Kirk A. Benson

I think if we were in the position where we felt that costs were going to jeopardize margins, we would be in a position to raise prices. We're right now looking at where we're at with the cost structure and the cost pressures that we see, we don't think we're going to have to raise prices in light building products in order to maintain and improve our adjusted EBITDA and operating margins going forward. So we think that our continuous improvement activities have been sufficient to at least, and on the 12/31 quarter and going into the March quarter, have been sufficient to address any incremental cost pressures that we're seeing. And our diesel prices haven't come down, transportation costs are always an issue for us, where we continue to be very concerned about cost pressures. But as of today, I think we're quite comfortable that we can see a continuation of the margin improvements that we accomplished in the 12/31 quarter going forward without raising prices. But if we had to, I thinks that's something that we'd revisit.

Operator

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

Seth Yeager - Jefferies & Company, Inc., Research Division

You talked quite a bit about California and volume growth there, not to beat the weather issue to death, but I mean what's the underlying demand look like there? There are some projects that are starting to pick up or was a portion of that just due to some of the favorable weather year-over-year? And top line specific?

Kirk A. Benson

Yes, and I'm not sure that -- And Bill, you'll need to speak to this as well. I don't think that in the Western region we were particularly impacted by weather. I know generally that's true. If you look at the business overall across the country, the weather in December quarter was comparable to the -- weather December 2011 was comparable to the December 2010. And so what we're seeing is a pickup in the economic activity unrelated to weather. But adding to that, Bill, is that what you would suggest as well?

William H. Gehrmann

Yes. I would echo that. I think what we have seen is some increased activity for most of our ready mix customers out there. I think a measure of that is plants in operation obviously over the last couple of years they had idled a lot of their plants, a lot of their mixer trucks. And I think we have seen over the last quarter some positive impacts, some pick up as far as them operating a few more plants and bringing back a few drivers and operating some more mixer trucks.

Kirk A. Benson

Yes, but we're not saying this is a change from like night to day.

William H. Gehrmann

No.

Kirk A. Benson

This is more like more night to -- the sun is starting to peak just a little bit above the horizon. So we're not trying to say that this is -- it's not a game changing event for the Western region. It just happens to be the first time that we've have a positive year-over-year comp, which is good. But it's not like Bill is selling his home in Texas and moving to California.

William H. Gehrmann

No. I think that as we've said in the script, we feel that it's stabilized. But beyond that, would be difficult to say.

Seth Yeager - Jefferies & Company, Inc., Research Division

On the cash flows with the, a bit of pick up in demand, what's your, I guess, best guess at this point for your use of working capital as you go throughout the year? And are you guys going to see any impact from reclamation or anything like that with the potential asset sale?

Kirk A. Benson

From a cash flow standpoint, we guided at $20 million to $30 million of free cash flow for the year and we're sticking with that range. So from a working capital standpoint, I'm not seeing a significant plus or minus to the assumptions that we had in that $20 million to $30 million range. In terms of reclamation expenditures, we are not expecting a material dollar amount related to that kind of activity.

Donald P. Newman

The estimate is $3 million.

Kirk A. Benson

At the very, very high side, $3 million. Probably something south of $2 million. So still sticking to that $20 million to $30 million range.

Donald P. Newman

And I was just going to add that we're going to continue to focus on paying down debt. And so as we generate free cash flow, our primary mission in life is to reduce our subdebt.

Seth Yeager - Jefferies & Company, Inc., Research Division

And you guys have a good job of taking advantage of repurchasing in the open market. How much cash do you have remaining and set aside for the 2.5 if any?

Donald P. Newman

So the way that I would think about it is based upon our projections for the year, we paid down about $15 million of subdebt so far in fiscal '12. We would expect that based upon the cash generation for fiscal '12, we would look to have about another $30 million available through the operations of the business to pay down debt. Operations of the business plus we do have some initiatives in place to improve some of our working capital management, et cetera. So about $30 million. That $30 million does not include our estimated proceeds from the sale of coal cleaning.

Kirk A. Benson

Some of it may take a little bit into October because you're collecting receivables and stuff. Your working capital basically peaks in about June, July kind of timeframe, stays kind of constant, and then declines. And so as Don's references, it probably flows a little bit past the end of the fiscal year.

Donald P. Newman

That's absolutely correct. So the way to think about it is when I talk about fiscal '12, don't use that $30 million as a forecast figure for why we're going to end up with a net debt to EBITDA ratio for the end of the period. It's the cash generated from the fiscal '12 activities. And to Kirk's point, some of those receivables are being collected 30 and 60 days after period end, paying some payables, et cetera, et cetera. So that'll give you a sense on what we expect to do.

Seth Yeager - Jefferies & Company, Inc., Research Division

Okay. I appreciate that's helpful. And if I could just sneak in one last one. Just sort of on a high level, there has been some cement price increases announced beginning of this year and potentially some for April that were I guess for the most part unsuccessful. Did you guys see any impact on fly ash from any of those announcements from your customers?

Kirk A. Benson

Bill needs to respond to this as well. But I just want to make a general comment, which is that there's still a fairly large spread between the average price per ton that cement sells at, the average price per ton that fly ash sells at. The reason there is that wide spread is the nature of the fly ash market and so we don't see like a 1 for 1 kind of impact when cement prices change. It's very good if the cement prices go up. But it doesn't necessarily have a 1 for 1 impact on fly ash pricing. Bill, is that your sense?

William H. Gehrmann

Yes, that's my sense and to add a little more color. Obviously, it's typical strategy within the cement industry to start in the late fall and start to float out price increases and see what sticks. As you mentioned a lot of them didn't stick or the full extent of the asked-for price increase didn't stick. What we're seeing is cement companies going back out in some of these markets and floating out another price increase and we're starting to see a little bit more of that stick so we'll continue to monitor that throughout the spring.

Operator

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

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

A couple of quick follow-ups. First to Dave, you commented on the housing starts. You're talking about I think it was 20-plus percent up in the fourth quarter. My impression, that's mostly multifamily. Can you talk about maybe your exposure there and the opportunity you see multifamily versus single, which is I guess what I've always pegged you guys to?

Kirk A. Benson

So we are more oriented towards single family. I think that's absolutely correct. We do have some exposure to the multifamily particularly in our stone business for example we've got a number of relationships that result in sales to multifamily. But I think your impression is accurate. We are more oriented towards single family than multifamily.

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

And I think historically, you quoted something along the lines of -- [indiscernible] $10 million of -- was it $10 million of revenue per 100,000 incremental homes built or something along those lines? Is there anything comparable in the multifamily quarter you can quote us? Or if you can correct my numbers if I'm a little stale?

Kirk A. Benson

Well whether you're a little stale or not, we would be a little stale on that, on those numbers. That's about as, I remember, that was almost 3 years ago that we made that statement. So we would have to refresh our calculation of even -- of your first number Dan. We don't have a number on multifamily.

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

Okay. And then just a final question on light building products, as you look at Q4, can you just slow down of the 5% up, how much of that was price versus volume or mix as well would be a piece of it?

Kirk A. Benson

No, I think that a fair amount of that in the quarter was price. We did see some volume increase in a couple of specialty lines, but there was a -- but a fair amount of that was price.

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

Okay. Real quickly on the construction material side, on ash, given what we've seen I guess with a little bit of decreased coal output, any issues yet with availability? I mean, I know you said, you picked up some new sources, but are you seeing reduced availability from existing and is that a constraint at all?

Kirk A. Benson

It has not been the constraint on us at this point. You do have to look at -- you got to be -- you have to drill down into regions and sometimes even into local situations to really make the assessment but our distribution system as I've indicated, allows us to compensate for some of those. When a facility shuts down, we can oftentimes compensate but it does take, sometimes it takes a little bit of time to put some logistical system in motion so that you can compensate for those changes in supply. But generally, supply has not been a barrier to sales.

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

Okay. So it will be a high-class problem when you don't have enough ash is what you're saying?

Kirk A. Benson

It absolutely will be.

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

Okay. And then a clarification also on construction materials. With Virginia City and Prairie plants coming on line in June, are those service agreements that are kicking in? Or are those going to be ash sale agreements or a combination?

Kirk A. Benson

They're service agreements.

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

Okay. So there won't be any ash component, ash sale component?

Kirk A. Benson

I don't believe so. Bill, is that correct?

William H. Gehrmann

There might be an opportunity, Dan, at Prairie States now. Both those plants are online but not fully commercial. So they will continue to grow through the end of the June quarter from a revenue basis. But if those plants both are up and operating they just started coming up in the December quarter.

Kirk A. Benson

So we have the agreement to market the ash like out of Prairie State, that's part of our agreement. We -- because it's a brand new facility, we still need to verify the quality of the ash. And as Bill said, there may be an opportunity there depending on how the production of the ash proceeds.

Sharon A. Madden

Operator, we're hitting up against our one hour time allotment. So let's go ahead and just take one more questions.

Operator

Our final question comes from the line of Chris Cook with Sashaf [ph] Associates.

Unknown Analyst

I just had a quick question on capital spending. It looks like cap spending for fiscal 2011 was $27 million. I was curious as to what cap spending was in the first quarter as well as what your expectations are for the full year?

Donald P. Newman

Our cap spending -- this is Don Newman. Our cap spending was roughly $6.5 million for Q1. We expect our full year CapEx to be in the $26 million to $27 million range.

Unknown Analyst

And interest expense, I assume, is going to be in -- the cash interest expense should be around the $38 million range?

Donald P. Newman

Something that range. Yes, that's about right.

Unknown Analyst

And what about your cash..

Donald P. Newman

By the way our run rate interest expense is in the $36 million range. And I'm sorry I interrupted.

Unknown Analyst

Yes, the cash tax liability in 2012.

Donald P. Newman

Yes, cash tax about $2 million of expense.

Sharon A. Madden

We'll go ahead and conclude our call then. Thank you for joining us.

Operator

Ladies and gentlemen, this conclude the Headwaters' Inc., first quarter conference call. Thank you for your participation. You may now disconnect.

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