Headwaters' (HW) CEO Kirk Benson on Q3 2016 Results - Earnings Call Transcript

| About: Headwaters Incorporated (HW)

Headwaters Incorporated (NYSE:HW)

Q3 2016 Earnings Conference Call

August 2, 2016 11:00 ET

Executives

Tricia Ross - Investor Relations

Sharon Madden - Head, Investor Relations

Kirk Benson - Chairman and Chief Executive Officer

Don Newman - Chief Financial Officer

Analysts

Rob Hansen - Deutsche Bank

Brent Thielman - D.A. Davidson

John Quealy - Canaccord

Dan Mannes - Avondale

Jim Barrett - C.L. King & Associates

Wayne Archambo - Monarch Partners

Al Kaschalk - Wedbush Securities

Gary McHam - McHam Taylor & Company

Rohit Seth - SunTrust

Charles Smith - Fort Pitt Capital

Operator

Good morning and welcome to the Headwaters Incorporated Third Quarter 2016 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tricia Ross. Please go ahead, ma’am.

Tricia Ross

Thanks, Frank. Good morning, everyone and thank you for joining us for the Headwaters Incorporated third quarter fiscal year 2016 conference call.

There are slides accompanying today’s presentation. They can be found in the webcast link at the Headwaters Incorporated website under the Events and Presentations tab. You can also download them from there. Please go there to follow along with today’s slides. If you have any issues, please feel free to e-mail me at tross@finprofiles.com and I can also e-mail you a PDF copy.

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

Sharon Madden

Thank you, Tricia. Good morning, everyone. Today’s call will be conducted by Kirk Benson, Headwaters’ Chairman and Chief Executive Officer and Don Newman, Headwaters’ Chief Financial Officer.

Please remember that certain statements that are made during the call, including statements relating to expected future business and financial performance, maybe 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 address matters that are, to differing degrees, uncertain. These uncertainties are described in more detail in Headwaters’ annual and quarterly reports filed with the SEC. These filings are readily available from the SEC’s website, Headwaters’ website or directly from the company.

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

Kirk Benson

Thank you, Sharon. Today’s script is a few minutes longer than usual, because of our acquisition and some very positive fly ash information that we would like to share. In the June quarter, we continued on our path with top line growth and leadership economics, completing a very good quarter tempered somewhat by weather, particularly the rain in Texas.

Highlights for the quarter included continued expansion of adjusted EBITDA margins to a record 19.1% on a trailing 12 months basis. Upward pricing in fly ash continued with a net price increase of approximately 6% resulting in record margins. Recently, we executed an agreement to acquire the assets of Krestmark, a manufacturer of vinyl windows. Krestmark has experienced double-digit organic growth over the past 8 years and has margins that will be accretive to Headwaters, so that is adjusted EBITDA margins greater than 19.1%. We also redeemed $47 million of our unsecured senior debt.

Now, turning to Slide 3, we just completed our 20th consecutive quarter of year-over-year revenue and adjusted EBITDA growth. We continued our top line growth to $262 million in adjusted EBITDA to $54 million. Adjusted earnings per share, was up 20% and based on our performance, we are reaffirming our guidance for fiscal 2016 of $185 million to $200 million of adjusted EBITDA.

Now, turning to Slide 4, we are very excited about our agreement to acquire the assets of Krestmark for $240 million, which will be Headwaters’ entry into a niche windows market. The windows category is an excellent and natural fit with our existing exterior building products. It allows us to offer a more fulsome exterior product portfolio. Windows are also sold to many of the same customers we already service, while also allowing some customer expansion opportunities for us. We have examined entering the windows industry for many years and believe we have found an excellent company with which to do so, one that is a perfect fit for Headwaters.

So, now turning to Slide 5, so why is Krestmark a perfect fit for Headwaters? First, it is margin accretive. Krestmark’s adjusted EBITDA margins will be accretive to Headwaters’ consolidated EBITDA margins of 19.1%. Krestmark’s margins are at the top of the windows sector. Second it is a market leader in its local geographic market similar to our existing businesses, including the attractive Dallas, Fort Worth, North Texas market one of the strongest construction markets in the US. Third, it has been a high growth company achieving double digit organic compounded annual revenue growth rates over the past eight years and we anticipate double digit growth in Krestmark revenue in 2017 such that revenue could meet or exceed $125 million.

Over the years, we have walked away from many window opportunities because we did not see a company with high margins and a sustainable competitive advantage. Krestmark has both. For its size, Krestmark has the fastest growth and strongest margins of any acquisition we have looked at and that includes any product group. The CEO of Krestmark, Bill Robinson, is one of the finest executives that I have met. He started as a teenager in windows, working for his father. Over a lifetime of devotion to the windows space, Bill has honed in on a strategy that produces superlative top line and EBITDA results. He has put together a very special management team and we expect the special performance to continue.

Krestmark has shown great performance by following a disciplined strategy. Elements of the strategy include high levels of customer loyalty; a standardized SKU set appealing to the customer base, which leads to efficient purchasing and manufacturing and consistent quality. Finished products are shipped within 5 days of the order and Krestmark provides premier customer service. The transaction is subject to normal closing conditions and we anticipate funding the acquisition through additional debt. We anticipate that our net debt to adjusted EBITDA ratio will increase in the September quarter to the range of 3.1x to 3.2x. In fiscal ‘17, we anticipate that our net debt to adjusted EBITDA ratio will fall back to a range of 2.5 or lower.

Now, turning to Slide 6. On Slide 6 you can see revenues from our Building Products segment for the third quarter increased $15 million to $163 million, an increase of 10% over last year. Our block product revenue was negatively impacted by rain in the Texas market. Block projects are just starting to come back online. Underlying fundamentals of our end markets continue to be strong. Single-family housing starts have grown 12% this fiscal year and we continue to see strength in our building products with repair and remodeling exposure. We have revenue growth across all of our four major product groups led by a double-digit increase in our trim product line. Our strategy of extending our geographic footprint of acquired products through leveraging our existing distribution continue to pay dividends. The increase in building products third quarter revenues led to a 12% improvement in adjusted EBITDA, improving from $32.7 million in last year’s quarter to $36.5 million this quarter.

Now, turning to Slide 7, you can see that revenue for the June 2016 quarter in the Construction Materials segment was $97.7 million compared to $91.9 million for the June 2015 quarter, resulting in a 6% year-over-year increase. Revenue was the highest revenue ever recorded in any June quarter within the construction materials segment. Site service revenue for the June 2016 quarter was higher year-over-year, with 10% organic growth and incremental site service work from our SynMat acquisition. Site service revenue was approximately 23% of our overall revenue for the June 2016 quarter compared to 18% of our overall revenue for the June 2015 quarter. Service revenue was 21% for all of fiscal 2015.

The graph on the top of Slide 7 illustrates a seasonality of coal-fired power generation. While CCP production generally follows this pattern, 2016 has been unique because of low natural gas prices and warm winter weather, followed by a cool spring. It is only in July that temperatures have risen significantly. Utilities took advantage of lower demand for electricity and a low natural gas prices to extend maintenance outages and lower overall dispatch from coal units. During the June quarter, we have experienced an abnormally wet spring in many parts of the country and especially along the Gulf Coast, which has also impacted demand. As you can see in the center graph, as temperatures began to return to normal in late June, natural gas prices began to recover. The switching point is in the range of $2.50 to $3. We should have less pressure on coal from natural gas pricing going forward.

Looking at the bottom graph, our pricing trends are consistent with Portland Cement. During the quarter, we realized approximately a net 6% year-over-year price increase for high value CCPs. We continue to see opportunities for price increases and plan to implement additional price increases during the September 2016 quarter. Adjusted EBITDA for the June quarter increased 15% to $25.6 million compared to $22.3 million for the June 2015 quarter. The adjusted EBITDA margin increased 190 basis points year-over-year to 26.2%.

Now turning to Slide 8, you can see on Slide 8 our current estimate of total value – total high-value CCPs under contract is 9.3 million tons and the estimate available during the construction season is 8.2 million tons. In 2016, supply under contract has grown approximately 300,000 tons. The excess tons available presents an opportunity to increase the number of times that we can put in the right place at the right time to meet market demand.

Now turning to Slide 9, you can see our 2014 and 2015 actual tons shipped of 5.3 million in 2014 and 5.8 million in 2015. The next two bars are a forecast of the tons expected to be shipped for 2016 in the range of 5.4 million tons to 5.6 million tons and for 2017 tons to be shipped in the range of 6.1 million tons to 6.5 million tons, representing growth in the range of 9% to 20%. The forecast for 2017 is based on detailed specific opportunities. Our objective is to get the ash to the right place at the right time. The bridge to 2017 reflects underlying activities that have been specifically identified including the impact of weather on 2016 supply. Look at the box on the right of the slide for the bridge.

First, new supply sources, we already have in our contract net additions to our supply that should produce ash in the range of 200,000 to 300,000 tons. Second, storage and reclaimed CCPs, we currently have 47 storage locations that store a lot over 500,000 tons of ash. We have identified six additional storage sites, which should grow storage by 10% to 15%. In addition, we are working on three locations to reclaim previously produced CCPs. The total miss in this storage and reclamation is estimated to be in the range of 150,000 tons to 250,000 tons of ash. Third, enhanced utilization, this category includes increasing the quality of ash, such as using our RestoreAir technology or leveraging existing supply to higher value applications. These opportunities are already identified. The range in this category of increased ash supply is between 100,000 tons to 200,000 tons. Finally, our estimate of tons we lost in fiscal ‘16 due to weather, low natural gas prices and other is in the range of 250,000 tons to 350,000 tons.

Now turning to Slide 10, briefly, you can see that there has been above average rainfall in much of the U.S. and particularly in Texas from the Gulf Coast. Clearly, rain has impacted demand in both of our segments. We are looking forward to a strong finish to 2016, but I have to say we are excited about how things are lining up for fiscal 2017. We see our end markets continuing to grow. We are making good headway integrating our roofing acquisition, Krestmark will be a strong contributor to 2017 growth and performance and we continue to focus on increasing our ability to meet the significant demand for fly ash. And we believe that will add significant value to Headwaters in 2017.

I would now like to turn the time over to Don for a financial summary.

Don Newman

Thank you, Kirk. Good morning and thank you for joining us. So I will start with Slide 11. This was another growth quarter for Headwaters, our 20th consecutive quarter of year-over-year revenue and adjusted EBITDA growth. Sales for the quarter were $262 million and adjusted EBITDA of $54 million, increases of 8% and 11% respectively over Q3 2015. Year-to-date performance highlights include 10% top line growth, a 20% increase in operating income and a 50% increase in adjusted EPS. We continued to lower our debt levels with cash generated from operations. In July, we repaid $47 million of unsecured notes. We also re priced our term loan debt, reducing interest rates by 50 basis points. With the repayment and re-pricing, we reduced our cash interest run rate to $24 million and our weighted average interest rate to 4.6%.

Let’s move to the next slide and take a closer look at the quarter. Our top line growth of 8% for the quarter reflected a combination of 10% growth in building products and 6% growth in construction materials. Building products revenue was $163 million in the quarter. We saw revenue growth in all major product groups despite adverse weather conditions in a number of our key markets and the likely pull forward of sales into the March quarter due to unseasonably mild winter temperatures. Construction materials revenue was $98 million in the quarter. We saw favorable impacts from increases in average fly ash prices and organic growth in services as well as contributions from our SynMat acquisition.

Fly ash volumes were negatively impacted year-over-year, but we saw production pickup as weather and gas prices started to normalize later in the quarter, which is a positive indicator. The SEC provided guidance on non-GAAP financial measures during the June quarter that indicated measures such as adjusted EPS should include income tax expense with both deferred and current taxes. We have been including only cash taxes in the calculation of adjusted EPS to provide investors insight into the impact of tax yields on underlying performance. In compliance with the SEC guidance, we have used the normalized GAAP base tax expense in the calculation of adjusted EPS in Q3. To improve comparability to the current year, we have calculated prior year adjusted EPS using a tax rate consistent with the fiscal 2016 provisioning rate.

Let’s move to Slide 13 and look at the year-to-date results. Our top line growth of 10% year-to-date reflects the combination of 14% growth in building products and 6% growth in construction materials. Building products revenue is $424 million year-to-date. As with Q3, we have experienced revenue growth in all major product groups in 2016. Construction materials revenue was $256 million year-to-date. Our growth reflects increases in average ash prices and services revenue, partially offset by negatively impacted fly ash volumes. Operating income increased 20% and operating margins expanded 100 basis points over 2015 levels. Adjusted EPS, which excludes the charges related to our re-financings and early debt repayments, grew 50% from $0.40 per share in 2015 to $0.60 per share in 2016. From a – for the trailing 12 months ended June 30, revenue was $956 million, adjusted EBITDA was $182 million, generating an adjusted EBITDA margin of 19.1%. The 19.1% margin represents a new record for the ongoing business.

Let’s move to Slide 12 and talk about the full year expectations – excuse me Slide 14. We are reaffirming our 2016 adjusted EBITDA guidance range of $185 million to $200 million, which represents increases of between 12% and 21% over 2015. Our guidance reflects expected strengthening in the housing markets and R&R in the fiscal Q4. The continuing strong demand for Portland Cement and fly ash has been encouraging and has favorably impacted pricing. We expect that demand to – that demand to continue in the fourth quarter and into 2017 for that matter. As weather and gas prices normalize, ash sales volume should pick up relative to what we have experienced year-to-date. We are also expecting new supply sources and storage capacity to improve our ability to meet market demand as the quarter progresses. Finally, our EBITDA margins have expanded 90 basis points year-to-date. We expect the margins will continue to improve into 2017.

And with that, I will turn the call back over to the operator to take questions.

Question-and-Answer Session

Operator

Thank you, Sir. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rob Hansen from Deutsche Bank. Please go ahead.

Rob Hansen

Thanks. I wanted to see if you could just expand a little bit more on the strategic fit of the Krestmark acquisition. And ultimately, what you see the size of this business, what it can ultimately be and if there are any procurement synergies or any revenue synergies in terms of pushing this product through your existing distribution relationships?

Kirk Benson

I think, the fit is – it fits extremely well with our strategy to provide products in the exterior of new residential construction and repair and remodel homes. Some percentage of sales goes through one step distribution, which is where we have our strongest and deepest distribution ties. So, we think there is an opportunity that fits very well with our core competencies.

From a growth perspective, we will have a Southern United States growth strategy, where we already have plans in place and are moving forward with growth into the Arizona market and we will be looking for opportunities to expand into the Atlanta market. So, we can have a Southern exposure to new residential and repair and remodel construction. So, we are actually very positive about the growth opportunities. There is going to be some synergies – the synergies won’t be significant with this transaction although we are anticipating that there clearly are going to be some.

Rob Hansen

Got it. That’s helpful. And just a broader question, in terms of your M&A strategy, I think the last three acquisitions have broadened your portfolio pretty significantly. Have you – have we kind of reached the limit so to speak on the number of products where now you can just focus on the windows and the decking growing those out? What are your thoughts on that in terms of just the size and the breadth of the portfolio now?

Kirk Benson

I think that’s 90% accurate. There is opportunities for us in a product set of outdoor products and we are looking at opportunities to do that. We already have exposure into outdoor living. It’s an area of significant growth and that’s an area where we could look for additional expansion, although those products will be similar to what we are – what we currently have in our portfolio.

Rob Hansen

Got it. Okay. And then just on the – just returning to the Krestmark acquisition, for ‘17, are there any additional CapEx or working capital needs that would mean that basically that EBITDA wouldn’t fall mostly to the free cash flow line? Obviously, there is going to be interest expense in there, but are there any of those type of expenditures that you will need to put in?

Kirk Benson

No, we don’t think there is any extraordinary CapEx expenditures and we anticipate very strong free cash flow from the transaction.

Rob Hansen

Got it. Thanks. I will defer to others.

Operator

And our next question comes from Brent Thielman from D.A. Davidson. Please go ahead.

Brent Thielman

Yes, thanks. Good morning. And thanks for the 2017 bridge on CCPs. As far as the confidence on volumes in this current quarter, at this point, if there were some unusual changes that forced the utilities to reduce the operating mid rates, would that make a difference on your supplier? Do you feel like you have what you need at this point to address demand for the quarter?

Kirk Benson

We are pretty comfortable on the 5.2 to 5.4, feel pretty good about that.

Don Newman

5.4 to 5.6.

Kirk Benson

5.4 to 5.6, feel pretty comfortable with that, yes.

Brent Thielman

Okay. And then as far as Krestmark goes, it looks like they have quite a bit exposure in Texas, which presumably a big good tailwind for them in the last few years. Through a cycle, are the margins still above kind of the traditional Building Products segment levels?

Kirk Benson

Yes, we feel really good about the margins or cycle. We have got a lot of cushion.

Brent Thielman

Okay. And then just one last one on building products, the gross margin this quarter is down a touch, even though the top line grew nicely, can you just explain kind of what happened there?

Kirk Benson

There is – that’s just products mix. And so it’s – that will switch a little bit with product mix.

Brent Thielman

Okay. Any more specifics there?

Kirk Benson

Well, when you have got like – we have got roofing acquisitions that we have done and we are going through the integration process. So, it is a little bit of mix to some of these newer products that we are putting online.

Brent Thielman

Okay, great. Thank you.

Operator

And our next question comes from John Quealy from Canaccord. Please go ahead.

John Quealy

Hey, good morning folks. Couple of questions. Ash, the pricing up in ‘17, is that a good assumption how much – I know you have had a couple of good years of price and it sounds like you are going to end the year up with price, but can you just talk about what sort of relative contribution we should be looking for price in ‘17?

Kirk Benson

I think generally, we believe that we are going to continue to get price increases. And so we feel good about price. We will probably fall back to where we were at the beginning of 2016 as far as guidance is concerned, but we do think we will have a positive pricing environment.

John Quealy

And Kirk, the last couple of quarters on ash volume, I know March generally isn’t representative in June. We start to pickup with some projects for selling into the channel, but is this just variability in weather that you are seeing or is there any other – clearly you are looking to get a decent amount of volume growth next year, what’s the move to getting another 10% to 20% of volume?

Kirk Benson

Yes. I think that the bridge provides some additional detail as to the different elements of fly ash growth. We clearly were impacted by weather, rain, the temperatures and low natural gas prices and those things are temporary. So, we feel very good going into 2017.

John Quealy

Okay. Switching off building products, can you talk about organic growth in that business? Is that something you can break out for us?

Kirk Benson

Yes, the organic growth was relatively flat and a lot of that was the impact on our block product group in the Texas market.

John Quealy

Okay, okay. And then I am sorry, I think one of the callers asked this. Is Krestmark in the guide or not we are expecting that to close in ‘17?

Kirk Benson

Well, we don’t know for sure when it will get closed and so we don’t know for sure when it will close.

John Quealy

Okay. So that means it’s not in the guidance?

Kirk Benson

It is in the range, we have got a wide range. It will be in that range.

John Quealy

Okay, okay.

Kirk Benson

But we don’t know when we are going to close, so we haven’t adjusted our guidance for Krestmark.

John Quealy

Right. Okay, alright. Thanks.

Operator

And our next question comes from Dan Mannes from Avondale. Please go ahead.

Dan Mannes

Thanks. Good morning, everyone.

Kirk Benson

Good morning, Dan.

Dan Mannes

I wanted to follow-up on Krestmark. If you could just give a little bit more color here. Obviously, you talked maybe qualitatively about some of their advantages. The margin structure just looks a little bit higher than most what we have seen and you have looked at a lot of windows companies, it sounds like the best you have seen. Could you maybe be a little more granular about maybe what their special sauce is?

Kirk Benson

Yes. I think as I indicated in the script, there is the customer loyalty, the somewhat standardized SKU set which leads to efficient purchasing and manufacturing also to quality. All those factors relate to the ship time. We get these windows on trucks within 5 days of receiving an order and that’s very important for the customer base. And so you end up with this – so you end up with a virtuous cycle in providing the windows to the customers. It increases and creates value for the customers. And that allows you to continue to increase your volume, which improves your manufacturing coverage of overhead. And so it’s a very strong and we believe sustainable competitive advantage that integrates all of these activities to get the product in the hands of the customer.

Dan Mannes

Got it. And then in your dialog as it relates to your target debt to EBITDA by the end of ‘17, it seems like you are applying some pretty substantial free cash flow, maybe into the tune of $130 million to $150 million with at least was what my math would get me to. Am I in the right ballpark as to what you are targeting or is there some other factor that might be allowing you to reduce debt quickly?

Kirk Benson

You are absolutely in the right ballpark.

Dan Mannes

Okay. And then lastly, I just want to close that on ash, can you maybe talk a little bit more about volumes in the quarter and then the impact of SynMat on product sales and how you accounted for that?

Kirk Benson

Yes. We had the – volume of course, was impacted by rain and by the cool spring during the quarter. So clearly, volumes were impacted. SynMat is about 60% service and about 40% product.

Dan Mannes

Got it. And then just lastly, since we are now through July, weather has heated up, gas is certainly better than it was over the last two quarters, can you talk at all about your experience quarter-to-date from an available fly ash supply perspective?

Kirk Benson

We had – we still had some rain with weather at the beginning of July. We are seeing, because of the temperatures, we are seeing the dispatch load starting to pick up. We are starting to see the normal improvement of supply as you get into these summer months.

Dan Mannes

Got it. Thank you very much.

Operator

And our next question comes from Jim Barrett from C.L. King & Associates. Please go ahead.

Jim Barrett

Good morning everyone.

Kirk Benson

Hello Jim.

Jim Barrett

Kirk, my questions are on Krestmark as well, could you talk about what percentage of their sales roughly is the new homebuilders that was highlighted on Page 1?

Kirk Benson

It’s a very high percentage. The strategy that has been developed is – has been to new residential construction.

Jim Barrett

Okay. Are they involved in hurricane resistant windows, given where they are located, in [indiscernible]?

Kirk Benson

Yes. Very little to-date.

Jim Barrett

Okay. And I assume the debt used to finance it, is that similar to your 4.6% average interest rate?

Kirk Benson

It should be a little bit lower than the average interest rate.

Jim Barrett

Good. And then what is the normal delivery time, five days is what they deliver in, any sense as to what the industry standard is?

Kirk Benson

It could be a couple weeks. It’s much better than the industry standard.

Jim Barrett

And then finally, was this an auction process or did it – they negotiated strictly with Headwaters?

Kirk Benson

It was an auction process.

Jim Barrett

Okay. Thank you very much.

Operator

And our next question comes from Wayne Archambo from Monarch Partners. Please go ahead.

Wayne Archambo

Yes. Good morning. Can you quantify the incremental bump up in your operating margins from this acquisition?

Kirk Benson

We think it’s going to be accretive. So our 19.1% and so it should increase the overall margins for Headwaters. And so it’s – it is the highest margin window business that we have ever seen. And we think we should do approximately $125 million revenue in 2017 on those margins. So it will – it will be accretive to our overall margin.

Wayne Archambo

Can you quantify that, is it 5 basis points, is it 50 basis points, is it 500 basis points, just trying to look for a little more granularity here?

Kirk Benson

Yes. I don’t think it’s not going to be 500 basis points for sure. But it has the potential with our other business activities with our margin expansion in our other product groups. We would have the possibility of being over 20% adjusted EBITDA margins in 2017.

Wayne Archambo

And you are planning on keeping management on for some like the time from Krestmark?

Kirk Benson

Yes, sir. We are.

Wayne Archambo

Thank you.

Operator

And our next question comes from Al Kaschalk from Wedbush Securities. Please go ahead.

Al Kaschalk

Can you hear me, okay.

Kirk Benson

We can Al, go ahead. Go ahead Al.

Al Kaschalk

Can you hear me?

Kirk Benson

Yes. We can.

Al Kaschalk

Sorry about that. I wanted to see if you could quantify the weather impact from the quarter specifically on fly ash?

Kirk Benson

Yes. We think that the – it ranged in 250,000 tons to 350,000 tons. Now that’s for the entire fiscal year, not just in the quarter. But a lot of that was in the quarter.

Al Kaschalk

Okay. If I recall in the past we have talked about that weather is a temporary issue, not a lost contracts walking away or customers going away, is that the case with this – with the Q3 shortfall and the Q2 shortfall?

Kirk Benson

Generally, that is absolutely the case.

Al Kaschalk

Okay. But generally – is there any...?

Kirk Benson

You might have some projects that were urgent projects. And so they ended up using less fly ash because it wasn’t available. So that clearly can happen. But generally, these projects are going to move forward and they are not lost, but there can be some exceptions.

Al Kaschalk

Okay. So just for a cadence perspective, I think about it as three quarters loss in the third quarter and two – and a quarter of it in the second quarter, of that 250,000 tons to 350,000 tons, is that fair?

Kirk Benson

I think it weighted a little bit towards the June quarter. It should be weighted a little bit towards the June quarter.

Al Kaschalk

Okay. I mean in the past you have given us organic growth on building products, but I don’t know if it was called out this quarter maybe there was some anniversary of the acquisitions in the prior quarter, what was the organic growth versus the acquisition non-organic growth rate?

Don Newman

Yes. I think Kirk had mentioned earlier on the call that building products organic was relatively flat.

Al Kaschalk

Okay. Thanks. I missed that one.

Don Newman

You bet.

Al Kaschalk

And then finally, just more of a macro question, we have heard from a few others about resin costs, in particular some PVC increase, so how are you managing that environment, which is certainly different than the last several quarters?

Kirk Benson

So we are – continuous improvement is a core competency and a core value at Headwaters. And so what we have been able to do traditionally is find opportunities for improvements. So you can have price or volume favorable variances, depending on our continuous improvement activities and we have been able to offset increases in costs. And so that’s – we are going to continue those kinds of activities to make sure that we focus on our adjusted EBITDA margins.

Al Kaschalk

Okay. And then finally if I may, on the acquisition, can you give us a rough sense of the overlap with existing customer base that you have?

Kirk Benson

We don’t have a lot of overlap in the Texas market, because we don’t have a lot of exposure to new residential construction in Texas. Our exposure is to commercial institutional and infrastructure. And so there is not a lot of overlap in Texas, which is quite positive, because it puts us into a new market and gives as an opportunity potentially to cross-sell some of our other products.

Al Kaschalk

Okay, very good. Thanks a lot and good luck guys.

Don Newman

Thanks Al.

Operator

And our next question comes from Gary McHam from McHam Taylor & Company. Please go ahead.

Gary McHam

So I am seeing, it’s not easy to get specific answers from you guys, so I will ask you something that’s not numerical, the GAAP tax expense, is this something that you expect to occur each year?

Don Newman

Well, right now we are provisioning at 39%. We would expect that we will be able to see some improvement in that rate and reduce it by a couple of hundred basis points as over time as we implement some strategies to do that. But…

Gary McHam

It won’t be a reduction, but it will still be a recurring expense each year?

Don Newman

Yes, sir. Yes.

Gary McHam

Okay, alright.

Don Newman

I would also point out Gary, that our cash tax rate is much lower. We are estimating about $5 million of cash taxes this year.

Gary McHam

Okay. Thank you. And finally, if one of your acquisitions or one of the acquisitions that you might be making is for outdoor products, you mentioned Arizona and Atlanta, are you looking – there is a climate question and there is a climate angle to this, the climate between well, between Arizona and Atlanta – the difference is huge, a lot more outdoor activity that would involve your products or any products you would look at for Arizona, you are not going to find it occurring in the Atlanta area, I am not far away from there and I can tell you from experience, so just a thought for you?

Kirk Benson

Thank you.

Gary McHam

It’s not dry. Very high, people don’t go out and stay outside like they do in Arizona, it’s too darn humid.

Kirk Benson

Right. Thank you very much.

Gary McHam

You’re welcome and have a good one.

Don Newman

Thank you, Gary.

Operator

Our next question comes from Rohit Seth from SunTrust. Please go ahead.

Rohit Seth

Just can you update us on the integration of some of the other acquisitions that you have done earlier in the year?

Kirk Benson

Yes. So in the stone coated metal roofing, our strategy was to consolidate three facilities – three manufacturing facilities into one. We have done that. We are now working through the final stages of that integration into a single facility. We did a small acquisition of a decking product and we have now fully relocated that manufacturing from the seller’s location to our location. And so we are in the process of fine tuning that manufacturing activity in decking. We are going to – and the third major activity is in – it’s still in roofing. And we are in the process of combining the materials for the different – for two different kinds of composite products. And so we are in the process of doing testing for those different materials. And then we will have to do some – we will have to do the – getting cold compliance for those different materials. Outside of the building product space, in the ash segment, we are finding more opportunities for our SynMat acquisition than we had identified before the acquisition. So we feel very positive about the value added from SynMat and the integration has gone very, very smoothly.

Rohit Seth

The wallboard producers had mentioned tile – that existing supplies for two quarters now, is that helping your business at all, you get anything from that?

Kirk Benson

Yes. We got – we have get very good margins in SynMat. It is accretive and continues to be very strong. And that’s one of the reasons. It’s because of the wallboard strength.

Rohit Seth

And then I mean the latest acquisition that – the guidance [indiscernible] debt. Are you guys on the pro forma number using – are using the same pro forma for the acquisition also you have said $125 million of revenue and make an assumption on your EBITDA, is it the same number for your ‘16 average – end of ‘16 average and ‘17 average?

Kirk Benson

Yes. The only difference is we are using historical numbers for 2016 and we are using 2017 numbers for 2017, but they are….

Don Newman

There will be growth in the 2017 numbers.

Rohit Seth

Okay. That’s all I have. Alright. That’s all the questions I had. Thank you.

Don Newman

Thanks.

Operator

Our next question comes from Charles Smith from Fort Pitt Capital. Please go ahead.

Charles Smith

Hi, good morning. Thanks for taking my call. Kirk, I wondered if you could estimate what fraction of your fly ash volume for 2017 would come from reclaimed product versus current electricity production?

Kirk Benson

Yes. It’s going to be a relatively small percentage in 2017, because we are just putting the CapEx and the workforce in place. So 2017 is the first year. We believe that we are going to be reclaiming ash from three sites in 2017, but we are working on many more sites. And so ultimately, it could become a bigger percentage. It will be a relatively small percentage in 2017, but it has the potential of some very significant growth.

Charles Smith

Are there any significant differences as in the cost profile of the reclaimed versus the current?

Kirk Benson

We don’t think there is going to be a significant difference in the adjusted EBITDA margin profile for the ash – for the reclaimed ash that we will be selling.

Charles Smith

Okay. And what about in terms – it’s not priced any differently?

Kirk Benson

No. It won’t be priced differently.

Charles Smith

Okay. Thank you.

Operator

And our next question comes from Dan Mannes from Avondale Partners. Please go ahead.

Dan Mannes

Thanks guys. Just a follow-up on that topic, as it relates to the reclaimed, you are saying the margin is the same, but I assume that means, I mean the cost is likely to be higher than produced ash, so are you then targeting markets obviously, where there is higher demand and limited supply, i.e. the Northeast and places like that?

Kirk Benson

That’s true. And it’s also true that we will have a different relationship with the utilities.

Dan Mannes

So there will be a smaller sharing relationship or?

Kirk Benson

Yes. The cost sharing will be different, because we have got higher manufacturing costs. And so that’s why I responded adjusted that the EBITDA margin should be similar.

Dan Mannes

Got it. And the second thing I was going to ask is particularly as it relates to storage and to a lesser extent, reclamation, can you talk at all about for your expected CapEx either for the latter part of this year into next year in order to lock in additional supply?

Kirk Benson

Yes. I think that we have been targeting between $40 million and $50 million of CapEx. And that might go up some, but it’s not going to go up dramatically in 2017.

Dan Mannes

I am sorry, so $40 million to $50 million is your 2017 current budget or…?

Kirk Benson

That’s 2016.

Dan Mannes

Okay.

Don Newman

And that’s for the overall business Dan, that’s for the overall business. Not for this particular activity.

Dan Mannes

Would you anticipate then that the CapEx spend would be higher in ‘17 than it was in ‘16 for flash?

Don Newman

It may be modestly higher, but we are also taking advantage of lease arrangements to help mitigate costs. And we are also very disciplined in terms of how we are spending this capital to increase storage. And so we could see a modest increase. But I think, it will be – it won’t materially change our CapEx spend profile.

Dan Mannes

Got it. That makes sense. Thanks.

Operator

And our next question comes from Jim Barrett from C.L. King & Associates. Please go ahead.

Jim Barrett

Kirk, there has been significant storm activity helping the roofing industry in various locales, have you – do you foresee any benefit for your roofing products looking forward from that?

Kirk Benson

Yes, absolutely. We should absolutely benefit from the storm activity.

Jim Barrett

And like the roofing shingle manufacturers, do you find at least in the storm-damaged areas the ability to – obviously, not only to sell more volume, but to raise your price, is that part of the strategy?

Kirk Benson

Yes. We think that we are going to be positioned quite well from a pricing perspective, although volume is really more important to us than price in our roofing products.

Jim Barrett

And I realize it’s one of your smaller segments, but is this a – at least within the roofing segment, is this a material up-tick in sales or would you foresee at least?

Kirk Benson

I think, that – I don’t think it’s going to be a reasonable up-tick in sales from the strong volume. We had revenue increase in the quarter and we anticipate that we will continue to see some revenue increases in roofing.

Jim Barrett

Okay. Thanks again.

Operator

And our next question comes from Rob Hansen from Deutsche Bank. Please go ahead.

Rob Hansen

Just a couple of quick follow-ups, what’s the G&A run rate of Krestmark?

Don Newman

Depreciation and amortization is about $1 million.

Rob Hansen

Per quarter?

Don Newman

No, per year. No…

Kirk Benson

That’s going to change because we are going to take the purchase price and allocate the assets. So the depreciation and amortization is going to change...

Don Newman

And I would add to that, that purchase accounting analysis is still underway and so we will be nailing that A part of the D&A, especially in short order.

Rob Hansen

Okay, got it. And then just last thing on the weather impact, right, I mean I think your organic growth was around flattish year-over-year for the company, have you run any numbers on what the weather impact potentially was this quarter and how that could kind of shift into 4Q for your organic growth there?

Kirk Benson

Well, I think that you are going to – look, we gave that guidance in the ash, what was –250,000 tons to 350,000 tons and that roughly half of it was in the quarter. And so you can figure out what the revenue impact from that in the quarter. On the building products side, it was probably in the single-digit millions of dollars.

Rob Hansen

Got it. Thank you, guys.

Operator

And this concludes the question-and-answer session. I would now like to turn the call over to Sharon Madden for any closing remarks.

Sharon Madden

Thank you, Operator. In closing, Q3’s overall performance was in line with our expectations, allowing us to reaffirm our adjusted EBITDA guidance of $185 million to $200 million. We would like to thank you all for joining our call this morning.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your line.

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