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Headwaters (NYSE:HW)

Q4 2012 Earnings Call

November 06, 2012 11:00 am ET

Executives

Tricia Ross - Vice President

Sharon A. Madden - Vice President of Investor Relations

Kirk A. Benson - Chairman and Chief Executive Officer

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

Murphy K. Lents - President of Eldorado Stone

William H. Gehrmann - Former President of Headwaters Resources Inc

Analysts

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

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Philip Volpicelli - Deutsche Bank AG, Research Division

John Quealy - Canaccord Genuity, Research Division

Operator

Good morning, ladies and gentlemen, and welcome to the Q4 and Fiscal End 2012 Earnings Conference Call on the 6th of November, 2012. [Operator Instructions] I will now hand the conference call over to Tricia Ross of Financial Profiles. Please go ahead, madam.

Tricia Ross

Thank you. Good morning, everyone, and thanks for joining us for the Headwaters Incorporated Fourth Quarter and Year End 2012 Conference Call. Please note there are slides accompanying today's presentation that can be found on the webcast link at Headwaters Incorporated under the Investor Relations section of events and presentations. Please go there to follow along with the slides. Should you have any trouble accessing the slides, please contact me at (310) 478-2700 or tross@finprofiles.com.

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

Sharon A. Madden

Thank you, Tricia. Good morning, everyone. We appreciate you joining us as we report Headwaters fourth quarter fiscal 2012 year-end results. Mr. Kirk Benson, Headwaters' Chairman and Chief Executive Officer; along with Don Newman, Headwaters' Chief Financial Officer, will be conducting today's call. Joining them will be Bill Gehrmann, who is President of Headwaters Resources; and Murphy Lents, who is President of Eldorado Stone. Both will be reporting under individual business segments as we go forward with the call.

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

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

Kirk A. Benson

Thank you, Sharon. Thank you, everybody, for your attendance on Headwaters' year-end conference call. I would like to begin by making some overall comments on our year from Slide 3, and Don Newman will comment on the financials, followed by Murphy Lents discussing light building products and Bill Gehrmann discussing our heavy construction materials segment.

There were 3 themes of importance that dominated 2012. First, our new residential construction end markets began to show improvement compared to last year, adding a little buoyancy to our top line and allowing us to take advantage of our strong operating leverage. Second, our restructuring efforts were very successful, resulting in a lower cost structure and improved margins. And third, we are gaining market share in some of our key markets.

We experienced some notable achievements during 2012. Our business segments have maintained a low variable cost profile at a contribution margin greater than 45% and both segments had adjusted EBITDA margins in the 20% range in the fourth quarter. We continued to perform at the top quartile. Adjusted EBITDA increased by over $12 million from 2011, but that includes $15.5 million in above-target performance-based compensation. $12.3 million of the above-target compensation was tied directly to the stock price improvements that created $314 million increase in equity value. Without the above target compensation, adjusted EBITDA for the year would have increased over $28 million or 36%.

After adjustment for the portion of the above-target compensation that related to the fourth quarter, which was approximately $10 million, our earnings per share in the fourth quarter was $0.21 per share from continuing operations.

During the year, we repaid $38.2 million of convertible debt and reduced our debt-to-EBITDA ratio from 6.7 in the June 2011 quarter to 4.9 at September 2012. Our cash interest expense peaked to an annualized level of $47.9 million and is now $37.1 million, representing an improvement of $10.8 million. GAAP interest expense will be approximately $42 million in 2013.

Operating income improved from a negative $12.2 million in 2011 to almost $50 million positive operating income in 2012 after adjustment for above-target compensation. In 2013, lower interest expense combined with improvements in operating income should result in our first net income from continuing operations since 2007.

Let's turn the time over to Don now to discuss the quarter and the year-end financial statements.

Donald P. Newman

Thank you, Kirk. Good morning, and thank you for joining us. Before discussing Slide 4, I wanted to mention that we intend to file our Form 10-K later in November. My comments today will be directed to the slides that were sent out this morning and, to a lesser extent, the condensed consolidated balance sheet and statements of operations that were attached to the press release.

Starting on Slide 4. Our full year revenue from continuing operations was $632.8 million, up $44.8 million or 8% from the prior year revenue of $588 million.

Full year adjusted EBITDA from continuing operations was $90.4 million, up $12.7 million or 16% from the prior year's EBITDA of $77.7 million, despite approximately $15.5 million of above-target compensation expense. Excluding the additional compensation expense, adjusted EBITDA increased over $28 million or 36% from the 2011 levels.

Revenue from continuing operations for Q4 was $190.1 million, up $11.8 million or 7% from the prior year revenue of $178.3 million.

Adjusted EBITDA from continuing operations for the quarter was $38.8 million after adjusting for approximately $10 million of above-target compensation, an 18% increase from prior year EBITDA of $32.9 million.

We continue to see favorable year-over-year margin performance as a result of the improved revenues, as well as our cost management actions. In Q4, gross margins increased 230 basis points, and EBITDA margins improved 190 basis points after normalizing for compensation costs. On the same basis, full year gross margins expanded 280 basis points, and adjusted EBITDA margins expanded 350 basis points.

We ended the year with a liquidity of nearly $105 million, including $53.8 million of cash on the balance sheet.

Now let's move on to Slide #5 and take a closer look at the quarter's financial results. Revenue from continuing operations for the quarter increased $11.8 million or 7% year-over-year to $190.1 million.

Heavy construction materials revenue increased $10 million or 12% from 2011 levels due to higher sales in the Central region and to improved site services revenue. Light building products revenue increased $4.8 million or 5%, largely due to the higher volumes and to increases in our average sales prices. Energy technology revenue was down $3 million year-over-year due to customer maintenance outages and timing of orders.

Gross profit was $56.7 million or $7.7 million or 16% increase from the prior year gross profit of $49 million. The increase was driven by higher revenue, as well as cost reductions.

SG&A increased $11.3 million year-over-year, largely due to increased performance-based compensation, including short-term and long-term incentive programs, partially offset by year-over-year cost reductions.

Adjusted EBITDA from continuing operations totaled $28.8 million. The quarter's expenses included approximately $10 million of above-target compensation expense, which reflected strong operating performance, as well as a 28% increase in our stock price in Q4. When excluding the $10 million of above-target compensation expense, adjusted EBITDA for Q4 was $38.8 million, which represents an 18% increase over the prior year.

Interest expense decreased $2.7 million as a result of debt repayments during the year.

Other expense of $3.2 million largely reflects a noncash charge to write off an investment in a hydrogen peroxide joint venture that the company entered into in 2004.

Discontinued operations reflects the results for coal cleaning. We completed the sale of 2 of our coal cleaning plants in October and signed an agreement for the sale of the remaining 8 plants. Under terms of the sale of the 2 plants, the buyer has assumed certain plant liabilities and agreed to pay Headwaters a royalty for each ton of coal produced by the plants in the future. There's a total minimum royalty of approximately $10.7 million that the buyer must pay Headwaters related to the plants regardless of production levels, which includes minimum certain -- certain minimum amounts to be paid annually. Payment of royalties based upon production begins in latter fiscal 2013. Closing on the remaining 8 plants, which is subject to closing conditions, is anticipated by the end of the calendar year. Proceeds from the sale of those plants will include cash at closing, future royalties and the buyers assuming certain lease and reclamation obligations. A significant portion of the current quarter's loss from discontinuing operations reflects accruals for reclamation obligations associated with the plants yet to sell, which would ultimately be assumed by the buyer of the plants under the current sales agreement.

Now let's move to Slide 6 and talk about the full year financial results. Revenue from continuing operations increased nearly $45 million year-over-year to $633 million. Heavy construction materials sales were up more than $28 million or 11% from 2011 levels due to higher sales in the Central and West regions and improved site services revenue, offset by lower sales in the Eastern. U.S. Light building products saw its sales increased $26 million or 8% due to higher volumes and to increases in average sales prices. Energy technology sales were down $9 million year-over-year due to customer maintenance outages and timing of orders.

Gross profits increased 20% year-over-year from $146 million in 2011 to $175 million in 2012, driven by higher revenue and cost -- and reductions in our cost structures. Gross margins have also expanded, increasing 280 basis points in 2012.

We've also seen nice improvement in our EBITDA year-over-year, reflecting revenue increases and cost actions. Adjusted EBITDA from continuing operations totaled $90.4 million versus 2011's EBITDA of $77.7 million. The 2012 figure includes approximately $15.5 million of above-target compensation expense, $12.3 million of which relates to stock price increases that also resulted in a $314 million increase in our market cap. When you adjust for the $15.5 million of compensation expense, adjusted EBITDA from continuing operations totaled $105.9 million, a $28.2 million or 36% increase year-over-year.

We mentioned last year that we expected to reduce our cost to $14 million due to the actions initiated in 2011, with about $9 million of that benefit expected in 2012. In fact, we were able to capture slightly more than $14 million of savings in 2012.

The year-over-year decrease in interest expense largely reflects the charges that were taken related to refinancing our senior secured debt in 2011 and to debt repayments.

Let's move to Slide 7 and spend a few minutes discussing debt. Our debt position has improved over the past 5 quarters as we've increased our trailing 12-months adjusted EBITDA from a low point of $74.5 million in the June 2011 quarter to $90.4 million at the end of the current quarter. We've decreased our net debt by nearly $54 million over the same period of time.

We closed the current quarter with a net debt to adjusted EBITDA ratio of 4.9:1 after reaching a high point of 6.7:1 in the June 2011 quarter. And after adjusting for the 2012 above target compensation expense that we've discussed, the ratio is down to 4.2:1 this quarter.

We repaid approximately $48 million of debt in the past 5 quarters and $38 million in 2012. The 2012 repayments included $16 million of 2.5% notes, as well as the remaining $13 million of 14.75% and $9.2 million of 16% notes.

Starting on Slide 8, Murphy will cover light building products.

Murphy K. Lents

Thanks, Don. Good morning, everybody. On Slide 8, you can see revenues from our light building products segment for the fiscal year grew $26 million to $340 million, an increase of 8% compared to fiscal year 2011. The growth came from our siding and architectural stone product groups, while our regional block business in Texas was negatively impacted by decreased school construction. Fourth quarter revenues to the segment increased 5%.

According to the Census Bureau, non-seasonally adjusted single-family housing starts for the 12 months ended September 30, 2012, were 19% higher than housing starts for the 12 months ended September 30, 2011. Economists are optimistic for growth in 2013 for both new housing starts and remodeling. If it materializes, we're confident that we have sufficient manufacturing capacity to meet demand.

Gross profit margins improved 470 basis points in fiscal year 2012 versus 2011. The progress is the result of our continuous improvement strategy, restructuring initiatives implemented in the second half of fiscal 2011 and price increases counteracting increase in commodity prices and other costs.

Adjusted EBITDA increased to $63 million for fiscal year 2012, growth of $24 million or 60% versus fiscal year 2011. Higher revenue, restructuring initiatives and improvements in operating efficiencies all contributed to this significant improvement. Margins increased 600 basis points to 18.6% for the year, the best adjusted EBITDA margin since 2007. Fourth quarter adjusted EBITDA for light building products increased by $5 million, a 37% improvement over the fourth quarter of 2011.

We're excited by the significant progress made over the past year, but we continue to look for ways to further improve our businesses. Last year, the architectural stone group brought its 3 stone brands under one operating structure to provide pricing and channel clarity to market. This new structure broadened customer revenue opportunities across all price points, and we expect it to be helpful going forward in attracting new customers and increasing our market share.

Our siding group increased sales in 2012 as we gained new business, especially with our specialty side and roofing product lines. Our newly reorganized manufacturing and engineering team focused on process improvements and cost reductions this last year and continues to look for ways to optimize our manufacturing processes.

Our block business mainly serves the Texas and Louisiana markets, which strengthened our position in Louisiana last year with the acquisition of a block plant at Baton Rouge.

2012 results were hurt by slower school construction, while retail and residential markets continue to show improvements. During 2012, we introduced 2 new products, which are doing very well in the market, polished and textured custom blocks.

Slide 9 illustrates how the year progressed. Revenue grew in each of the 4 quarters. The second quarter showed the largest percentage growth over last year as we benefited from the unusually mild winter. This pattern is also reflected in the quarterly adjusted EBITDA as the additional revenue in our restructuring initiatives resulted in increased performance every quarter.

Now I'll turn the presentation over to Bill.

William H. Gehrmann

Thanks, Murphy, and good morning, everyone. On Slides 10 and 11, you can see that our coal combustion products group completed the year with revenue of $281.7 million compared to revenues of $253.3 million for 2011, resulting in an 11% year-over-year increase. Revenue for the September 2012 quarter was $92.6 million compared to revenue of $82.6 million for the September 2011 quarter, a 12% year-over-year increase.

Headwaters Resources provides site services to many of its utility clients. These services include constructing and managing landfill operations, operating and maintaining material handling systems and equipment maintenance. While these services typically have lower margins than our product sales, they are not as seasonal and are not as impacted by declines in construction spending.

Site service revenue for the year was up by 19% on a year-over-year basis. And for the September 2012 quarter, it was up over 42% on a year-over-year basis. As we have mentioned on previous calls, we were awarded several new long-term site service contracts this year. Site services revenue was just over 28% of our overall revenue for the quarter and for the year.

Gross profit for the year increased by 19% to $71.5 million compared to $60.3 million for 2011. Gross profit margin increased 160 basis points year-over-year, driven by improved product sales to sales mix and our continuous improvement efforts. Gross profit for the September 2012 quarter increased by 14% to $25.7 million compared to $22.6 million for the September 2011 quarter.

Adjusted EBITDA for the year increased over 18% to $54.8 million compared to $46.2 million for 2011. The adjusted EBITDA from margins for 2012 increased 120 basis points year-over-year. Adjusted EBITDA for the quarter increased by 5% to $20.1 million compared to $19.2 million for the September 2011 quarter.

Moving to Slide 12. During September quarter, the U.S. Senate introduced the bipartisan legislative solution for the disposal of fly ash, including a federal standard that would be administered by the states. The Senate bill has 12 Democrat and 14 Republican cosponsors, sufficient support that we are likely to have 60 senators supporting the legislation if it came to a vote. The House version of the Senate bill was passed with a strong bipartisan majority earlier in the year. It is now important to identify legislative vehicle in which fly ash disposal language can be attached and provide Congress an opportunity to resolve the regulatory uncertainty caused by the EPA in a bipartisan environmentally sound manner.

As part of its response to deadline litigation initiated by environmental organizations, the EPA formally stated that it requires more time to evaluate proposed fly ash disposal regulations. In its recent court filing, the EPA indicated that it will not propose final regulations until 2014, at the earliest. We do not anticipate any significant developments in the near term from the EPA unless action is required by the courts.

Finally, the EPA has now completed its risk evaluation methodology for encapsulated beneficial use of fly ash. When the risk evaluation methodology is complete, we believe that the EPA may apply it to fly ash concrete and synthetic gypsum wallboard, 2 examples of encapsulated products, confirming the historical consensus that there is no environmental exposure associated with use of coal combustion products in these applications.

During the year, low natural gas prices and EPA regulations have combined to force both a temporarily idling and long-term shutdown in some coal-fired units of power plants, impacting the supply of coal combustion products in some markets.

Today, we have lost one unit to a permanent shutdown and have had a few other units temporarily idled due to low demand. These idled units have updated emission control systems and are not expected to be impacted long term. We are not aware that any of our major supply sources will be impacted by permanent shutdowns. Our multiple sources of supply and broad distribution system allows to backfill supply in markets where supply has been impacted.

During 2012, we were also awarded new supply agreements. As a result, we believe that opportunities exist for us to increase market share and fare better than our competitors in the current regulatory environment.

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

Kirk A. Benson

Thanks, Bill. Moving to Slide 13. Our Energy Technology segment now consist primarily of operations related to HCAT, our heavy oil operating catalyst. During the year, there were some outages at our customer refineries and shipment timing that negatively impacted our sales. We continue to work on adding new customers and continue to have confidence that the value proposition for refineries is very positive. From a technology perspective, 2012 was an excellent year. The HCAT technology is now clearly commercially proven and operations are proceeding smoothly.

Slide 14 illustrates the impact that this decline in revenue has on adjusted EBITDA. Other than the cost of goods sold, our costs are principally fixed and have been stable for over a year. In our heavy construction materials and light building products segments, we are looking forward to 2013 with a high degree of optimism. We expect to have sold our noncore coal cleaning business, improve free cash flow and operating margins. Our subordinated debt will continue to decline as we generate cash flow and have the opportunity to repurchase debt in the market, resulting in improved credit ratios and reduced risk.

As you can see on Slide 15, we are initiating our outlook at $100 million to $115 million in adjusted EBITDA. Clearly, if our end markets continue to improve, our strong operating leverage provides us with upside to our guidance.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Dan Mannes from Avondale.

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

First question for you. On the guidance for 2013, given if you pro forma out the noncash comp, as well the above expected comp levels for '12, it doesn't look like your guidance for '13 is particularly ambitious. So I guess, I'm wondering, what are you baking into that as it relates to end market improvement? And given what looks to be, again, fairly conservative, is that just you being conservative? Or is there anything you're hearing through the channel that gives you some caution?

Kirk A. Benson

It's generally our conservative nature. As I indicated in the last statement that of -- that I made, if the end markets continued to improve as they have and as they show signs of improving, then there's upside to our forecast. Basically, if you take our 2012 adjusted EBITDA and add the above-target compensation, you get into the $105 million, $106 million of adjusted EBITDA. So it's right in the middle of our forecast. So what that implies is we may have forecast some slight improvement in the end markets. But clearly, it's a -- it's related to making sure that we can over perform and under promise, so we're trying to be relatively conservative in our forecast. Over the last 5 or 6 years, people have forecast recoveries and they've been wrong. This time, it feels different than in the prior 3 or 4 attempts of people to forecast recoveries. This year, it feels like there actually is a recovery that has started and that is taking place. So we're pretty optimistic about next year. And because our operating leverage is still in the 47%, 48% range, so if you have an uptick in revenue, we continue to believe that, that 47% or so of that uptick in revenue will fall to our bottom line. So there is clearly an upside opportunity to our forecast, but we want to make sure that we under promise and over perform.

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

Got it. And real quick, given all the noise, particularly on the -- on noncash comp side and comp in general, can you -- how should we think about SG&A year-over-year from a core perspective?

Kirk A. Benson

Well, one of the things that you can do is, by and large, you can take that above target compensation and you can -- some of that is going to be in cost of goods sold, so it's not all in SG&A. The bulk of it is in SG&A, and so you can use that as a way to adjust the SG&A downward to a more reasonable number in 2013.

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

Okay. And then one last question, and this is more for Bill. As you look at the heavy construction materials business, there's certainly some inklings, at least regionally, of some improvement in the cement markets. Certainly, it sounds like in Texas. Can you talk a little bit about your leverage to price and especially in light of maybe some of the sharing arrangements you have and how much leverage you have to improvements in pricing and, I guess, to a lesser extent, in volume as you think about that market maybe getting a little bit better?

Kirk A. Benson

As a general comment, before Bill adds some color to this, we have -- there continues to be a gap between portland cement pricing and fly ash price nationally. And as portland cement prices are firming up a little bit and strengthening, that does give us cover and an opportunity to increase our pricing. So Bill, why don't you share a little bit of detail on our ability to raise prices?

William H. Gehrmann

Sure. And obviously, we spend a good part of the year, we had a pricing increase initiative pushed down to our salespeople. Just to give you an idea, this is somewhat dependent on regional sales mix, obviously. But our year-over-year pricing increased 10%. In the Q4, pricing increased 17% year-over-year. So we are making some traction. We're seeing the opportunity. That's in comparison to the engineering news record data that we typically follow internally, which had year-over-year price increasing in cement of about 3.6%. So we're able to gain ground even with our revenue share on cement in a lot of these markets.

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

So the 17% price, was that -- would you institute it in the fourth quarter? Or is that what you actually realized and is that a negative impact to you?

William H. Gehrmann

That's what we realized in the quarter, Dan.

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

Okay. And that's -- and then some of that goes back to share but, obviously, you were able to keep a piece of that?

William H. Gehrmann

Right, right.

Operator

The next question comes from Al Kaschalk from Wedbush.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Just a follow-up on the prior question. So Bill, can you share, of that 17% or I think you also referenced 10%, what you kept?

Kirk A. Benson

Well, you can see in the financials, basically, that the revenue increased. And so a portion of that was because of price increases, and a portion of that was, of course, volume and a portion of that was from services. So we're basically going to try to be as aggressive as we can be in the -- in our pricing and in price increases as we go forward. I'm not sure we have a precise breakout of the revenue increase between pricing and volume for the quarter. So why don't you get -- come back to us, Al, and we'll see if we can get some more detail on that question.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

Okay. I guess, the other way maybe to ask, it seems as if service revenue as a percent of the segment was a little bit lower than last year, at least in the fourth quarter, yet the -- if I'm not mistaken, I think margins were a little better. Maybe I don't have my apples together, but it seems like we performed a little bit better, yet the mix was a little bit opposite of that.

Kirk A. Benson

Yes, the mix did have some impact on it for sure when you look at the consolidated margins between service and volume. I think that's right.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

If I may flip over to light building products. Obviously, there's the macro call here, but can you talk a little bit about the pricing across inflation that you may or not be seeing? It appears that inventories are being managed pretty effectively. And while there's plenty of capacity for you from a production side, I'm just wondering how we should think about it as we ramp into the first part of fiscal '13 and roll a little bit deeper into the year about the margin profile of the segment?

Kirk A. Benson

Of course, you've noted that margins substantially improved over the prior year. Some of that -- there's 2 reasons for those margin improvements. One is, as Don indicated, we were very successful in our restructuring efforts, and we were able to get even slightly more than the $14 million that we had predicted for cost savings. So that clearly improved margins. And then the other thing that's in our -- the -- as revenue has increased, we've seen those increases in our products that go to the new residential construction markets and slightly to the repair and remodel markets. Those products have a higher contribution margin than our regional block activities in Texas, so our lowest contribution margin is in our regional block product group. And revenues from the block group declined, and that's a decline at a lower contribution margin. And so what -- and so our revenue from stone and from accessories increased enough to make up for that drop in revenue for block, and our increased revenue was at higher margins. And so what we would expect to see as the -- that our Texas activity seem to have stabilized. And as we indicated in the press release, we expect 2013 to be flat to slight growth. And so we shouldn't have that drag going forward into 2013, and the growth that we would then expect would be with our higher-margin, higher contribution margin products. So that should result in improved margins in 2013. From an inflation perspective, we are seeing some pressure from cement pricing. That's been indicated in the call. I think we are seeing that. I think that we're -- labor cost seem to be pretty much in -- under control. And we are continuing to improve our productivity and efficiency, which, hopefully, that should offset most, if not all, of the inflationary pressures from our cost structure. So Murphy, if you want to add something to that.

Murphy K. Lents

Well, yes, I mean, I think that's true, Kirk. I mean, we're continuing to -- we have an active process improvement program, and I fully expect it to set off raw material price increases, which we do expect to see. So the other thing that helps a little bit in what we think is going to be a moderate growth environment is that the -- you do get some additional fixed cost absorption as we ramp up. So I think the combination of those things is going to be relatively positive from a margin stand.

Kirk A. Benson

One other thing on costs as we're entering into the year on the polypropylene costs, they -- the polypropylene costs fluctuate significantly, and they can change fairly quickly. Fortunately, we're entering into the fiscal year with relatively moderate polypropylene pricing, and so our cost going into the year are pretty favorable from a polypropylene perspective. Now as I said, those costs can change pretty rapidly. But at minimum, we're going into the year in a -- from a fairly good perspective relative to polypropylene costs.

Albert Leo Kaschalk - Wedbush Securities Inc., Research Division

One more final, if I may, and this is more of a structural question about the market on light building products. It does not appear or at least when you talk with folks that they believe the repair and remodel market is anywhere close to where expectations were, at least, at the start of the building season. And I'm wondering, if going into fiscal '13, if you made any different assumptions about that into your numbers and outlook. Because generally, that has been the better driver for your business, yet performance was up substantially improved over the year-ago period. So I don't know if there's anything structurally you can talk about at the market, not necessarily your business, but maybe the implications if there is a change back to an improved R&R market versus new housing starts.

Kirk A. Benson

I think that we're generally -- what we generally built into our forecast is a flat to slightly up repair and remodel market. There are some forecasts that have repair and remodel up substantially in 2013. We did not build that growth into our forecast. It does provide us with another opportunity for some upside opportunity to the forecast if repair and remodel improves substantially in 2013. But we didn't build that into our forecast out. We basically have assumed that it would be flat to slightly up in 2013.

Donald P. Newman

Al, this is Don. I would note, too, that we have the plant capacity available in order to take advantage of an uptick in demand if it's there.

Operator

The next question comes from Philip Volpicelli from Deutsche Bank.

Philip Volpicelli - Deutsche Bank AG, Research Division

My question is with regard to the outlook. Now that you've brought your debt levels down and your leverage levels down to levels that, I think, you would be more comfortable with. What is the target for leverage? And would you guys consider making tuck-in acquisitions with the cash that you should generate in '13?

Donald P. Newman

Philip, this is Don. I'll take a shot at answering that question. First, in terms of our longer-term targets for our debt leverage from a net debt to EBITDA standpoint, is to have a net debt to EBITDA in the 2.5x to 3x trough EBITDA. And we haven't, of course, moved too far off of the trough. So if you're trying to get a sense as to what trough EBITDA looks like for us, you don't have to look very far to get that. But that's our long-term goal, and we think that we have made some good progress toward that as we noted. Right now, we're at about 4.2x net debt to EBITDA once you normalize for that additional compensation. In terms of acquisitions and potential acquisitions, when it comes to looking at opportunities, of course, we're interested in looking at opportunities. At the same time, we always have in our mind that longer-term objective in terms of leverage. And so if an opportunity were there, it would have to be a very, very strong strategic fit, and it would also have to work within the parameters that we're setting for long-term capital structure.

Philip Volpicelli - Deutsche Bank AG, Research Division

Great. And then just last for me on HCAT. I know in the past, you've talked about potentially monetizing that. Is that still something that could happen? And is it a '13 event or is it more likely further in the future.

Kirk A. Benson

We're absolutely looking for opportunity to monetize the asset. It probably won't happen in 2013. There's potential that it could, but it's something that goes beyond to 2013.

Philip Volpicelli - Deutsche Bank AG, Research Division

Okay. You just need to grow it more, Kirk. Is that what it boils down to?

Kirk A. Benson

Yes. We think that we've got a significant upside opportunity with HCAT. There is -- we've got a high contribution margin. And so with some additional customers in our base, it -- since we are with normalized shipments, we're basically at breakeven from a cash perspective in that business. So every additional customer will generate incremental EBITDA for which we should be able to get value as we bring that asset into the marketplace. So it's a matter of taking -- getting some of the benefit that's associated with the business that we built.

Operator

The next question comes from John Quealy from Canaccord Genuity.

John Quealy - Canaccord Genuity, Research Division

Just a couple of clarifications. In that guidance for $100 million to $115 million of EBITDA, heavy construction and light building, what's the relative rates of growth we're looking at? They grew 12% and 7%, respectively, in '12. Is it similar? Maybe heavy construction temps down a little bit, given that we've got some price. Could you just help us quantify that a little bit more, please?

Kirk A. Benson

Well, actually, to get to the midpoint of the range, you can get there with really no improvement in your end markets. That's why there's upside to our forecast. So if you had 10% growth at the top line, because of our operating leverage, you could result in 20%, 30% growth in adjusted EBITDA. So the forecast is, by nature, conservative, and the midpoint of that forecast is roughly that there's not substantial growth in our end markets. And if you did have a 10% growth in our revenue line, with the 47% contribution margin, you could expect up to a 20% to 30% growth in adjusted EBITDA. So if you have that 10% upside growth, you'd have a very decent chance of beating our forecast.

John Quealy - Canaccord Genuity, Research Division

And then, Kirk, just to clarify, the stock comp was $15.5 million. Is that a hard comp or an easy comp for next year? Do you still have to pay a similar amount? Just walk us through the math and what we should think about for that.

Kirk A. Benson

Basically, the way that it would work for 2013 is that if you had $1 increase in stock price, it would work out to about $1.5 million of incentive compensation. That's a little bit lower than it was in 2012, but there is still incentive compensation tied to the stock price. If our stock price goes up over 300%, again, that's something that we would accept and something that we'd be really happy about.

John Quealy - Canaccord Genuity, Research Division

Okay. But the base of $15 million, that resets or not?

Kirk A. Benson

Resets in the sense that we are -- what we've basically built into our forecast is a compensation at the 50th percentile of market. That's where our target compensation basically is. And so that $15.5 million is not built into the forecast, but the normal target compensation is built into the forecast.

John Quealy - Canaccord Genuity, Research Division

And now more qualitatively, on the heavy side of things, with the EPA coming out, talking about '14. I think there were some M&A recently with Lafarge or EXP. Is the market now looking past this issue, Kirk, and just going to formalities when the EPA gets its act together in '14 plus? Or how would you characterize it?

Kirk A. Benson

I think, generally, the -- most people believe that the issue with the EPA is going to be resolved in a common sense, environmentally friendly manner. So I think that we've got an excellent opportunity that the extremes in the EPA's position will be tempered, and that we are going to be successful in maintaining our ability to replace or to include fly ash in concrete and get all of the economic and environmental benefits associated with putting fly ash in concrete. So we're saving federal and state governments between $5 billion to $6 billion each year because of that substitution of ash for portland cement. We are reducing CO2 emission by about 10 million tons per year, reducing water consumption by 30 billion gallons and over 1 trillion BTUs of energy. So there's a lot of environmental benefits associated with the substitution, and there's a lot of economic benefits. And I think that reason has pretty much prevailed, and that we're going to get an outcome from the EPA that everybody is going to be able to live with. The only caveat to that is that it isn't done yet, and so no one knows until the ink is dried as to what ultimately it will be done. But by and large, people are much more optimistic now than what they have been for the last 2 years.

John Quealy - Canaccord Genuity, Research Division

And I'm sorry, just one last one. On cash flow, Don, I'm sorry if I missed this. Did you talk about cash flow expectations, CapEx, free cash for '13 at all?

Donald P. Newman

No, we haven't, but I can give you some ideas on it. For 2013, we would expect to have CapEx in the $27 million to $29 million range. And I forgot the rest of your question.

John Quealy - Canaccord Genuity, Research Division

Free cash flow.

Donald P. Newman

Free cash flow, sorry. Free cash flow would be kind of in the mid-30s for continuing operations. Does that cover your question?

John Quealy - Canaccord Genuity, Research Division

That's it.

Operator

And the last question comes from Jefferies.

Unknown Analyst

It's Diego Jefferies [ph]. Just a couple of quick follow-up questions. For the light building products business, maybe if you can exclude your block products, but can you give us a sense as to the price versus volume sort of relationship during the quarter as far as your growth there?

Kirk A. Benson

Yes. We had very good volume growth, and we would -- if you look at the total light building products growth, it works out that about 60% of the growth was volume and 40% of the growth was price.

Unknown Analyst

Okay. That's very helpful. And then what's the market share? I think you've talked about it more, specifically this quarter, on your vinyl and accessory products. Is there a greater penetration in customers with your existing portfolio? Or is that some new products that you guys have introduced recently?

Kirk A. Benson

Don and Murphy, that's -- you should -- why don't you respond on the stone side to that question on what's happening relative to market share?

Murphy K. Lents

Yes. I mean, it's a little of both, and we do have some new products that are in the market. They tend to -- our new stone products tend to take about 3 years to ramp up, and we tend to introduce a couple every year. So we usually have up in the pipeline from a new product standpoint, it's adding to the total. We do feel like we've gained some market share over the last year, and we've added some distribution that we've taken -- displaced some competitors in that have been material, and our combination of the 3 brands under our common sales management team has had an impact. It's been able -- it's given us the ability to, in a coordinated way, really provide the market with a good, better, best type product offering, which we haven't really had in a very connected way in the past. And that's really helped us in a number of different respects from a market share standpoint. We have 87% of our distribution only carries one of our brands. We've got an opportunity to insert the other existing distribution without even expanding the distribution footprint.

Kirk A. Benson

On the accessory side of the business, we -- our specialty siding product and our roofing product have both taking market share. So our -- and our specialty siding product is a little bit different than the -- than our competitors' specialty siding. And it -- from an ease of application and putting the siding on the wall and the reduced waste associated with the application of the siding, we think that we've got some competitive advantages. And those are starting to play out in the marketplace, so we've had very robust growth in specialty siding. We've introduced some new products, some extensions of our existing products but new, in effect, extensions of our roofing products. And those have been very successful and well-received in the marketplace, and so we've had very robust growth in our roofing product as well. We've got some new product extensions that we'll be introducing and feel really good about the market share dynamics on the roofing and specialty siding products.

Unknown Analyst

Great. And I appreciate the color there. And just, if I could sneak one more. With the revenue improving and it sounds like you guys are being pretty cautious for the coming year, but assuming the market ticks up maybe a bit, at what level, maybe you can talk about it by segment, would you start to see some headcount coming back from a revenue standpoint?

Kirk A. Benson

So from a headcount perspective, I think that we're going to be able to manage our business so that we maintain our contribution margin. So there is a fair amount of headcount that's in our variable cost, and so some of that, of course, is like a step variable. So if you bring on additional shift at the manufacturing facility, you can see that you'll have a little bit of a step variable impact. But by and large, I think as we look at the business, we think, over time, we're going to be able to maintain a contribution margin in the 45% range so -- in the mid-40% range. And that would be true in the light building products segment and in the heavy construction materials segment. So we've actually brought on additional headcount. Because as I indicated in light building products, for example, 60% of our increase in revenue was from volume and so -- but those costs are in that -- in our variable cost structure, and we've still been able to maintain a high 40% contribution margin. As we go into the fixed cost and when we start adding labor from a fixed cost perspective, I think that we're going to be very cautious about adding fixed cost to the structure because it's been a difficult 5 or 6 years, and so adding fixed cost is something we're going to do very gingerly. And so you're probably not going to see very much increase in fixed cost in 2013 at all, and there has to be a fairly significant increase in our end markets to justify a substantial increase in those fixed cost in 2014.

Donald P. Newman

This is Don, maybe I could add, too. When you think back to the $14 million of cost reductions that we took in 2011, about 45% of those cost reductions related to SG&A. And the way that we approach those cost reductions was not just blind cuts, it was being pretty strategic in terms of how we structured our support organizations with the expectation that we could leverage those organizations as the business recovered. So I think we feel pretty good that we're going to be able to keep those expenses in check even with the recovery in the business and see some continued marginal improvement in terms of leverage around those cost structures in a recovery.

Operator

There are no further questions.

Sharon A. Madden

Thank you, operator. If there's no further questions, then we'll go ahead and conclude the call. We'd like to thank you all for your participation.

Operator

Ladies and gentlemen, this concludes our conference call for today. Thank you for participating. You may now disconnect.

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