Headwaters gains on fly ash demand

Building supplier Headwaters didn’t look much like its old and energized self as it emerged from the housing and economic downturn a few years ago.
It has sold most of its legacy energy-related businesses, including a coal-sourced synthetic fuel business.

Also out: taking catalyst technology to China for converting coal into low-sulfur diesel. Now only a tiny fraction of the firm’s energy-focused technology is left, and it may sell that off, too.

“We’re left with fly ash and building products,” said chief executive Kirk Benson in a phone interview with IBD. Fly ash is the fine ash that flies up when coal is burned, but can be captured before it leaves the smokestack; it’s used as a replacement material for portland cement, a basic ingredient used in concrete.

Headwaters hauls it away and sells it to ready-mix cement contractors such as Martin Marietta, Lafarge and Cemex. “We think fly ash will continue to grow because it’s cheaper and you get a better concrete product,” Benson said.

Construction Demand Lifts

Both of the firm’s two surviving business segments have made a lot of headway the past few years as new-home starts picked up, the repair and remodeling market slowly improved, and commercial construction got its legs back.

Headwaters’ business had bottomed in 2011 as the housing crisis and Great Recession took their toll. That year, revenue had fallen in half from its peak in 2007 to under $600 million.

Revenue has since grown more than 10% annually on average. In 2015’s second fiscal quarter, which ended March 31, it jumped 15% from a year earlier to $180 million.

Benson says that he’s most excited about fly ash, due to increased demand at a time when limited domestic production capacity has led to cement shortages.

John Quealy, an analyst with Canaccord Genuity, calls Headwaters “the market leader in alternative portland cement.”
‘Northeast, California, Florida’

Headwaters’ fly-ash business, he says, has “rebounded strongly” in the last three to four quarters on strong demand and higher prices. “A lot of it is used in nonresidential applications,” Quealy said. “There’s strong demand in the Northeast, California, Florida.”

Fly ash, which is used in everything from roads and bridges to large office and apartment buildings, accounts for about 40% of Headwaters’ revenue. The firm’s chief rival is Eagle Materials. Benson noted in the last quarterly report that 2015 fly ash volumes were on track to set “an annual growth record.” He expected a “continuing positive pricing environment.”

The other 60% of Headwaters revenue comes from its building products business — specialty siding, niche roofing, shutters, gable vents, manufactured architectural stone and mounting blocks for things such as light fixtures.

Building products with exposure to repair and remodeling “trended positively” for the second straight quarter, Benson said in the Q2 report, resulting in margin expansion in siding accessories.

Concrete For Texas

Headwaters’ Texas-focused concrete-block business “performed well” in the quarter despite rain and flooding that resulted in delays at some large projects, Benson noted in the Q2 report.

Concrete blocks made by Headwaters are used to build schools, big-box retail stores and other low-rise commercial projects, mostly in Texas.
About 20% of Headwaters’ revenue comes from Texas, making that the company’s largest state in sales.

Heavy rains and flooding in Texas in April and May will have an impact on revenue in the quarter ended June 30, Benson says. But he says that the company’s Texas business has not seen a negative impact from lower oil prices .

While the rest of Headwaters’ business is scattered pretty much throughout the country, California is a “major market” for fly ash, Quealy says. That’s due partly to state incentives for the use of the material in infrastructure projects such as roads and bridges.

When fly ash is collected before it escapes into the atmosphere, pollution from coal-burning is reduced. And using it in place of traditional cement helps cut the carbon emissions that come from cement manufacturing.

Building the business
Meanwhile, Headwaters’ earnings are seen flying higher, in contrast to their relatively anemic showing in recent years. After three years of losses, Headwaters made a slim 12-cent per-share profit in 2013, followed by 21 cents last year.

Analysts polled by Thomson Reuters estimate that 2015 earnings will reach 48 cents per share and go up 116% next year, to $1.04. Benson says that earnings before interest, taxes, depreciation and amortization (EBITDA), “adjusted for nonroutine costs” like those associated with M&As (mergers and acquisitions), has done better than EPS since 2011.

“We’re valued on EBITDA by institutional investors,” Benson said, noting that EBITDA went from under 14% in 2011 to slightly below 19% in the last quarter.

“Earnings per share is coming back. It’s getting big enough that (valuation) will switch to per-share earnings. In the down cycle, nobody valued us on EPS,” he said.

Headwaters’ balance sheet is also looking stronger. In the last two quarters, it cut its cash interest expenses from over $50 million a year to a run rate of $31 million per year.

“Clearly this will have a very positive impact on our earnings per share,” Benson said.


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