Headwaters Incorporated (HDWR)
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cash flow and new products generating excitement for Headwaters Incorporated
Mr. Benson: Headwaters is an energy technology company that commenced its business operations in the early 1990s, and has developed some technologies that add value to energy, and have had success in commercializing these technologies over the last couple of years.
CEOCFOinterviews: What would you say is your most recent and exciting news?
Mr. Benson: The most recent news that has had the most impact on the company is the recent acquisition of the company called ISG Resources. It is a company, which is involved in the post-combustion management of the products produced, when coal is burned to produce electrical energy.
CEOCFOinterviews: Is it incorporated into your business as a subsidiary?
Mr. Benson: ISG Resources is a 100% owned subsidiary. We have two operating business units; one is a pre-combustion business unit called Covol Fuels and the other one is ISG, which is a post-combustion business unit.
CEOCFOinterviews: Which one generates the most revenue for you?
Mr. Benson: The greatest revenue generator is the ISG business. ISG is probably going to continue to generate more revenues than Covol Fuels. Last year ISG generated on a Proforma basis, $225,000,000.00 dollars of revenue and Covol Fuels generated a $108.000,000.00 dollars of revenue. Covol Fuels is growing more rapidly than ISG but ISG had more revenue to start with.
CEOCFOinterviews: Is Covol Fuels something that you developed or did that come through an acquisition as well?
Mr. Benson: Covol Fuels has commercialized a technology that was developed in-house by Headwaters in the early 1990s. It is our legacy business. I am happy with the performance of both the business units.
CEOCFOinterviews: Have you been with the company since its inception?
Mr. Benson: I joined the company in April of 1999, so I actually have come late to the company.
CEOCFOinterviews: What kind of changes have you seen since you have been there?
Mr. Benson: There have been significant changes since I arrived at Headwaters. When I came in 1999, we had about six million dollars of revenue and this year we will finish out somewhere between three hundred and sixty to three hundred and seventy million. That is a significant change.
CEOCFOinterviews: How large are the markets?
Mr. Benson: Some of the markets that we are participating in are quite large, The markets for Covol Fuels and ISG businesses are probably in the range of $750,000,000.00 dollars. Some of the other products that we are just starting to commercialize are markets of several billion dollars in size.
CEOCFOinterviews: Where are you positioned?
Mr. Benson: In our ISG business, which is the post-combustion business, we are the largest company in that business managing the coal combustion products that are produced when coal is burned. In the pre-combustion business, we are the largest company as well. We have significant market positions in both of these strategic business units.
CEOCFOinterviews: How do you differ from your competition?
Mr. Benson: In the ISG business, we have three competitive advantages one is that we have long-term exclusive contracts for the supply of the coal combustion products. We have contracts that are 20-25 years in length and they are exclusive, which gives us access to the supply of these materials that other companies do not have. Secondly, we are the only company with a national distribution system for these coal combustion products. We have over thirty terminals that are strategically located throughout the United States that allows us to distribute the materials directly to our customers. Thirdly, we have a proprietary chemical reagent that improves the quality of the fly ash that we distribute. In our other business, we have intellectual property that covers a unique chemical reagent that is used to treat coal before it is burned and over 50% of the people in this business, use our chemical reagent, and it provides us with a unique and exclusive technology that we apply to coal before it is consumed at the electric utilities.
CEOCFOinterviews: Is this strictly a U.S. market?
Mr. Benson: Most of our revenue is generated in the U.S. The third activity that we are involved in is with the development of new technologies. We have a business unit that has a core competency in what is called nanocatalyst. We are able to make catalyst, which are required in many chemical reactions and many energy reactions. We can make these catalysts as small as a single atom, so we can make them the thickness of one atom, and that is why they are called nanocatalyst. We have some business outside of the U.S. that relates to some of our catalyst technologies.
CEOCFOinterviews: When do you think that will develop?
Mr. Benson: Last year we entered into a license agreement with a company in China called Shenhua Group Corporation, Ltd. who used one of our technologies to convert coal into an ultra clean diesel fuel. We have a few things that we are working on outside of the United States that hopefully will generate some revenue. We are excited about the future potential. One of our business strategies is to have a pipeline of new products that we are continually developing and commercializing.
CEOCFOinterviews: Do you see growth in your company coming through new clients, products or both?
Mr. Benson: Probably both. There are three new products that we are in the process of commercializing; one is a building product that we call FlexCrete it is made from 70% fly ash, which is one of the coal combustion product. It is a building material developed internally and we have applied for patents to protect our intellectual property. This building product weighs about 25% of concrete materials, yet it is actually stronger and more durable. It is fireproof and soundproof. It is something that we believe could be compatible with wood materials for construction. We got another product that upgrades heavy oils, it is a catalyst product and we think that the market for that product is quite significant; we are in the process of starting the commercialization of that product. Finally, we have developed another technology that we are in the process of selling to utilities right now that is part of the clean-coal initiatives; it is related to the control of nitrogen oxide, so it blocks emission from coal power plants.
CEOCFOinterviews: How do you bring in potential customers?
Mr. Benson: We have thirty to forty people that are directly involved in sales and we have some technical sales people, primarily engineers that are involved in the technical aspects of the sales opportunity.
CEOCFOinterviews: It sounds like you put quite a bit into your R&D.
Mr. Benson: Our R&D line on our income statement will show about four-and-a-half million dollars for the year. We also invest in the commercialization of these technologies, which is not reflected in the R&D line but it is directly related because we need to convert our R&D efforts into businesses and positive cash flow.
CEOCFOinterviews: Can you give us a picture of your revenue model?
Mr. Benson: Revenue from our post-combustion business is made up primarily from the sale of post-combustion products. We are purchasing those products from electric utilities so we have revenue from those products and the cost of goods sold as we purchase those materials and then we have some transportation cost associated with those materials and then just regular SG&A to support that business activity. Our pre-combustion business has two revenue lines, one is the sale of chemical reagents, we purchased those reagents from DOW RICHOLD, and then SG&A to support that revenue line. Finally, we receive a fairly-significant amount of license fees from the license of our technologies. Those are the revenue and expense lines for our income statement.
CEOCFOinterviews: What is your current cash and credit position?
Mr. Benson: At the end of the quarter, we had cash and short-term investments of approximately $10,000,000.00 dollars. Today we have a long-term debt of about $150,000,000,00 dollars; our debt to EBIDA (Earnings before interest, depreciation and amortization) ratio is approximately 1.8. Our interest and expense coverage ratios are between five and six. We have been rapidly paying our debt down and feel very comfortable about our balance sheet and our cash flow.
CEOCFOinterviews: It sounds like you have your industry knowledge down, to where you can be successful!
Mr. Benson: We have very good visibility in our businesses and feel very comfortable about hitting our earnings expectations. We shared a $1.32 as our goal for the current fiscal year and feel very comfortable that we are on track to achieve those earnings.
CEOCFOinterviews: In closing, what would you like current shareholders and potential investors to remember about Headwaters?
Mr. Benson: We have two very strong cash flow generating businesses, and we are very excited about the new products, particularly the nanocatalyst that we are developing and the potential for continued growth and continued positive cash flows in the future.
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