Nortek's (NTK) CEO Michael Clarke on Q2 2014 Results - Earnings Call Transcript

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 |  About: Nortek Inc. (NTK)
by: SA Transcripts

Operator

Good day, ladies and gentlemen and welcome to the Nortek second quarter 2014 conference call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Nortek's Vice President of Strategy and Investor Relations, Michael Botelho. Mr. Botelho, you may begin.

Michael Botelho

Thank you, operator. Good morning everyone and thank you for joining us. With me on our call today are President and CEO, Michael Clarke, and our Chief Financial Officer, Al Hall.

If you have not received a copy of the earnings press release we issued last evening, you can find it on the investor relations section of our Web site, nortekinc.com. We also filed our 10-Q last night which is also available on our Web site.

During the prepared remarks today, we will be referencing a presentation that summarizes Nortek's second quarter 2014 performance. These slides are also posted on our Web site. Click on Investors and Events and Presentations. We invite you take a moment to open the file and follow the presentation starting with Slide 2.

Before I turn the call over to Michael, I would like to remind you that our comments today may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this conference call, words such as expects, anticipates, intend and estimate or similar expressions are intended to identify these forward-looking statements. These statements are based on the company's current plans and expectations and involve risks and uncertainties and other factors over which we have no control and which could cause future activity and operating results to be materially different than those set forth in the forward-looking statements. For additional information on these factors please refer to our earnings press release dated August 4, 2014, the risk factors in our Form 10-K and our other filings with the SEC.

Participants are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. I would also like to mention that during our call in addition to reporting financial results in accordance with generally accepted accounting principles are GAAP, we will discuss certain non-GAAP financial measures. Please see the reconciliation of these non-GAAP measures to their closed GAAP equivalents which is appended to this morning's slide presentation.

I would now like to turn the call over to our CEO, Michael Clarke.

Michael Clarke

Thanks, Mike and hello everybody. Thank you for listening this morning. Could you please turn to Slide 3 and I will start with some comments on our business this quarter. Al will review our financials and then we will open up as usual for your questions. Nortek performed well in the second quarter. This performance was driven by strong demand in our home security and automation products as well as our non-residential air management solutions.

The Reznor business we acquired during the quarter also contributed to these results. As announced yesterday, we are now reporting results from our audio-video business in a new group titled AV. These results were previously included in our TECH segment. In reporting them separately, we effectively unmask our strong underlying performance in the security, access and home automation.

Our net sales in the second quarter were up year-over-year not only in our TECH, but also in our other major segments, RESV, RHC, DMS and CES. Overall net sales increased by $87.9 million or 14% from Q2 last year with $23.8 million coming from Reznor. On the bottom line, four of our five major segments delivered higher adjusted EBITDA margins than in Q2 last year. This improvement was driven by strong fixed expense leverage and on higher sales level, the impact of our operational improvement initiatives and the continued benefit of ongoing product mix shift in our DMS segment.

As you know, residential remodeling and single-family constructions drive a major portion of our business and these were the weakest parts of the market this quarter. The housing market in Canada remains sluggish and the economic conditions in Europe continue to be challenging. Our non-residential markets were mixed, up slightly overall but down in healthcare which continued to struggle. Given these conditions, we are pleased with our overall results.

Now for a quick review of the segments, if you could turn to Slide 4. Second quarter net result in RESV were up 4% from Q2 last year which excludes the impact of our exit from the bath cabinet business in Q1. Our growth in RESV this quarter was primarily driven by higher sales in the U.S. appliance and retail distribution channel. Net sales in the U.S. were up 7% in the quarter, excluding the impact of the bath cabinet. Internationally, the weak conditions in Canada in Europe were not too friendly for us.

We are working on numerous strategies to position this business for a long-term profitable growth. In addition to investing in new products, we will implement a number of design to value or DtV initiatives in this segments. These initiatives will fundamentally change the way we design, build, price our products going forward. The goal is to deliver the most value to our customers at the right price.

In the TECH segment, we had strong results this quarter driven by increased shipments of security and home automation products. Net sales in the TECH segment were up 47% from Q2 last year. In part this was due to the shift from Q1 to Q2 by a major security and home automation customer. We discussed this shift in our prior conference call. Setting this aside, the TECH segment is continuing to deliver solid underlying growth. For the first half of 2014, sales were up 18% on a apples-to-apples basis.

Looking forward, we are well positioned as technology evolves towards greater integration of security and home automation in response to the growing consumer awareness and product demand. Our installed base of more than 1.5 million touch panels makes us the leading home automation platform in the security industry. We are working to leverage this strong position to penetrate existing accounts, win new business and grow internationally.

The TECH segment has tremendous opportunity in both the security and the connected home. We believe that separating these businesses from AV operation will allows us to sharpen our focus on these opportunities. It will also put us in a better position to address the recent underperformance in our AV. As we said before, we are catching up with some technology changes in this market. In addition we are putting a team in place to look at the structure of the AV business and implement system and processes to improve operational performance. We have invested in developing major new product platform will we will be rolling out at the major yearly CDAC trade show next month.

Turning to Slide 5. In our DMS segment we posted year-over-year net sales growth for the third consecutive quarter. Operating margin expanded for the tenth straight quarter on the top line as system and device management solutions drove strength of our Ergotron branded product line. We grew 15% in the quarter and year-to-date. On the bottom line, the continued margin improvements in DMS reflect the impact of our cost reduction initiatives and more favorable mix.

Now the RHC segment, Q2 net sales residential HVAC products were down slightly year-over-year following an exceptionally strong first quarter. Some parts of the country experienced cool start to this summer which negatively affected demand. In addition, we believe that some of our customers just bought ahead. Net sales in RHC as a whole were up more than 16% from Q2 last year, driven by Reznor, which we acquired in April 30.

In addition to Reznor's contribution to the sales and EBITDA, we are very pleased in how the business integration is progressing and how the teams are coming together. Lastly, our production moves in RHC are ahead of schedule and the quality out of our new facility in Mexico is just excellent.

In CES, we posted year-over-year sales growth of 16% for the quarter, keeping us on track for a solid year. We continue to see strong sales two our major cleanroom customers. Q2 was also a good quarter in the commercial office and data center market. CES bookings in the quarter were a little soft which was right what we had seen in the marketplace. We are working hard to drive sales and bookings in this choppy environment. Our data center penetration continues to increase and we are coming out with great new products for this market. As previously announced, we are in the process of restructuring CES to make the business more scalable and better position it for growth over the long term.

Turning to Side 6. As we said in our last quarter, our initiatives in the area of supply chain, manufacturing, logistics are all in full execution mode. The savings are on track as planned, we are seeing the benefits in several of our segments which is more apparent in our less complex businesses such as DMS and RHC. As I have mentioned before, we re-engineering some of our product lines and moving to fewer, common platforms and much smaller number of SKUs. This will lead to manufacturing cost reductions as well as procurement savings.

We also are heavily focused on sales pricing analytics across the company and adjusting prices where appropriate. This is a part of our design to value initiative which is now a part of our business system.

Moving forward, we are planning a strategic deep dive to look for market synergies in our air management business, comprising of RESV, CES and RHC, which include our recent acquisition of Reznor. We plan to explore opportunities for distribution, cross-selling synergies, as well as to address product gaps and product gaps. All to help us better capitalize on market opportunity in the air management space.

Please turn to Slide 7. Summing up, over the past two years we have strategically transformed Nortek from a portfolio of companies to operating or management company. As a result, we expect to continue to improve the operating leverages in our business, we also expect to further strengthen Nortek's balance sheet as we move forward.

We are on track to achieve solid growth and improved profitability in 2014. We expect to see improvements in the residential market in the second half with a sense of caution in light of some of the recent housing related forecast. We are also cautious in the overall outlook for the non-residential construction activity in the second half. Recognizing the challenging marketing environment, we are focused on driving growth across the businesses. At the same time we expect to realize a portion of the benefits of our operational initiatives this year. With the balance being achieved over the next couple of years. We are well positioned to continue to drive an improve and results, especially as our end markets pick up.

With that being said, I would like to turn the call over to Al. Al?

Almon Hall

Thanks, Michael and good morning everyone. Please turn to Slide 9. For a full year review of our overall results, I would like to first discuss our decision to remove our AV businesses from TEC segment.

As Michael mentioned earlier, strong growth performance of our security, home automation and access control products combined with the sharp decline in the AV products operating performance has led the company to the strategic decision to manage and report these businesses separately. Consequently, the AV segments operating results are no longer reported within our TECH segment. In addition, the significant decline in the operating performance of the AV businesses in the second quarter led us to conduct an interim impairment test of their long-lived assets, which resulted in $80.4 million non-cash impairment charge or $3.87 loss per share after tax effect.

We are considering all of our options with respect to these businesses and will continue to take whatever actions are available to improve their performance and optimize their value. Further details related to the interim impairment test and the related charge could be found in our Form 10-Q filed with the SEC yesterday.

Now let's review our operating performance. Nortek's total net sales for the second quarter of 2014 increased by $87.9 million as compared to the second quarter of 2013. We were pleased to see that net sales increased in all five of our major business sector. Organic growth drove increased sales in the RESV, TECH, CES and DMS segments while growth in RHC came from the Reznor acquisition.

In our AV segment, net sales decreased by $7.1 million in the second quarter as compared to the same period last year. Overall, adjusted operating earnings increased in the second quarter of 2014 by $8.7 million or 17.2%. This increase was primarily driven by improved year-over-year performance in our TECH, DMS and CES segments, partially offset by lower adjusted operating earnings in our RESV and AV segments. Overall, the improvement in adjusted operating earnings reflects the benefit we realized from the leverage of our fixed expenses and higher sales levels, lower cost achieved through our sourcing initiative and planned favorable product mix shift.

Organic sales growth was 12.1% while organic growth in adjusted operating earnings was 34.2% in the second quarter 2014 after excluding the performance of the AV segment. I will now take you through each of these segments starting with RESV on Slide 10.

For the second quarter of 2014, net sales in RESV increased by $1.3 million from the second quarter of 2013. Excluding the impact of foreign exchange, net sales increased by $2.4 million in the second quarter. Net sales for the RESV segment in the U.S. were also $3.1 million lower in the second quarter due to the exit of a non-core product line in the first quarter of 2014. Excluding the effect of these items, sales in the RESV segment increased by $5.5 million or 3.7% in the second quarter.

On this basis, there was a $7 million increase in sales of United States, primarily due to strength in our retail and appliance channels where our sales increased by $3.3 million and $3 million respectively. Excluding the $3.1 million impact of the product line exit that I just mentioned, sales into the U.S. wholesale channel in the second quarter increased $2.4 million. Excluding the impact of foreign exchange, net sales in Canada fell by $700,000, reflecting the continued softness of the Canadian housing market.

Net sales in Europe and other regions, again excluding the impact of FX, fell by $800,000 in the second quarter compared to the same period last year. In the second quarter, adjusted operating earnings in the RESV segment were $17 million, a decline of $2.3 million in the same quarter over 2013. This decrease reflected $1.8 million higher product liability expenses in the quarter as compared to the same period last year. Material costs a percentage of net sales were slightly higher in the second quarter reflecting year-over-year increases in price of steel and motors as well as changes in product mix, partially offset by increases in sales prices of certain products.

Please turn to Slide 11. As a reminder, our Technology Solutions segment no longer includes our AV business. The principal remaining product categories included in the TECH are security, home automation and access control. In the second quarter, net sales in the TECH segment increased by $51.4 million or 46.7% compared to the same period last year. This increase was driven in part by the shift in orders that we mentioned on last quarter's call.

For the first half of 2014, net sales in the TECH segment increased by $69.1 million or 38.9% compared to the prior year. Even after adjusting for the pro forma impact of the 2GIG acquisitions in the first quarter of 2013, this segment showed solid growth in the first half of this year. In the second quarter, adjusted operating earnings in the TECH segment increased to $22 million from $9 million in the year earlier period. The sharp increase was driven in part by higher volume and lower warranty related cost and $3.1 million of expense reported in last year's second quarter related to the inventory fair value adjustment that resulted from the 2GIG acquisitions.

Turning to Slide 12. In our display mount solutions segment, net sales increased $300,000 in the second quarter of 2013. This increase reflects $6.4 million of higher sales of Ergotron branded products and a $500,000 increase in service revenue, partially offset by $3.5 million and $2.1 million of lower sales to OEM and retail customers respectively. As we have mentioned previously, we are intentionally withdrawing from certain low margin OEM business in this segment.

Adjusted operating earnings in the DMS segment increased to $11.7 million from $10.9 million in the second quarter of 2013. Their adjusted operating margin increased by 110 basis points to 16.9% from 15.8% in last year's second quarter. The margin expansion was driven by the favorable impact of a shift in product channel mix as well as from our ongoing cost reduction efforts. Their material cost as a percentage of net sales improved by 270 basis points from the second quarter.

Please turn to Slide 13. Net sales in our RHC segment increased by $22.6 million or 16.5% compared with the second quarter of 2013. The increase in net sales was due to our acquisition of Reznor, which contributed $23.8 million to net sales in the second quarter. Excluding the acquisition of Reznor, net sales in the RHC segment, fell by $1.2 million in the second quarter. We believe the drop in sales was due in part to unseasonably cool weather in the second quarter of this year. Overall, RHC adjusted operating earnings were essentially flat year-over-year while adjusted EBITDA which excludes acquisition related amortization, increased to $21.5 million from $18.2 million in the second quarter last year.

Reznor acquisition contributed $2.8 million to the increase in adjusted EBITDA for the second quarter. The total cost as percentage of net sales improved by 210 basis points in the RHC segment in the second quarter. This improvement reflected in part the positive strides that we are making with our strategic sourcing efforts.

Turning to Slide 14. Net sales in our custom and engineered solutions segment for the second quarter were $139.4 million, up $19.4 million or 16.2% from the second quarter of 2013. Excluding the effect of changes in foreign exchange rates net sales increased by $20.2 million or 16.8%. This increase was primarily driven by higher sales of cleanroom and packaged equipment in the semiconductor cleanroom, data center and commercial office market. Backlog in the CES segment was approximately $217.5 million at the end of the second quarter compared with $259.1 million in the same period of 2013.

The lower level of backlog at the end of the second quarter, reflected strong shipments in this quarter as well as some of the weakness in order input in certain key market such as healthcare. Adjusted operating earnings in the CES segment increased to $12.9 million which represents an increase of $4.8 million compared to the second quarter of 2013. This increase was driven in part by the benefit of increased operating leverage from higher sales volume in this segment.

Please turn to Slide 15. Sales in the AV segment declined by approximately $7.1 million during the second quarter of 2014. Adjusted operating loss in this segment was $7.7 million in the second quarter of 2014 compared with an adjusted operating loss of $100,000 in last year's second quarter. The decline in sales and operating performance in the second quarter in AV was driven in part by weak demand, sales prices discounts and other sales adjustments on certain legacy products.

Over the past several years, technology changes that affect certain product categories that the businesses compete in, has caused demand to shift away from certain of our legacy products to newer technologies. In order to keep pace with these changes AV has had to increase selling, marketing and research and development expense levels to catch up with these changes in the market. Also impacting the operating performance of our AV businesses, were inefficiencies experienced in a combination of certain of these businesses including inefficiencies in the transfer of logistics function to a third party provider. Management is focused on taking whatever actions are necessary to improve the performance and value of these businesses.

Now turning to Slide 16. Moving to liquidity and cash flow. We ended the second quarter with approximately $91 million of cash on hand and $95 million of borrowings outstanding our ABL facility. Nortek's free cash flow was negative $18.3 million in the second quarter of 2014 as compared to a positive $17.1 million in last year's second quarter. A major driver impacting net cash used in operating activities in the second quarter of 2014 was the substantial increase in accounts receivable, which was due to the sharply higher sales levels towards the end of the quarter in certain of our businesses. We continue to focus on working capital efficiency with a goal of lowering our cash conversion cycle.

Borrowings outstanding on our ABL facility increased to $95 million from $35 million at the end of the third quarter. This increase was primarily due to seasonal working capital needs in certain of our business segments. As of August 1, we had $80 million of borrowings outstanding under our ABL facility. Please turn to Slide 17. In his earlier remarks, Michael provided an update on our operational initiatives. During the second quarter of 2014, we recorded $7.7 million of restructuring and transformation charges compared with $8.4 million in the second quarter of 2013.

As a reminder, these are long-term initiatives and are not expected to be concluded until sometime in 2016. Our latest estimate is that the annualized savings compared to current cost levels at commodity markets will approximate between $48 million and $60 million when all of the projects have been completed. While we are starting to see the benefits in supply chain and strategic sourcing and expect to realize a good portion of the savings throughout this year, we do not anticipate full run rate savings to be realized until all of the projects have been successfully concluded, which we currently expect to be in 2016.

These are estimates of the savings that could be generated from our operational improvement initiatives and there can be no assurance that the savings will be realized in the expected range. Turning to Slide 18. To summarize. We are confident that 2014 will be a good year for Nortek. Overall, we expect that our key markets will be up for the full year 2014, although it is slower-paced than we anticipated earlier this year. The third quarter has traditionally been good for us and this year's second half will benefit from our acquisition of Reznor. Due to seasonal factors, Reznor fourth and first quarters are typically its strongest ones, as it primarily sells heating products.

Our operational initiatives continue to progress well and we remain focused on delivering the projected savings over the next couple of years. We are also focused on achieving synergies from the Reznor acquisition and on cross-selling opportunities that we have identified, particularly within our wholesale channel of distribution. In closing, we look forward to updating you on our performance in the quarter's ahead and thank you for listening.

And now, Michael, Mike and I are available to take your questions. Operator, please proceed with the Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Phil Ng with Jefferies. Please proceed with your question.

Philip Ng - Jefferies & Company

In your outlook, you sounded a bit more cautious on non-res, specifically healthcare. Is the choppiness pretty broad-based or is it tied to a particular business such as CES or Reznor?

Almon Hall

Wells, it's tied mostly to CES and as I noted, our backlog is down. And although over the last several months, we have seen some strong reportings in the ABI index, and that index is really a future looking out. And as you know we sell most of our product out in the backlog in CES and it's usually anywhere from a five to an eight months backlog. So in selected markets we have seen some softness and we are just being a little cautious. But we continue to be out there in the marketplace bidding on every job that makes sense for us in this competitive market.

Philip Ng - Jefferies & Company

Got you. That's very helpful. And then when you talk about the Reznor acquisition, you sound pretty upbeat overall. Can you talk about some of the opportunities from integrating that business more fully, particularly in parallel with your restructuring effort? Can you help us quantify what the financial impact could be down the road?

Almon Hall

Well, I think previously we had disclosed we initially had about maybe $6 million of immediate synergies through the diligence of which, two-thirds to three-quarters was material sourcing and the rest of it was through top line growth. So most of it was really just cost reduction efforts. And the key right now in 2014 is to fully integrate Reznor into RHC will all the systems and the processes etcetera. And I could tell you that so far it's going along quite well. They are a business that was managed by Thomas & Betts for a long time and they really have sort of a state of the art business systems that we are moving to.

Michael Clarke

It's Michael. We put a team in -- I think we told you a couple of times -- we have put a team in place, a post-acquisition team that is monitoring this. So we monitor this -- I personally monitor this every week and see where we are. And it's going very well. And the sort of synergies that we talked about, that Al just talked about, we are all on track with that. So I think it's probably, we seem to be getting -- we did well with Ergotron, we did better with the 2GIG and now with this one it seems to be getter better. So we seem to be getting a track of record with this team in place to do the integration. So we feel pretty good about that, feel very good.

Philip Ng - Jefferies & Company

Got you. And just one last question for me. I appreciate how you guys are breaking out TECH and AV. And the TECH segment alone had a very strong first half. Are you still seeing that momentum in the back half? It's a pretty strong start to the year.

Almon Hall

I think we have disclosed this in the past but the security business tends to have a peak, more of its in the first half and the second half. But we have added new customers, we continue to expand our product offering.

Michael Clarke

That business is pretty cyclical. So as Al says, there is a lot of other opportunities we are seeing. So we are trying to move that out, the cyclical nature of the business. And some of our customers are trying to do that as well. So we feel pretty good about it as we go. This is our first sort of full year in this cyclical cycle, so we have probably been a little conservative and we will see how that goes but we have broadened the customer base and you can't beat a broader customer to level this stuff out.

Operator

Our next question is from the line of Phil Volpicelli with Deutsche Bank. Please proceed with your question.

Phil Volpicelli - Deutsche Bank

The first question for me is on the AV. Do you prefer to fix that business and invest in it or are you thinking more of selling it? And what are the guideposts, I guess, that you are looking at to make that decision?

Michael Clarke

Well, we figured you'd ask that question. But I mean, like, we have made no decisions at all. Like with any of our businesses that we brought to divest the businesses. We realized we wanted to break them apart as I said, so we could really focus. And we put a hotshot team on that to look at the operations. We have also got a lot of new products coming out, bringing out at the trade show next month. So our major focus is fixing the businesses and seeing how that business goes. That’s what we would be doing for the next short while and obviously we will keep you folks abreast of any changes. But the major focus is to continue to improve our customer service, get those products out there and make sure we turn this thing around.

Phil Volpicelli - Deutsche Bank

Okay. And when you say the technology moved beyond you, was that kind of wireless streaming, wireless speakers? Is that what we are referring to there?

Michael Clarke

Well, it's a bit of both. It's not -- and there is also -- our products are really high end, really expensive integration in there. Probably we were like right at the top. And we didn’t get the medium on low-end products. People can't afford to spend $250,000 in home audio visuals anymore. So there is a combination of hard wired and wireless that’s taking place. So you got to have sort of a low-end control to do it. So we have redesigned the new ones. We have put different chipsets in. It can link to many of the wireless products out there from other manufacturers as well as our own. So we got some really exciting products going out there. But that’s what we sort of realized that the market has changed for our business. You have to go to this mid to low-end. And all the products that we have gone ahead fulfill that. That being said, we have got some great products on the high end as well. So if you look at stuff, what we are bringing out, we can now with the new products, go from high, mid to low-end. Both wireless convertibility and hardwire.

Phil Volpicelli - Deutsche Bank

Great. Thank you. Within DMS, the low margin business that you are moving away from. How much in total are you moving away from and how far along are you in that process?

Michael Clarke

Well, we keep thinking about the bottom of that process. I don’t know, I haven't got the numbers in front of me. They are becoming less significant.

Michael Botelho

Yes. The business that we are exiting away from, we've probably mostly transitioned out of that. What sort of left is sort of the base ODM business which is still bouncing along and struggling a little bit along with the general PC market.

Michael Clarke

Yes. That links to the PC market. So as the PC market declines that we -- as that sort of declines, we are sort of like in the same range is what's happening with that. But eventually it becomes not as critical. Because now as you see with the OmniMount, our branded product, we are growing at 15%. And so it's offsetting that and the mix is better for us. So I would like to think that’s hit the bottom but I am not sure. But even if it still declines a little bit, going forward it's not going to have the impact. It's going to be a switchover from the Ergotron branded products where they are growing 15%, they are not just going to offset that. So I think we feel pretty confident that you will see a growth pattern going forward in that business going forward.

Phil Volpicelli - Deutsche Bank

Okay. Last...

Almon Hall

Let me just follow up on that. One of the things we did in this 10-Q of investors was, we expanded some of the disclosures. So we have some tables in MD&A, particularly the DMS. And you could see the level of sales now for Ergotron branded versus OEM. And some of our focus in the OEM business has been focused on products that we can offer into other channels of distribution that have a lot more value added and higher margins. So you may not see over time, all the OEM sales go away. You may see higher value-added products coming into the space.

Phil Volpicelli - Deutsche Bank

Okay. Very helpful. Thank you. Last one for me. With the move of manufacturing from the U.S. to the Mexican campus, inventory appears to be higher than it has been historically and I think that part of that was planned. When do we expect that inventory level to start moving back down?

Michael Clarke

Well, we are actually just starting to see it move back down now slightly. I think we were a little ahead of where we actually -- we are actually ahead of our internal plans, to be honest. We expect that so we put in a new SAP system in place which is helping us. So I think we could be back down to historic levels once we are in full production there. So that will be probably back half or probably next year where we will be back to sort of current levels when they are made in the U.S.

Operator

(Operator Instructions) The next question is from the line of Dan Mannes of Avondale Partners. Please proceed with your question.

Dan Mannes - Avondale Partners

First question. On the TECH segment, can you give any color around maybe the volume of the catch up orders relative to Q1 or just to help us figure out, because obviously the growth was very, very strong. We are just trying to figure out how much was regular versus sort of the order push.

Michael Botelho

We think this shift was probably about $15 million to $20 million between Q1 and Q2.

Almon Hall

And so on the call what we did is, I think I gave you some data on the growth for the first half which sort of takes care of that. It shows that there was strong growth.

Michael Clarke

Yes. I think we said the first was about 18%, growth on the first half. And that’s what we try to do level -- but it's still pretty good. It was still pretty good.

Michael Botelho

Strong growth.

Michael Clarke

Strong growth in that business.

Dan Mannes - Avondale Partners

Sounds good. Secondly on RESV, on the margin side they came in a bit -- and in looking through some of your disclosures, you talk a little bit about higher material costs and also higher freight. On the materials side, is that one of the drivers of the design to value plan. And then, two, any change in terms of the freight cost environment?

Almon Hall

The design to value is probably, in terms of material costs is a longer term thing. Because what it does is tries to SKUs and change how we manufacture and takes material content out. So that takes a while. Now we started in the RESV this year. And we will see the benefits of that in the next two years probably. But when you think about their product offering, particularly range hoods and bath fans, there is a lot of steel in that. And so we have just had commodity price increases, it's more significant for them. And that overshadows some of the other cost savings to sourcing we achieved.

Dan Mannes - Avondale Partners

And then on the freight side?

Almon Hall

On the freight side, I think we are pretty good not only here but across all of our businesses on freight costs. Some of the issues we have had is the transition with the logistics and the warehousing side of it. And it impacts our different businesses differently. We have had some inefficiencies in this transition but that was to be expected.

Michael Clarke

We have had improvements across the board on freight. And I think it will probably improve a little better as we go for the forward. Because as you transition to a 3PL, sometimes you miss the opportunity to have full loads and half loads. And as we get a little smarter in how we are doing this, we think that’s that. But generally the freight costs, if you look at the freight costs for us a company, they have gone down. They have gone down for us.

Dan Mannes - Avondale Partners

Got it. And then...

Michael Clarke

We are consolidating most of the freight within all of Nortek, not just in the divisions as we used to.

Dan Mannes - Avondale Partners

Okay. And the one other question is on the AV business. I think you left some of kind of the higher end home automation stuff in AV. Any thoughts on why that's there rather than staying in, and I guess the now TECH segment? Any synergies there back?

Michael Clarke

There are probably are two channels. The security and access and home automaton tend to be like more OEM. You sell it to the large players. Like hardware suppliers. You know all the names, you just turn your TV and you see the ads every day. And that becomes (indiscernible) selling to an OEM. When you sell the high-end home automation, you sell them to an integrator. And they are like completely different channels. One thing I will say though, these, when you start talking about the firmware, the chipsets, there is integration that is going on there and we are working that. So one can talk to the other. That’s where the benefit. But they are completely different channels as we sell. So we kept the AV where it is, on the high end.

Michael Botelho

The security is primarily wireless, like Z-Wave, ZigBee solutions. And on the AV side that’s typically a hard-wired programmed solution.

Michael Clarke

And then with connectibility to wireless. So that’s why we have kept it that way.

Dan Mannes - Avondale Partners

Got it. Thank you very much.

Michael Clarke

Let me just go on that because there is probably other people listening in. Look, we are still very integrated with regards to engineering, the product development. And we have set the organization up, so we will connect technologies. So they are not siloed. So we are going to make sure that from a OEM business, security business, we still keep in very close to the AV business and where technology is going. So there is still a lot of cross-selling that will go on there and across technologies. So I don’t want to leave everybody thinking we just siloed these at all. It's not that at all. We just put it up so we could get more, understanding more and get more help and turn it around. So both of the businesses.

Operator

Your next question is from the line of [Daniel Riven] of Gates Capital Management. Please proceed with your question.

Unidentified Analyst

Hi, this is Jeff. Can you tell us what the apples-to-apples comparison would be for Reznor, the full quarter this year versus last year on sales and EBITDA?

Almon Hall

Jeff, we don’t have that handy but we have got pro forma disclosures in there. My sense was, sales were up a little bit, earnings was probably either flat or down. This quarter is really a sort of a seasonal low for them. Since they are predominantly heating products. And in the fourth quarter and the first quarter, that’s where you see their sales volume increase significantly. To levels that their incremental contribution margins are really significant.

Unidentified Analyst

So that 11.8% margin for this quarter, for the two months that you owned it, is not atypical for that quarter?

Michael Botelho

Correct, that ranges, that’s in the range.

Almon Hall

That’s in the range.

Unidentified Analyst

Okay. The second question is, how confident are you in your ability to contain the losses in the AV segment? I mean this was a fairly large departure from historical -- from historically, even low profitability in the past. But what kind of confidence do you have that you will be able to stop the bleeding in that space?

Michael Clarke

We actually do feel pretty confident. I mean you know I think if we feel probably had left it as it is, we would have probably still felt reasonably confident. But we wanted to make sure so we have got the team in there. We are looking at it. We haven't made that move overnight. So the Q2 -- it wasn’t a supply -- we could see this happening. So we have been doing a lot of work for the past couple of months preparing for this. So I feel confident we can stop that bleeding. But, again to be frank, we have got all new products coming out. So we got to sell these products. And we are actively knocking on doors and trying to bring you new accounts on all, persuade existing accounts to sell our products instead of the competitors product. But we I don’t think we feel pretty confident. I think you could look at this as more securing it as opposed to it's sort of like, it was out of control. We believe that we saw it happening, we figured we wanted to make sure we contained this and that’s why the move. Plus it also was, I clearly said, we have got a great security and access business and we really wanted to make sure that you guys saw that. And so that’s why we split that up.

Unidentified Analyst

All right. And then the last question is, I know Sean is leaving the Tech Solutions business. And I am just wondering what your plans are for managing that business going forward.

Michael Clarke

Well, you know we have got a team in place now and they are actually there. So we have got a person that used to be, called Denise, and she is going to take over management of those three AV businesses. She is originally from Stanley Black & Decker, very experienced. So we feel confident there. We have brought some new people in who are really quite good, from the business. So we feel pretty confident there. Switching over to the security and access business, [Mike O'Neal] (ph) has been running that business for a long time. He has been very successful. And he will report directly to me as Denise will. And I mean he was instrumental in getting us where we are in the security and access. So from a management perspective, I think we have got a lot. And as I said to you before, we do have a strong, more strong corporate office functions here, in materials, supply management. And IT, now it's centralized, HR, finance. So we have a lot of horsepower here to look after this businesses. But I feel pretty confident, I wouldn’t have (indiscernible) that this is the right move that we have made.

Operator

Our next question is from the line of Mike Hughes of SGF Capital. Please proceed with your question.

Mike Hughes - SGF Capital Management

Yes, a couple questions for you. First on the $48 million to $60 million in projected cost savings by 2016. Is that off of current expense levels or when the program was announced? I think you first announced the initial program in early 2013. So is it off those expense levels?

Almon Hall

Yes, it's off those expense levels, yes.

Mike Hughes - SGF Capital Management

Okay. And did you say earlier how much you have realized so far because I think you said in the 10-K, $7 million to $9 million last year. What is the current number?

Almon Hall

I think the number is $15 million to $20 million, we have disclosed.

Michael Botelho

For this full year.

Almon Hall

Yes, for the full year.

Mike Hughes - SGF Capital Management

Right. Where are you -- where do you stand right now? Are you willing to disclose that?

Michael Clarke

Well, I think...

Almon Hall

We are on track

Michael Clarke

I mean that’s what we said. I think, yes, we are on track for that. We monitor it closely. Yes, we monitor this closely. We definitely monitor this closely. So (indiscernible) for that.

Mike Hughes - SGF Capital Management

And then in that savings number of $48 million to $60 million, did that contemplate any savings coming out of AV or if you take costs out of AV now would that be incremental beyond that $48 million to $60 million?

Almon Hall

Yes, this is not a step...

Michael Botelho

It probably includes a little bit of AV but not significant.

Michael Clarke

Yes, it's not significant.

Michael Botelho

I don’t think it would be (indiscernible)...

Michael Clarke

I think the AV crept upon us before we were doing that.

Michael Botelho

I don’t think it would cause to change the target.

Michael Clarke

No, we won't change the target. You know we are also in the AV business. We are also heavily invested in that business as well. So we put in more product development into it.

Mike Hughes - SGF Capital Management

Okay. And then last question for you. Just is there a DSO goal or better yet, kind of a cash conversion goal?

Michael Clarke

For sure. And people bonus on it. So we are for sure, there is a goal for that.

Mike Hughes - SGF Capital Management

Can you say what it is?

Almon Hall

No, we haven't disclosed it.

Michael Clarke

We haven't.

Almon Hall

Typically, with our business, a lot of its seasonal, particularly air-conditioning and security in the first half. So by the end of June, we have higher levels of working capital and over the second half of the year, those will always come down dramatically and generate a lot of cash.

Michael Clarke

But our goal is the improvement over last year, for sure. And so definitely there is a goal for improvement over last year. And the thing about that though is, when we move it back to (indiscernible) we got to be very careful. But that’s probably done.

Mike Hughes - SGF Capital Management

Right. Just one follow-up on that. I understand that AR is a little elevated because of the quarter it sounds like was maybe a little bit back-end loaded. But could you just speak to the quality of the receivables? You feel comfortable about the quality of receivables, I assume.

Almon Hall

Yes, absolutely.

Operator

Our next question comes from the line of Sam McGovern with Credit Suisse. Please proceed with your question.

Sam McGovern - Credit Suisse

I may have missed this earlier, but can you talk a little bit about the M&A pipeline? Are you guys still finding good opportunities out there? And then just sort of follow up on that, I know you guys have been doing acquisitions about once a year. Is that the pace you guys want to set going forward or do you guys feel like as you have been integrating them, you can take them down on a more rapid basis?

Michael Clarke

So as I said in a few of the calls, we have put in a system in place for the M&A and being more proactive. If you look at sort of the last two M&As we did, it was sort of the generator. We went and knocked on the door. So, yes. We see a pipeline. We see an opportunity. But we have gotten all set targets that do one a year or -- the one thing I would say, we have looked at it. We have been proactive. We have a system in place to be able to, to integrate these now, as you can see. But our main focus is to just carry on running our business as we do the improvements that we have sort of told or talked to you about.

Operator

Thank you. At this time we have reached the end of the Q&A session. I will now turn the conference back over to Mr. Clarke for any closeting or additional remarks.

Michael Clarke

Thank you, operator, and thanks for everybody for listening and as always, we look forward to talking to you again next quarter. So that concludes the call and again, thank you.

Operator

Thank you. That concludes today's conference. Thank you for joining us today.

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