Apogee Enterprises, Inc. Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for being here and welcome to the Apogee Enterprises Second Quarter 2021 Conference Call. At this moment, all participants are in listen-only mode. After the presentations, there will be a question-and-answer session. I will now turn the conference over to your speaker today, Jeff Huebschen. Please proceed, sir.

Thank you, Joelle. Good morning, and welcome to Apogee Enterprises Fiscal 2021 Second Quarter Earnings Call. With me today are Joe Puishys, Apogee's Chief Executive Officer; and Nisheet Gupta, Chief Financial Officer. I'd like to remind everyone that there are slides to accompany today's remarks, which are available in the Investor Relations section of Apogee's website. During this call, we will reference certain non-GAAP financial measures. Definitions of these non-GAAP measures and a reconciliation to the nearest GAAP measures is provided in the earnings release we issued this morning, which is also available on our website. I'd like to remind everyone that our call will contain forward-looking statements reflecting management's expectations, which are based on currently available information. Actual results may differ materially. More information about factors that could affect Apogee's business and financial results can be found in our SEC filings. And with that, I'll turn the call over to you, Joe.

Okay. Thank you, Jeff, and good morning, everyone. Thanks for joining the call today. I'm very, very proud of our team for the results we delivered this quarter. On our last earnings call, I said we expected second quarter sales and operating income to increase in each and every one of our 4 segments relative to the first quarter, and that is exactly what we delivered. We achieved adjusted earnings of $0.73 a share in the second quarter, rebounding nicely from the $0.15 per share in the first quarter and well above prior year. The decisive actions we've taken in response to COVID have stabilized our business and driven strong earnings and cash flow despite a challenging operating environment. This morning, I will review highlights from the quarter and discuss the trends we are seeing in the business and how we are positioned for the future. I'll then turn it over to Nisheet for additional details on the results, our financial condition and our outlook. After that, I'll take your questions, of course. So let's talk about the second quarter. Start with the highlights. First, we saw continued headwinds from COVID and economic conditions, which caused year-over-year revenue declines in three of our four segments, but margins and earnings rebounded strongly compared to the first quarter as our team did an impressive job of managing costs. Our cost savings are tracking ahead of expectations. Nisheet will provide more details on this when he remarks. Additionally, we had very strong execution across all four of our segments, with improved factory productivity, particularly in Architectural Glass, and we are seeing orders begin to ramp up at our Velocity Small Projects Glass business. Our Large-Scale Optical segment came back stronger than expected, returning to profitability in the quarter. Recall that in the first quarter, the LSO segment was essentially shut down for the entire month of April and May, as nearly all our retail customers were closed due to COVID and government regulations, and our factories were closed until late July two-thirds of the way into the second quarter. Going into this shutdown, we built inventory and maintained close contact with our customers, so that when the government allowed retailers to reopen, we were ready. Late in the second quarter, nearly all of Large-Scale Optical's retail and independent customers reopened and our order volumes steadily increased through the quarter. In late July, we resumed normal operations at our two factories, restarting without any hiccups. Revenue for the quarter came in at 81% of the prior year level, a particularly significant improvement from the first quarter when we were at only 30% of the comparable prior year. The strong recovery is a testament to the resilience of our team and the reputation of the brand and products in the marketplace. My hats-off to our Large-Scale Optical team. Architectural Services continued to achieve premier performance. Not only did we see solid sequential growth, the segment also delivered double-digit year-over-year growth on both the top and bottom lines. Over the past year, Services has had great success winning new business and building a record backlog. We had a step function change in backlog, growing from around $500 million last year to approximately $700 million in the first quarter of this year. We are now executing projects in our backlog with visibility out more than two years. Our Services business is arguably the leader in the industry, and we even as current market conditions have softened, we still have a strong pipeline of opportunities to win additional projects in the coming quarters. In Architectural Framing Systems and Architectural Glass, we saw impact from the current disruptions in our end markets. These two segments saw many project delays and schedule changes, which impacted revenue. Both segments did a terrific job managing their costs and execution in the quarter, which helped offset the volume reduction. Finally, our team did a particularly extraordinary job of managing working capital and cash flow. Year-to-date, cash from operations is up more than 375%. We've generated more cash in the first half of fiscal '21 than we did in all of last year, with year-to-date free cash flow at $71 million and operating cash flow at over $85 million. With continued economic uncertainty, we are taking a conservative approach to capital deployment, focused on paying down debt and building liquidity. Over the past 12 months, we have reduced our total debt by $105 million. As we move through the rest of the fiscal year, we will seek to further strengthen our financial position to provide dry powder so that we can invest to accelerate growth going into an economic recovery. So overall, it was a very strong quarter, and we're pleased with the results given the current economic environment in the United States. Regarding the market conditions and outlook. Even as we are successfully managing what we can control, the economic and end market conditions are clearly top of mind for all of us. Let me share a few perspectives on what we are seeing. First, in all cases, projects in our backlog and pipeline are moving forward, although we are seeing some projects progressing slower than expected, particularly due to several large cities like Boston, New York, and San Francisco to name a few, which shut down temporarily all construction due to government regulations. All of these cities are back up and running again. Forward indicators like employment growth, the Architectural Billing Index, and the Dodge Momentum Index have rebounded from their April lows, but are still well below pre-pandemic levels. It is obvious the U.S. is in an economic downturn. It's just unclear at this point how long or how severe. We are preparing for this decline by maintaining our focus on cost, execution, and cash flow. Pre-COVID, the fundamentals in our end markets were very healthy with strong demand for new constructions and no signs of overbuilding. So, we are optimistic that we will see a brief downturn followed by the return to end market growth sometime next fiscal year or calendar year 2022. Regardless of what lies ahead for end markets, Apogee is a much stronger and more resilient company today than when we entered the last recession. Over the past several years, we’ve pursued a purposeful strategy to diversify our business mix and expand our customer offerings. We've reduced our concentration in high-rise buildings, moving to a more balanced customer offering with broader exposure to segments of the market, which are historically less volatile. This includes our recent expansion into small projects for Architectural Glass and our growing Renovation business. Let me emphasize a very critical point here regarding our transition. When I joined Apogee in fiscal 2012, our Glass segment under the Viracon brand was over 50% of our total company revenues. Of that, 60% of their revenues went toward monumental office towers. We define that roughly as buildings greater than 20 stories. Today, Viracon, our Glass segment, is approximately 22% of our revenue, and only 20% of that is in this monumental category. This is a very important transition that will bode well for our future of being less dependent on these towers. We have pursued a growth strategy, which included geographic expansion and new product innovation. And today, we have a portfolio of market-leading brands and innovative products that are well positioned to take advantage of a market rebound. As we move forward, I'm challenging my team to continue to drive innovation and keep Apogee at the forefront of our industry and unlock new growth opportunities. We have significantly improved productivity in our operations. We've invested in factory automation and built a continued improvement culture through all of Apogee via our Lean Enterprise System, which has taken root in our company and is contributing to our recent factory improvement across all our segments. Over the past few quarters, we've driven sustainable cost reductions through our procurement program and other projects. We are developing a pipeline of further initiatives to drive more productivity gains in all aspects of our business from selling, general administration, overhead functions, supply chain and manufacturing COGS. Nisheet will put some numbers to this discussion in a few moments. Finally, we've maintained a very healthy financial position with modest debt, strong cash flow and improved financial flexibility. Putting it all together, I'm confident Apogee has the strength to navigate this uncertain economic environment, and we are taking the right steps to position the Company to emerge stronger when the economy turns. With that, let me turn it over to Nisheet to provide more details on the quarter and our outlook, and I'll be back to take your questions after Nisheet. Thank you.

Thanks, Joe, and good morning, everyone. I'll begin with our consolidated results for the quarter, which are on Page 6 of our earnings presentation. Total revenue reached $319 million, down 11% from the same period last year, reflecting ongoing declines in volume related to COVID and market conditions. Our operating margin was 7.3%, and the adjusted operating margin was 8%, surpassing last year's second quarter's 7.7%, as our cost savings and enhanced productivity helped mitigate the effects of lower volumes. The adjusted results for the quarter excluded $1.3 million in COVID-related expenses and $1 million linked to a previous acquisition and associated projects. Full details are available in the non-GAAP reconciliation tables in our earnings release. Adjusted EBITDA was $38.3 million, down from $39.2 million in the same quarter last year, which was mostly offset by improved margins despite the revenue decline. Net interest expense was $1.3 million, significantly reduced from $2.6 million last year due to our decreased debt levels and lower borrowing costs. The tax rate of 23.7% was roughly consistent with the prior year's 24%, and our diluted share count was $26.5 million, down from $26.7 million last year, reflecting our share repurchases over the past year. In summary, our adjusted earnings were $0.73 per share, up from $0.72 per share in the previous year's quarter. Additionally, adjusted earnings were more than four times the $0.15 we reported in the first quarter, highlighting our success in stabilizing the business amidst COVID and the economic climate, as well as driving sustainable operational improvements. Now, turning to segment results on Slide 7. Architectural Framing Systems revenue was $153 million, down 18% from the previous year, due to project delays and reduced auto volumes. The operating income for Framing Systems was $11.7 million, with an operating margin of 7.6%, compared to 8.3% in last year's second quarter, reflecting lower revenue partially mitigated by our cost-reduction efforts and better execution in our factories. The backlog for Framing Systems decreased slightly to $404 million from $423 million last year. We are still winning new awards and have a promising pipeline ahead, but so far this year, order flow for the segment is about 20% lower than last year's level. Architectural Glass revenue was $87 million, down 13% from the same quarter last year. Similar to Framing Systems, this segment faced revenue pressure due to COVID-related project delays and diminished order volume. Architectural Glass posted an operating income of $5 million and an operating margin of 5.7%, down from an income of $6.4 million and a margin of 6.5% the previous year, as lower volume was countered by strong factory performance and effective cost management. The profitability of Architectural Glass rebounded sequentially, recovering from an operating loss in the first quarter. In Architectural Services, marketing services had another robust quarter with revenue climbing 20% to $74 million as we executed projects from our record backlog. The segment's operating income surged 65% to $6.6 million, with margins improving to 8.9% from 6.5% last year, fueled by effective project execution and cost management. Services backlog fell to $665 million from a record $685 million last quarter but remains 32% higher than a year ago. As Joe mentioned, Large-Scale Optical saw a strong sequential recovery, with revenue more than doubling from the first quarter. Year over year, however, revenue was down 19%. LSO returned to profitability this quarter with an operating income of $2.1 million and a margin of 12.7%, though still below last year's margin of 22.3% due to negative leverage from lower volume, slightly offset by cost reductions. I would now like to update you on our cost-saving initiatives outlined on Page 9 of our presentation. We are ahead of the targets we set last quarter and now anticipate around $50 million in savings for the current fiscal year. In the first half, we achieved nearly $25 million in savings through a mix of procurement initiatives, operational improvements in Framing Systems, and temporary cost reductions in response to COVID. For the latter half of the fiscal year, we plan to begin reversing some of these temporary cost reductions, which may create a slight headwind. Concurrently, we will ramp up savings from procurement and consolidation within the Framing segment. Looking beyond this year, we anticipate structural run-rate savings of approximately $40 million. We will continue to challenge our teams to find and seize additional opportunities to enhance productivity and permanently lower our cost structure. Moving to Slide 10. Our cash flow and balance sheet remain strong. Year-to-date, we have generated $85 million in cash flow from operations, a significant increase from $18 million in the first half of last year, primarily due to effective working capital management. Kudos to our teams across all businesses for their excellent management of working capital. Capital expenditures in the second quarter dropped to $5.6 million, totaling $14 million year-to-date as we have limited capital spending to essential projects only. We expect capital spending in the second half to remain below last year's levels, while we will assess investments in high-return growth and productivity initiatives. Our focus for capital allocation this quarter was on debt reduction. We paid down $43 million in debt, eliminating the entire balance on our primary revolving credit facility. In the second half of the fiscal year, we expect to increase our cash balance, which will enhance our liquidity and provide resources for potential investments that can drive productivity and accelerate our growth. During this quarter, we also distributed a dividend payment of $4.9 million, and we remain committed to paying dividends as part of our capital allocation strategy. Before I conclude, I would like to share some comments regarding our outlook for the rest of the fiscal year, summarized on Page 11 of our presentation. At this time, due to ongoing economic uncertainties from COVID, we have opted not to provide specific financial guidance. While we've noticed some signs of stabilization in our end markets, substantial risks and uncertainties persist. In our Architectural segments, we anticipate continued project delays and weak market conditions. In our Large-Scale Optical business, we expect conditions to improve further; however, volumes are likely to stay below last year's levels as COVID's impact will continue to hinder recovery in retail. Overall, we foresee that the dynamics for the rest of the fiscal year will resemble what we experienced in the second quarter, with pressure on our top line countered by our continued focus on cost management and productivity. While we are not offering comprehensive financial guidance, we do anticipate that revenue and earnings in the second half of the fiscal year will exceed those in the first half. To sum up, our team has demonstrated impressive performance this quarter, stabilizing our business and rebounding strongly from the first quarter. In the near term, we are preparing for ongoing economic uncertainty, with a consistent focus on costs, execution, and cash flow. Long term, we will continue to pursue sustainable operational improvements to position our company for growth and enhance profitability in the future. With that, I'll turn the call back over to Joe.

All right. Thanks, Nisheet. I close by once again recognizing the entire Apogee family for what we've accomplished together over the last six months. Our employees have truly gone above and beyond to help our company deal with the impact of COVID and economic turmoil. We've made significant changes to our business to prioritize the health and safety of our team and to ensure that we can continue to operate and meet our customer needs. I am particularly proud to be part of the Apogee team. Looking ahead, the environment remains uncertain, but I'm optimistic about Apogee's direction for both the second half of the fiscal year, which will improve over the first half and for the long term. Over the past several years, we've successfully executed a strategy to build a stronger, more resilient company. Our substantial backlog and strong financial condition, together with our talented team, gives us the resources to continue to manage through the current situation. And we will continue to push ourselves to drive better performance in our current business and develop new opportunities for growth. I look forward to sharing more details with you in the coming quarter. Okay, today is a big day. I announce my retirement from Apogee at the end of February 2021. 10 years at the helm, I'll be 63 years old. We built a new management team that is a terrific combination of experienced fenestration industry executives and new leaders with fresh eyes and ideas. We've launched aggressive cost and growth initiatives to substantially lower our cost base and grow. We've dealt with some problem projects, and they are now behind us, and we've added some very new strong leaders to our Board of Directors. I wanted to see this through. It's now my time. Until February, I will bleed company blood. With that, I'd like to open up for your questions. Joelle, if you could open up for questions, please.

Thank you. Our first question comes from Chris Moore with CJS Securities. Your line is now open.

Yes, let's start with LSO. I’m trying to understand what to expect for Q2. Some of it may be a bit of catch-up. I want to know if the second half of the year will be more in line with historical norms and how much visibility you have on that.

Yes, Chris, thanks. So first off, I don't really attribute to Q2 to catch up. Good news is the products we sell are in demand right now. As you're well aware, people cooped up in home and home products, everything from carpet flooring to arts and trinkets and trash so to speak, and people wanting to reframe art that's in their house. People had a lot of time to look at what's in their home, and I expect strong demand in that business going forward, plus they're launching new products at a pretty good clip in that business. We did ramp up to 85%. Our retailers came online late in the quarter. A lot of our pickup came from our independent distributors for the independent channel, and we expect our retailers to have a strong Q3. We're not projecting to get back to 100% this year, but we will continue to ramp up and improve. So, we feel very, very good about that business. And as you saw, mid-teens operating margins in a quarter where our factories were down for two thirds of the quarter is extremely impressive. So, we obviously have some upside in LSO. I think the demand is repetitive and we feel will continue to recover in the second half.

Got it. That's helpful.

Chris, I'm obligated to point out. Obviously, we don't expect the United States to go into another shutdown, but that business is clearly dependent. It doesn't fall into the critical infrastructure category that our Architectural segments did that we were allowed to at least keep running mostly. We don't expect any shutdown of retail in the United States again, but we'd be dependent on that. We feel really good about that business led by a terrific team.

Got it. I'll move on to Framing. The Framing backlog is down slightly year-over-year, but it's not too concerning. Could you share more details? Are there specific areas or types of business that are performing better or have greater visibility at this time?

Half of the Framing Systems businesses involve longer lead times and larger projects that contribute to our backlog. This area can be inconsistent, similar to our Services segment, which has performed well over the past few years. I anticipate that the Framing Systems will remain variable in that regard. The shorter lead time businesses have experienced some delays and schedule push-outs. However, I believe there is potential to increase our backlog with some current opportunities we are pursuing. Therefore, I wouldn't be overly concerned about the slight backlog reduction this quarter. Some of our longer lead time businesses consumed backlog while we are waiting to incorporate new projects. It is not a significant issue for us at the moment.

Got it. And last for me, just on the Small Glass, it sounds like it's going quite well. Can you provide a little more detail there?

Yes. I believe the idea that the office sector is dead is completely unfounded. Many people, including investors and analysts, are concerned about large office towers, especially as many have not been in the office for months. However, the office segment is not finished. We've significantly reduced our reliance on big towers, and I anticipate a rise in demand for smaller buildings and remote offices. Instead of Manhattan, we may see people opting for locations in Westchester or Jersey City. There have been recent developments, such as JP Morgan and Goldman reopening their offices, and I've noticed increased attendance in my own office while managing safety protocols. I am confident the office segment will rebound, particularly in smaller buildings, which is the focus of our Velocity Small Projects business. We are gaining market share and have produced an excellent product, with signs of growth already emerging. I believe we will reach the breakeven point soon, and this will contribute to our profits in fiscal year 2022, likely before the end of this fiscal year. To support this growth, we have increased capacity at our factory by adding shifts, which I consider a very successful strategy.

And just to add one more thing, Chris, we have doubled our revenue in that Velocity business in quarter two versus quarter one. So, we are on the right track there.

And the decision to potentially add another facility is probably a year or so away at this stage?

Yes. I won't get into my future plans on that on this call, Chris. Sorry.

Sounds good.

Our next question comes from Eric Stine with Craig-Hallum. Your line is now open.

I mean, a lot of the questions that I have on the Velocity initiative, it sounds like not to be shared on this call. But I'm just curious, could you talk about the margins on that compared to the rest of the glass business given the level of automation, but also just that it's a different setup, shorter lead times versus the other parts of that business?

Sure. It's not a lower-margin product; it actually has a slightly higher margin. Our cost basis is lower, and the automation in that business is very high. While there are some overhead costs from the start-up and some depreciation, at a normal production rate—meaning a couple of shifts, five days a week—the margins will improve the overall Glass segment. It's a good margin business.

Got it. Got it. That's helpful. And maybe just turning to the retrofit business, maybe an update on where that stands? I know you've long had that $100 million goal. And just curious as you think about that business in the context of the current environment where maybe that's an area that people look at now just given some uncertainty related to COVID in the economy. I mean, is that an area that you think potentially sees an uptick given the current environment?

I believe there is even greater potential now than when I first introduced it several years ago. We are exceeding $50 million and moving towards $100 million. The industry has slowed down recently. Currently, many buildings are focusing on their interiors, such as spacing, floor layouts, and directional settings, similar to how we have adjusted our cubicle configurations for social distancing due to COVID. Once we move past COVID, I expect significant growth as businesses aim to attract talent to possibly older offices located outside of metropolitan areas. People will seek appealing buildings, and I believe the emphasis on curtain wall and window renovations will increase. Thus, I am optimistic about the future. There is considerable potential for sustainability and green initiatives. The investment community and those monitoring companies are pressing for management to adopt sustainable practices. I think this opportunity will become even more pronounced as we emerge from COVID. This summer, we've noticed a slowdown as people concentrated on their building interiors, but I anticipate that will shift in the next two quarters.

Okay. Got it. Maybe last one, it would be for Nisheet. Now you're, I guess, a little over a quarter in at Apogee. Just curious what you see? I mean, I know you're talking about cost cuts ahead of schedule and that you've upped the target in the near term. But as you look at it long-term, I mean, where are some of the areas that you with some fresh eyes see as the opportunity for Apogee?

Yes. There are opportunities everywhere, and we have just begun. Regarding our cost structure, particularly the SG&A structure, we are evaluating it closely. This industry experiences cycles, and we need to be more flexible with our costs. We are looking at ways to adjust our SG&A structure in line with these cycles. Significant actions related to our SG&A structure will be implemented in the coming quarters. Additionally, we are addressing COGS, which is another major focus. We have already made progress with procurement, which is reflected in our P&L. We will also concentrate on non-procurement-related COGS, a substantial part of our expenses, over the next six months. Joe and I have plans regarding COGS that we will share in the upcoming months. I see considerable potential for enhancing our cost structure as we navigate the challenges in this industry over the next six to eighteen months.

Our next question comes from Brent Thielman with D.A. Davidson. Your line is now open.

A question on the Services segment. You're putting up solid margins. I'm wondering if some of these additional precautions to keep people safe in the field is still having an effect on productivity and therefore, margins, it will be hard for me to imagine a year ago, you foresaw some of this in terms of building that into the bids?

We are not experiencing any impact from COVID on this segment regarding productivity.

Yes. People are back in the factories, and we are fully up and running in most of our plants. So we don't see any impact right now on COVID. It's all kind of looking like normal even though volumes are not normal.

But your question was around the Services segment itself?

Correct.

Yes, we are not experiencing any productivity issues. Initially, when COVID struck, some construction sites faced minor productivity challenges, particularly due to limited capacity in construction elevators. However, everything has returned to normal now, and we are in a good position without any concerns to highlight.

Okay. So the $1.3 million COVID-related adjustment, is that primarily for the glass business and the productivity issues you experienced during the outbreak?

Half of that would be for the glass business and half of that is for other businesses.

The Glass segment has the largest workforce. Almost everyone is back to work now. In Q1, a significant number of employees were quarantined due to social contact tracing, but that has decreased significantly in Q2. Currently, we are nearing normal operations regarding the number of people in the building.

Yes. Okay. And Joe, in any of your businesses, are you seeing any competition starting to make, we'll call it, sort of distressed decisions at the bid table, just trying to fill the coffers at sort of any price that are concerned for the future? Or has it been pretty rational?

I think it's been pretty rational in general. I'm sure my segment leaders could call out the occasional drunk and disorderly bid action. But I would say, it's been what I would call normal. There's always a project where somebody must be bidding to the wrong spec and you think they're drunk and disorderly, but nothing beyond what we're used to.

Our next question comes from Julio with Sidoti & Company.

First off, Joe, congrats on the retirement and your success in lessening the cyclicality over your tenure.

Thank you.

I guess my first question is just on the cost savings initiatives. The $50 million in savings you expect this year. So that would be roughly a 60-40 split between permanent reductions and temporary?

I would say it's more a half and half. Half is related to COVID-related response and cost actions and half is in procurement as well as in consolidation-related savings.

Okay. Lumber has been something that's risen pretty meaningfully year-to-date. Can you maybe discuss the effects of lumber on your glass business? I know you're a user there and maybe the timing of when that is your P&L?

Yes. We have managed to absorb the increases in lumber costs. Overall, our procurement expenses have decreased due to a company-wide initiative we undertook last year, which included hiring an external firm for assistance. A new Chief Procurement Officer joined us at the start of this calendar year. We are managing the modest increases in lumber effectively. You are correct that we use a significant amount of lumber for shipping our products. Our contracts are favorable, and the actions we are taking have more than compensated for these changes. In fact, as Nisheet mentioned, we have revised our outlook for cost savings from procurement, increasing it from what we discussed in the first quarter. Although lumber presents some challenges, they are not substantial.

Got it. And is your Velocity business a similar user as Viracon was or is?

It's similar, yes.

Okay. And I guess on LSO, you did see a nice top line rebound compared to the first quarter. Can you maybe discuss maybe an exit rate for how LSO was tracking on the top line in August? Was it up year-over-year or maybe close to up year-over-year?

I don't have the logs in front of me, but it was similar to the previous year, probably in the 85% to 90% range. It’s a very seasonal business. I mentioned that our independent customers, the custom framers in the United States, performed very well this quarter. Our retailers will likely show stronger results in the third quarter. It’s a somewhat unpredictable business, and with it being a small segment, under $100 million, it can fluctuate significantly from month to month. As I said, it was quite close to last year in August.

Our next question comes from Bill Dezellem with Tieton Capital. Your line is now open.

What are you seeing just in terms of where we are in the process of returning to a normal order pattern in terms of behavior of customers? Would you talk to that, please?

Bill, you're asking about a specific segment or in general across Apogee?

I was really looking in general.

It's different by segment, but the economy is quite challenging. Projects in our backlog and pipeline are progressing with very few delays. In our Services segment, we are achieving record activity levels. While there is some slowdown in activity, our share of demand in the United States has been small, and the segment is very diverse. We can succeed and grow even in a down market, and we are experiencing decent bidding activity, although it hasn't returned to pre-COVID levels. In Glass, we are encountering project delays, but they are still moving ahead. Additionally, we are seeing increased orders in our small projects business. Being a newcomer in the Small Project Glass area is advantageous, as growth continues regardless of economic conditions. In Framing Systems, we are feeling the most impact from weaker market conditions and have seen about an 18% decline year-over-year in that segment. However, our profitability has improved due to cost management initiatives. I believe we will secure some new projects and potentially increase our backlog in that segment before the end of the year. In LSO, customers are largely reopening, and I anticipate normal order levels will be restored by year-end. Overall, it’s a mixed situation, but until COVID is fully addressed, there remains a level of uncertainty.

You mentioned ongoing project delays, but you also noted that construction in larger cities, which had been shut down, has now reopened and some of the strict work rules are returning to normal. I'm struggling to understand how that aligns with the project delays. Can you clarify this for me?

Well, like I said, the construction is permitted in almost all locations, and most projects in our backlog are moving forward. They're just moving slightly slower-than-expected due to economic caution and the COVID-related friction, creating absences at the job site. Some minor supply disruptions, not ours and this is what's mostly impacted Framing Systems and Glass. But as every week goes by, we're seeing more and more workers back at the construction site and the progress in the building goes up. Nisheet, do you want to add anything?

Yes. I just wanted to just add to that to say, there are industries which have not really picked up based on the recovery of the economy. For example, hospitality industry, we have customers who are buying things in the hospitality industry, and those projects are getting delayed. Similarly, there are other industries where we see they have not picked up, and therefore, they've deferred their decisions on buying until things come back. None of those projects we're seeing cancellations as such, but we are seeing a delay.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back to Joe Puishys for closing remarks.

Okay, Joelle. Thank you. All right, folks. I won't torture you anymore. I thank you all. I'll be talking to many of you next week in a couple of conferences that Nisheet and Jeff and I will be participating in, and we'll look forward to further connection to many of you that are on this phone and have a safe week and be good. Thank you all.

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