Earnings Call Transcript - APOG Q1 2021

Operator, Operator

Thank you all for joining us, and welcome to the Apogee Fiscal 2021 First Quarter Earnings Conference Call. I will now turn the call over to your speaker, Jeff Huebschen. Please proceed. Thank you, Josh. Good morning, and welcome to Apogee Enterprises Fiscal 2021 First Quarter Earnings Call. With me today are Joe Puishys, Apogee's Chief Executive Officer; and Nisheet Gupta, Chief Financial Officer. We are also joined by Maggie Kirchoff, Apogee's Controller. 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 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.

Joseph Puishys, CEO

All right. Thank you, and good morning, everyone. I appreciate that, Jeff. Thanks, everyone, for joining our call this morning. Wow! What times we live in today, I'm not aware of anyone that had the foresight and imagination to predict a global pandemic and the impact on our country, and in our case, our industry this year. That said, our team did a terrific job managing through the challenges of COVID-19 during our first quarter. We delivered positive earnings; not everyone will be able to do that this quarter; strong cash flow in a quarter where we always use cash; and increased backlog, all of which demonstrate the underlying health of our business. This morning, I will provide more details on the impact of COVID-19 during the quarter and our response to the situation. And I'll discuss the current trends we're seeing in the business and how we are positioned for the future. Then I'll introduce Nisheet Gupta, my new CFO and business partner, for additional details on the results of our financial condition. After that, I'll certainly take your questions. Let me start with the impact of COVID-19 on our business during the quarter. First, I'd like to say how proud I am of the entire Apogee team. Everyone truly rose to the occasion. In just a few short weeks, we made fundamental changes to the way we operate our business. We established a full-time COVID response team, implemented a number of policies to maintain a healthy working environment in our factories and on our job sites, including health screening, social distancing, enhanced cleaning, and the increased use of personal protection equipment. For our employees who normally work in the office, we transitioned nearly everyone to working from home in a matter of days. We've had weekly and at times daily communications with all 7,000 employees through voice, written communications, and video. And we accomplished all this without missing a beat, continuing to ship product to meet customer needs. Even with these preventative actions, the COVID impact in the quarter was substantial. Most notably, in our Large-Scale Optical segment, we saw a near-complete shutdown of our customer base to comply with state and local government stay-at-home orders. This drove a 70% year-over-year decline in revenue. In response to this dramatic decrease in demand in Large-Scale Optical and to comply with stay-at-home orders, we closed our LSO manufacturing operations and furloughed most of our workforce. We were able to continue shipping some product, thanks to strategic inventory buildup, leaving no stone unturned. Our three Architectural segments continued to operate as essential businesses. However, a number of projects were temporarily halted or delayed due to state and local government restrictions, economic reasons, or other disruptions. The good news is that, with few exceptions, the projects in our backlog and pipeline are moving forward, though many are moving forward at a slower pace than projected due to delays and disruptions, which impacted our revenue. We also saw COVID-19 outbreaks in some of the communities where our factories are located, which impacted our workforce, particularly at our primary Architectural Glass facility in Southern Minnesota. In our Glass business, many employees were placed on precautionary quarantine or took voluntary leave, which impacted productivity and revenue. In fact, at the peak, we had nearly 25% of our Glass workforce in Southern Minnesota on quarantine. Because of our aggressive response, we are now nearly back to full employment at that facility. Outside of these COVID-related issues, the Glass business performed quite well operationally with very strong customer service and quality metrics, but this also brought added costs, including paid leaves and extensive personal protective equipment for our people and our production lines. We have taken a number of proactive steps to manage our cost and capacity, which delivered over $5 million in savings in the quarter and contributed to keeping the company profitable despite the significant volume decline. Our procurement savings initiatives started to deliver meaningful savings, and we implemented several steps to temporarily align compensation costs with the current market environment. Our Framing Systems segment made steady progress toward optimizing operations, improving execution, and removing costs. The impact of these actions will continue to ramp up as we move into the second quarter. And Nisheet will provide more details on the financial impact in his remarks. We also asked our team to focus on working capital management with an emphasis on receivables and collections, which led to strong cash flow, well above last year's first quarter. I'd also like to highlight the continued strong performance of our Architectural Services segment. Segment operating income improved despite slightly lower revenue, driven by solid execution, project selection, and cost management. Also, we were awarded several new projects during the quarter, increasing this segment's record backlog to $685 million, up over $200 million from this time last year. So given the challenges in the quarter, we are overall pleased with how our team responded and the results we achieved. We were profitable, we managed the balance sheet, adding cash, paid down some debt, paid our dividend, all while adding to our backlog in our long lead time business. As we look ahead to the rest of the fiscal year, there remains significant uncertainty around the impact of COVID-19 and the overall economic situation and the impact on our end markets. Accordingly, at this time, we are not prepared to offer guidance. We will strive to provide guidance in the coming quarters as the economic situation stabilizes and becomes more realistic. But I can say that we are cautiously optimistic about our path to improve results in the coming quarters. More on that in a moment. In Large-Scale Optical, our customers are beginning to return to reopen status, and the trend line in orders and sales has been positive over the last month. Our LSO manufacturing facilities will reopen this quarter. In our Architectural segments, our strong backlog of over $1.1 billion gives us good visibility in the longer lead time portions of our business. Additionally, while we are still seeing some project delays and disruptions, we expect these will moderate in the coming quarter as the economy reopens. Finally, we should see increased benefits from our cost reduction initiatives as we move through the second quarter and beyond. We see the potential for each of our four segments to deliver improved results both on the top and bottom line in the second quarter compared to the first quarter. Looking out longer term, it seems likely that we will see some degree of downturn in our end markets. How severe and for how long, no one knows. In the Q&A session, I'm sure I'll get questions about this, and I'm prepared to answer what we're seeing from industry analysis. But we also see many reasons to be optimistic about Apogee's long-term outlook. Unlike the last recession, the Great Recession of '08 and '09, we entered this downturn with healthy end-market fundamentals with strong demand for new construction and few signs of overbuilding, excellent tenant commitments to support new construction, and very low office occupancy challenges. We're also seeing some economic indicators that give us optimism, such as the improved May unemployment report, particularly versus expectations, and measures like retail sales and industrial production, which have started to rebound in May off their low April numbers. Also, various government stimulus measures provide some support for construction end markets. Regardless of what lies ahead for our end markets, Apogee is a much stronger and more resilient company today than we entered the last downturn. Over the past several years, we've pursued a purposeful strategy to diversify our business mix and the end markets we serve. Today, we have a much broader exposure to a range of project types and sizes, including sectors like healthcare, education, government, multifamily housing, and a growing renovation business. These are historically less volatile segments within the market. We have also reduced our reliance on monumental high-rise projects, which are the most cyclical and sensitive to market fluctuations, and increased our exposure to small and mid-sized projects, including our recent expansion into small projects for Architectural Glass. We have pursued a growth strategy that included geographic expansion and new product innovation. And today, we have a portfolio of market-leading brands that are well positioned to take advantage of a market rebound. And we have significantly improved the productivity of our operations by investing in automation in our factories and building a culture of continuous improvement through our lean enterprise system. A wide range of cost-saving efforts are underway, including procurement savings. And if necessary, we have additional options available to manage costs and capacity. Strong cash flow and a healthy financial position have long been hallmarks of Apogee's business, and that is no different today as we have significant financial flexibility to manage our business with substantial liquidity. Finally, I strongly believe that we have the right team to manage through this situation. Over the past year, we have added key talent across our organization. This includes new members of our Board of Directors and several new members of my executive leadership team, including a new General Counsel, a new Head of Human Resources, a proven procurement leader, and Nisheet Gupta, our new CFO. We've also added key talent in our segments and at our business-unit level. With these talent additions, I sense tremendous energy and enthusiasm across our company, and I'm confident that Apogee's best days lie ahead. With that, I'd like to introduce Nisheet. He started at Apogee on June 15, so throwing him into the fray with an earnings call less than 2 weeks into his job. He brings tremendous range of experience to Apogee, having led and transformed finance organizations at several high-performing companies, and I'm truly excited to have Nisheet as a part of the team and my business partner. I'd also, one more time, like to thank Jim Porter for his countless contributions to Apogee. With that, let me turn it over to Nisheet to provide more details on the quarter and our financial positions, and then I'll return and quarterback taking your calls and add some additional comments.

Nisheet Gupta, CFO

Thanks, Joe, and good morning, everyone. I'm very excited to join the Apogee team and to participate in my first earnings call with the company. I look forward to speaking with many of you in the coming quarters. Hopefully, I'll be able to meet with many of you as travel restrictions are lifted. Looking at the results for the quarter, let me start with our consolidated results, which are on Page 5 of the earnings presentation. Total revenue was $289 million, down 19% from last year's first quarter, reflecting several COVID-related disruptions across the businesses. Operating margin was 2.2%, which includes the impact of COVID-related expenses. Excluding these costs, adjusted operating margin was 2.7% compared to 6.5% in the last year's first quarter, reflecting the impact of lower volumes, partially offset by our efforts to manage cost and capacity. Adjusted EBITDA was $20.4 million compared to $34.1 million in last year's first quarter, reflecting the lower revenue and lower margins. Net interest and other expenses were $2.5 million, roughly in line with $2.6 million in last year's first quarter. The tax rate of 28.2% was above last year's level and above our long-term estimated tax rate of approximately 24.5% due to discrete tax matters. Finally, our diluted share count came down to 26.4 million from 26.8 million last year due to share repurchases over the past year. Putting it all together, we had adjusted earnings of $0.15 per share compared to $0.58 per share in the prior year quarter. Now turning to segment results on Slide 6. Architectural Framing Systems revenue of $150 million was down 17% from the prior year. We entered the quarter expecting lower revenue based on the timing of projects. This was magnified by the impact of COVID-related project halts and delays, particularly in those regions with tighter restrictions on construction activities, such as New York, Pennsylvania, and California. Framing Systems operating income was $7.3 million with an operating margin of 4.9% compared to 6.8% in last year's first quarter, reflecting negative leverage on the lower revenue, which was partially offset by cost-reduction actions. Framing Systems backlog decreased slightly to $423 million from $432 million at the end of last fiscal year. We continue to win new awards, and most projects in our pipeline are moving forward, but overall order flow in the segment was down about 15% compared to last year's first quarter. Architectural Glass revenue was $77 million, down 23% from last year's first quarter. As in Framing Systems, we entered the quarter expecting lower year-over-year revenue due to the timing of projects in our pipeline and then saw additional pressure from COVID-related project delays and a small number of project cancellations. As Joe mentioned, the area of Southern Minnesota, where our primary Glass Fabrication facility is located, became a hotspot for COVID-19, which impacted many members of our workforce and disrupted production, reducing revenue by approximately $4 million in the quarter. We also saw increased costs associated with pay for employees on quarantine and personal protective equipment. The segment had an operating loss of $500,000 compared to income of $6.4 million in the prior year, reflecting leverage on the lower volume and added COVID-19-related costs. We also saw lower-than-expected revenue and an operating loss associated with our new small glass facility in Texas. While we remain confident in this venture's long-term potential, the market disruptions caused by COVID and current economic conditions will likely result in a slower-than-planned ramp-up for this operation in the current fiscal year. Architectural Services continued to deliver strong execution and saw the least impact of any of our segments from COVID-19. Services revenue of $64 million was slightly below the prior year level, reflecting a handful of delays on project sites. Despite the lower revenue, operating income increased to $5.3 million with an operating margin of 8.4%, up from 7% in last year's first quarter, reflecting strong project execution, project selection, and good cost management. Services backlog increased again this quarter as management booked several new project awards. The segment's backlog now stands at a record $685 million with project work that extends into fiscal 2023. As Joe mentioned, Large-Scale Optical saw the most severe impact from COVID, as almost all of the segment's customers were closed for most of the quarter to comply with the government's stay-at-home restrictions. This drove a 70% year-over-year decline in revenue and an operating loss of $3.1 million. In response to this situation, we closed our two manufacturing facilities and furloughed most of our workforce. As we moved into June, our customers have begun to reopen, and we are seeing a gradual uptick in demand. Through the first weeks of June, shipments are trending higher, but still well below the historical levels. We expect sales will continue to gradually recover as the economy reopens. Cost-savings initiatives. Even as three of our segments experienced significant volume declines due to COVID-19, we took action to manage our costs and capacity to keep the business profitable. As we have discussed previously, we entered the fiscal year with a number of cost-saving initiatives already in place. Our procurement savings program delivered $3 million of cost savings in the first quarter, and we expect to see these savings ramp up through the year. Also, even with reduced volumes in our business, we remain committed to achieving our procurement saving goals. We made further significant efforts to integrate and optimize our Framing Systems segment, which we expect to deliver cost savings through the rest of the fiscal year. During the first quarter, we announced several additional temporary cost-saving measures primarily related to compensation. These measures, only in effect for a portion of the first quarter, contributed $2 million of savings. To summarize, with all of these initiatives taken together, we will now deliver $40 million or more of total savings during fiscal year 2021 and an annualized run rate saving north of $40 million in future years. Coming on to cash flow and balance sheet, turning to Slide 8. We had strong cash flow with $24 million of cash from operations in the quarter, which compares to a use of cash of $10 million in last year's first quarter. The increase was driven by exceptionally strong working capital management and receivables collections across the business. As we discussed last quarter, we have put a temporary hold on all nonessential capital spending. Capital expenditure for the first quarter was $8.6 million compared to $11.2 million last year. We expect the capital spending to decline further in the second quarter as the first quarter spending included investments to complete some projects that were already underway. Free cash flow was positive $15 million compared to a negative $21 million last year. We used a portion of this free cash flow to pay down debt, reducing total debt to $211 million. We have made significant progress in reducing our debt over the past year with total debt down $82 million compared to the end of the first quarter of 2020. Also during the quarter, we made a dividend payment of $4.9 million and repurchased $4.7 million worth of stock early in the quarter. Subsequently, we've put a temporary hold on our share repurchase plan, which we will continue to evaluate as the year progresses. As previously announced, we successfully extended our $150 million term loan during the quarter, pushing the maturity out 12 months to April 2021. Our liquidity position remains strong with significant unused capacity in our revolving facilities. Together with a strong free cash flow, we believe we have more than enough liquidity to fund our operations and meet all our obligations. To wrap up, our team successfully managed through a very challenging quarter. As we look ahead, we are encouraged by signs of improvement in our end markets as the economy reopens, and we expect increased benefit from our cost-saving actions as we move into the second quarter. Importantly, our financial position continues to improve, and our strong cash flow provides significant financial flexibility as we manage our way through the COVID situation. With that, I'll turn the call back over to Joe.

Joseph Puishys, CEO

Thank you, Nisheet. This quarter has been particularly tough for almost all companies, and I'm glad it's behind us. I want to express my appreciation to the entire Apogee team for stepping up during this time. Everyone in our company has made meaningful sacrifices over the past three months. Our collective efforts have allowed us to adapt our operations to ensure the health and safety of our workforce while still providing the high-quality products and services our customers expect. Despite the challenges, our team's hard work kept us profitable and generated strong cash flow, demonstrating the resilience of our business. The economic environment remains uncertain, making it hard to predict the future. However, I am optimistic about Apogee's trajectory for the rest of this fiscal year and beyond. With our substantial backlog, solid financial condition, and dedicated team, I am confident about what lies ahead. Before taking your questions, I want to discuss some economic indicators we monitor, starting with the architectural billing index. This is a monthly metric we track. Over the past decade, the ABI has mostly shown month-to-month increases. We entered 2020 with strong performances in January and February, but March saw a decline, which was expected, and April's numbers dropped even further with most architectural offices closed and employees working from home. May showed a slight rebound, and inquiries increased, offering a small positive signal. Earlier this month, Dodge Data and Analytics released their construction market forecast, and I want to highlight a few key points. For nonresidential building starts, they predict a decline of 15% to 20% in 2020, with square footage pulling back between 13% and 15%. However, after a significant drop in 2020, nonresidential construction starts are slated to improve, with an expected growth of 5% in square footage in 2021 and 16% through 2024. For the construction aspect of nonresidential projects, growth is expected to be 6% in 2021 and 15% overall by 2024. Another important area for us is institutional billing, which they anticipate will grow modestly by 3% in 2021 and 15% over the next three years. These forecasts remind us that our world is changing rapidly, and we remain unsure of how COVID will influence us as we move forward. Still, the Dodge Construction Data indicates that our industry had solid fundamentals before this unprecedented shift in our economy. With that, I would like to turn it over to the operator to open the call for questions. Thank you.

Operator, Operator

Our first question comes from Chris Moore with CJS Securities.

Christopher Moore, Analyst

I understand that visibility is still quite limited at this time. Looking ahead to the end of fiscal year '21, I'm curious about what the main uncertainties are, particularly regarding the LSO ramp and the recovery speed of the quick turn, short lead time business. Would you say that's accurate? Could you elaborate on those points?

Joseph Puishys, CEO

Certainly. You are correct that visibility remains uncertain. The greatest uncertainty pertains to the economy impacted by COVID. If we avoid another shutdown similar to what happened in March, I am confident that our upcoming quarters will see improvement, with Q1 likely being our most challenging quarter. If nothing unexpected occurs, I anticipate that all four segments will sequentially progress from there. In Q2, our Large-Scale Optical orders showed improvement each week in June. Last week, we were operating at just over 50% of a typical week, which is encouraging. The team expects a gradual recovery for the remainder of the fiscal year in LSO, and there are indicators that support this expectation. Our backlog remains strong, and more of our employees are returning to work. We anticipate that our Glass business will improve in the second quarter as staffing levels increase. Our Services division is spread across the U.S., and positively, their operations have not been concentrated in cities that have experienced significant closures. This has worked in our favor, and we expect this division to perform exceptionally well this year. Regarding our renovation business, I previously mentioned that it will show year-over-year growth, supported by sales from our Framing Systems and Glass businesses. While some might think that increased glass breakage due to recent unrest would lead to more sales, we are not positioned in the business of emergency repairs. The key issue will depend on how robustly the U.S. economy rebounds. According to Dodge Construction data, there is a sense of optimism. Ultimately, the wildcard remains the fate of the office market. We foresee a shift from large office towers to smaller satellite locations, which aligns with our capabilities for small, medium, and large projects. With more space expected per office worker, we believe this will positively influence the office segment and potentially mitigate the impacts of a more widespread work-from-home model. Most business leaders agree on the importance of having employees back in the office for collaborative efforts, and I share that mindset. While there may still be some work-from-home arrangements in the future, I believe demand for office space will increase. That's the clearest outlook I can provide.

Christopher Moore, Analyst

No, that's helpful. You covered a lot, for sure. Last one for me. Just with respect to the $40 million in cost savings, maybe can you provide a little more detail on the cadence for the additional cost savings for the rest of fiscal '21?

Joseph Puishys, CEO

Yes. Let me give some comments, and then Nisheet can jump in. First off, we had announced last year $30 million to $40 million of cost savings for this year as a measure that would be the run rate as we exited the year. We were a little coy in not providing a specific number for the flow-through for the year. It was obviously in the middle of that range or maybe $25 million, $30 million. Because of COVID, we took some substantial actions, both on furloughs. As I mentioned, our Large-Scale Optical business was virtually closed. With the exception of fewer than a dozen people, every employee was, unfortunately, furloughed. We've taken some salary actions. We've amped up our efforts on procurement. And Nisheet will tell you now, the flow-through numbers are pretty substantial for fiscal '21. Some of the actions we took did not kick in until May or June. So many of our actions won't be at full force until the second quarter. I will tell you, I certainly hope to restore the salaries of my troops to their prior levels when the time allows it. But most of the actions we've taken will continue going forward in the future quarters and next year. And Nisheet, if you'd like to provide some more specifics on the dollars, please do so.

Nisheet Gupta, CFO

Sure. So earlier guidance has been more working towards a $40 million number by the end of the year to provide an annualized run rate of $40 million savings in future years. With all the efforts that the team has done, I would put our savings into three buckets, the first being procurement. With a new procurement officer, we have savings coming through already in quarter 1, and they will be much higher in the rest of the year. That is in the range of $10 million to $15 million. The second is the cost actions. That is temporary cost actions taken in response to COVID. They are, again, in the range of $10 million to $15 million. And the last and the bigger work, which the Architectural Framing team is doing, they're really working hard to align the cost structure with the business. And that's another, I would say, $15 million. So overall, we are confident to deliver $40 million of in-year savings this year, and it will go north of $40 million in the future years now that our Chief Procurement Officer has started looking at all opportunities in the company.

Eric Stine, Analyst

Welcome, Nisheet.

Nisheet Gupta, CFO

Thank you.

Eric Stine, Analyst

I understand that previous questions have covered some of this, but I will ask for clarification. Reflecting on fiscal '21, there were several operational challenges and project delays, which, like many companies, you faced. Looking ahead, particularly in Services, you had a strong bookings quarter and a solid backlog. Do you see this situation as a temporary issue in the backlog that might affect a quarter or two in fiscal '22? Given that the industry's underlying fundamentals are relatively strong, do you believe this is somewhat of a short-term concern? I know it can be challenging to predict, but I would appreciate your insights.

Joseph Puishys, CEO

Yes, Eric, thanks. I will discuss that. First of all, I want to clarify that we did not have any operational issues; we experienced volume issues. We did not lose market share, but the volume challenges were due to COVID and project delays. Additionally, we faced staffing issues because of high quarantine rates in one region. However, factory performance was outstanding across all our operations, particularly in Glass, where on-time and complete deliveries were exceptional. They had to reschedule some customer orders and worked with several clients to delay production into the second quarter. Most customers cooperated, but some did not. We focused on navigating through the quarter, and while they managed to recover some volumes, approximately $10 million in Glass revenues slipped out of the quarter due to production capacity limits and customer pushouts caused by project site issues. Our plants operated exceptionally well, with no significant issues. As you mentioned, the Services backlog is solid, nearly reaching $700 million, which equals more than two years of revenue. This is encouraging. Regarding potential revenue shortfalls next fiscal year due to these delays, we are uncertain. If the situation worsens or if the recent trends reverse due to COVID, it might impact revenue in some short lead time businesses, although our long lead time business has the backlog to facilitate growth. We are implementing operational improvements to counter any minor revenue delays. Consequently, the extent of revenue disruption next year is still to be determined, but I currently believe it will be modest. It largely depends on the trends related to reopening in the U.S., which remains uncertain.

Eric Stine, Analyst

Yes. I misspoke earlier. I was referring more to the project delays rather than internal issues, but I appreciate the update. Yes. And just on the cancellation, good to hear that they've been minimal. And again, this is prefaced on the thought that there's not a return in terms of COVID coming back and having to shut down, et cetera. But do you feel like if things start to gradually open up that you're kind of out of the woods on the cancellation front or the risk of cancellation of projects that you see?

Joseph Puishys, CEO

Yes. Regarding cancellations, I want to clarify our situation. In my nine years here, I've only witnessed one cancellation in our Services segment, and that project returned to backlog about a year later. Cancellations are rare once something is in backlog. For our Glass segment, we see it moving in and out of backlog quickly, as we only enter it when we have a purchase order. We haven't experienced any cancellations there either. In fact, our Glass backlog increased by about $10 million in Q1. You might have concerns about that increase because it's $10 million we wanted to ship. However, $5 million of that increase was due to capacity constraints related to staffing, and another $5 million stemmed from customers delaying their projects. Therefore, we've faced more delays than cancellations. We have seen a few cancellations in Glass, but those were not part of our backlog; they were in our win column. So while we won't meet our original full-year revenue expectations, we felt most of that impact in the first quarter, and we anticipate sequential improvement in Glass moving forward.

Julio Romero, Analyst

So I wanted to ask about the Services segment. Joe, you had outlined some of the drivers of that segment's profit increase, execution, mix, cost. Can you maybe kind of rank order those? And just given the expectation for the top line next quarter, do you kind of expect that, that margin, 8.5%, to kind of continue?

Joseph Puishys, CEO

First off, since they improved their margins on slightly lower revenue, they're obviously performing well. We categorize that business into two areas. It starts with project selection. I have been discussing for a decade how the team has been using big data and data analytics to analyze every project they have completed over the past few decades. They have leveraged that data to identify which projects to pursue in order to enhance their win rate. Bidding on every project incurs costs, even for those that are unsuccessful. They have excelled in project selection, leading to consistent performance in both fabrication and installation. I would attribute the quarter's performance to project execution in both our manufacturing and installation sites, which was made possible by the project selections made two years prior. It’s important to remember that this operates on a two-year cycle. The work they are diligently focusing on now, which added $26 million to our backlog this quarter, will not commence in the field for 12 months and will generate revenue over the following year. The groundwork laid two years ago is the reason they were able to realize projects in our pipeline this quarter at better-than-expected margins. I anticipate this kind of performance to continue in the second quarter. While I won’t provide specific margin guidelines, I do expect robust margins in that business for the foreseeable future.

Nisheet Gupta, CFO

Sure. Early days, so this question next quarter would have a lot more meat into it. But the great companies are made of two things. The first is great people, and the second is a good set of customers. And what I've seen in the last two weeks is we've got both of those ingredients in plenty and available to make this transformation happen in the coming years. So I look at significant value-creation opportunities for everyone here in terms of optimization, transformation, and making sure that our great brands are known in the country and even outside the country.

William Dezellem, Analyst

I have two questions. The first one is about the Services business. Are they expanding into new cities, and is that contributing to the backlog? Secondly, regarding the LSO business, we are hearing a lot about consumers nesting and doing various things in their homes, from buying new homes to purchasing furniture. Is that creating any interesting dynamics for the LSO business as people decide to hang pictures or other art?

Joseph Puishys, CEO

Thank you, Bill, for your questions. Let me address them. The Services sector has made some selective moves into new regions over the past few years, but their growth hasn’t primarily come from these new areas. We operate throughout the U.S., but we're not in every city. They have the capability to reach most cities. For example, about six years ago, we utilized our Cleveland office when we noticed significant growth in Upstate New York, which received a lot of investment. We took on a substantial amount of work there and managed it from that office. We do that frequently. However, the growth we've seen in the last year, which amounts to $200 million, is primarily derived from our existing core geographic segments. I attribute this success to strong project execution. Their performance at construction sites leads to repeat business from the same general contractors. So, the answer is generally no; it's not due to expansion into new areas. That still represents an opportunity for us. Regarding the LSO business, it’s a great question; I wish our product was something like puzzles or toys that people could engage with while working from home. Unfortunately, our product is something that requires an in-store experience. Customers often bring in their artwork or important items like their son’s diploma to have them framed and want to see the frames and matboard in person. It’s a process that really needs to happen in-store. I believe the trend of people improving their homes due to spending more time at home will positively impact our product; however, it requires the stores and independent framers to be operational. That is indeed happening. Many of our major retailers have transitioned from being completely shut down to nearly 100% operational just in the last week or two. The last store of a major retailer in New York opened recently. I am confident that the broader trend of home improvement will benefit our product. Now that the stores are reopening, I believe it will provide a positive momentum for our business moving forward. Unfortunately, this wasn’t helping when the large stores were closed, as you understand, Bill. I want to thank everyone for joining our call and thank you all. Stay safe. Be part of the solution, not the problem. Wear your masks. Go get something custom-framed and ask for antireflective ultraviolet protection glass when you do it. Have a great day. Stay safe. Thank you.

Operator, Operator

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