Ufp Industries Inc Q1 FY2023 Earnings Call

Good day, and welcome to the Q1 2023 UFP Industries Inc. Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Dick Gauthier, Vice President of Investor Relations. Your line is open, sir.

Welcome to the first quarter 2023 conference call for UFP Industries. Hosting the call today are CEO, Matt Missad; and CFO, Mike Cole. Matt and Mike will offer prepared remarks and then the call will be open for questions. This conference call is available simultaneously in its entirety to all interested investors and news media through our website – webcast at ufpi.com. A replay will also be available at that website. Before I turn the call over to Matt Missad, let me remind you that today’s press release and presentation include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company’s expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the press release and in the filings with the Securities and Exchange Commission. I’ll now turn the call over to Matt Missad.

Thank you, Dick, good afternoon, everyone. Thank you for joining our first quarter 2023 conference call. Although something unpredictable happened, in the end, everything is okay. We navigated through a tricky quarter and we were able to report earnings per share of $1.98, which exceeded our analyst consensus estimate. The first quarter results were generally in line with our expectations, although some unexpected events occurred. January was in line with expectations. February was below and March was above. We will review the results by segment, but the overarching theme is that challenges will continue as the economy is affected by interest rate changes, reactions to unsustainable federal debt levels, and the resiliency of consumers. We plan to anticipate and meet these challenges head on. As we discussed in February, the year 2023 will not likely be smooth, but we expect it to align more with pre-COVID economies plus normal growth. Our team is focused on executing our plans and seizing opportunities if others stumble. We have accumulated a significant amount of capital and will maintain an operationally aggressive and fiscally conservative approach using our balance sheet to support our growth and value creation. Our unique business model allows decisions on cost containment, staffing, and inventory levels to be managed by those closest to the actions, and we do not wait for events to make decisions. Our growth has not affected our agility and we intend to keep it that way. Now, let’s review segment performance and outlook. In retail solutions as a value-added manufacturer, seller, and self-distributor, our products provide solutions for the DIY consumer as well as the professional contractor. Our strategy in this segment is simple: provide innovative new products and solutions, find, harness and expand opportunities, select and build the right brands, and utilize our national reach, purchasing expertise and distribution network to provide the best customer value. Overall, retail unit sales were only down 2% versus 2022, a better than expected result. The leading indicators of remodeling activity published by the Joint Center for Housing predict a modest 2.8% decline in remodeling activity over the period ending in Q1 of 2024. Our Big Box customers are executing their strategies to capture business from the professional contractor and they appear to be gaining share. We too will work hard to ensure we capture additional market share while enhancing our return on investment. In the first quarter, ProWood and Sunbelt unit sales were up double digits from 2022. This growth can be attributed to a favorable market where prices are comparable to pre-pandemic levels. Outdoor projects using lumber are now much more affordable than in the previous few years. Most of the total revenue shortfall was due to a lower level of lumber market activity. And as we anticipated, margins were lower in Q1 of 2022 as the buying opportunities did not materialize in 2023 like they did a year ago. On a positive note, you may recall in Q2 the declining market hurt margins in ProWood and Sunbelt. Thankfully, we do not expect a similar lumber market decline in 2023, and I am encouraged by the words of Paul, who said, 'You cannot fall off the floor.' Deckorators had a solid first quarter. They have invested in more innovative capacity and will be driving new products to market using our patented mineral-based technology, which has substantial opportunities for growth. Its durability, ease of use, and enhanced strength-to-weight ratio make it a contractor favorite. The launch of our rapid rail has exceeded our expectations, helping us achieve our goal of increasing share while achieving better sales attachments of railing to decking sales. In our UFP-Edge business unit, we named a new leader. Chris Hayn will bring a renewed focus on driving efficiency and implementing the growth strategy set forth by Will Schwartz and the retail team. While Edge was slow in the first quarter, market demand has started to pick up. Edge sales were particularly affected by weather conditions in key markets on the West Coast. Inventories in the channel are also better balanced, allowing Edge to better manage demand with the ability to react quickly. Gaining market share is a critical component of the Edge strategy. As we analyze the next manufacturing location in the U.S. for this great product lineup, we will utilize our partnership with Pinelli Universal in Mexico to produce products in one of the best facilities in North America. Moving to the Construction segment, Factory Built is trending according to plan and is well below year-ago levels. The RV industry is down by as much as 80% in some areas, while the MH industry is down 29% based on February shipments. The current forecast for shipments of manufactured housing units in 2023 is 71,000. We have adjusted our business accordingly and are investing in more technology to provide options for affordable homes. Our sales into RVs are a small percentage of total sales, but there continue to be opportunities to innovate and create more value in that space. Site Built has been a pleasant surprise thus far, even with February actual new home sales being down from 2022. March showed a rebound and current order files have improved as well. We are adding a second shift in many locations as we ramp up to fulfill customer orders. The outlook for our Site Built business is more positive than it was two months ago as the annual starts forecast ranges between 1.2 million and 1.4 million for 2023. At that level of activity, we have a sustainable business unit for Site Built. The Commercial segment had a positive Q1. As we have observed, when economic times are uncertain, there is a tendency to delay projects. They eventually proceed, but it creates a much greater cost for us to service. While the order files are strong, our ability to hit our plan for the year hinges on our customers moving forward with their remodeling and construction plans. Our team has done an excellent job of refocusing on profitability and return, and we will need to maintain this improvement to compete for capital with our other business units. Concrete forming solutions are making investments in growth by opening new facilities and adding sales talent in selected markets. Our new locations in Long Island, New York and Colorado are operational. These will increase SG&A costs in the near term but will serve as a catalyst for their target of $500 million in revenue and beyond. UFP Construction will rely on our experienced management team to guide the business through any uncertainty and to produce strong results for the remainder of 2023. UFP Packaging continues to strengthen its structure to enhance efficiency on the design and manufacturing side of the business while better serving customers. Our investments in mixed materials allow us to create better solutions at better values. We expect these improvements to yield greater market share in each of our runways. The packaging industry is fragmented, and our modest market share presents significant opportunities for growth. PalletOne performed well in Q1 and has utilized the combination with other UFP facilities to serve national customers and grow its presence with national, regional, and local customers. PalletOne continues to seek opportunities to expand its network to be closer to customers nationwide. In structural packaging, demand for this business unit was unexpectedly soft in Q1. The Purchasing Managers’ Index indicates a lack of strength, with March's indicator being 46.3, a 19% drop from a year ago. However, as lumber and other input costs have normalized, the value of our product remains relatively better due to our focus on capacity and solution-based designs. We are expanding capacity without adding additional facilities by consolidating production of certain items in key regional locations. We need to convert customers to more value-added products and services, as well as increase our market share to meet our targets. Enhancing our design, engineering, testing, and analytical capabilities will aid this effort as we increase capacity in our steel and mixed material solutions. Productive packaging is growing revenues and seeking to scale its recent acquisitions in corrugates and labels. The unit is executing its scale and synergy plans, which are designed to add 50% more capacity to label production and add a second corrugate conversion facility. Our international team is focused heavily on extending our packaging solutions to multinational customers. The recently acquired online timber trading platform, Timber Base, is expected to drive sales growth and create efficiency in the supply chain for our foreign-to-foreign sales. Some other areas of interest include new product sales. New product sales for the first quarter were $166.6 million. Our annual target for 2023 is $795 million, so we have work to do to achieve that target. We are building out the framework to support reaching this target. Our Innovate Fund has a robust pipeline of new targets, which we will select from to ensure the best results three to five years from the date of our investment in these companies. Acquisition growth is another focus area. We continue to drive our growth strategy, including acquisitions. Currently, our acquisition team is reviewing several potential transactions. One of the challenges is determining the new normal for financial results after a few years of exceptional performance. Again, we look for companies with a good cultural fit that bring clear new product capabilities or an expansion of existing product lines, which we can scale through our network. Purchasing: the lumber market has been trading in a relatively narrow band thus far in 2023. For example, with Southern Yellow Pine in week one of 2023, random lengths was $459 per thousand board feet, and at quarter-end in week 13, the market was $533 per thousand board feet. Contrast that with week one of 2022 at $922 per thousand board feet and week 13 of 2022 at $1,235 per thousand board feet. We expect that as new production comes online, mills will curtail other production to manage excess supply. Unless there is unexpectedly high demand, we do not anticipate the same price levels in the lumber market as 2022 or 2021, which may lead to lower revenues per unit. Transportation: the availability of drivers is improving while wages, equipment, fuel, and insurance costs are elevated. We will implement our new transportation management system in the second quarter, which will serve as a springboard to enhance overall transportation management. Human capital: while typical unemployment numbers remain low, the U6 index was 6.7% in March. The workforce participation rate was 62.6%, still well below historical averages. We are receiving more applications yet still finding it challenging to motivate candidates to advance their careers. We have enhanced our training programs to allow more of our internal candidates to acquire the skills and training needed to progress within the organization. Additionally, we have installed our new human capital management software in most of our facilities and will be integrating the latest acquisitions over the coming year. In an uncertain economy, our goal is to retain our key employees and assist them in growing with our company. We will also strive to attract outside skills and talents to our organization when other companies falter. Our growth will be fueled by our talented team, so we will continue training, recruiting, and improving ourselves for the future. All who are eager to work hard for a better life for themselves and their families are welcome, and we encourage them that at UFP, the best performers will succeed. Capital allocation: as you know, we are focused on prudently and profitably investing capital in our business. Growth capital is a priority via greenfield and technology investments, as well as targeted acquisitions that expand our product offerings or reach, or both. We will also allocate capital for replacement and maintenance needs. In Q1, we returned capital to shareholders through share repurchases, buying back 451,000 shares, and our board declared a $0.25 per share dividend for payment in June. For the forward outlook, as I try to predict what will happen over the next three quarters, I am reminded of MGK’s lyrics: 'All I know is I don’t know anything; people talk and they don’t say anything.' While those lyrics may disappoint an English teacher, they serve as a simple reminder that there are numerous forecasts published and just as many predictions about what the Fed might do or whether Congress will rein in spending or increase the debt. From what we can glean today, we are still on track for our annual targets, and the current market indicators support us in achieving those targets. Only time will tell if 'I don’t know anything at all.' Now I’d like to turn it over to Mike Cole to review the financial information.

Thank you, Matt and hello, everyone. Our results this quarter were in line with our overall expectations and included a 27% drop in sales to $1.8 billion, consisting of a 20% reduction in selling prices, primarily due to the decline in lumber prices we passed on to our customers, and a 7% decrease in units. A 37.5% drop in operating profits to $162 million, resulting in a decremental operating margin of 14.6%, slightly better than the 15% to 20% range we estimated for the year. There was a $208 million improvement in operating cash flow compared to last year as soft unit sales and low lumber prices reduced our seasonal increase in working capital. Additionally, our balance sheet continues to gain strength with a net cash surplus of $145 million this year compared to net debt of $410 million last year. By segment, sales in our Retail segment dropped 25% to $750 million, consisting of a 23% decline in selling prices and a 2% decrease in units. Given market conditions, our unit sales held up well this quarter, primarily driven by our ProWood and Deckorators business units. Our unit sales to Big Box customers also held up well with a 6% increase for the quarter, while our business with independent retailers, which is more closely correlated with new housing starts, dropped by 17%. Also, our Big Box customers continue to pursue a greater share of professional contractor business. Our retail operating profits decreased by $41 million this year, a 42% decrease from last year, resulting in a 12.5% decremental operating margin. As we mentioned last quarter, we expected a challenging comparison in Q1 this year for retail. Last year, retail, which has a sales mix heavily weighted toward variable-priced treated lumber, greatly benefited from a rising lumber market that reached over $1,300 per thousand compared to only $400 per thousand this year. This greatly enhanced profitability in Q1 last year, causing unfavorable results in Q2 through Q4 when prices dropped steadily until reaching just under $400 a thousand at the end of 2022. As we mentioned last quarter, we continue to believe retail is well-positioned to report an increase in operating profits for the year, as Q1 results were in line with our expectations. Moving on to packaging, sales in this segment dropped 20% to $487 million, consisting of an 18% decline in selling prices and a 2% decrease in units, which was in line with our expectations. We were pleased to see that our team added approximately $28 million in sales to new accounts and $7 million in sales to new locations of existing accounts. These increases were more than offset by a decline in prices and unit sales to existing accounts as market demand waned. Our packaging operating profits dropped to $55 million, a 34% decrease from last year, resulting in a decremental operating margin of 22%, which is within the 20% to 25% range we estimated for the year. Customer quoting activity accelerated during the quarter resulting in a more competitive environment, but we believe this should also present opportunities to gain market share of desirable business as the year progresses. Turning to construction, sales in this segment dropped 34% to $516 million, consisting of an 18% decline in selling prices and a 16% decrease in units. As expected, the unit decline was due to our Site Built and Factory Built businesses, which declined 22% and 19% respectively. These declines were offset by unit increases in our commercial and concrete forming units as these end markets proved resilient. Operating profits in our construction segment dropped to $54 million, a 31% decrease from last year resulting in a decremental operating margin of 9%, which was better than the 20% to 25% range we estimated for the full year. Last year in Q2 through Q4, the construction segment benefited from the drop in lumber prices mentioned earlier, as sales are more heavily weighted to products with selling prices that are fixed for a period of time. Peak demand and capacity constraints also enabled the team to be more selective in the business we pursued last year. As we navigate through this downcycle, each segment continues to focus on executing our strategies to grow our portfolio of value-added products, and we’re pleased to report an increase in our ratio of value-added sales to total sales to 68% this year from 58% last year. Similarly, our ratio of new product sales to total sales increased over 9% this year from 7.4% last year. We’re confident these efforts will continue to help us achieve our minimum target of a 10% EBITDA margin and enhance our profitability over the longer term. We’re pleased to report an EBITDA margin for the quarter that exceeded 11%. We’re also mindful of our cost structure in this environment as we ensure the company is appropriately sized relative to demand while still providing the necessary resources to execute long-term strategies that enhance our ability to offer value-added solutions and drive innovation. Our SG&A expenses came in slightly under plan, declining nearly $26 million this quarter or 12%, primarily due to lower bonus and sales incentive expenses. Moving on to our cash flow statement, our cash flow used in operations was $37 million, a $208 million improvement over last year due to lower seasonal working capital requirements resulting from soft unit sales and lumber prices. However, our cash cycle for the quarter increased to 71 days this year, from 61 days last year due to a four-day increase in our receivable cycle and a seven-day increase in our inventory cycle, offset by a one-day increase in our payable cycle. While we’ve experienced a slight delay in payments from certain customers, our overall receivables are in good shape with over 93% current. Our inventory cycle was above historical trends and is an area of focus as we reset our safety stock levels for the improvement in supply chain constraints and a lower demand environment. Our investing activities in Q1 included $38 million in capital expenditures. We continue to target CapEx of $200 million to $225 million for the year, but long and variable lead times may continue to impact timing. Our capital investments are primarily focused on expanding our capacity to manufacture new and value-added products primarily in our packaging segment and Deckorators and ProWood business units, achieving efficiencies through automation and improved working conditions in our plants across all segments, and increasing our transportation capacity as we transform this function from a cost center to a profit center. Lastly, our financing activities for the year included $16 million in dividends and $33 million in cash paid for share buybacks. Regarding our capital structure and resources, we maintain a strong balance sheet with a $145 million surplus in cash exceeding our debt compared to $410 million in debt last year. Our total liquidity was approximately $1.7 billion, consisting of surplus cash of $423 million, availability of $41 million under our credit facility, and $535 million under a shelf agreement with certain long-term lenders. The strength of our cash flow generation, conservative management of our capital structure, and prudent return-driven approach to capital allocation provides us with ample capital to grow our business and return value to shareholders through up and down cycles. We’ll continue to pursue a balance and return-driven approach, including dividends, share buybacks, capital investments, and mergers and acquisitions. Specifically, our board approved a quarterly dividend of $0.25 per share to be paid in June. Additionally, we have a share repurchase program approved by our board providing authorization to purchase up to 2 million shares until February of 2024. Through April, we’ve bought back 550,000 shares at an average price of $78.45. As I mentioned earlier, we are planning for total capital expenditures of $200 million to $225 million this year, and we continue to pursue a healthy pipeline of acquisition opportunities with companies that are a strong strategic fit and enhance our capabilities and competitive position while providing higher margin returns and growth potential. That’s all I have on the financials, Matt.

Thank you, Mike. Now I’d like to open it up for questions.

Thank you. And today’s first question will come from the line of Stanley Elliot with Stifel. Your line is open.

Hey everyone. Thank you for taking the question. Impressive results in the environment, but I’d like to start off on the packaging business. I mean, we’ve seen PMI, as you mentioned, being down around 46, but we’ve had five quarters or so sub-50, and they’ve kind of rebounded here. Should your packaging business track that, but maybe on a lag, or do we think that some of the outgrowth initiatives you all have, in terms of gaining share and gaining customer wallet, can actually help that part of the business perform better?

Yes, I would say it’s the latter, Stanley. To me it’s just a data point to consider. I think our team; the market was soft in the first quarter, no doubt about it. I expect it probably will remain a little soft, but we see signs of improvement, and I think that’s the important thing. However, most importantly, as you outlined at the end there, is our ability to gain market share and provide new innovative solutions we expect will help us regardless of market size.

And then switching gears, you mentioned, well, I thought I heard positive commentary around the Deckorators product. If that’s so, I’d love to hear a little bit more about that. And then, more broadly, how are you all thinking about the retail business? The news is constantly talking about the consumer getting stretched, and I do think the Big Box channel is positioned to outperform other distribution networks, but if you could elaborate a bit on those two, that would be great.

Sure. So on the Deckorators side, obviously we’re excited about the future. The mineral-based composite, which I talk about often, is something we’re optimistic about, with a lot of potential new products for that technology. I think the rapid rail system, among other things we’re adding, will help us tie those together with our decking sales and capture more share of the combined total, which is a big plus for Deckorators and the Deckorators brand. Looking at retail in general for your second part of your question, there is a slight reduction, predicted to be about 2.8% decline over the next basically year in the repair and remodel index. But I like the customers that we have, and I like our approach, and I really think that with the combination of both ProWood and Sunbelt and the strategies our retail group has, we should be able to take share. I would expect growth from increased share; as long as the market holds reasonably well, we should do very well. I think the main challenge is what happens if the consumer loses confidence.

Right. And I guess one last quick one if I could. You mentioned a comment around January, then February and March. Could you share or care to share anything around how April is looking thus far?

Yes, I think it’s kind of – the trend is positive from March, and I sense that this is continuing, at least at this point.

Great guys, thanks for the time and best of luck.

Thank you.

Thank you. And that will come from the line of Reuben Garner with Benchmark Company. Your line is open.

Thank you. Good evening, everybody. Matt, thank you for the MGK lyrics, I appreciate that. Maybe we could start off with a follow-up on the retail side. So Matt, you mentioned inventory in the channel, I think was better balanced. Can you go into more detail on that? We’ve heard in a few building product categories that maybe retail or inventory had gotten too low, and things are starting to normalize in the other direction. Just curious if you’re seeing that and if it’s different by kind of product categories.

Yes, the reference I made was to the Edge product line, Reuben, but I think there is probably a fair amount of accuracy to the comment regarding inventory generally carrying a little less, not quite as heavy as they were. So that makes it a lot easier for us to manage and, as Mike alluded to, to help manage our safety stock levels back to a more normalized situation. So cautiously optimistic there.

Okay. And then a broader question about pricing. You guys have distanced yourselves increasingly from commodity price action, and I was wondering if you could talk about some of the value-added areas where pricing is holding in better than it historically has or areas where there’s more pressure than others. Anything that jumps out to you for some of the things that are areas where you’ve moved into more value-add versus the commodity piece?

Yes, we discuss converting customers from sticks and panels to more designed engineered manufactured products. We see this both on the industrial side and on the concrete forming side, for example. Those are areas where we can help drive that process. I would add that another key portion of this is making sure we are at least compensated reasonably for many of the products that we put significant effort into, with treated lumber being one area where we probably haven’t been fairly rewarded for the value of that product. Thus, we continue to aim for improvements in that model, which will be essential for future value-add sales. Regarding commodity-type business, we’re trying to de-emphasize that where we can, but we also recognize that some of it is the 'bread and milk' we require in order to deliver the rest of the value-added products to customers. So I know each of the business units and segments is very focused on maximizing value-add. Developing new products is another avenue for us to enforce that and to facilitate growth as well. We’re approaching this from multiple angles and expect this to continue to improve.

Understood. Congrats on the results in a choppy period, and good luck going forward.

Thank you, Reuben.

Thank you. And that will come from the line of Ketan Mamtora with BMO Capital Markets. Your line is open.

Good afternoon. To start off, can you talk a little about your comments in the prepared remarks? You said Site Built was a bit of a pleasant surprise. I’m curious if you can provide additional context in light of the sharp drops we saw in building permits and starts late last year. As we cycle through that so far as material consumption is concerned, can you elaborate on that?

Yes. Let me ensure I understand your question correctly. Basically, if I looked at it, you could tell what our expectations were when I said January was in line, February was below, and March was back in line again. I think for Site Built, we provided detrimental margin information last year. We talked about what that might look like. I would say to the credit of the Site Built management team, they’ve outperformed, even though sales have not met their expectations but they’re in line with what we anticipated. At this juncture, with March rebounding from the low we observed in February, it seems there’s more strength in that market. We feel much better today regarding that and are confident in our annual numbers, especially compared to February when we would have felt less so. I know I’m taking a long walk, but I hope that answers your question.

No, that’s certainly helpful. And Mike, has that part of the market become more competitive in general, given that lumber has decreased and demand has eased? Curious if you can tell if the competitive dynamics have changed at all.

Yes. I’ll mention a couple of components to the competitive dynamics. One is the circumstance we were fortunate to experience over the last few years, where demand far outstripped supply. This has now diminished, which creates a shift in competitive dynamics. Furthermore, lower pricing will create additional competitive pressure. If I look at some of the services we offer, our value-based engineering, and other customer relationships, I think we still remain a preferred supplier, and it’s crucial that our customers recognize we can deliver as promised. That represents a significant advantage for us.

No, that’s helpful. From an M&A standpoint, the balance sheet is in a strong position. Where do you see the most opportunities? You mentioned reviewing a number of opportunities. Where do you think has the greatest potential?

That’s a great question. Each business unit has identified targets critical to their future growth, fostering what I believe is healthy competition for capital—a pursuit of transactions that make the most sense and yield substantial long-term impacts. We’ve discussed the industrial and packaging space, which now represents our total packaging. Additionally, we will look at areas such as concrete forming, where opportunities to convert more sales into value-added products exist. On the retail side, there are several excellent opportunities for mixed materials and other initiatives. So I don’t believe there’s a lack of opportunities, Ketan; instead, our challenge is maintaining fiscal conservatism as we evaluate our options. As noted in my remarks, the larger challenge lies in ensuring that projected growth is real when it might not be.

Got it. That’s very helpful information. I’ll yield back and best of luck for the rest of the year.

Thanks, Ketan.

Thank you.

Thank you. And that will come from the line of Kurt Yinger with D.A. Davidson. Your line is open.

Great, thanks, and good afternoon, Matt, Mike. Just looking at the retail gross margin, I mean, absent any major changes in lumber pricing going forward, is the Q1 kind of 12.6% number reasonable as a run rate? Are there any mix impacts to be aware of in Q2, perhaps a heavier emphasis on pressure treated items that could weigh that down? How do you perceive that?

Yes. The main drivers within gross margin, Kurt, if we look at a market that remains stable like it is now and doesn’t showcase a lot of sequential volatility, the large variables arise from shifts in mix. While you will see more treated lumber as you noted in Q2 and less in Q3, volumes should increase dramatically in Q2. Thus, even with challenges in mix being more weighted towards treated lumber—which could lower margins—you’ll likely experience significant increases in overall sales dollars, improving profitability.

Perfect. That makes sense. In the Packaging business, we finally noticed pricing turning into a headwind. Did that flow from lower lumber prices, perhaps with some lag? Or were there any other sources of pricing pressure from customers?

Yes. I would tell you that I think most of the lumber market flow through has been built in at this point. Customer slowdowns may relate to a longer-term outlook, others may rebound quickly, and that’s the positive aspect of our diverse customer base. Currently, there does seem to be increased quoting activity, with those not as busy as before examining and attempting to optimize supply chains where they can. Again, our valued offerings should allow us to deliver better value to our customers, but there will inevitably be the standard market pressures that didn’t exist in 2021 or 2022.

Got it. That makes sense. Just on detrimental margins, Mike, I apologize for missing this. What was the outlook for that within the Retail segment for the year?

We hadn’t provided one. We guided you last time we spoke for Q1 results that would certainly be below last year. So we anticipated this gap, given lumber market dynamics. However, we had mentioned that once we pass Q1 and look at the full year Q2, Q3, and Q4, we expect to surpass whatever shortfall we faced in Q1. This reflects that we gave back what we earned in Q1 last year and then some in Q2 and Q3, meaning with a stable lumber market today, we still believe the upcoming months offer strong prospects. Therefore, shortfalls in Q1 should see recovery over the remaining months.

Got it. And previously you discussed decremental operating margins in the range of 15% to 20% for the year. From a market or performance perspective early in the year, is there anything that suggests you can perform better, possibly coming in at the lower end of that range? Or any thoughts around that?

We feel good about our current position. However, the guidance provided is for the full year and includes uncertainty surrounding the severity and duration of any potential recession, which we’re currently in. Therefore, I believe we should remain cautiously optimistic yet still objective. Those ranges remain acknowledged as we work through the year.

Certainly, Kurt. There are opportunities for improvement. Each business unit and segment identifies various ways to enhance operations, but there are external factors beyond our control. We’re committed to focusing on areas within our reach and hopefully favorable external conditions.

Exactly, still early in the year. All right, last one from me, Mike—what was the bonus expense here in Q1?

The bonus rate was about 20% of pre-bonus operating profit. So with that figure, and considering the operating profit numbers, you can approximate what the bonus expense was.

Got it. Okay, thanks for all this detail, guys. Good luck in Q2.

Thanks, Kurt.

Thank you. And that will come from the line of Julio Romero with Sidoti & Co. Your line is open.

Hi, this is Stefan Gillo on for Julio Romero. How are you?

Good, how are you?

Good, thank you. I guess my first question is can you talk about your execution in retail and the progress your segment president is making on creating synergies and scaling your products?

Sure. I think Will Schwartz, who just got into the role on January 1, is doing an excellent job. He’s working with his team and helping drive the business forward; I remain very optimistic about where that business is headed.

Thank you. Can you talk to pricing trends in the construction segment? How much more do you foresee prices in that segment coming down before we see stabilization there?

Yes, that’s a really tough question. I try not to delve into specific pricing, particularly by segment or by business unit. As we outlined before, I believe lumber market pricing and any premium from demand exceeding supply have already filtered into pricing in Q1. Consequently, it hinges on the demand in the future. As long as demand falls within our estimates, pricing should stabilize in that range.

Thank you. Lastly, can you speak to the potential impacts of the regional banking crisis, whether to your business or to your customers, suppliers, etc.?

Certainly, I could probably speak for hours on it, but I don’t think that would be particularly useful for anyone since I lack specialized knowledge on the matter. However, I think it underscores that the interest rate environment has produced some complications and will have ripple effects. At this moment, we’re observing next moves from the Fed, yet it is difficult to predict if it will be a widespread issue or isolated to a small number of banks.

Thank you very much for the information.

Thank you.

And I’m showing no further questions in the queue at this time. I would now like to turn the call back over to Mr. Matt Missad for any closing remarks.

Well, thank you again for joining us today. 2023 will be a challenging year, and as we all know, with what might be the world’s largest toddler birthday party in DC, we’ll keep our eyes wide open. I know our team thrives on a good challenge, so while it snowed in Michigan this week, let’s hope for sunshine in Q2 and throughout 2023. Regardless of the obstacles we face, our team plans to adapt and succeed. Have a great day.

Thank you all for participating. This concludes today’s program. You may now disconnect.