Q1 2023 Ufp Industries Inc Earnings Call

Participants

Dick Gauthier; VP of Communications & IR; UFP Industries, Inc.

Matthew Jon Missad; CEO & Chairman; UFP Industries, Inc.

Michael Richard Cole; CFO & Treasurer; UFP Industries, Inc.

Ketan Mamtora; Building Products Analyst; BMO Capital Markets Equity Research

Kurt Willem Yinger; VP & Research Analyst; D.A. Davidson & Co., Research Division

Reuben Garner; Senior Equity Research Analyst; The Benchmark Company, LLC, Research Division

Stanley Stoker Elliott; VP & Analyst; Stifel, Nicolaus & Company, Incorporated, Research Division

Unidentified Analyst

Presentation

Operator

Good day, and welcome to the Q1 2023 UFP Industries, Inc. Earnings Conference Call and Webcast. (Operator Instructions) 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.

Dick Gauthier

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 opened 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 will now turn the call over to Matt Missad.

Matthew Jon Missad

Thank you, Dick, and good afternoon everyone. Thank you for joining first quarter 2023 conference call. (technical difficulty) unpredictable would happen, but (technical difficulty) chaperoning 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 unanticipated things happened. As an example, 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 the challenges head on.
As we discussed in February, the year 2023 will not likely be smooth, but we expect it to be more in line with pre-COVID economies plus normal growth. Our team is focused on executing our plans and taking advantage of opportunities if others stumble. We have accumulated a significant amount of capital and will stay operationally aggressive and fiscally conservative 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 handled by those closest to the action, and we don't wait for events to make decisions. Our growth hasn't 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 taking share. We, too, will work hard to make sure we can 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. The growth can be attributed to favorable market where prices are comparable to pre-pandemic levels. Outdoor projects using lumber are much more affordable now than in the previous few years.
Most of the total revenue shortfall was due to a lower level of lumber market. And as we predicted, 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 don't 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.
Decorators had a solid first quarter. They have invested in more innovation capacity and will be driving new products to market using our patented and mineral-based technology, which has considerable 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 the 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, including key markets on the West Coast. Inventories in the channel are also better balanced, which will allow Edge to better manage demand with the ability to react quickly. Share gains are a critical piece 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 were 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 RV 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 shift customer orders. The outlook for our Site Built business is more positive than it was 2 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 good sustainable business unit for Site Built.
Commercial had a positive Q1. As we have seen in this business, when economic times are uncertain, there's a tendency to push back projects. They eventually come through, but it creates a much greater cost for us to service. While the order files are strong, our ability to hit plan for the year hinges on our customers moving forward on their remodeling and construction plans. Our team has done a very good job of refocusing for profitability and return, and we will need to continue to drive that improvement in order to compete for capital with our other business units.
Concrete Forming Solutions is 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 up and running. 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 balance of 2023.
UFP Packaging continues to strengthen its structure to bring greater efficiency on the design and manufacturing side of the business while better serving the customers. Our use of our investments in mixed materials allows us to make better solutions and better values. We expect these improvements to yield greater market share in each of our runways. Packaging industry is fragmented and our modest market share there's tremendous opportunity for growth in packaging.
PalletOne performed well in Q1 and has been using the combination with other UFP facilities to serve national customers and grow their presence and importance with national, regional and local customers. PalletOne continues to look for opportunities to expand its network to get closer to the customers nationwide.
In Structural Packaging, demand for this business unit was unexpectedly soft in Q1. The Purchasing Managers Index indicates the lack of strength with March's indicator of 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 growing 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 reach our targets. Increasing our design, engineering, testing and analytical capabilities will help this effort as well adding increased capacity in our steel and mixed material solutions.
Productive Packaging is growing revenues and looking to scale its recent acquisitions in corrugate and labels. The unit is executing at scale and synergy plans were designed to add 50% more capacity to the label production and to 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 are 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 achieving the target. Our Innovate Fund has a robust pipeline of new targets, which we will select from to ensure the best results 3 to 5 years from the date of our investment in these companies.
Acquisition growth is another area of focus. 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 outsized performance. Again, we look for companies with a good cultural fit, who bring clear new product capabilities or 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 1 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 1 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 against excess supply. And unless there is unexpectedly high demand, we don't anticipate the same price levels in the lumber market we saw in 2022 or 2021, which may result in lower revenues per unit.
Transportation. The availability of drivers is improving while the cost of labor, equipment, fuel and insurance are elevated. We are implementing our new transportation management system in the second quarter, which will serve as a springboard to improve transportation management overall.
Human capital. While the typical unemployment numbers remain low, the [US VIX] index was 6.7% in March. The workforce participation rate was 62.6%, still well below historical averages.
We are receiving more applicants, yet finding those motivated to grow a career is still a challenge. We have enhanced our training programs to allow more of our internal candidates to obtain the skills and training they need to move up in the organization. And we have implemented our new human capital management software in most of our facilities, and we'll be integrating the most recent acquisitions over the next year. In an uncertain economy, our goal is to retain our key employees and to help them grow with our company. We will also try to bring outside skills and talent to our organization when other companies falter.
Since our growth will be fueled by the talent of our team, we will keep training, recruiting and making ourselves better for the future. All who want to work hard to create a better life for themselves and their families are welcomed and encouraged at UFP, and the best performers will win.
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 our reach or both. We also will provide capital for replacement and maintenance needs.
In Q1, we returned capital to shareholders through share repurchases, buying back 151,000 shares and our Board declared a $0.25 per share dividend for payment in June.
And for the forward outlook, as I try to predict what will happen over the next 3 quarters, I am reminded of MGK's lyrics, "all I know is I don't know nothing. People talk and they don't say nothing." Although the lyrics may disappoint an English teacher, they create a simple reminder, that there are hundreds of forecasts published and equally as many predictions as to 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 to our annual targets and the current market indicators support us achieving those targets. Only time will tell is, "I don't know nothing at all."
Now I'd like to turn it over to Mike Cole to review the financial information.

Michael Richard Cole

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 for 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; 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 net working capital and a balance sheet that 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 Decorators 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 dropped to $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 difficult 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 to cause unfavorable results in Q2 through Q4 when prices then dropped steadily until they reach the bottom of just under $400 per 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 expectations. We were pleased to see that our team added approximately $28 million of sales to new accounts and $7 million of 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 declined.
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 give us opportunities to gain market share of desirable business as the year progresses.
Turning into 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, whose units declined 22% and 19%, respectively. These declines were offset by unit increases in our Commercial and Concrete Forming units as these end markets remain 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 I mentioned earlier because if sales are more heavily weighted to products with selling prices that are fixed for a period of time. Peak demand and capacity constraints also allowed the team to be more selective in the business we pursued last year.
As we manage through this down cycle, 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 to over 9% this year from 7.4% last year. We're confident these efforts will continue to help us achieve our 10% minimum EBITDA margin target and help us continue to 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 resources needed to execute long-term strategies and 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 4-day increase in our receivable cycle and a 7-day increase in our inventory cycle, offset by a 1-day increase in our payables cycle.
While we've experienced a slight delay in payments with 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 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. The 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, achieve efficiencies through automation and enhanced working conditions in our plants in all segments and increase our transportation capacity as we transform this [function] from a cost to a profit center.
Finally, our financing activities for the year included $16 million of dividends and $33 million of cash paid for share buybacks.
Turning to our capital structure and resources. We continue to have a strong balance sheet with $145 million in surplus cash in excess of debt [plan] compared to [410] debt last year. Our total liquidity was $1.7 billion, consisting of surplus cash of $423 million in availability to $41 million under our credit facility and $535 million under a shelf agreement with certain long-term (technical difficulty).
The strength of our cash flow generation conservative (technical difficulty) managing our capital structure and prudent returns-driven approach to capital allocation continues to (technical difficulty) with an abundance of capital to grow our business and also to return to shareholders through up and down cycles. We'll continue to pursue a balanced and return-driven (technical difficulty), share buybacks, capital investments and M&A.
Specifically, our Board approved a quarterly dividend of $0.25 a share to be paid in June. We had a share repurchase program approved by our Board of Directors, providing us with authorization to purchase up to 2 million shares until February of 2024. Through April, we bought back 550,000 shares at an average price of $78.45.
As I mentioned earlier, we're planning for total capital expenditures of $225 million this year, and we continue to pursue a healthy pipeline of M&A opportunities of companies that have a strong strategic fit and enhance our capabilities and competitive position while providing higher margin return and growth potential. It's all I have on the financials, Matt.

Matthew Jon Missad

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

Question and Answer Session

Operator

(Operator Instructions) And today's first question will come from the line of Stanley Elliott with Stifel.

Stanley Stoker Elliott

Impressive in the environment. I guess I'd like to start off on the Packaging business. I mean we've seen PMIs. You mentioned them being down kind of 46-ish, but we had 5 quarters or so sub-50 as kind of rebounded here. Should your Packaging business track that maybe on a lag? Or do we think that some of the outgrowth initiatives you will have in terms of gaining share and gaining customer wallet can actually help that part of the business perform better?

Matthew Jon Missad

Yes, I would say it's the latter, Stanley. I think 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 be a little soft, but we see signs of improvement, and I think that's the important thing. But most important is what you outlined at the end there, which is our ability to gain market share and provide new innovative solutions, we expect will help us kind of regardless of market size.

Stanley Stoker Elliott

And then kind of switching gears. You mentioned, I thought I heard (inaudible) commentary around the Deckorators product if that's -- so I would love to hear a little bit more about that. And then more broadly, how are you all thinking about the retail business, the news constantly talking about the consumer getting stretched, and I do think the big box channel is positioned to outgrow your other distribution networks. But if you could kind of elaborate on a little bit, those two would be great.

Matthew Jon Missad

Sure. So on the Deckorators side, obviously, we're excited about the future. Certainly, the mineral-based composite, which I talk about a lot is something that we're excited about. A lot of potential new products for that technology. And I think the rapid rail system, among other things that are being added to the extent that we can tie those together with our decking sales and get more of the share of the combined total. That's a big plus for the Deckorators and the Deckorators brand.
I think if I look at retail in general for your second part of your question, there is a slight reduction, 2.8%, I think, over the next basically year is what's being predicted in the repair/remodel index. But I like the customers that we have, and I like the approach we ask. And I really think with the combination of both ProWood and Sunbelt and the strategies that our retail group has that we should be able to take share. And so I would expect getting growth from share. And as long as the market holds reasonably well, we should be very, very good. I think the challenge to everything is what happens if the consumer loses confidence.

Stanley Stoker Elliott

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

Matthew Jon Missad

Yes. I think it's kind of going to look at it, the trend is a positive trend for March, and I sense that, that is continuing at least at this point.

Operator

And that will come from the line of Reuben Garner with The Benchmark Company.

Reuben Garner

Maybe if we could start off with the -- 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 a few building product categories that maybe -- or inventory retail have gotten too low and things are maybe starting to normalize in the other direction. Just curious if you're seeing that and if it's different by kind of product category.

Matthew Jon Missad

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

Reuben Garner

Okay. And then kind of a broader question about pricing. You guys have sort of distanced yourself, I think, increasingly so in recent quarters from commodity price action. And I was wondering if you could talk about some of the value-added areas, maybe some 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 areas where you've moved into more value add versus the commodity piece that would be [great].

Matthew Jon Missad

Yes. I think we talk a lot about converting customers from sticks and panels to more designed, engineered and manufactured products, so we see that both on the industrial side and on the concrete forming side as examples. So those are areas where we can help drive that process.
I would say the other key portion of this is to try to make sure that we are at least paid reasonably for a lot of the products that we do, put a lot of effort and energy into treated lumber being one where we probably haven't been fairly rewarded for the value of that product. So we continue to try to make improvements there in that model, and that will be important to future value-add sales.
With respect to some of the other commodity type business, we're trying to deemphasize that where we can, but we also recognize that some of it is the bread and milk that we need in order to get the rest of the value-added products to the customers. So I know each of the business units and each of the segments is very, very focused on trying to maximize the value add, developing new products is an area for us to help enforce that and to help that to grow as well. So we're coming at it from a lot of different angles, and we expect that to continue to improve.

Reuben Garner

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

Matthew Jon Missad

Thank you.

Operator

One moment for our next question. And that will come from the line of Ketan Mamtora with BMO Capital Markets.

Ketan Mamtora

Can you talk a little bit about your comments in the prepared remarks where you said Site Built was a bit above, pleasant surprise. Curious if you can provide some additional color in the context of the sharp drops that we saw in building permits and starts late last year? So as we cycle through that, so far as consumption of materials is concerned, so if you can elaborate on that, that would be helpful.

Matthew Jon Missad

Yes. Let me try to make sure I understand the question well. So basically, if I looked at it and you can kind of tell what our expectations were with -- when I said January was in line, February was below and March was back in line again. And I think I would take a look at Site Built in a similar vein and say that we've provided decremental margin information last year, we talked about what that might look like, and I would say to the credit of the Site Built management team and all the people on that team. They've been able to outperform even though sales have been less than certainly they want it, but they're in line with what our expectations were.
And I think what we're talking about at this juncture is the way March rebounded from what the low was in February, it appears that there's more strength in that market. So we feel much better about that today and feel very confident in our annual numbers, where they all look like February, we would have been less confident.
I know I'm taking out a long walk around the block, Ketan, but I think that's, hopefully, that answers what you're trying to get at.

Ketan Mamtora

No, that's certainly helpful. And now has that part of the market become just generally more competitive so far as you can tell, given lumber has come down, demand has eased? Curious if the competitive dynamics have changed at all.

Matthew Jon Missad

Yes, I think there's -- I'll say a couple of components to the competitive dynamics. One is the situation which we were fortunate to have a little bit of over the last few years, which was the demand far outstripped supply. So there was actually a positive pricing element to our sales. That premium, I'll call it, is gone. So that by itself creates competitive dynamic. And then with pricing being lower, that's going to create a competitive squeeze as well.
I think if I look at some of the services we offer in our value-based engineering, some of the other component services and the customer relationships that our team has been able to forge, I think we still become a preferred supplier, and there is a value in making sure that the -- our customers know we can deliver when we say we are, and I think that's a big benefit for us.

Ketan Mamtora

No, that's helpful. And then final question. From M&A standpoint, obviously, the balance sheet is in very strong shape. Curious where you see kind of most opportunities. You talked about reviewing a number of opportunities. Where would you say you think there is the most potential?

Matthew Jon Missad

That's a great question. And I think each one of the business units has identified targets that they feel are very important to their future growth. And that's creating what I think is a terrific competition for capital trying to find transactions that make the most sense that can bring the biggest impact over time. So we've talked a lot about the industrial and packaging space, which for us is really total packaging now. I think we also would look at areas such as concrete forming where there's some opportunities to convert more value-added sales.
And I think on the retail side, there are some very good opportunities there for mixed materials and other things. So I don't think there's a shortage of opportunities, Ketan. Our challenge is making sure that we maintain our fiscal conservatism as we evaluate these opportunities. And as I mentioned in my remarks, I think that probably the bigger challenge is people thinking that the hockey stick that they are planning going forward is real when it may or may not be.

Operator

One moment for our next question. That will come from the line of Kurt Yinger with D.A. Davidson.

Kurt Willem Yinger

Just looking at the retail gross margin, I mean absent any big changes in lumber pricing going forward is, is the Q1 kind of 12.6% number, kind of a reasonable run rate? And then any kind of mix impacts to be aware of in Q2, maybe like a little bit heavier on the pressure treatment side that could weigh that down? Or how do you think about that?

Michael Richard Cole

Yes. The biggest drivers within gross margin, Kurt. So if we get a market that stays pretty well deflated like it is now, and we don't get a lot of sequential volatility.
The big drivers are kicking the lumber market swings out of it, give me an amount of variable price treated lumber. And then it's really more mix changes. And I think you're going to see more treated number, like you said, in Q2, a little less to that than in Q3. And so while volumes pick up tremendously in Q2, the mix is more weighted towards treated lumber and could move margin down, but you have a lot more sales dollars. So profitability would it be expected to be way higher.

Kurt Willem Yinger

Okay. Perfect. That makes sense. And then in the packaging business, I mean, we kind of finally saw pricing slip to a headwind. Is that all flow through from lower lumber prices, maybe on just a bit of a lag or any other areas of pressure from a pricing perspective with customers?

Matthew Jon Missad

Yes. What I would tell you is I think most of the lumber market flow-through has been built in at this point. I think the question about how slow are the customers going to be is that some different runways, maybe more of a longer-term slowdown. Others will bounce back, and that's the beauty of the balanced model of the customers that we have. So what I would tell you is I think there's probably an increase in quoting activity right now as people who are not as busy as they were before, starting to take a look and trying to squeeze where they can.
So again, I think the benefits that we bring allow us to provide more value for the customer, but there certainly will be that kind of normal pressure in the marketplace that hadn't existed in '21 or '22.

Kurt Willem Yinger

Got it. Yes. That makes sense. Okay. And then just on decremental margins, Mike, forgive me because I missed this. What was kind of the outlook for that within the retail segment for the year?

Michael Richard Cole

We didn't provide one. So we guided you, I guess, last time we spoke. For Q1 results, that would be well below last year. So we knew that was going to happen given the dynamics with the lumber market, and -- but we had said that we felt like once we get past Q1, I mean, when we look at the full year, in Q2, Q3 and Q4, we would more than make up for whatever shortfall we had in Q1 because whatever we made in Q1 last year, we gave back and then some in Q2 and Q3. So with the lumber market where it's at today, we still feel like we definitely feel like that's the case. So the shortfall that we have so far for the year, we're going to more make up for the next 9 months.

Kurt Willem Yinger

Got it. Okay. And then last quarter you talked about, I think, decremental operating margin 15% to 20% for the year. You guys, I guess, said that Q1 was pretty much in line with expectations. But anything from a market or a performance perspective here early in the year that makes you feel like you could do a little bit better or come in at the low end of that range? Or any thoughts around that?

Michael Richard Cole

I think we feel good about where we sit today. But the guidance that we gave is for the full year, and I think the guidance has to reflect some uncertainty about -- still about severity and duration of any recession. And we're already in one today. So I think we still want to be conservative in how we look at that. And so those ranges, I think, are ones that we're still going to still look to.

Matthew Jon Missad

Yes. And I'd probably add, Kurt, that there are some opportunities for improvement. I know each one of the business units and segments see some different things that we can do to improve, but Mike's right, there's other external factors that we can't control. So we're going to continue to work on the things that we can improve and hope the external factors take care of themselves.

Kurt Willem Yinger

Right. Yes. Still early in the year. Makes sense. And then just last one for me. Mike, what was bonus expense here in Q1?

Michael Richard Cole

The bonus rate was about, we accrued to about 20% of pre-bonus operating profit. So with that number, you can -- and you have the operating profit number, you can calculate what bonus expense was pretty close.

Kurt Willem Yinger

Got it. Good luck here in Q2.

Matthew Jon Missad

Thanks, Kurt.

Operator

One moment for our next question. And that will come from the line of Julio Romero with Sidoti & Co.

Unidentified Analyst

Can you hear me?

Matthew Jon Missad

Yes.

Unidentified Analyst

This is [Stefan Geom] on for Julio Romero. I guess my first question is, can you talk about your execution in retail and the progress the new segment President is making on creating our synergies and scaling your products.

Matthew Jon Missad

Sure. I guess. So Will Schwartz, who just got into the role on January 1, is doing an excellent job. He's working with his team and helping to drive the business. And I think we're very optimistic about where that business is headed.

Unidentified Analyst

And can you also talk to pricing changes in the Construction segment? By how much more do you see for the prices in that segment coming down before we see some stabilization there?

Matthew Jon Missad

Yes. That's a really tough question. I try not to get into specific pricing, particularly by segment or by business unit. As we outlined before, I think the lumber market pricing and probably any premium from the demand far outstripping supply, those are already out of what I would say was pricing in Q1. So for us, it really becomes what's the demand look like going forward. And as long as the demand is in the range that we estimated is then the pricing, we think will be somewhere in the range that it is.

Unidentified Analyst

I guess the last one for me. Can you speak to the potential impact on the regional banking crisis with the FBI or to your customers, suppliers, et cetera?

Matthew Jon Missad

Yes, I wish I could probably speak for hours on it, but I don't think it would be particularly useful for anyone because I don't have any specialized knowledge in the area. I think what it indicates is that interest rate environment has caused some issues and so it has ripple effects. And so from our standpoint, we're just looking to see what the next moves that the fed makes are, but at this point, very difficult to predict if it's a broader-based issue or just specific to a small number of banks.

Operator

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.

Matthew Jon Missad

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 birthday party in D.C., we'll still keep our eyes open.
I know our team prides on a good challenge. So while it's not in Michigan this week, let's hold for sunshine in Q2 and throughout 2023. And I know that no matter what the obstacles we face, our team plans to roll with the changes and come out ahead. Have a great day.

Operator

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