UFP Industries, Inc. (UFPI) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the UFP Industries Second Quarter 2021 Earnings Conference Call [Operator Instructions]. Please be advised that today's conference is being recorded [Operator Instructions]. I would now like to hand the conference over to your speaker, Mr. Dick Gauthier, Vice President of Business Outreach.

Welcome to the Second Quarter 2021 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 webcast at ufpi.com. A replay will also be available at that Web site. 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. Now I would like to turn the call over to Matt Missad.

Thank you, Dick and good afternoon, everyone. As you can see from the press release, the UFP family is en fuego. While Mr. Bezos is flying into suborbital space, the UFP team made a quantum leap to another galaxy in the second quarter. The first six months of 2021 constitutes the best earnings year in UFP’s 66 year history. I send a sincere thank you to all of the UFP family of companies for your incredible effort. When the company is successful, we share that success with our teammates and we are grateful to share over $10 million in additional benefits and bonuses with our hourly employees for the first six months of 2021 to thank them for their exceptional effort too. You have seen the truly remarkable financial performance, and Mike will provide more analysis shortly. I would like to highlight a few items while providing some insight into the balance of 2021. We saw more records in the second quarter than the Grammys, yet our team is not focused on receiving awards. For them, it is about competing, improving, growing our people and opportunities and making our company stronger. They had a grand slam in the second quarter. We can't talk about Q2 without acknowledging the significant impact of the lumber market. We had top line help from a rising lumber market during the first half of the quarter. However, the last half saw a drastic drop in lumber prices, which made an impact on our retail variable price products. While we had anticipated a market reduction in that late second or third quarter, we did not anticipate that it would fall as far and as fast as it did. Included in our quarterly results was a charge of $23 million to reduce the value of inventory on certain of our variable priced products in our retail segment. Since the Southern Yellow Pine market has dropped nearly $1,000 per 1,000 in the last several weeks, the impact would have been much worse if not for the skill and dedication of our purchasing and operations teams who managed inventories very well under the circumstances. This lumber market drop also highlighted another benefit of our new structure as our teams were able to coordinate movements of inventory and maximize utilization of on hand items to limit the impact of the market decline. Thanks to our balanced business model, diverse product and customer mix and a variety of pricing methodologies, we are well positioned to weather these kinds of events. As we have discussed on many occasions, these diverse markets and pricing methodologies enable us to create a natural hedge against lumber market fluctuations like we just experienced. Last fall, when prices were rising, the Retail segment benefited overall, while the Industrial and Construction segment suffered. Going forward, for the balance of 2021, we expect that Retail will lag while Construction and Industrial will benefit. We expect the lumber market to normalize and believe that mills will try to balance inventories to match demand. We believe the lumber market is trading today within the range where it should remain for the next 30 to 60 days with slight fluctuations. Since most of the lumber products are sold under agreements between suppliers and customers, a significantly smaller volume is actively traded and reported via random lengths and other market reporting services. Therefore, this metric is subject to more fluctuation and is less reflective of the overall lumber market than it used to be. Certain products such as OSB remain tight. However, DIY demand is not as robust as it was a year ago, while professionals are still very busy and maintaining robust purchases for their businesses. Many believe that DIY demand is paused due to other pursuits such as vacations and travel, which were severely curtailed due to the lockdowns in 2020. Overall, however, we remain confident in our original PBOP targets for the year. A quick review by market shows that our retail solutions team was the most impacted by the lumber market decline. The segment recorded a 6% decline in unit sales versus a year ago. Looking at retail business units, the ProWood unit sales were down 17% as demand returned to more normalized levels from a significantly higher sales in Q2 of 2020. The Sunbelt team has done a great job growing their business and more recently, integrating the acquisition of Spartanburg Forest Products. We have been impressed with our treating operations and quality and have worked together to target synergies in our purchasing and administrative areas. This team suffered the most from the lumber market drop as customer orders did not match customer forecast. UFP-Edge, our Siding, Pattern and Trim business unit, was up 27% in unit sales as new capacity came online during the quarter. More capacity will be added in Q4 and early in 2022 to meet expected demand for our high quality finishing services and our Pattern and Trim products. The Deckorators unit sales increased 11% over record Q2 2020 levels. The patented Deckorators' Voyage and Vault mineral based composite products continue to grow their fan base among contractors as the strength to weight ratio, product flexibility and ease of installation make it a preferred product. As a result, the production is sold out through year end. And as previously disclosed, additional mineral based capacity will be coming online starting in November of '21. And by the end of '22, we will have doubled the mineral based capacity. Our wood plastic composite line is sold out through November with additional capacity coming online in 2022, which will add around 30% to 35% more capacity in those product lines. Deckorators continue to feel some of the impacts of higher resin and transportation costs in Q2, while passing along some of these costs to customers during the quarter. Handprint, the new home and decor business unit, formerly known as Dimensions, will be rolling out its new Web site in late Q3 and will be adding to its ready to make craft and product and project line of products. Handprint continues to gain more sales volume with its cut to size product offering for building materials’ retailers too. Outdoor Essentials has expanded its fencing range to include a variety of materials, including aluminum and composite. It is also unveiling a new raised planter for 2022, specifically targeted for customers’ e-commerce portals. Moving to the UFP Construction segment. Unit sales increased 29% over the second quarter of 2020. Strong single family residential demand continues in the geographic markets we serve and multifamily remains solid and may even begin to expand again as developers who held off due to high prices reengage as commodity prices normalize. Steel products, such as the connectors used in our trust manufacturing, remain in short supply due in part to overseas shipping constraints. Unit sales to the factory built business unit rose 56% as strong demand continues. The robust growth in factory built reflects the growing recognition that it is an authentic and much needed affordable housing option, and our factory built team has been working hard to meet this need. Our team continues to grow its new product portfolio for the factory built market, and we should see growing new product sales units by Q4 in several new product lines. The factory built customers have also seen shortages in certain items, such as appliances and other items using microchips, which has moderated their growth somewhat. Unit sales to the site-built customers rose 32% in the quarter. The customers in this business unit are bullish on the market and have been very complementary of the ability of our teams to supply product in this challenging market. They are also imploring us to add more capacity to serve their growing needs. Unit sales to the commercial construction unit rose 11%. More importantly, our commercial business unit was profitable in Q2 and focused on improving margins and rationalizing customer concentrations. We continue to position the commercial business unit for significant improvements in performance and have been refining our customer mix to ensure that we do not work for free or, worse yet, pay a customer to do work for them. Our Concrete Forming business unit continues to grow. The team has been offering new solutions to its customers and expanding its supply network geographically. We expect continued organic growth in this market and are looking at potential targeted acquisitions as well. UFP Industrial segment grew unit sales 73% over lockdown impact in 2020. Organic growth accounted for 26% of unit sales growth. Acquisitions led by PalletOne, T&R and Pallet USA, comprised 47% of the unit growth. The assimilation and integration of these acquisitions is going very well operationally. Both T&R and Pallet USA have been part of the family for over a year and have been working well in their geographic regions. PalletOne was a very large acquisition for us and the cultural fit has been incredibly good. They have great team members and have a can-do spirit and treat each other well. They are also becoming an integral part of our industrial leadership team and the exchange of best practices has been exceptional. We have already utilized the PalletOne experience with automation and technology to fuel our adoption in existing facilities, and we expect that process to grow. Unit sales of protective repackaging products, our newest runway in Industrial, rose 53% in the quarter. Gross profit for the Industrial segment rose 262%, well in excess of unit sales growth. And PalletOne made a big impact by contributing 54% of the increase in gross profit. Rationalizing capacity, enhancing operating leverage and utilizing better analytics helped improve this gross profit return. The industrial team is working together to drive increased automation, consolidate capacity and utilization of its vast facility network to serve national and regional customers better. New product sales increased to $232.1 million for the quarter and are $396.9 million year-to-date, well in excess of our year-to-date budget. We also launched our new Innovation Accelerator initiative in June and it will work with the business units to identify new product opportunities and rapidly design, prototype and test them to increase our speed to market. We have increased the breadth of products in each business unit, but we need to be even faster to vet and bring these new products to consumers more quickly. We continue to deploy capital targeted on automation and expansion, to promote and invest in new products and technology and to develop our teams. We have been forced to increase our spend on regulatory issues, cybersecurity and other nonvalue added requirements as well. Acquisitions remain a strategic growth initiative as we pursue targets in each segment with an emphasis on scalable and synergistic new products or services, complementary value added products and core competencies. Our capital allocation strategy targets acquisitions at reasonable ROI based values first, followed by greenfield growth and automation and efficiency projects. During the quarter, we completed Sunbelt's acquisition of Spartanburg Forest Products, which added scale to the Sunbelt operations. We expect to scale the Endurable Building Products acquisition with our existing site-built business unit geography as it adds adjacent product lines for both new and existing customers. And our Handprint unit added Walnut Hollow Farm, which introduces handprint to craft and decor customers and allows expansion through the existing manufacturing and distribution network of UFP Retail. Given the number of automation opportunities available to us, which help us become the low cost producer and grow our businesses, we are adding an additional $25 million for capital expenditures in 2021. Given long lead times for equipment, most of the installations will not occur until late Q4 or early Q1 of 2022. Labor continues to be a challenge as we have more than 500 open positions posted on a weekly basis. In geographic areas where the states have eliminated the additional $300-a-week bonus, the labor market has loosened up somewhat. In other areas where taxpayers are subsidizing cash and benefits to the tune of nearly $20 an hour, not surprisingly, hard working employees are tougher to find. However, our HR teams and business operators have worked together to craft creative solutions for the markets where our facilities are located. And by taking care of our strong performing team members, using as one example, I previously mentioned the $10 million in year-to-date bonuses and extra benefits paid to our hourly employees, we hope to be able to alleviate challenges in finding and retaining talent. We have expanded our recruiting to discover additional sources of employees and broaden our outreach to make sure that all demographic groups are aware of the opportunities for them at UFP. And we have incentivized existing team members to recruit from their own network of friends and acquaintances. Now I'd like to turn it over to Mike Cole, who will provide more details on our financial performance.

Thanks, Matt, and hello, everyone. Our consolidated results this quarter are highlighted by unit sales growth of 47%, including 11% organic growth and 36% growth from acquired businesses. Organic growth included [$88 million] of new product sales growth, which continues to provide a margin lift for us. And operating profits grew by 157%, as acquisitions contributed $15 million in operating profit and $18.5 million in EBITDA for the quarter. Now I'll review our income statement and sales by segment. Sales to the retail segment increased 107%, consisting of 59% increase in selling prices and 52% unit increase from acquisitions, offset by 4% decrease in organic unit sales. Organic growth was impacted favorably by 27% increase in UFP-Edge, an 11% increase in Deckorators and 6% increase in Outdoor Essentials. New product sales for the retail segment were also strong, growing by over 32%. Unfortunately, our ProWood business unit reported 17% decrease in units compared to last year, reflecting a decline in demand as consumers shifted spending as a result of pandemic related restrictions being lifted and the economy being reopened. Sales to the Industrial segment increased 172%, consisting of 99% increase in selling prices, 26% organic unit growth and a 47% unit increase resulting from acquisitions. Year-over-year organic growth was strong due to the impact of the pandemic related restrictions last year and strong demand this year, while market share gains from new customer and new product sales contributed $33 million and $27 million respectively to sales growth for this quarter. Finally, our sales for the Construction segment increased 106%, consisting of 77% increase in selling prices and 29% unit growth, including 3% contribution from acquisitions. Organic unit growth was driven by our factory built and site built housing business units, which achieved 56% and 24% increases respectively. Our commercial business unit also achieved an 11% unit increase. Again, these organic increases were largely due to the impact of the pandemic related restrictions last year and a strong demand environment this year. Moving down the income statement. Our second quarter gross profits increased by $216 million or 106%. By segment, Retail increased by $39 million in spite of a $23 million reserve to reduce the value of our treated inventory to net realizable value at quarter end, primarily in our new Sunbelt and Spartanburg business units. Industrial and Construction gross profits increased by $97 million and $73 million respectively. Recent acquisitions contributed $3 million to Retail, $2 million to Construction, $23 million to industrial and $30 million to our overall increase in gross profits. These increases resulted from a variety of factors, including strong unit sales growth and leveraging fixed costs, increased sales of value added and new products that have higher margins and more effectively adjusting for increases in lumber and other costs in our selling prices. Lumber prices that continue to fall and normalize will continue to impact our gross profits of commodity based products sold on a variable price, primarily our treated lumber products that were not purchased through a vendor managed inventory program. We anticipate that this will be more than offset by the benefit we experienced on value added products sold on a fixed price, primarily in our Industrial and Construction segments. Continuing to move down the income statement, our SG&A expenses increased by almost $71 million, consisting of $15 million from recently acquired businesses, a $33 million increase in bonus expense and $9 million increase in sales incentives. The remaining $14 million increase is primarily related to higher compensation and benefit costs and travel costs, which have started to normalize. Finally, our operating profits increased by $145 million, which was comprised of $16 million increase in Retail, a $64 million increase in Industrial, a $48 million increase in Construction and an $8 million increase in international. Again, acquisitions contributed $15 million to our operating profits primarily in our Industrial segment. Moving on to our cash flow statement. Our cash flows used in operations for the year was $116 million and consisted of net earnings and noncash expenses totaling $328 million compared to $148 million last year, and $444 million increase in net working capital since the end of December of 2020 compared to a $300,000 increase in the prior year, reflecting strong market demand and record high lumber prices this year. Our people continue to do a great job managing our working capital efficiently as evidenced by our cash cycle, which remains on pace with last year. Our investing activities included capital expenditures totaling $79 million, including expansionary and efficiency CapEx of $42 million. We're now planning for total capital expenditures for the year of $140 million, which includes projects to expand our capacity to produce our mineral based and wood plastic composite decking products, our UFP-Edge Siding, Pattern and Trim products, expand our machine built pallet capacity and take advantage of automation opportunities. And $433 million was spent on acquisitions so far for the year, including the recent additions of Spartanburg Forest Products, Walnut Hollow and in durable building products this quarter. Lastly, our financing activities include another $9 million of dividends paid this quarter at a rate of $0.15 a share, a 20% increase in the rate over last year. And net borrowings under our revolving credit facility totaling $260 million to finance the increase in our net working capital. With respect to our balance sheet, at the end of June, our total debt net of cash was $562 million and our total liquidity was $288 million. Looking forward to Q3 and Q4, we expect our seasonal working capital investment of $444 million to be converted to cash as lumber prices and demand normalize, leaving our liquidity and balance sheet in strong shape as the year progresses. That's all I have in the financials, Matt.

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

[Operator Instructions] Our first question will come from Stanley Elliott with Stifel.

Can you talk on the Deckorators business, it sounded like there was somewhat inventory constrained. Curious to kind of get your view a little bit of a step down from Q1 but still very good numbers in terms of the units. But just curious kind of what you're seeing in the marketplace there?

We're still seeing very, very strong demand. And again, I think we’re kind of lapping year-over-year where we had capacity issues a year ago. We were full up, as I mentioned, on the mineral base through the end of the year and on wood plastic composite in November. So we're still feeling really good about the demand there. Obviously, I mentioned a couple of cost challenges that I think will be rationalized out and so we should be able to get ahead of those, certainly by the end of the third quarter. So again, very, very optimistic about where we are there.

And when we think about kind of the working capital unwinding in the back part of the year, it's going to be a very nice boost. With so many growth opportunities, it sounds like that we could still see a fair amount of M&A activity on the horizon?

I think that's one of our forefront ideas, that's what we're trying to get accomplished here. And again, we want to make sure valuations are right and continue with our conservative approach to how we value and acquire companies. But definitely, the pipeline is full. There's a lot of opportunities out there. And we just want to make sure we choose the right ones and the market for valuations is right.

And last for me. Any comments on the visibility that you're hearing from your construction customers as it relates to state projects moving forward, other infrastructure projects moving forward?

We have not gotten a whole lot more insight into the kind of infrastructure-type projects. And maybe it's because I probably turned a little bit of a deaf ear to some of that until it becomes a reality. There's been talk about it for several years. And as soon as something hits, I think then it will become much more real. But our Concrete Forming group is probably going to be the one that would be most impacted there in a positive way. So we're hopeful that we end up with something that's reasonable and rational and that we can participate in it.

Our next question will come from Kurt Yinger with D.A. Davidson.

Just a couple of questions here. I mean, first, you touched on customers and site built looking to you to perhaps add capacity. I think in the past, that's been an area where you've been kind of cautious growing the footprint given the cyclicality. Has that changed at all? And do you feel like in this type of environment, the adoption of component solutions can be more significant than it has been in the past?

Kurt, I still think there's opportunities for us to convert. There's maybe not as many people that are doing total stick framing. But our floor cosset concept, roof trusses, wall panels, selling more components is definitely where we want to go. And I think that's the capacity they're looking for as labor is tight, particularly skilled labor in the field. We're still going to be cautious about it. But if we have good insight into both the customers’ plan and our own ability to service it, there will be areas that we will continue to expand. Again, we're trying to keep it within our basic geography that we're in today. We want to still stay away from the old, the so called boom and bust markets. But where we are today, I think, are very steady, stable type markets.

And then obviously, it was a great 2020, but your commentary this afternoon seems to be more cautious than we've heard previously in terms of the repair and remodel and DIY side. Just curious how recently you've maybe seen some deterioration there. And are you concerned at all that this is more than just a tough comp situation and that the market could really start to slow down quite a bit?

I think, I tried to outline the differences there. The professional builder contractor, they're still extremely busy and so that indicates that demand is solid. I do think DIY, you can discuss whether they pulled forward from sales in 2020 from future years or if it was because people were locked down at home and they just did more projects. So I think it will normalize. What I'm trying to convey mostly is that we just had a blowout quarter. And I'm trying to moderate people’s expectations relative to repeating that type of quarter.

And then on the idX and commercial construction businesses, what type of progress have you made there in terms of getting that business back to breakeven? And are you seeing any green shoots in terms of pent up demand or new coating activity, anything along those lines?

I think there's been a really fundamental shift as we've tried to focus on it, and that team has been working extremely hard trying to to get the ship rightsized, I'd say, in terms of both looking at and analyzing their customer base, their margin profiles for those customers and what I would call the imbalance, where the customer has historically held most of the leverage and us taking the position that -- we need to be able to make money, as I mentioned in my remarks. We need to be able to make money in order to stay in business. So we've changed our pricing methodology and we probably have lost a few customers along the way, but that's the right thing to do. And they are running at a profitable rate here for the last couple of months and we anticipate that will continue. So it's a big turnaround. We're still not there yet. But they're on the right path and I really thank them for all the effort that they've put forward.

And then just last one for me, kind of higher level. I mean with the performance over the last year and some of the benefits from the rise in the lumber market, I think there's been a lot of concern here that as that's rolled over, you'll give a lot of it back. But I think Mike said that with the trend you're seeing in lumber, you expect the benefits from the fixed price products to kind of outweigh the headwinds you might see on the variable side. Could you just maybe walk through some of the other puts and takes there as we think about the back half of the year and into 2022? I mean is the comp issue associated with lumber in your view a much smaller issue than it seems to be to people you talk to or at least in terms of maybe what the stock might suggest?

I think the way that I would encourage folks to look at, at least our company is we try to focus on unit sales. Sales dollars is not going to be a good comparable, because the lumber market pricing impacts so much of that. But if we look at unit sales and more particularly gross profit dollars on a per unit basis and overall that's kind of where I would focus the attention and we feel good about that. As you mentioned the fixed price and Mike talked about fixed price items in Industrial and Construction, and they actually had a headwind a year ago as prices were rising. So they’ll have hopefully a little bit more of a tailwind this year with the lower price levels. And your question is, how do that balance off against the challenges at retail we’ll face from declining market in that area. So we feel good overall. As I mentioned, I think we feel very comfortable with our original forecast for the year. But I think as we look at the different stress points and the different margins within the segments that's what we would expect to see.

Our next question will come from Jay McCanless with Wedbush Securities.

I guess the first question on ProWood, have you ever communicated or tried to find out from the field what the split from the sales on that are for do it yourself versus contractors installing those decks?

Yes, it's really, really difficult to do. I think in prior years, I'd say, 10 years ago, actually, Jay, it was probably a little easier to do because the big box retailers were primarily DIY. And right now, all the big box retailers have been pushing more to the pro customer. So it's kind of blurred that line. We can kind of tell who our independent retail customers are that generally serve the professionals and the contractors. But we haven't been able to really nor have we necessarily tried to get at the detail level at the big box.

And then the next question I had, just maybe give me a little more of your supporting I guess ideas that lumber prices are going to be able to stabilize at these levels? Is it the transportation issues and [candidly] getting better, or you're seeing a little bit better delivery of wood in the South. Just maybe -- because we hear so much in the media about all these transportation issues and supply chain issues. Just what are you seeing that makes you feel like lumber prices can stabilize here? Because with the puts and takes of the acquisitions in there, at least getting close on the lumber price would certainly help.

Yes, that's an excellent question, and I'm not sure I got a great answer for you on that. What I would say is that transportation issues are still there. They've moderated quite a bit. I think the international transportation issues are still a bigger problem, a bigger challenge. But I would say the production side on the mill side has improved, the demand takeaway hasn't been as great as originally forecast, particularly at Retail. And I think that's created a little breathing room in the marketplace. I think a lot of retailers had considerable amounts of inventory in their supply chain and the takeaway being not as great has really opened up a lot of product availability. Again, certain items are still tight, but I'd say, overall, there’s a good supply right now.

And then just digging down on the retailers. I mean do you feel like the retailers are overstocked right now or is the sell through sufficient to keep you guys, maybe not up in terms of units year-over-year but at least flat to slightly negative?

I would say and it's tough to paint them all with a broad brush. I think they all had different strategies in terms of what their purchasing strategy was. So some wanted to commit early and make sure they had supply given last year when they ran out of supply. So I would say that overall, I think your last statement is accurate though in terms of how we would look at unit sales takeaway.

And our next question will come from Ketan Mamtora with BMO Capital Markets.

First question, maybe to start off on the Industrial side, very strong performance there, especially on the gross profit side. Two part question. Maybe talk a little bit around, from a unit sales standpoint, where you are seeing areas of strength and products where you are seeing increased traction? I know kind of one of the focus areas has been kind of growing on the mixed material side, so with some of the acquisitions you've done. Maybe talk about kind of where you are seeing the most traction? And then obviously, great performance on the gross profit side. Talk a little bit about kind of where you've been able to make the most progress?

Well, there's a lot to unpack in those questions there, Ketan, so I'll try to hit the high points. So on the industrial side, the Industrial teams have been doing just an outstanding job. What they've been focused on is providing more value added customer oriented solutions. And as you will recall, historically, we started out selling sticks and panels to people who made their own crates and packaging materials. And that's been a constant goal of ours is to continue to convert those types of customers who will buy our complete value added program. And I think they've done an outstanding job of that. They've also utilized their own pricing analytics and tools to make sure that, again, as we mentioned before with some of the commercial things, let's make sure that we're properly getting paid for the value that we provide. And I think they've done really, really nice work in that area as well. So I think on Industrial that is part of their strategic plan, and they've just had really, really good execution. Overall, I think, again it's a tale of the different markets. And so if you look at Construction & Industrial, you've seen improvement and enhancement there and a lot of it's efficiency in terms of getting utilization and operating leverage pickups too. But lumber market certainly helps there. Retail is the one that we've already talked enough about that one. So we're hitting it out of the park last year and we don't expect that to happen this year but we still expect it to be strong.

And then sticking with Industrial, obviously, on the pricing side, it was a big help, almost 100% year-over-year increase. As we look into the back half of the year and I know you all don't provide specific guidance. But I'm just trying to underpin what is the right way to think about it, especially given how sharply prices have fallen over the last eight weeks. Can you just kind of help us frame what is the right way to think about it?

Yes. I think Mike and I have talked a lot about that, I'll kind of turn it over to Mike. I think there's some examples and metrics that you can probably look to that will help guide you there. Mike, can you?

Yes, there's a natural lag in the pricing on the industrial side on the fixed price side. One reason is because you got to sell through that inventory that you bought in order to be able to supply the customers. So there's just kind of a natural lag that occurs that helps us. And we would expect that as a result of that lag, that's really going to help us offset in the Construction and the Industrial side with what's going to occur on the Retail side with more variable priced product. I think the other thing that's happening though is there's a lot of pricing rationalization I think that's occurred throughout the company, just making sure now as we're able to add more value and provide more solutions for our customers we're making sure we're getting paid for it in our prices. And so there's all those activities that are going on, which I think sets up for Industrial and Construction, in particular, a nice, healthy operating margin environment the back half of the year.

And then shifting to the retail side, I'm just curious, it seems like on the treated lumber side, there is some easing in demand. We've seen a sharp drop in lumber prices as well. I'm just curious, are you seeing any signs of having any ripple effects on the composite decking side? From what I heard in your prepared remarks, Matt, it seemed like that demand is still pretty strong. But I'm curious if you're starting to see signs for, at least in sort of Q4 and into next year of having any impact on composite taking demand?

Maybe I could kind of frame it in a slightly different way, Ketan. So as I look at the composite products that we provide, more and more of those are do it for me projects as opposed to do it yourself projects. They're spending a lot more money on them and they want to make sure it's done right. So what we're seeing with the composite is consistent with that. And what we're seeing on the DIY side for the ProWood decking, for example, that's much more of a do it yourself type project, people feel comfortable doing that. And it's kind of consistent with the overall theme that says, hey, maybe people are taking a pause and they're going on vacation and they're doing other things now that they're able to do it. So I don't see anything that says the composite demand is going to fall off, again, absent some other kind of change in the economy that isn't obvious today.

And speakers, I am showing no further questions at the queue at this time. I would now like to turn the call back over to you for any further remarks.

Thank you. As we look ahead, we expect that unlike Mr. Bezos’ 11 minutes of heaven, which ended when he landed on earth, the UFP team will continue its incredible focus, adjust to the economic changes that inevitably will come our way and to perform our plans. Our business model helps chart the course but our talented and experienced teammates are the ones responsible for our ultimate success. Whether it's crazy lumber market, unpredictable government or an Ohtani curve ball, I'm confident that we will win. Thank you for your investment and have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect and have a wonderful day.