Ryland's smart efficiencies keep profits flowing.
By Roberta Maynard
?I love what I?m doing. I love the success of the company.? That?s Chad Dreier?s take on things these days. It wasn?t always so. The company lost money in 1993, the year Dreier brought a fresh strategy to his new post in Maryland, where The Ryland Group was based. A born-and-bred Californian, he surprised employees with his unusual mix of laid-back attitude and disciplined drive for improvement and with his extremely cautious mindset coupled with a decidedly uncorporate-like approach to running a corporation.
In Dreier?s hands, everything at Ryland changed: land acquisition, corporate culture, employee development, and, most important, financial controls.
?I could never figure out,? he says, ?how a company could build 8,000 houses and lose money. I figured I could change all that in two years.? It took four, but it happened.
?To Chad?s credit, he inherited a much weaker hand than he realized at the time,? says Greg Nejmeh, equity analyst for Deutsche Bank Securities. Nejmeh recalls that despite its volume, Ryland?s home building operation was unprofitable when Dreier came to the company. All earnings came from financial services.
Those days are gone. This spring, the sixth-largest builder reported a year-over-year gross margin improvement of 19 percent. ?Margin expansion; margin expansion, and more margin expansion: You get the picture.? So summed up Credit Suisse analyst Ivy Zelman in her April report on the builder.
?RYL submarined analysts with a 58 percent surprise,? she went on, noting the company?s wow-inducing earnings increase. Even taking into account its losses in the early 1990s, the builder?s 17-year, earnings-per-share growth rate (CAGR) comes out to 12.6 percent.
Turn, turn, turn
Dreier says he didn?t set financial goals, per se, but as a former CFO, he had some numbers in mind, along with a sense of the kind of company he thought Ryland could be. ?I wanted to run a low-risk business model with quick inventory turnover,? he explains. Now on more solid footing than in the mid-?90s, Ryland leads the public builder group with a turn of 2.4 times yearly compared with the group?s average of 1.5 times. The turn shortens the time that land is on the books, enhancing liquidity. CFO David Fristoe says that there?s more improvement still to come. ?We have the highest turn in the industry, and we?re not done.?
As Dreier began to turn the ship around, he did have one specific goal: to keep return on equity to at least 15 percent. Last year, Ryland?s ROE was 29 percent, four points higher than the public builders? average. And, of course, profit has always been top of mind. ?In the beginning, we would have been glad for 5 percent pre-tax profit,? he recalls, noting that the once-cherished benchmark is now a thing of the past. For the past four years, profits have risen steadily, from 4.5 percent in 1998 to 8.4 percent last year.
One reason for the jump is that management puts profits front and center on employees? radar screen. ?You get a percent of pre-tax profit,? explains Ed Gold, the company?s division president in Baltimore. ?You make more money, you make more bonus. That means you?d better be focused on customer service and cycle time,? he adds. ?It?s not necessary to tell employees to treat people right ? it?s an economic issue.?
Or, as Dreier puts it: ?All compensation is tied to earnings. Period. End of discussion.?
Significantly, Ryland has focused as much on saving money as on making it. While many of the big builders have widened margins in recent years, most have done so primarily by raising selling prices, notes Carl Reichardt, equity analyst with Banc of America Securities. By contrast, Ryland has boosted margins through efficiencies. Between 1998 and 2002, the average builder increased selling prices by 25 percent. Ryland?s price increases were just 8 percent, and its operating margin improvement was better than average.
Looking for smart ways to save money is a mentality that has been woven into the Ryland culture. ?Everyone behaves as if each $20 is his money,? says Gold. ?Every person believes it?s his company.?
One way or another, everything goes back to cycle time and each employee?s effect on it. Productivity had hit bottom in 1993, revenue per employee was $430,000. But with training and compensation, productivity has trended steadily upward to $1,061,000 in 2000.
Prelude to profits
The new management?s first priorities, now well documented, were to pay more attention to both design and land buys. Dreier brought discipline to land purchasing, involving himself in monthly reviews of all deals. In the mid-?90s, he shifted the company from a manufacturing orientation to a design orientation, selling four facilities that provided trusses and other components to Ryland homes. ?The manufacturing process was driving design more than the customer,? recalls Pete Skelly, Chicago division president. That change in mentality enabled the company to slice the concept-to-final-design time frame from 15 months to less than four. ?Chad?s focus was on land, product, and people,? says Skelly. ?Those three areas are still driving forces in the company.?
Nejmeh recalls a clear distinction drawn in the early days as these changes were implemented. ?Over a two-year period, it was clearly stated that X percent of sales were coming from new communities and Y percent were coming from old communities.? The difference in performance between the two was apparent, he says.
Those early changes put Ryland on the right track, but they were only a prelude to maximizing margins. Efficiencies really took a jump two years ago, when Dreier relocated the company?s headquarters to just north of Los Angeles. That provided an opportunity to right-size and re-configure corporate operations, generating savings of $1 million yearly, according to Fristoe, who in addition to being senior vice president, controller, and chief accounting officer, is also Ryland?s CIO.
His collection of titles is no accident. The decision to tie the financial and IT groups under one executive was a deliberate move, meant to ensure coordination of effort, and it?s been very effective, he says. Fristoe, who came to the company in 1995, led the restructuring of IT operations to improve integration and to make Ryland?s systems do more for less. His latest project is to improve handling and automation of option sales and to implement a new CRM program.
Years ago, Ryland changed its mortgage structure to handle only Ryland customers. Now, with its capture rate up to 82 percent, within the industry?s standard range, the company off-loads its risk by flipping every loan on the day it closes to Countrywide. The mortgage operation is smaller than it was a decade ago ? contributing $58 million in revenue in 2001 ? but vastly more profitable, says Fristoe. The finance arm generated $35.1 million pre-tax earnings last year.
To gain more efficiency, Ryland merged its mortgage processing centers, consolidating two or three locations into one in Phoenix. It co-located the systems group, and soon the company?s title and escrow operations will be there as well. The savings in IT infrastructure and other costs dropped about $2 million a year to the bottom line, estimates Fristoe, who notes that the company is still realizing costs savings. Much of that money was put into training and other programs geared to boosting productivity. ?We?re using our money a lot more smartly,? he says.
Ryland?s strategy of growing internally, which Dreier views as lower risk than buying its way into markets, has also been put to the efficiency test. The company, which operates in 21 markets, has minimized expansion expenses by setting up satellite offices in new markets rather than full-blown, 65-person divisions until sales from the start-up operations justify greater expense. A satellite group of five to 10 front-line people access the closest division for support and other services.
National purchasing has become a key focus of the company, with more than half of the products in each Ryland home acquired via national agreements. Already, this has lowered the builder?s cost structure 200 basis points since 2000, says Fristoe. By getting more suppliers involved ? 28 at last count ? and beefing up coordination of the program at the corporate office ? Ryland gets rebates of $1,200 per home, up from $500 18 months ago. And the savings are just beginning. Dreier, ever bent on improvement, told a group of investors in March, ?We think we can double that.?
And he has his eye on other profit-producing areas. ?By shaving a couple of days off the building process and structuring a land deal differently,? he says, ?I think we can get a couple of points out of our margins.?
As important as any other changes, according to long-time division presidents, Dreier forced the company to focus on its mission. With its emphasis on mortgage finance, he says, ?Ryland had gotten distracted and had lost its sense of identity. It was lacking a single purpose.? He has tethered Ryland to entry-level and first- and second-time move-up production homes, resisting the temptation to enter golf course communities, multifamily, and semi-custom segments. He says he?s not enamored of active adult projects, either.
The commitment to that purpose has been unwavering, says Gold. ?I?ve worked for four CEOs [in my career]. He?s the first to stick with his strategy. In some of my early days at Ryland, it wasn?t always fun.? Like 1994, when the Federal Reserve tightened credit six times just as Dreier was implementing his plan. Or like the spring of 1997, when Ryland stock dropped below $12 per share. ?At those times, I think we all questioned whether we were on the right course,? says Gold ?Other executives give up the minute they hit a speed bump. He stuck with it. He didn?t do the easy thing.?
Dreier?s conservative approach has been a good match for Ryland. While other builders bit off big mergers, his incremental approach has been the secret of the company?s steady growth and returns. While not ruling out a merger, Dreier says he can do just fine by adding one sale per community in his 21 markets, or 1,000 units yearly. ?I actually do believe in incremental change,? says Dreier. ?I have a financial background, and I understand the numbers real well.?
A decade ago, his challenge was to make a profit. These days, his challenges are different. He worries about providing career paths for employees to keep turnover low and maintaining the design standards he has set.
As for his own tenure, Dreier, who sees himself as more a leader than a manager, reports he has no plans to leave the company. ?I learned from the military to create a vision and inspire, and push to be better. ... I think I?m a much better CEO than I was eight years ago.?
Looking down the road, analysts see the company as well positioned for growth in the range of 10 percent yearly, and its efficient leanings a perfect complement to its core buyers. ?Ryland is very focused on affordable production homes, and the best places to leverage costs of capital is in the low end of the market,? says Reichardt. ?That?s where private companies can?t compete.?
Published in BIG BUILDER Magazine, June 2002