Following his investor presentation this morning at the UBS Building and Building Products Conference in New York, Larry Nicholson, president and COO of The Ryland Group, focused on the company's cost cuts during the Q&A session.
Of primary importance was the company's SG&A. After hitting 16% of revenues in 1Q2006, management has worked quarter after quarter to get the company's SG&A levels down. The company's latest quarterly report clocked in SG&A at 11.6% of revenues versus 12.3% during 3Q2007, marking a significant reduction amid shrinking sales revenues.
"We're down pretty skinny," said Nicholson, "So, as for SG&A, we hope to keep it at a level where it is."
Much of the work in trimming back SG&A has come from continued headcount reductions. Nicholson noted that the company has cut its payroll back roughly 50% from peak.
Additional overhead savings have come out of the consolidation of divisions, Nicholson said. The company's Fort Myers, Fla., division has been rolled into its Tampa operations, while its Myrtle Beach, S.C., and Austin, Texas, businesses are being run out of Charleston and San Antonio, respectively. Nicholson said the consolidation allows the company to gain management efficiencies while leaving enough people in place to be able to quickly ramp up the smaller divisions when the market turns around.
Moreover, the company has been able to take down its cost of sales by moving away from expensive print advertisement to more Web-based marketing. "Seventy percent of marketing budgets are geared at the Internet," Nicholson said.
On the operational side, Nicholson said management was focused on stripping out costs and inefficiencies from the supply chain.
Management was looking at traditional areas of cost savings, such as better managing the rebate process--it recently captured $20 million in rebates--as well as what Nicholson called "nontraditional product categories." For example, management sought out national contracts, which came with a significant rebate as a signing bonus, with new partners. Whereas the company has always had national contracts with large manufacturers and suppliers such as General Electric and Moen, it has since moved to having contracts with smaller product providers, such as fireplace manufacturers.
Nicholson also said the company has changed its bidding process based on product type and moved away from working with turn-key vendors, who both supply the labor and materials, in the name of cost cuts.
"We need to get every dime out of a house, so we are breaking it down piece by piece," Nicholson explained.
He went on to offer an example: The company used to use one truss supplier in a project; now, the job is bid out in pieces. If it saves coin, the company may end up with one truss supplier for roof trusses and another for floor trusses.
And no stone has been left unturned in the search for savings. Nicholson said the company saved $14,000 by renegotiating its contract with FedEx and has been finding additional ways to trim costs associated with document storage and office supplies.
In addition, Nicholson said the company has undergone a "feature rationalization," where management has taken a hard look at "what do people really want, and what are they willing to pay for" in terms of features in their homes.
According to Nicholson, even today's price-driven buyers still demand granite countertops and stainless steel appliances in their kitchens; in fact, they'll give up molding and upgraded faucets to have the granite and stainless steel at a lower base price because they can always add those features later. As such, Ryland is achieving cost reductions without sacrificing buyers' sense of value by offering fewer in-home product features but making sure that they are the most desirable ones. This process has led the company to de-spec its homes and reduce its portfolio of in-home product offerings, lowering the company's SKUs from 700 to 350.
This scaling back of product features is part of a larger effort to simplify the company's product. Nicholson said the company was reducing square footage in some of its product, introducing a "value" product into its existing product lines, and moving toward one-sided architecture.
However, Nicholson said that perhaps the greatest area of opportunity for cost cutting has yet to be realized on any major scale. He said that finding a way to work with municipalities to reduce the fees that they charge builders to develop their projects would yield significant cost cuts, particularly in markets like Florida and California where development fees are particularly high. In Florida, for example, Nicholson said fees averaged around $20,000 a home. "If they give you $5,000, it's a huge win," he said.
However, he noted that efforts to get municipalities to waive fees in the short term haven't been met with great success to date, even as changes in building codes are proving to be more costly to builders during the construction of homes.
"They have concerns because they see their tax base eroding," Nicholson said. "But at some point, they will have to bend because there'll be no more business."