Ryland foresees higher profits as reforms near completion

June 02, 1994|By Timothy J. Mullaney | Timothy J. Mullaney,Sun Staff Writer

The new chief executive of Ryland Group Inc. told analysts yesterday that he will have two-thirds of his reforms implemented by the end of this year, which he said would help the Columbia-based homebuilder improve profits that have lagged behind major competitors as the economy has improved.

In a speech to the Baltimore Society of Security Analysts at the Hyatt Regency Baltimore, Ryland President R. Chad Dreier gave his most detailed public explanation of changes made since November, when he replaced Roger W. Schipke as head of the nation's third-largest homebuilding company.

"Two-thirds will be done in 1994, one-third in 1995," he said.

Mr. Dreier also gave an unusually blunt confession of how Ryland had slipped in the period when most other big homebuilders were pulling out of the recession, saying that Ryland allowed its customer satisfaction ratings to slip and that it "lost" its ability to be a low-cost producer.

"We tried to run away from the fact that we are a homebuilder and it cost us," Mr. Dreier said, adding that Ryland missed a chance to enter emerging markets such as Las Vegas, one of the fastest growing cities of the 1990s. "We forgot what our core business was and is. . . . And we forgot to pay attention to the customer."

In the first quarter, Ryland said, its homebuilding business lost $623,000, compared with $4.8 million in same period in 1993. The company's stock closed at $18 yesterday, down 12.5 cents.

Ryland is concentrating reforms on three main areas, he said. It is loosening its land purchasing policies, going away from an extremely conservative stance that left Ryland unable to build in choice locations as the new home market recovered in 1992 and 1993; cutting costs by centralizing purchasing to get better discounts and pushing subcontractors harder for lower prices; and improving marketing and customer service.

The company is tying part of managers' bonuses to improvements in customer satisfaction ratings, Mr. Dreier said. The company also is bringing in independent inspectors to look over homes before delivery and expanding field managers' authority to force subcontractors to improve quality, he said.

But the changes in land and purchasing will make major improvements to the company's profit margins, which have lagged behind those of other major builders like Centex Corp. of Dallas and Pulte Corp. of suburban Detroit.

In a departure from a 27-year policy of almost never buying lots from developers until the company has an order for a home, Ryland is now willing to buy chunks of 40 or more lots at a time, which allows the company to get much better prices. But he said he will not buy raw land on which developers have not yet installed infrastructure such as sewers, because land development is a riskier business than homebuilding.

"It doesn't bother me to buy 100 lots," he said. "If you're selling two houses a week, you'll be out in a year."

Mr. Dreier said that at one development outside Baltimore, the company saved $8,000 per lot by buying 84 lots in two chunks, rather than paying a small price for an option on the whole property and buying individual lots as the company gets orders for homes. The company can save another $9,000 per house by cutting construction costs.

The $17,000 total savings on the 1,800-square-foot houses can become higher profits, or part of the money can be used for price cuts to make the homes sell faster, he said.

"Based on this scenario, we can expect to sell out of this community in one-third the time: 12 months instead of three years," he said.

Mr. Dreier said changes like this throughout the 17 states where Ryland sells homes will rebuild the company's profits and eventually should help its stock price.

The company improved earnings in the first quarter, but Mr. Dreier said the improvement, which still featured a small loss in homebuilding offset by profits from Ryland's mortgage banking unit, was only a beginning.

"Ryland is a great buy," he said, especially since the company's stock is trading at about book value. "We are positioned for dramatic earnings growth, and we know what we need to do."

Mr. Dreier said Ryland's business has not been seriously affected by increases in mortgage rates.

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