Builders tie the knot
For Pulte Homes and Centex Homes the marriage is all about size and diversity. If the two production builders complete the expected merger in the third quarter, the combined company will be the largest home builder in the United States, with a portfolio of entry-level, move-up and active-adult homes spanning 59 markets.
But for Pulte and Centex suppliers, the deal is all about the supply chain. Or more specifically, whether the new company changes the way it purchases building materials. LBM dealers and manufacturers are also wondering about that $240 million in projected annual savings in corporate and field overhead: Will they recognize any of the heads that roll once the consolidation starts?
On an April 8 conference call with analysts and investors, executives from both companies said there would be “significant overlap” in functions as well as head-count reductions. They also seemed to be in a hurry to streamline the two organizations.
“The faster that we move as combined companies, the better off we are going to be to position ourselves for the future,” said Pulte president and CEO Richard Dugas.
Pulte’s CFO, Roger Cregg, said the companies had not yet looked at combining their buying offices or construction divisions. “We don’t and have not included in our [$240 million> estimates anything on the purchasing synergy side or the production efficiency side,” Cregg said.
Keith Hughes, an analyst who follows the LBM industry for SunTrust Robinson Humphrey, notes that the Pulte-Centex deal “is more about survival than synergy.” But that doesn’t mean the two companies won’t try to throw their new weight around, he observed. “If they want to take advantage of the [combined> buying power, they’re going to have to do things on a more centralized basis,” Hughes said. “But builders have struggled with that. So much of the decision-making is done on a regional basis”.
One way around this obstacle is to partner with a national pro dealer with locations in numerous markets. George Finkenstaedt, a former senior VP supply chain for ProBuild, notes that the game has changed now that builders are consolidating or downsizing their staffs.
“There might have been some regional offices that were resisting in the past, but now they might cease to exist,” said Finkenstaedt, who now works as an independent consultant. “If somebody at headquarters says ‘Just do it,’ you’re not going to argue over how to acquire OSB.”
The new entity, which will use the Pulte banner and be headquartered outside of Detroit, is expected to have a strong presence in Florida, Phoenix, Southern California and Las Vegas, all red-hot markets during the building boom, all paying the price now during the downturn. But Pulte and Centex were focused on reducing labor and supply chain costs even before the crash, observers say. Dealers who can plug into this outlook may find themselves with a competitive advantage.
Pulte operated its own turnkey construction crews in high-volume markets like Arizona and Florida, as well as a manufacturing plant in Manassas, Va.
Centex worked with consulting firm McKinsey & Co. and developed its own network of distribution centers called CTX Builders Supply. At one point, Centex was directly sourcing commodities and products from China, assembling them into building packages and delivering them to job sites.
Things began changing in 2007 as the housing market worsened. That September, the VP purchasing and distribution at Centex, Paul Dodge, left to join ProBuild as the senior VP of its supply chain. A year later, Centex sold its entire CTX division to ProBuild, adding six distribution points to the nation’s largest LBM chain.
Pulte closed its Manassas, Va., component plant in 2007 and began focusing more on value engineering its existing home models. Centex, an early adopter of value engineering, has also brought in its trade partners to further refine those techniques.
“Pulte and Centex have the right mind-set, but they have to identify those dealers that can support them,” said Dave Krawczyk, the former president of Wickes Lumber who now heads his own consulting firm. “Market to market, the capabilities vary.”
Krawczyk’s firm, has worked with companies such as Pulte, Masco and Boise to introduce on-site framing efficiencies that save time and materials. For LBM dealers, the process is offered to builders as a value-added proposition. Assuming the dealers still want to do business with production builders, that is.
National builders have become very aggressive when it comes to pricing; many are demanding “cost visibility” that reveals a dealer’s margins. When Centex awarded ProBuild its “Vendor of the Year” in 2008, the Dallas home builder commended ProBuild for being “very proactive with upfront invoice pricing as well as help[ing> us create and capture value in the supply chain.”
“You have big chunks of dealers who don’t want to do business like that,” observed Krawczyk. “But there is fairly significant opportunity beyond the margins to make money.”
Michael Murray, a VP at A.C. Houston Lumber in north Las Vegas, has done business with Centex in Phoenix and Pulte in California, selling lumber, trusses and other building materials. He said he’s never understood the advantages of national contracts between home builders and large LBM dealers: All he sees is the downside.
“Distributors like ourselves are willing to sell at very low margins,” Murray said. “[Lumber> is a commodity, and everybody knows what the price is. There are no secrets in this industry.”
What Murray doesn’t understand is how nationwide pricing can accommodate the needs of individual markets. “Building codes don’t always allow national deals to work,” Murray said. “What we hear is that the cost of doing business is different in different markets. So it affects profitability.”