SHOW TRANSCRIPT

 

 

[00:00:05] Speaker 1 All right, welcome to another episode of the Go With John Show, we’re here today with Michael Schnitzer, president of Stanley Martin Custom Homes. Welcome back, Michael. Hey, John.

 

[00:00:15] Speaker 2 Good to see you doing good. Good.

 

[00:00:17] Speaker 1 So so we’re going to talk about today. We’re going to talk about what’s going on in the building industry with the supply chain and some of the things we’re doing over at Stanley Martin Custom Homes to work through this. So tell us a little bit about what’s on your mind today.

 

[00:00:34] Speaker 2 Perfect. Yeah. So I think everybody knows now that COVID has created supply chain issues, right? And we’re navigating through that. I mean, we have a huge corporate purchasing team that buys, has agreements and is managing commodities in multiple states, in multiple divisions. Mm-Hmm. But what we found that was the most pressing for Stanley Martin and our customers is the cost of framing material and specifically lumber, roof trusses, wall panels, floor sheathing, roof sheathing, right? So those what we call framing materials, right? And what we’ve seen is is the framing materials have skyrocketed and then plummeted. Mm-Hmm. Right. So. Fast forward from the time we sell a house, our cost to build the house could exceed the sales price that we gave to the customer, right? Conversely, the sales price, the cost could have gone down. And now we made more money than what we anticipated. So that’s, you know, it’s a depending on where we are with the plummeting and the skyrocketing. It’s either a not fair to Stanley Martin. We have to stay in business and B it’s not fair to the customers where we’re making much more money than we anticipated. Right. So we had to find some fair and most importantly, a transparent way to navigate through this market, right? And it’s and it’s not. Let’s give the customer price and then we’ll say, Oh, well, let’s wait until we start construction and then we’ll update your price. Right? I mean, that’s not fair to the customer. They’re going to be like, Well, what’s the price

 

[00:02:38] Speaker 1 going to be right? And that’s a really interesting point because, you know, I spend most of my days on the front line with the customers and I’m hearing that, you know, some of the other builders have in their contracts that they have the right to raise prices if their costs go up. But but I’m not hearing that the other builders are saying that they’re going to reduce their price if their costs go down. So it’s a it’s a really interesting

 

[00:03:00] Speaker 2 yes, I’m trying to balance, right? I mean, our our company is in terms of core value is focused on integrity. Absolutely. And we want to stay within the integrity framework. Absolutely. So our answer to all of this is so let me backtrack. So corporate purchasing, which is many, many, many, many, many people, you know, 20, 30 people manage the supply chain and manage costs for Stanley Martin Corporate. In multiple states. Right, right. And it’s important, right, because if they can save $100 over many thousands of houses, that has a big impact just in general. Right, right. So one of the things that they manage and this has been since day one is what are we buying framing material for? What is the cost? How do we determine the cost? And so what what we do is we’re linking the framing material cost to our sales price. Right. So the parent company is buying framing material as a commodity. Mm-Hmm. And in fact, corporate tracks in terms of commodities, the lumber commodity market, broad market and the panel market. Right. And they track it on a weekly basis as they’re getting a chart that has week one week to week three of each year. Right. With specific weekly average index values. So the lumber value could be 600 that week. Right. And the panel value could be. I’m just picking a number of five hundred, right? And then the next week, it’s a different value. So each week we get discrete values, both for lumber and for panels. Mm hmm. Right. The the the cost that we use is a limited or a finite number of framing materials species, right? So we’re not looking at the entire market universe, right, framing material. But it could be two by 10s that are him fur or two by sixes that are stud grade. So we have a certain criteria of lumber species and we we we buy the material by looking at mills in North America and creating this aggregated cost on a weekly basis. Right. So customers can go online and they can look at lumber, commodity costs, right? And our costs are going to track right. If the trend is up, our trend is up, it’s going to be close and it meaning our values would be close to the on line values, maybe not exact because we’re doing a finite, limited number of species, right? But it’s going to be close so a customer can go one line. Yeah, what’s the lumber market doing? Right? So it’s in that way. It’s a very transparent way to navigate through the sales process and into construction. Right, right, right. The through throughout the year. Stanley Martin changes the cost, changes their purchasing agreements with their suppliers. So how did they do that? They look at the number, the chart that comes in each week. They look at what we call a prior four week average. What does that mean? So let’s just take January one. So if corporate purchasing was locking in costs for a specific period of time, January through whatever right, they would go back in time to December and look at the prior four weeks of December, look at the average costs right for lumber and for panels. Right. And there would be a discrete value, and they will use that to buy the framing components. So it’s a very, you know, easy method in terms of for corporate purchasing because they have tons of people looking at this on a daily basis.

 

[00:07:41] Speaker 1 Right. So so the previous four weeks from January one would be weeks number forty nine fifty fifty one in 52. Correct? Because we’re looking we number the weeks, the number of weeks in the year, right? Exact first week in January is week number one.

 

[00:07:55] Speaker 2 Right. Yeah, right. And we get this chart every week from corporate purchasing and you know, we send it to customers right as needed. So it’s very transparent. So then, you know, we started thinking, OK, so we’ve got this index value, right, that’s linked to the cost. So what about Stanley Martin customers? How do we tie this all together? Right? So at certain periods of time, we take snapshot costs from corporate purchasing, right? Because we dovetail on corporate purchasing. Mm hmm. So that snapshot costs of all costs, windows, doors framing everything. Right, right. The framing material. Lost has a specific index value, right, right? That was set. With the suppliers. Right, right. So that a sales price for your home has a discrete value or cost associated for framing materials and has an associated index value. Right? Pretty easy. Right.

 

[00:09:02] Speaker 1 So so let me. Yeah, yeah. So let me say so. So the prices on our website right and the base prices in our matrix always match.

 

[00:09:10] Speaker 2 Right, correct, they

 

[00:09:11] Speaker 1 always match exactly so. So if our pricing on our website was based on the lumber price of weeks 49, 50, 51 and 52, right, and somebody buys a house in February of 22 and we’ve got our lumber factor. Our lumber prices or prices online is based on the last four weeks of the year. That’s how that’s where that metric is set, right?

 

[00:09:38] Speaker 2 Right. We don’t update our prices every I mean right.

 

[00:09:41] Speaker 1 We do every every few months, we update our price.

 

[00:09:43] Speaker 2 Exactly, exactly. So, so, so so we have a defined value for lumber components, and we have a defined average four week index value, right? Pretty easy,

 

[00:09:54] Speaker 1 right? So that’s the first part.

 

[00:09:56] Speaker 2 That’s the first part that so let me just kind of summarize here for a second. So framing material costs skyrocket and plummet right at the start of construction if the commodity cost decrease. Right? What do we do when we’re going to lower our customer sales price? They’re going to have the commodity chart, so they’ll see it right. So we’re going to lower their price because the index value has lowered at the start of construction. If the index value increases, then conversely we’re increasing the sales price, right? Makes sense.

 

[00:10:36] Speaker 1 Makes perfect sense.

 

[00:10:37] Speaker 2 OK, so

 

[00:10:39] Speaker 1 so so let’s just let’s just try to tie it together a little more so that the the price that is in the contract is going to be based on a specific four week average.

 

[00:10:52] Speaker 2 It’s already it’s already predefined. Examine the sales. It’ll have an index value. Yes. And we will define the lumber factor only because a customer may buy just the base house or they may buy a finished basement, a rear sunroom, a finished attic so they can get more framing components. Right. So I got a I need to adjust with what they what they select, right?

 

[00:11:15] Speaker 1 So the two time points are the four week moving average that was used to factor the the sales price in the contract. And then the second time point is

 

[00:11:28] Speaker 2 these when we actually wait. So so what we’re doing is we’re comparing the lumber and Panel Index average index when we set the price up to the index value of when we excavate. Exactly. There’s two time points, right?

 

[00:11:45] Speaker 1 And both of them are a four week moving averages.

 

[00:11:47] Speaker 2 There are four week averages, right? Because it’s not fair to anybody to say, Oh, let’s take a daily average, right, that daily average could be an anomaly. Yes. Right, exactly. This is the way we we purchase. So let’s just look at an example. Yes. Right. And this is hypothetical, right? I’m not saying these numbers tie up anything, but let’s say a house for simplicity. Six hundred thousand. Mm hmm. And let’s say the framing material costs again, just keeping it easy is 60000. Right? In fact, we call those framing material costs. A lumbar factor, because it’s a certain factor, right, lumbar factor of the overall sales price, so let’s say when we set the sales price, the prior four week average was $500. Right, right. And let’s say the prior four week average when we excavate was 575 mm. Right? What is that’s a difference of $75, right? 575 compared to five hundred. Right. So in this example, the difference the value right of the index went up by 15 percent. Mm hmm. And so it’s pretty easy. We take the 60000. That’s the framing material costs we call lumbar factor. Mm-Hmm. Multiply it times the percent change. In this case, it’s 15 percent. Mm-Hmm. And so in this example, it would be 15 percent times 60000 or a sales price increase of $9000. Right now, I’m saying that’s the increase, right? Right. But just conversely, if we have 600000 and we have a framing material cost a.k.a. lumbar factor of 60000. Right. If the index goes down by 15 percent, then a customer instead of getting charged $9000 is going to have a reduced sales price of not not 900. $9000 is going to have reduced sales price of $9000. Right, right. So we give the customer the chart that has the average index value. So it’s all transparent. That’s set the sales price, right? And we give the customers the chart at time of excavation that shows the prior four week average. And we do the math and we send them an addendum, right? So this is fair to both Stanley Martin and the customer. It’s very reasonable. The only way we can do this is because we dovetail one Stanley Martin and their sophisticated approach to buying materials. Right? Right, right. I mean, if we were a smaller company, we wouldn’t be able to do this right? So that’s just the the benefit of dovetailing. And, you know, Stanley Martin’s a top 20 builder nationally. So it allows us to take advantage of those costs and create a nice, easy win win fair, fair method to navigate, right?

 

[00:15:01] Speaker 1 And I think a lot of this boils back to trust also. And interestingly enough, I think Stanley Martin was just named the second most trusted builder in the country, you know, so our transparency and our, you know, desire to be fair, honest and trustworthy with our buyers, I think this is a great approach, you know, to to be fair to the customer and fair to the to the company.

 

[00:15:29] Speaker 2 Exactly. Yeah, exactly.

 

[00:15:31] Speaker 1 Yeah. Cool. All right. Well, we’re going to take a quick break. And Michael, when we come back, we’ll continue the conversation. Okay, sounds good. Welcome back, we’re still here with Michael Schnitzer, good to see you again. Hey, John. So so let’s you know, I think at the highest level. Michael, thank you for sharing all that information with us. I think it’s going to be really helpful for our prospective buyers to hear how we’re managing it. And the good news is, you know, everybody that’s building with us right now is living through this program that we have and the feedback we’re getting is phenomenal. And I think, you know, what are you hearing from our customers, Mike?

 

[00:16:13] Speaker 2 You know, so before we had this in place, there was a lot of, well, what’s going on and blah blah blah blah blah. Now, you know, because customers can they can just go online and see what’s going on with the commodities. Right, right. They they have a sense of where things are. And occasionally they’ll they’ll say, Hey, can we get a copy of the commodity chart? We just showed it out to them. Right. But really, I’m hearing zero from our customers related to this right

 

[00:16:43] Speaker 1 now because it kind of it is what it is now. Yeah. This is just a fact of life in buying and building a home in 2022, right?

 

[00:16:50] Speaker 2 And you know, I would say if we look at this at the highest level, you know, from a supply chain, corporate is managing everything right? Garage doors, light fixtures, you name it, plumbing fixtures, whatever. So. So they’re in close dialog with manufacturers, right? Like we have corporate manufacturing agreements with cola directly, blah blah blah and suppliers. So they’re they’re looking at up and down the supply chain. And, you know, if there is, oh, lighting is going to be, I’m just picking this as an example, right? Is is going to be delayed for weeks. That information is broadcast companywide so that we can. Stanley Martin, customs and corporate better manage when we order materials. So if we were ordering on June 1st when I say we, yeah, the lighting fixtures, maybe we should order on May 1st. Right, right. And now granted, it would be way too in advance to order in if we didn’t have supply chain issues. But we’re trying to take real time feedback on a sometimes as a daily basis well, as you say, weekly basis and change our ordering habits to meet the new criteria. And you know, I would say both from from an operational standpoint, you know, that kind of 80-20 rule, where do you spend your time? You know, so each week, the back office has meetings or a meeting to to check on deliverables right when we get permits, blah blah blah. Construction has meetings, regular meetings to go over permits and what’s coming up and all kinds of stuff, right? But I find that certainly the back office and then my meetings with my executives that there is a considerable time talking about supply chain. Right? Oh hey, you know what’s going on with this? How you know, how’s the back office managing this and purchasing and purchasing construction? What are you doing to offset this element? So we’re spending a lot of time where we’re talking about things and then, you know, rehashing it, potentially at every meeting until it becomes ingrained. Mm hmm. You know, it used to be when we would start a house, we would order windows. Right? Right. But the windows are taken a long time. Right. So now we had to create a completely new process to order windows well in advance to even getting the permit. Right? So but what does that look like, right? I mean, you know, hey, by the way, we ordered your windows only customers like, what are you talking about? I mean, we would never do it that way, right? So now we have to have a change addendum. Yep, it could be no cost specifying exactly the windows that we’re ordering. Right. Because remember, we haven’t locked everything in yet, but we have to lock in the window order, right? Early. Yes. To give us a better chance to get the windows at the right time. Right. So now the back office is spending an exorbitant amount of time doing all this work and putting together all this material to review. You with the customer to then prepare a change addendum in order to order the material early? Right. Whereas in normal times, we’ve never had this, you know, many, many, many, many hours of of time consumption devoted to just one project. Right? So so it’s a it takes a lot of time. But the good news is we have the information from core corporate. Yeah, to better manage our supply chain directly.

 

[00:21:17] Speaker 1 Yeah. Yeah. And there are so many value adds in dovetailing with Stanley Martin because, you know, you said earlier, if we were just a small company on our own, we wouldn’t be able to do this sophisticated lumber factor and indexing it just would not be perfect.

 

[00:21:33] Speaker 2 We may we may not hear of or get wind of write a potential supply chain issue for several months later because it’s then it’s affecting us.

 

[00:21:44] Speaker 1 Yeah. And so we get

 

[00:21:46] Speaker 2 it way in advance because, you know, as a top 20 builder, these large manufacturers want to retain our business

 

[00:21:57] Speaker 1 right? And we get we get the data from corporate. So, you know, we were on top of the window situation. We knew in real time that we had to start ordering our windows early. It’s not like we found out by accident now. We were notified. We got we got to, we got the memo from corporate. So we started ordering our windows a month earlier than we normally would. Then we started ordering our windows two months earlier and three months earlier as well.

 

[00:22:20] Speaker 2 There’s a certain point of where we just it just doesn’t even make sense to order them too far in advance because it’s too fluid. Sure. So it’s, you know, there’s a little bit of a sweet spot there that at some level isn’t just black and white, right? Like if John Jorgenson is making updates to their to the Jorgensen, they’re updating their plan, right? And we want to order the windows. We can say, OK, well, we’re just going to order the windows. And if you update and change your windows, well, right? I mean, we just can’t do it. Exactly. There’s some common sense and nuance, yes, behind this ordering. But suffice to say that we are spending a lot of time in a lot of detail. Mm hmm.

 

[00:23:05] Speaker 1 So how do you see this playing out? Do you think this is here to stay or do you think,

 

[00:23:09] Speaker 2 well, eventually the business community is going to figure all this out? Right? And eventually, this will get worked out right? So this is just to use the word transitory, but this is just this is absolutely transitory. Right? But you know, I think we can leave it to America’s ingenuity and entrepreneurism to figure out long term supply chain. Right, right. And it could be that, you know, like it’s here to stay. Yes. But you know, just different operating environments, different procedures.

 

[00:23:53] Speaker 1 Yeah. How do we learn to live with it? Yeah. Yeah, yeah, yeah. So the interesting thing is we’re selling a lot of homes. I mean, we have a lot of buyers. We have a lot of people standing in line that want to buy a home from us. And what do you think that is? I mean, I have my thoughts, but

 

[00:24:08] Speaker 2 I don’t think it’s my looks. So let me take another reason for this. So perhaps our prices are very competitive. Stanley Martin being a large entity, people feel comfortable with our just largesse. Mm hmm. Right. Being able to dovetail on corporate purchasing is very attractive to people in this time. Yeah. So I mean, I think that’s why I mean, we we have some other value adds, you know, where we we will modify designs and get people pricing back quickly and whatnot. So that hasn’t changed, right?

 

[00:24:49] Speaker 1 I also I also think the interest rate environment is huge, and I think that people today are telling me what I’m hearing from the customers is they expect the interest rates to be much higher a year from now and they expect it to be even higher two years from now. So I think it’s a really appealing time from an interest rate perspective for the consumer to build now. So I think that’s another driver as well. Yeah.

 

[00:25:14] Speaker 2 Well, certainly we are very busy. We’re blessed to be very busy. Yes, we are. So the converse is is would not be a good thing. Yeah. And yeah, so I’ll take the stress of being busy versus the stress of not having any and any business.

 

[00:25:34] Speaker 1 That’s never happened. Yeah.

 

[00:25:35] Speaker 2 Yeah, yeah. I’m just saying just in general, forget whether it’s building a house or selling a widget.

 

[00:25:40] Speaker 1 Yep, so. It’s all good news. It is. All right, Michael, we’ll listen. It was a quick conversation today. So glad that you came in to update us on what’s going on with our pricing and indexing. And for those of you out there who are thinking about building a new home and want to learn more, call or click today so we can get you on the path to your very own Stanley Martin custom home. And Michael, thanks again for coming in, and this wraps up another episode of the Go with John Show. Go out there and build something extraordinary.

 

[00:26:12] Speaker 2 Thanks, John.