Monday 26 August 2019

McCaughey hits a second home run

Irish entrepreneur and ex-Century Homes team aim to become the world's biggest house framer

Irish entrepreneur Gerry McCaughey
Irish entrepreneur Gerry McCaughey

John Reynolds

Monaghan entrepreneur Gerry McCaughey and his team thought several years ago that they had found an opportunity to emulate and perhaps surpass the success of timber frame home business Century Homes - but this time in the US. For a long time, they thought it was too good to be true.

But as they prepare to open their firm Entekra's €30m second offsite framing factory - which will be able to produce the timber walls, floor panels and roof trusses to form 3,000 US-sized homes a year - it is clear the opportunity is very real.

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On one of its state-of-the-art production lines in the existing smaller factory in Ripon, about an hour's drive from San Francisco, advanced Swedish and German machines - on which nail guns, saws, drills and routers are mounted - measure, cut, prepare with the appropriate heads, put together, and finally mark up wooden panels using shorthand instructions. The new factory's production line in nearby Modesto will be a bit longer than the width of the pitch at Croke Park, and employ 250 workers. "There's nothing in Britain or Ireland that compares to it," the one-time Progressive Democrats candidate affirms. Industry watchers say one of these factories could earn over $150m (€136m) in annual revenues.

The engineering, process and design thinking behind the software that tells the machines what to do comes from Monaghan, where 100 employees and two of the management team are based.

Once the panels are trucked to a building site, the floors go down rapidly in as little as 40 minutes, and the main house structure is up within hours. It is built with greater precision and results in a better-quality build, compared with what the industry calls 'stick framers', who might take six days to get to the same stage, using various methods that can be prone to inaccuracies.

Between Monaghan and California, the Entekra team will continue tweaking the process, seeking to save builders time and money, and finding ways to make things easier for the tradesmen who later install plumbing, electrics and everything else a new house requires.

McCaughey's family have a long-held connection to this industry. Along with their father Brian, he and his brother Gary - who is in charge of Entekra's supply chain - co-founded Century Homes in the late 1980s. When it was sold to Kingspan for €98m in 2005, the firm had a turnover of about €80m, and they each made about €32m.

Brian established IJM Timber Engineering in 1965, and today it is run by other members of the McCaughey clan.

Now a US citizen, McCaughey has lived in LA since 2009, but also worked in California after graduating from UCD in 1985. For five years until 2014, he helped a number of building and green energy firms raise over $75m. He got "burned like many other people" on a number of investments - one involving Anglo that made the headlines -including some in property in the 2008 crash.

At a lakeside development, where new homes sell for up to $700,000, across the road from one house that Entekra has framed, the aforementioned stick builders are working away.

While houses here have to be built with extra fittings to withstand earthquakes, Entekra can also be used for the offsite manufacture of buildings up to about four storeys in size, such as offices and hotels. "US residential construction has been trapped in the 18th century. We're trying to bring it into the 21st. They're mostly still doing it the same way it was done 200 years ago," he explains.

In Europe, where timber frame home construction began in around the 1980s, the industry saw the role that automation and the factory-built element could play, he continues. This was what led his team initially to wonder if the opportunity to disrupt the US industry was too good to be true.

"We scratched our heads for about two years. We compared building and labour costs in major cities in 48 states. At one stage, I was probably working 18 hours a day, seven days a week, to try to find out if we were missing something."

As we look around one of the spacious finished homes, he adds that US builders have tended to recruit more people to try to speed up construction. But in northern California, with some of the highest labour costs in the US, they need to reduce expenses. McCaughey and his team therefore chose it as their first target market.

They established the company in 2016, with the founders investing $10m to get it off the ground. "It was the Century Homes band getting back together, or a reunion tour, if you like, when you look at our senior team. Eight of us worked there," he laughs. Chief operating officer Bran Keogh negotiated the Century sale to Kingspan and has various business interests in Ireland. CFO Michael Treanor advised on the Century sale and also advises Monaghan forklift manufacturer Combilift.

While Nasdaq-listed, Nashville-based building materials group Louisiana-Pacific took a 55pc stake in the firm last year, curiously McCaughey does not have a shareholding, he reveals. "Other members of my family do, but I don't. I'm still the CEO, and the rest is divided between the team."

Robert Moffett, the co-founder of Combilift, was previously a shareholder. A confidentiality agreement means McCaughey will not discuss what happened with his shareholding.

Entekra's first house was erected on August 21, 2017. A group of stick framers were across the road, watching with a degree of disbelief, waiting to see if they made a mistake.

"It was one of the most nerve-ridden days of my life. But the house, for a trial customer, went up like a dream. Back home, my dad was waiting until the middle of the night to see photos of it. In some ways, it's the closing of a circle. He returned from America 55 years ago and began timber frame construction in Ireland, then the UK, with IJM and Century, and now I'm here in the US, showing them how to do it," McCaughey laughs.

"When you see the house frame being put up, it's the last part of the equation. The design thinking, and the data and software that run our automated equipment, is the difficult part. That part of the process is where the money is made or lost. We've mastered how to manage that; we're a knowledge business."

A second large factory near LA is planned within the next 18 months. When the two are at full capacity, accounting for larger US house sizes, their combined output will be about twice that of Century Homes' five UK and Irish factories, which was 7,500 smaller homes at the peak, McCaughey says. Some of the largest housebuilders in the US are queuing up to place orders, even before it is built, so they can meet demand for the Golden State's 100,000 new homes a year.

"We have an idea of the next seven states we'll be in, and we've narrowed down the next one or two from that. But the focus for now is the Modesto factory, then the LA one, and eventually a third one," McCaughey notes.

"We will follow the demand from our customers. Our precision, timing, construction and logistics, plus the saving in labour costs, increased safety and reduced on-site waste, mean we can save housebuilders at least $15,000 on average and about 30 days in build time."

Louisiana-Pacific is hands-off, but always ready with help and assistance, even to the point of suggesting potential acquisitions, McCaughey says, adding that he and his team are not ready to look at any yet. "But there are various companies we could invest in. They're in for the long haul, and see us as a game-changer," he adds. With $1bn in the bank, according to its filings, it could perhaps fund any such moves.

Twenty miles down the road from Entekra's new factory, Katerra is building its fourth one that is almost three times the size, at 550,000 sq ft. It mainly designs and builds apartment blocks in the US, using offsite construction, then delivers the finished property and hands over the keys.

Its CEO Michael Marks was an interim boss of Tesla and grew electronics manufacturer Flextronics' revenues to $14bn. Japan's Softbank is a backer of the firm, which is valued at over $3bn and owns two architecture practices. Elsewhere, a smaller offsite firm, Blueprint Robotics, builds apartments on the east coast.

Is the Irishman concerned about a rival challenging his team? "Katerra has interviewed people that we wouldn't take on. We've also had people they've let go, and who we wouldn't take on. I'm not concerned," he says.

"The expertise we have in Monaghan doesn't exist in the US market. You need $30m to $40m to build a factory like ours. It's more likely that an Irish or British firm might come over and take us on, but they'd have to prove themselves, like we did."

Would Entekra not capture more value by moving into development as well? He says: "Do one thing well would be our view. We don't go and compete with our customers. We know from our experience with Century that there's good money to be made in this part of the business.

"What the Katerra story is doing is it's making traditional builders sit up and take notice. Our credibility and that of the offsite method is enhanced by the fact that so much money is being invested by the likes of Softbank."

Katerra's $3bn valuation also shows the kind of path Entekra might be on. "I'm prepared to take my time and do this right. It took 15 years for Century to become a household name. It became the largest timber frame manufacturer in Europe. After that, you're talking about looking to be the biggest one in the world. That's our plan," McCaughey concludes.

Curriculum Vitae

Name

Gerry McCaughey

Age

56

Position

CEO and co-founder, Entekra

Lives

Los Angeles

Education

Commerce degree, UCD; accountancy and business certificate, Dundalk IT. Four other business diplomas

Previous experience

Co-founded Century Homes

Family

Married, with three sons and a daughter

Pastimes

'I'm a news addict and avid follower of politics and current affairs. I'd sooner look at a spreadsheet than play golf, however.' He is a qualified diver and helicopter pilot. Previously enjoyed bungee jumping, until his wife told him to give it up.

Recent holiday

Palm Springs with the family

Recent book

Make Big Happen, by Mark Moses

 

Business Lessons

Have you had any role models in business?

I owe everything in my life to my parents, and particularly to my dad, who has been an adviser the whole way along. Steve Jobs’ and Henry Ford’s famous quotes about customers not knowing what they want until you show them have been relevant to our experience.

What advice would you give to Irish entrepreneurs looking to enter the US market?

Do your research. We gathered a ferocious amount of information before we got started. You might be told that something won’t work here, as we were. We proved ourselves. You might call it belligerent northern stubbornness, in my case.

Have you learned any lessons from Century Homes that are helpful now at Entekra?

This time, our team dynamic is a lot better, and we’re even more driven. The advantage we have now is our access to funding for investment and more advanced technology.

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