Maintaining Profitability or improving profitability Phillip Rosebrook, Jr. CR

Agenda State of the industry State of your company Planning future Gross and net margins Strategies

Why the Squeeze? Industry overview –Consolidation –Pricing pressures from insurance industry –Impact of catastrophe’s on insurance profitability Need for underwriting profitability Re-insurance –Overcapacity – except for catastrophe –Centralization of claims management

Pricing Pressures and Margin Deflation "A man's got to believe in something. I believe I'll have another drink." W.C. Fields Competition and overcapacity The 10 and 10 problem Big insurance companies can manipulate pricing guidelines but for contractors it is collusion Strategic approach to price reductions Volume discounts New contractors, new paradigm Numbers on a graph in a boardroom – its not personal

Insurance Company Profits Fortune 500 Averages P&C averages Where is the difference?

A Natural Evolution

Predictions Lower margins by up to 5% points Increasing size of insurance companies Increasing size and sophistication of contractors Rise of TPA’s Increasing professionalism and size of franchises New “non-restoration” companies in the industry

Solutions Know your numbers: How do your numbers stack up and what are your margins? –Gross profit – between 35% and 55% –Overhead – between 25% and 40% Measure your numbers: Make sure your financials are accurate and timely –Include WIP – see making and managing $ –Accuracy Job costing Estimate amounts Job budgets

Manage Your Business Create an operating budget, measure every month and stick to it! “First Say to yourself what you would be, and then do what you have to do.” – Epictetus AD

Gross Margin Efficiency vs. Growth Example

Perspective “You’ve got to be very careful if you don’t know where you are going because you might not get there.” - Yogi Berra

Dave’s Theorem A 5% Point increase in gross profit or decrease in overhead will double net profit If this is true – then more income can be achieved through increases in efficiency easier than increase in sales

Proving the Theorem Sales $2,000,000 GM 35% Gross Profit$700,000 Overhead Assumption$600,000 Net Profit$100,000

Aha! Sales $2,000,000 Gross Margin40% Gross Profit$800,000 Overhead Assumption $600,000 Net Profit$200,000 Twice the return with a bit of effort

7 ways to increase gross margin Plan jobs Communicate expectations to the customer and the field staff Set expectations and measure performance Cut travel and material procurement costs Improve customer service Finish jobs on time Increase profitable portions of your work

Changing Work Mix Branding Marketing message Facilities Vision Training

Overhead Create a realistic budget and stick to it –Measure variance monthly Vehicles Marketing expense –Measure carefully –Opportunity costs –Don’t do something because everyone else does, do it because it works –The future of insurance restoration is through claims programs, TPA’s, regional and national programs There is still a future in independent damage restoration – but more difficult than previous

Cash & Overhead Equipment – –how often do you use it –What is the payback time –What is the opportunity cost Staffing Increase volume from sales and production management staff

Compensation Define expectations Pay incentives for hitting the target Make sure the company wins first Model the position –Sales and production – 10% revenue –Owner up to 10% –Marketing – total costs under 4% –Office – variable –Production – in COGS

Reality Check “Get your facts first and then you can distort them as much as you please.” - Mark Twain What if you are only making 3% or 4%? –The good news is that you are likely throwing away 5% right now –This industry is full of waste and inefficiencies –Proactive planning puts money in the bank –Be realistic with your sales and overhead –Envision your success and then achieve your success

The Good News Know your environment and be ahead of the curve. Natural selection and Survival of the fittest Good time to sell The industry keeps providing better tools to assist with success Margins Be a master of your destiny

Parting thoughts – The purpose of Business is to Make Money. You have decisions, flexibility, social outlets and options AFTER you made money – otherwise you have risk and a job. You owe it to yourself, your family and your employees.