Maintaining Profitability or improving profitability

1. Maintaining Profitabilityor improving profitability Phillip Rosebrook, Jr. CR

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

3. 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

4. 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

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

6. A Natural Evolution

7. 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

8. 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

9. 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 50-138 AD

10. Gross Margin • Efficiency vs. Growth • Example

11. 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

12. 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

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

14. Aha! • Sales $2,000,000 • Gross Margin 40% • Gross Profit $800,000 • Overhead Assumption $600,000 • Net Profit $200,000 • Twice the return with a bit of effort

15. 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

16. Changing Work Mix • Branding • Marketing message • Facilities • Vision • Training

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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.