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Service King Looks to New CFO to Help Push Past Revenue Struggles

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With Service King’s recent hire of CFO Peter Hunt, FenderBender Editor Steve Bauer talked with CEO David Cush to discuss the company’s strategies moving forward, and how they plan to ramp up their acquisition rates in 2022 and beyond.   

Why do you feel now was the right time to bring Peter Hunt aboard as your new CFO? 

Well I think the key thing is that Peter brings a lot of experience that I think is important to Service King. First of all from an operating side he was also very much of an operator CFO at Virgin America, so he got quite involved in the operations and understood how an operating environment works, so I think that’s very helpful in a CFO is that he will, I think, pick up the industry very quickly and hopefully give us some insights from his many years in the airline business. 

They are very different businesses but in the end, any type of operating business has certain similarities. So that will be helpful, but the other thing is that we are interested in recapitalizing the company. That’s probably a more formal word than I’d like to use, but basically going in and acquiring capital because we’re interested in starting to grow the company again. 

Peter is very familiar with public markets, debt markets and equity markets, so he’ll be helpful in terms of us going out and attracting additional funds because we feel like we’ve got the current footprint under control and it’s operating where we want. I see a very strong market out there, so I think Peter will be helpful in terms of going in and helping us address some capital needs. 

Do you believe there are trends in the airline industry that Peter can utilize to help Service King in the near future? 

Yeah, I believed this when I came into the collision repair industry. The airline industry is highly automated and very efficient for a couple of reasons. One, because it’s also highly regulated, that it has the FAA that looks at everything, and your level of record keeping is a little bit higher because obviously because of safety considerations and stuff like that. But the other thing is that most of the employees in the airline industry are also very highly paid. Not only pilots but also aircraft mechanics and others, so you learn to be as efficient as possible from the labor standpoint. 

One of the things I’ve thought has been interesting in this industry has been the parts side. Getting supplies and parts in the airline industry, again, is very well developed and efficient. Because if you need a part for an airplane, and that plane is sitting on the ground it’s not making any money for you. So you have a very well developed and sophisticated supply chain in the airline industry. 

When I came into Service King what I saw was a less sophisticated supply chain, but one that was pretty effective. It was more localized around the shop and it worked very well. But

it was also very labor intensive. You needed to have parts managers and teammates in every location, and I think that’s going to be one of the challenges for the industry going forward. This country has a labor shortage, it probably will have a labor shortage for a long time, and it’s really going to be up to people in this industry to figure out a way to fix more cars than ever, but doing it with fewer bodies. So hopefully between me and Peter we’re going to be able to go in and figure out some solutions to getting more production out of fewer people. 

Have you been able to pinpoint the reasons for Service King’s revenue struggles, and what plans do you have in place to resolve those problems? 

My view of the last two years is that we’ve kind of fought through it, the way everyone else has. We are more thinly capitalized than our two largest competitors. Boyd is a public company, so they have access to capital that we don’t, and Caliber is a big, growing company that has a stronger balance sheet than us and always has. From an operating standpoint we’re probably struggling in similar manners they are, meaning up until 7-8 months ago there was a lack of business until May or June of 2021. 

And then all of the sudden you end up with a situation where the amount of demand, and the amount of work and process, just flipped overnight. As an industry we went from being 30-35 percent down to getting back to baseline. 

Another struggle is the long-term trend of not having enough new body techs coming into the industry to replace the ones who’ve retired. I absolutely believe it’s because the industry, trade schools and others have done a poor job of communicating to students that these are six-figure jobs if you want them to be. 

The second thing I’d point to is the disruption of the labor force. Across the entire U.S. labor force, there have been about 4 million “excess retirements.” So these are early retirements, in addition to the normal level of retirements you’d see, and it’s all happened because of the pandemic.Basically you get what should be a few years of retirements compressed into 6-8 months. 

There has been speculation in the industry that Service King is near the top of the list of companies that could be acquired by a competitor this year. Have you heard any of those rumors, and can you comment on whether that’s a possibility for 2022? 

I haven’t heard that speculation. I can’t really comment on it other than to say that we don’t really view ourselves as being for sale. We view ourselves as being in the growth mode going forward. But at the same we’re responsible stewards of our owner’s capital. If someone wants to write a big enough check everyone’s for sale. 

I think a lot of the reason for those rumors is because this is an industry that really needs to consolidate a little bit more, even though there has been a lot of consolidation in the past 10 years. We’re a highly fragmented industry and probably more consolidation would do us some good. 

What direction do you see Service King headed in the near future, especially when it comes to acquisitions? 

Our plan is to definitely start ramping up growth. The timing of it will really depend on the operating environment. The priority right now is just handling what we have today. Our work in process and demand are at all-time highs, but we can’t hire enough workers or get enough parts to get the work processed. 

I think as an industry we’re probably five days longer in cycle time than we were a year ago. Our view of this is first of all, we will need additional capital to grow, and that’s one area we have circled, but the second is we’d like to see the industry environment settle down a little bit between labor availability, parts availability, and then ultimately what’s going to happen with bill rates with the (insurance) carriers. That’s something I think is under the surface in terms of this industry because it’s sensitive stuff, but it’s a real issue right now with labor costs going up. 

Is there anything else you’d like to add that we haven’t covered? 

The entire industry is struggling from an operating standpoint, and I think sometimes you lose sight of the big picture. But from a collision repair standpoint, the fundamentals have never been better. I’m not a long-time veteran in it, but the balance between the supply and demand for our services has never been healthier. There are more wrecked vehicles and more demand for collision repair versus supply than there ever has been. 

I’m highly bullish on the industry as a whole, and I’m also bullish on our ability to compete on a high level in the industry. I think 2022 will be a transition year for us coming out of the COVID era and back to a full collision repair demand environment, and now it’s just a matter of Service King and everyone else in the industry figuring out how we operate in this resource-constrained world.

Editor's Note: Shortly after the Q&A, Service King entered into debt restructuring conversations. 

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