Cleaning Up On The Clean-Up of Natural Disasters

Damaged vehicles in parking lot of St. John's Hospital after tornado hit in Joplin, Missouri.
Damaged vehicles in parking lot of St. John's Hospital after tornado hit in Joplin, Missouri.

Bobby Lewis was watching TV and playing with his granddaughter on a quiet Sunday evening in May when one of his employees at ServiceMaster’s nearby disaster operations center telephoned.

“We just got word a tornado went through Joplin, Missouri,” Lewis recalls the employee telling him.

ServiceMaster, where Lewis is vice president of disaster restoration, is headquartered in Memphis, where 200 of its 1,200 employees man the operations center 24/7.

They monitor different public and private weather-alert services, “police and fire channels, anywhere we can get input on what’s going on,” says Lewis.

ServiceMaster is the parent company of more than 3,000 local franchises, which work day to day doing residential cleanup from burst water mains, rainstorms and fires. But when a natural disaster strikes anywhere in the country, they can be called up to serve, mobilized by the hundreds to respond to catastrophe for days and weeks on end.

It’s a business model loosely shared by several other big disaster cleanup companies including ServPro, Disaster Kleenup Internationaland the Signature Group.

“Within an hour we were ready to move into the area to serve our customers,” says Lewis. “By then we had information from insurance carriers, Google Maps and some paid services we use to get additional visual orientation. “

The monster tornado tore through Joplin, a city of 50,000, killing 120 people, seriously injuring 400 and destroying thousands of homes and businesses. It was the deadliest single U.S. tornado since 1947 and the ninth-deadliest of all time.

“Within four hours we were there, with our people, equipment and banks of lights up in parking lots, so they could do rescue and recovery," recalls Lewis.

Similarly, “when we hang up the phone, we pull the trigger," says Ken Melchiorre, a vice president with CH2M Hill , the global engineering firm under contract with FEMA to provide temporary housing and other disaster relief as needed.

More than most, the disaster restoration business is entirely dependent on Mother Nature. Its extreme revenue volatility is determined by the size and frequency of natural disaster.

Take, for instance, Signature Group, a Gulf-Coast, disaster-relief company based in Port Neches, Texas. In 2005, it had 1,500 people bringing back hospitals and 19 schools in the St. Bernard Parish of New Orleans, revenue topped $230 million.

“That was a unique year, that was the top-out for us,” says Bobby Chiasson, vice president of marketing for Signature Group. “We’ve had $12-million years, $30-million years. It fluctuates a lot.”

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Indeed, the banner year for restoration services was 2005, in the wake of hurricanes Katrinaand Rita. The federal government alone released more than $50 billion to deal with the crisis. Since then, at least until this year, revenue has fallen steeply each year.

“Between 2006 and 2011, industry revenue is forecast to rise at an average annual rate of 0.9 percent to an estimated $10.4 billion in 2011,” says Caitlin Moldvay, an industry analyst with IBISWorld market research

But in 2011, with seven months of remarkable floods and the deadliest tornado season in half a century, she's projecting industry revenue to rise 18.9 percent.

State Farm insurance has paid nearly $1.75 billion to more than 400,000 customers from the destructive storms of April and May, making the months the fifth most costly in the company’s nine decades. Allstate’s insurance payouts for April and May totaled $2 billion — close to its losses for all of last year.

Insurance accounts for about 15 percent of industry revenue, IBISWorld estimates. For most businesses and public institutions, it makes sense to have a disaster plan in place and a restoration company on retainer; the percentage of firms that can restart after a significant business interruption is small.

Chiasson of Signature spends much of his time giving presentations to small groups — hospital associations, school districts, apartment associations — on the efficacy of having a plan in place before disaster hits.

Stormy Weather - A CNBC Special Report
Stormy Weather - A CNBC Special Report

Lewis of ServiceMaster estimates that 60 percent of his company’s work is pre-planning, with the hope that a plan is never implemented.

Signature Group is located in the middle of Texas refinery country, and many of its clients are oil companies.

“We’re tracking hurricanes when they’re sitting in the middle of the Gulf of Mexico,” says David LeJeune, Signature’s general manager. “Chevron Phillips is watching a hurricane seven days out. They’re already calling vendors, we’re calling clients. Three days before it hits, we’re shipping our clients generators, fuel, figuring out a command center location point.”

On The Ground

Ken Melchiorre, right, CH2M Hill's vice president for government facilities and infrastructure, leads a disaster response training session at the company's office in Washington, D.C.
Courtesy of CH2M Hill
Ken Melchiorre, right, CH2M Hill's vice president for government facilities and infrastructure, leads a disaster response training session at the company's office in Washington, D.C.

On The Ground

Hurricane Ike flooded nearly all of the 3,500 homes in Bridge City, Texas, in September 2008, LeJeune recalls.

“The homes needed to be gutted, sanitized, and rebuilt. Most residents did not buy flood insurance since they had not been flooded in over 100 years," says LeJeune.

A nearby refinery LeJeune declined to name hired the firm to rebuild its employees’ homes, picking up the tab.

“They figured that if their people were panicking about their own houses, how were they going to help get the refinery up and running?” he says. “We had to muck out, take out all water, all the furniture and drywall, and start drying their homes.”

Sixty-five Signature Group employees worked on rebuilding after Hurricane Ike, but the company hired another 700 employees locally. That’s a typical ratio of company employees versus temps. With Katrina, Signature hired 3,700 people for 45 days.

ServiceMaster just hired hundreds to clean up after the flooding in Minot, N.D., says Chris Curran, director of public relations.

“We had a bunch of our franchises go to the area — some from as far as Minneapolis — but mostly we end up being managers and facilitators. We couldn’t bring 400 people to Minot, there was nowhere for them to stay,” he added. “Plus, you have all these local people out of business. We stimulate the economy and put people back to work.”

When a large-scale catastrophe wipes out entire neighborhoods, towns or small cities, the president declares a major disaster and the Federal Emergency Management Agency oversees the emergency response. Much of the work is ceded to huge engineering contractors like The Shaw Group , Tetra Tech or CH2M Hill.

As a response to some of the stinging criticism FEMA received over its handling of Katrina, the agency has split the country into four sectors, with CH2M Hill overseeing the hurricane-plagued southeast quadrant.

“FEMA has invested more in readiness, putting contractors in position to prepare for disasters,” says CH2M Hill’s Melchiorre, who’s in charge of the company’s U.S. disaster response. “A fixed-price FEMA contract pays us once a month to maintain readiness. They’re buying insurance.”

For instance, in May 2007, a tornado destroyed almost all of Greenfield, Kan., and killed at least 10 people. CH2M Hill came in and “worked around the clock to build a community site with 300 temporary housing units,” says Melchiorre.

He says the company made $150 million over the course of the contract.

When Hurricane Ike hit the Houston area, CH2M Hill built 2,500 temporary housing units, on baseball fields and parking lots, within 30 days, recalls Melchiorre. “We put in underground utilities, roads, even mailbox posts,” he said.

Forty company employees supervised 400 locals, who did the heavy lifting and hauling. "We pride ourselves in using small business," he says.

Still, when Melchiorre supervised CH2M Hill’s Katrina work he had 600 of the firm’s employees there, many of them away from home for 12 months, with four days off a month.

“We hear all the time ‘You guys are making money off other’s misery,'" said Signature Group’s Chiasson. “I turn it around. That’s not the case, I say. We can’t stop Mother Nature. We take time from our families to put your community back together."