Brooke Capital Corporation Q2 2008 Earnings Call Transcript

Brooke Capital Corporation (BCP)

Q2 2008 Earnings Call

August 19, 2008, 11:00 am ET

Executives

Kyle L. Garst – President

Robert D. Orr – Chief Executive Officer

Presentation

Operator

Welcome to the second quarter 2008 Brooke Capital Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Kyle Garst, President. Please proceed.

Kyle L. Garst

Thanks, Fab, and thanks, everyone, for joining us this morning. This is Kyle Garst, President of Brooke Capital Corporation. Joining me on today’s call is Robert Orr, Chairman of Brooke Capital Corporation.

On today’s call we will provide an overview and update of Brooke Capital’s strategy and growth plans. We’ll then open up the call for questions.

I will now review the required Safe Harbour statement. I need to remind everyone that comments made by management today may include certain estimates, projections, and other forward-looking statements. These statements speak only as of the date in which they were made and are not guarantees of future performance. Actual results may differ materially from those expressed, implied, or forecast in forward-looking statements.

Some factors and uncertainties that could cause actual results to differ from those indicated in the forward-looking statements include the uncertainty that the company will achieve its short-term and long-term profitability and growth goals. Uncertainties associated with markets, acceptance of and demand for the company’s product and services, the impact of competitive products and pricing, the dependence on third parties, suppliers, and their pricing, its ability to meet product demand, the availability of funding sources, the exposure to market risks, uncertainties associated with development of technology, changes in the law and in the economic, political, and regulatory environments, changes in management, the dependence on intellectual property rights, the effectiveness of internal controls and risks, and factors described from time to time in reports and registration statements filed by the company with the Securities and Exchange Commission.

Brooke Capital undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or expectations after the date of these remarks. Brooke Capital provides a detailed discussion of risk factors in periodic SEC filings and you’re encouraged to review these filings.

Okay. As expected, it was a challenging quarter for Brooke Capital Corporation. In our last earnings call I outlined the changes in the credit market resulted in greater than anticipated tightening in the lending market which has impacted our ability to sell new franchise locations. I advised that we had re-evaluated our outlook for 2008 and we have begun preparing for a no-growth scenario until credit markets turn around.

Since that time, we announced that we are undertaking a number of initiatives to ensure that Brooke Capital Corporation remains a viable company. Specifically, during the quarter we announced a reduction in staff which directly impacted positions at our national office and positions in various service centres. We announced the decision to sell our insurance companies and additional assets assuming acceptable terms were met. The implementation of these initiatives were expected to result in reduced operating expense and trim down our organization operating budget. These decisions were painful and difficult, but necessary.

To remain a strong business partner to our franchisees we must remain a strong organization. The previously announced operating initiatives will better align our cost structure to our lower expected revenues. We remain 100% committed to our franchisees and make sure that we continue to provide them with our primary support services, our business model, our national brand, access to insurance companies, and our web-based information system while still ensuring that we adhere to a strong level of operational discipline.

As of today I can report that our new era and operating initiatives have been implemented and management actions have resulted in Brooke Capital becoming a leaner and more efficient organization. We expect to return to profitability in the third quarter. Losses were incurred in the second quarter primarily as a result of our shrinking the number of Brooke franchise locations by closing, relocating, or liquidating poor performing locations.

Difficult credit markets have had a significant adverse effect on the sale of new franchise locations by the company. Without revenues from the sale of new locations the company has been forced to reduce our expenses significantly. As a result of our shrinking the number of locations, reserves were established in the second quarter for agency inventory write downs of $3.6 million, lease buy-outs and equipment write downs of $3.3 million, producer development write downs of $5.5 million, and other restructuring expenses of $338,000.

With that I will turn it over to Rob Orr.

Robert D. Orr

Thank you, Kyle. I’m going to go off script for just a second here. When Kyle was talking about the difficult period, the downsizing that occurred in the second quarter, I can’t emphasize enough how difficult that was for the entire company, for our employees, our franchisees, and our vendors. We know it was very difficult. To give you an example, we reduced payroll from something like 20-some million dollars on an annualized basis to more like $8 million on an annualized basis. So you known that the company has really made some significant and difficult decisions here so that it can focus on limited growth in a very difficult credit environment. With that, back on script.

Kyle Garst and Dane Devlin did a good job of transitioning our company in the second quarter to the limited growth business model required to wait out the current credit markets. To assist in returning Brooke Capital to profitability in the third quarter, I’ve taken a more active role in the company. Although I remain chairman and Kyle remains president, I’ve assumed the responsibilities of chief executive officer so Kyle can focus on the sale of troubled locations.

While Kyle and Dane were going through a difficult downsizing at Brooke Capital during the second quarter, I then focused my efforts on Aleritas Capital, another company in which both Brooke Corporation and I have significant ownership interests. Now that Aleritas Capital has returned to profitability, I’ve redirected much of my attention to Brooke Capital with expectations of returning it to profitability in the third quarter.

I want to stress that the value of Brooke Capital is its insurance distribution system, which generates about $1 billion per year in premiums. Until credit markets improve, Brooke Capital is focused on improving the quality of its agency force and distribution channels.

Because capital is not readily available, the company’s expansion plans for selling life insurance and auto insurance policies issued through wholly owned insurance company subsidiaries has been discontinued. The company believes that its distribution system and recruiting processes represent a tremendous asset to insurance companies and the company will instead pursue a partnership with one or more insurance companies.

In closing, I would like to reiterate that Brooke Capital is reasonably confident that third quarter operating expenses have been sufficiently reduced so that they are in line with third quarter operating revenues. Although servicing fee revenues due from securitization trust to our consulting unit have been delayed we are confident that they will soon be paid, which is important to meeting our third quarter revenue projections.

With that I would like to open the call for questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). We’ll pause a brief moment to compile a list. And there are no questions in the queue.

Robert D. Orr

Well, with that, in closing I would once again like to go a little bit off script here and re-emphasize our appreciation and my personal appreciation to employees, franchisees, vendors, and all others that have stayed with us during this difficult second quarter. We’re looking forward to the future. We’re looking forward to again developing a more routine business atmosphere instead of going through all the changes that we have in the second quarter.

With that, thank you, everyone, for listening in to our call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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