H & R Block Inc (HRB) 2012 Q1 法說會逐字稿

Good afternoon.

My name is Kristin, and I will be your conference operator today.

At this time, I would like to welcome everyone to the H&R Block first-quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Thank you.

At this time, I would like to turn the call over to our host, Mr.

Derek Drysdale, Director of Investor Relations.

Please go ahead.

Thank you, Kristin.

Good afternoon, everyone, and thank you for joining us.

Today Bill Cobb, our President and CEO, and Jeff Brown, our CFO, will review our first-quarter results.

Other members of our senior management team will participate during the Q&A.

In conjunction with today's call, you'll find the press release on our Investor Relations website at www.HRBlock.com, and we plan to file our 10-Q later this afternoon.

I'd like to remind everyone that today's remarks may include forward-looking statements, as defined under the Securities Exchange Act of 1934.

Such statements are those relating to matters that are not historical facts, and such statements are based on current information, and management's expectations as of this date, and are not guarantees of future performance.

Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict, and as a result, actual outcomes and results could differ materially.

Please see the risk factors included in our most recent periodic reports and other SEC filings.

H&R Block undertakes no obligation to publicly update such risk factors or forward-looking statements.

After our prepared remarks, we'll take your questions.

And with that, I'll now turn the call over to Bill.

Thank you, Derek, and thanks to all of you for joining us.

I know many of you are anxious to begin the long weekend, so our prepared remarks before we take your questions will be rather brief.

Earlier today, we reported first-quarter results that were in line with our expectations.

Our adjusted net loss from continuing operations of $111 million was essentially flat to the prior year.

On a per-share basis, the adjusted loss of $0.37 was $0.02 below the prior year, due to fewer shares outstanding.

Given the seasonality of our businesses, and the fact that nearly all of our revenue and earnings come in the fourth quarter, our first-quarter results generally don't provide a lot of color on our performance.

That said, I am pleased with the initial progress we've shown in Q1.

Following the sale of RSM, we will enter next tax season squarely focused on continuing to drive client and market-share growth in each of our 4 key areas -- retail, digital, international, and financial services.

I'll have much more to say about our plans at our investor conference in New York City on December 8.

Now, I'd like to provide a brief update on both TaxACT and RSM.

First, the TaxACT preliminary injunction hearing is scheduled to begin next week, on September 6.

We anticipate the hearing will last several weeks, and we are hopeful that a decision will be made soon after.

We continue to believe this merger is the right strategy, and that our legal position is strong.

Combining H&R Block and TaxACT will do exactly what the Justice Department wants -- bring competition to a digital market that's currently dominated by 1 player, Intuit.

Most importantly, we believe consumers will be the primary beneficiaries of the merger through innovation, enhanced functionality, and low prices.

Turning to RSM McGladrey, last week we signed a non-binding letter of intent to sell substantially all of RSM's assets to the partners at McGladrey & Pullen.

After a thorough review of the alternatives, we believe this sale is in the best interest of H&R Block and our shareholders.

Most importantly, we see this transaction as an important step in refocusing the Company on growing clients and market share in our core tax business, and improving our margins.

Total consideration is estimated at $610 million.

Approximately 90% of that consideration will be in the form of cash at closing, with the remainder being financed by H&R Block over a term of 5 to 7 years.

M&P will also assume substantially all liabilities.

We anticipate this transaction will close by calendar year-end.

I would like to wish our friends at McGladrey the very best.

For 12 years, they have been our partners, and shared in the journey with H&R Block.

I'm confident that the outstanding professionals at McGladrey will prosper in the years ahead.

I'd like to conclude with a few words on capital allocation.

Clearly, capital allocation remains very important to us.

First, I'd like to point out that we were restricted from buying shares in the most recent quarter, due to the ongoing negotiations with M&P.

Second, we have an authorization from the Board to repurchase shares in fiscal 2012, that we fully intend to utilize.

Following last week's announcement, a recurring question was -- what will you do with the cash from the sale of RSM?

We must be mindful not to get ahead of ourselves by discussing the potential uses of cash until we have definitive resolution on both the pending acquisition of TaxACT, and closing on the sale of RSM.

We will have more to say about our capital allocation plans on December 8.

With that, I'll now turn the call over to Jeff.

Thanks, Bill.

I'd like to begin by breaking down the net after-tax charge of $0.20 per share included in our first-quarter results.

That net charge consisted of the following items.

First, the goodwill impairment on the sale of RSM, which totaled $85 million, or $0.17 per share.

Second, we impaired all of the remaining goodwill at RSM EquiCo, a separate business of RSM's, that is not included in the sale to M&P, and which we will seek to dispose of separately.

That impairment totaled $14 million, or $0.02 per share.

Third, we realized a pre-tax gain of $10 million, or $0.02 per share on the first-quarter sale of RSM's compensation and benefit consulting practice.

And finally, we incurred a litigation charge of $15 million, or $0.03 per share in our tax services segment.

Now, looking at segment results, revenues in tax services were $91 million for the quarter, essentially flat to the prior year.

The segment's quarterly pre-tax loss of $169 million improved from a pre-tax loss of $175 million a year ago.

Each period included charges -- the litigation charge of $15 million in the current quarter, and a severance-related charge of nearly $17 million in the prior quarter.

In Corporate, our pre-tax loss of $31 million was a slight improvement to the prior year.

The improvement was due primarily to reduced loss provisions on mortgage loans held at H&R Block, which declined from $8 million a year ago to $5.6 million in the current quarter.

The net principal balance of mortgage loans declined to $467 million at July 31, a decline of $18 million from the prior quarter.

Turning to discontinued operations, our first-quarter loss of $2 million compared with a net loss of $3 million a year ago.

Claims for alleged breaches of representations and warranties in the principal amount of $48 million were resolved during the quarter, with incurred losses totaling $485,000.

Sand Canyon received new and reasserted claims during the quarter of $35 million, and at July 31, claims totaling $66 million remained under review.

Sand Canyon's reserve totaled $126 million at July 31, essentially unchanged from the prior quarter.

One other item of note relating to our discontinued mortgage operations -- in August, H&R Block was dismissed as a defendant to a securities fraud action initiated in October 2010 by the Federal Home Loan Bank of Chicago.

This claim involved 2 securitizations, with an initial principal balance of approximately $50 million, of which $42 million remains outstanding.

Sand Canyon remains as the sole defendant in this matter, and we have currently concluded that a loss on this claim is not probable for Sand Canyon.

With that, I'll turn the call back to the operator for questions.

(Operator Instructions).

Your first question is from the line of Scott Schneeberger with Oppenheimer.

Thanks very much.

Good afternoon, everyone.

I think I have about 3 questions.

First one, guys, a couple of weeks ago we heard from Intuit, and discussion of their tax season for TurboTax.

They mentioned that they took some share.

It looks like you took some share.

Could you talk, looking back now that the season has ended, on what you think the dynamic was, where the puts and takes were?

Thanks.

I'll take that and then Jason, if you want to add anything.

They did mention that they gained share, we gained share.

It's hard to speculate since the only information we have is IRS data and the public filings of our competitors, and essentially, I think we gained share -- clients and shares, and we're optimistic that we'll -- that's the plan for next year.

Jason, do you have anything to add to that?

No.

My team continues to be focused on the momentum that we created last year, in providing a great experience to our customers in the upcoming tax season.

Thanks, guys.

Just following up on that, I think it's implied that if both you and they took share, the smaller players, including TaxACT, probably lost a little.

Any comments on that, and how you think that dynamic may play going forward?

None.

Okay.

Shifting gears a bit, then -- the sale of RSM.

You've outlined some of the contingencies of what needs to occur for this to all be finalized.

I just want to gauge, is there a high certainty that this does close?

Anything incremental beyond, by calendar year end?

And what -- specifically in the question, what are the hurdles to seeing this deal completely finalized?

So I'll take the first part and then Jeff, if you want to add anything.

I think, Scott, this was 1 of the issues that we worked very hard on with our partners at RSM.

We're confident that we can close.

We want to be right up front.

We're working through the definitive agreement and the financing that the partners will come up with, and we believe that they've had very good advice on their side and that they will be able to close that.

I don't know, Jeff, if you have anything to add.

Yes, I think, Scott, I would echo that.

Conditions to close are really customary for a transaction of this size and nature.

I think we mentioned in the earlier release that the buyer is in the process of raising financing.

We have no reason to believe that they won't be successful in that and we're targeting a close within the calendar year.

Okay.

Thanks.

Jeff, 1 final question on a different tangent.

At this point in the year, what are your thoughts year-over-year, fiscal 2012, vis-a-vis fiscal 2011, with regard to cash flow and specifically your CapEx spending over the coming year?

Thanks.

Yes, as to CapEx, Scott, I think we've mentioned that our CapEx will be perhaps slightly higher than last year, but not dramatically higher.

I wouldn't point to anything out of the ordinary in the way of other cash flows, other than obviously to the extent we're successful in closing RSM.

Okay.

So with that closure and the way you look out at this year, I guess not to put the words in your mouth, but should the cash flow -- free cash flow in 2012 look pretty similar to 2011?

I don't think I'm going to give any specific guidance, Scott, but I wouldn't point to anything that we think is -- would expect to be unusual about this year.

Okay.

Thanks.

I'll turn it over there.

Appreciate it, guys.

Your next question is from Grant Keeney with Northcoast Research.

Good afternoon.

As you analyze your results from last tax season, how many clients do you think the Company may have lost by not having a RAL product?

If that client base is big enough to fight to win back, have you made any considerations for a RAL replacement, other than a RAC, for this upcoming season?

Phil, you want to go first?

And then I'll comment.

Grant, I think what I would say is important here, in terms of the first part of your question is -- last year, or the year before, we retained 65% of our RAL clients.

Last year, we retained 64% of our prior RAL clients.

So I think we have proven last year that the RAL is not so important to us.

It certainly is something that we can -- we have a full portfolio of initiatives, and we serve our clients very well.

So we're retaining clients at high rates.

The whole area of RAL as a financial product, is an area of a lot of uncertainty right now.

I can tell you that we're -- we continue to explore all the options at this point, and we'll talk more about that in the future.

Okay.

That's fair.

And then if you could, could you just provide some thoughts on the pricing environment in retail and digital next tax season?

Grant, what specifically do you want to talk about?

I mean, it will be -- everybody has indicated, they're going to be very competitive and we expect to be -- it to be a highly competitive market.

Okay.

And then just last question here is just a housekeeping question.

We noticed you broke out provision for bad debt and loan losses, I think for the first time.

Is that an expense that's going to be recurring into perpetuity, or should we treat that as an add-back?

I guess, Grant, I would answer that in 2 ways.

The line item that you're looking at would include loan loss provisions on the mortgage loans at the bank, which we have seen a declining trend on and we would expect that to decline as -- continue to decline into the future.

It also includes some level, and of course not a lot in this first quarter, of bad debt, just from our other businesses, and receivables that they have on their balance sheet.

And that will fluctuate from quarter to quarter, but on an annual basis, I wouldn't expect any big changes in that bad debt portion.

Okay.

Thank you very much.

I appreciate it.

Your next question is from Michael Millman with Millman Research.

Thank you.

I guess couple questions as well.

Can you talk about where you expect -- following up with an earlier question from Scott, where you expect online growth to come from?

Well, and this is Jason, Michael.

I appreciate your question.

We expect non-FFA online growth for the coming season to be in the low teens, and we do expect a lot of that growth to continue to come from pen and paper filers as we've seen historically, with the majority of those going to digital.

You don't think the pen and paper is -- if not dried up, drying up?

We think for the upcoming tax season, we continue to see that fueling the growth of online growth.

Okay.

Regarding RSM, you're going to be (inaudible - technical difficulty) keep the loss, pretty much the losses and give up by selling the profits.

Do you expect to somehow report differently, or do you expect some offset to help the second half of the season?

Mike, your line was breaking up a little bit.

I think the question you're asking, and if I don't get it right, is obviously there was an impairment, and with the close of the sale, the business services segment will go away.

I don't think we've settled in on reporting, other than to assume that tax services will be our only business segment, but frankly, we haven't made that decision yet.

But Jeff, I don't know if there's -- we haven't even talked about it so I don't know if there's any -- we should assume it's the tax services segment, right?

No current plan to change that reporting.

My question was really, this year's year-over-year comparisons will be -- total year will be hurt because you'll have only the losses and not the profits from RS on an operating basis.

I think here's what I would say, Mike, is, as we work through obviously the first item of business is to close the sale, and as we work through that and as we get toward our conference on December 8 we'll have more clarity around what I think is your question, and how we move forward from there.

On international, which you didn't talk about in the past -- when I see it, it looks like the Canada and Australia are relatively small businesses for tax.

They don't have any large [comparers] that are easy to buy, that do simple tax returns, therefore, revenue may be a third, a quarter of US.

Your history in the UK was a [failure].

Can you kind of talk to us about what you see that suggests otherwise?

Well, I think as I said early on, if anybody else wants to comment, as a new CEO, I'm going to look at all areas of the business.

I'm not unmindful, and I think you and I have talked about -- I'm not unmindful of the past.

We're in review right now, and as I've said a couple times, I think I'm going to beg indulgence here, and let us go through our strategy review.

We're right in the middle of it and we're going to have more to say on all that on December 8.

I wouldn't assume from my answer, anything other than, we will talk about all aspects of the business as we get to our investor conference.

Thanks, Bill.

Mike Turner with Compass Point.

Hi.

Good afternoon.

Just a couple follow-up questions.

Go ahead, Mike.

Mr.

Turner, your line is open.

Looks like Mr.

Turner has disconnected.

(Operator Instructions).

So operator, if there are no further questions --

Should we give Mike a minute, just in fairness to him?

Sure.

(Operator Instructions).

Operator, I think we might have been disconnected.

We're showing zero participants.

Everyone is still connected.

I apologize.

So I'm not showing anyone else in the queue, if that is what you're seeing as well --

Mike started his question.

We do have Mike Turner back in the queue.

We'll open his line now.

Hello, can you guys hear me?

There wasn't another earthquake in DC, was there, Mike?

No, I don't know what happened.

Sorry about that.

I was talking into dead air.

I appreciate you guys giving me a second shot.

Just a couple questions.

On the RSM spinoff, would there be any additional savings in corporate overhead as part of that, or should we just kind of assume that whatever we're modeling for RSM goes away?

Jeff and his team are just really diving in.

This was a long negotiation, a delicate negotiation.

Jeff and his team are looking into that, but having said that, and I'll Jeff weigh in, RSM ran pretty independently as a business services segment, so I wouldn't anticipate a large number here, but I don't know, Jeff, do you have anything to add?

I think that's the right answer, Mike.

They ran largely independently.

Okay.

Thanks.

And then just looking into this coming fiscal year, and the retail tax business, what's kind of a targeted retention rate?

I know your retention rate was up about 3% last year.

Kind of what a target is, or an expectation?

So our retention rates run right now in the -- I think we already disclosed, 72%.

It's actually the highest retention rates we've had in about 10 years.

I will say this.

New clients tend to retain at lower rates.

So as we look forward we expect, given all the initiatives we've put in place and given the trends we've seen from those initiatives, that we will increase both our prior client retention and our new client retention.

Overall retention I think, I wouldn't expect much movement there because of the mix between new clients and prior clients.

Does that -- I don't mean to get complicated on you.

I just want to make sure I don't set an unrealistic expectation.

No, that's helpful, I'm just trying to see, I know you had a big jump next year.

Sounds like you're at least hoping to maintain basically what your retention rate was last year.

I would say we expect to see improved retention on both prior and new clients.

That's the way I think you should think about it.

Okay.

Okay.

And then, also if you can remind me, how much do you have remaining on your buyback approval?

It's like $1.3 billion, Mike.

Okay.

That was obviously a multi-year authorization.

Okay.

And then just last question.

The dismissal of the Sand Canyon case, was that -- can you give me any color, was that like a jurisdictional issue or was that where they actually tried to pierce the veil and they didn't find it appropriate?

This is Jim Ash.

That was, the agreement with the plaintiffs to dismiss on personal jurisdiction grounds.

Okay.

Great.

Those were all my questions.

Thanks a lot.

Thanks, Mike.

Your next question is from Michael Chapman with Private Capital Management.

Thanks.

Quick question.

What is the CapEx associated -- what was the CapEx associated with McGladrey last year?

It's probably a question I'll have to take offline.

I would tell you not significant, but the specific amount, I would probably take offline.

Okay.

Just in the context of you guys had said last year, $77 million in operating income, and in the K you had $19 million in depreciation, and an additional $11.5 million in amortization of intangible assets.

I was wondering if that depreciation is essentially free cash that's not in the operating income, if there's no real offsetting CapEx?

No, they would have a level of maintenance CapEx that they incur every year.

Okay.

So the -- is the depreciation a relatively good assessment of that, unless we can get a more accurate one offline?

Yes, and in fact -- so here's last year.

I've got in front of me now.

And it's in our 10-K as well, if you wanted to grab it, but it's like $20 million last year.

So it's in line with depreciation, then?

Yes.

Okay.

And then when you said other liabilities associated with that, any more granularity on that?

Was there any debt?

Was there any liabilities buried in other, that will come off as a part of this sale, I guess?

Well, in addition to the on-balance sheet liabilities, payables and accruals, they would step in to all of the lease obligations as well going forward.

Thanks very much.

Kristin, is Vishnu on?

Yes, Vishnu Lekraj with Morningstar.

Good afternoon, gentlemen.

Thanks for taking my call.

Looking here at a little over a longer term question, looking at the changing product mix and some of your business mix, how should we view your operating margins, not necessarily 1 or 2 years out, but 3 or 4 years out?

Should they get back to your peak levels, or how should we think about that moving forward?

I think at this point, Vishnu, we're looking at -- that's kind of what we're gearing up for December, is to take a longer term view of where we're headed, so stay tuned on that.

Got you.

1 more follow-up, then real quick.

On the DIY market, do you think there's a huge amount of opportunity there for this year, especially given where you guys are taking your focus and how much growth do you believe that's going to amount to over the next 2, 3 years?

Can you repeat the question?

I'm not sure -- I'm sorry for all the technical difficulties we're having on this call, but you're breaking up a little bit.

Can you repeat the question?

Yes, I apologize if it's been asked previously but how much of the opportunity do you see in regards to the DIY market for this upcoming tax season in relation to TaxACT and in relation to Intuit and your other competitors?

I think what I'm most focused on, Vishnu, is really thinking about coming off a tax season in which my online retention was up 5 points, my net promoter score was up 5 points, I dropped my contact rates about 5 points, and really looking at that and thinking about how can we build on that momentum, and we feel really good about that.

We look at the coming tax season, we see, like I said, low teen growth in the category and we feel like we're well positioned to take advantage of our position.

All right.

Great.

Have a good holiday.

You too.

Mr.

Drysdale, do you have any closing remarks?

Everyone, thank you for joining us today.

Have a great holiday weekend and we'll chat soon.

Thank you.

Thank you, sir.

This does conclude today's conference call.

You may now disconnect.