H & R Block Inc (HRB) 2014 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the fourth-quarter earnings call.

(Operator Instructions)

Thank you.

Colby Brown, you may begin your conference.

Thank you, Johnna.

Good morning, everyone, and thank you for joining us to discuss our FY14 results.

Joining me on the call today are Bill Cobb, our President and CEO; and Greg Macfarlane, our CFO.

Jason Houseworth, President, Global Digital and Product Management will be available during the Q&A session.

In connection with this call, we have posted today's press release on the Investor Relations website at hrblock.com.

Some of the figures that we'll discuss today are presented on a non-GAAP basis.

We've reconciled the comparable GAAP and non-GAAP figures in the schedules attached to our press release.

Before we begin our prepared remarks, I'd like to remind everyone that this call will include forward-looking statements as defined under the securities laws.

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.

As a result, our actual outcomes and results could differ materially.

You can learn more about these risks in our Form 10-K for FY13 and our other SEC filings.

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

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

Thanks, Colby, and good morning, everyone.

Earlier today, we announced our financial results for FY14.

I'm very pleased with our results this year.

We entered this season with a strong plan to achieve our Tax Plus objectives, and we executed very well.

In FY14, we enhanced our service levels while improving return mix and increased attach rates on our best-in-class financial services products.

We successfully launched the first year of our digital product redesign, enhancing the client experience.

We continued to educate our clients on the upcoming changes resulting from healthcare reform, and gained some key learnings from our healthcare initiatives that will serve us well going into 2015 and beyond.

And most importantly, we served our clients better than ever.

The result of these efforts was that we grew revenue, expanded margins, and improved our customer satisfaction, while also continuing to invest in our business.

I'll provide a greater level of detail on our performance for the year, but before doing so, I'd like to provide some overall context on the tax season.

As many of you know, there was a lot of noise in the market this year due to the delayed opening of e-file, our decision to eliminate the free federal 1040EZ promotion, and aggressive pricing actions from our digital competitors.

Total IRS filings returned to historical norms and exceeded our expectations, with returns up 1.4% from last year.

The assisted category as a whole was essentially flat, while total digital returns increased nearly 6%.

There are a few reasons for the difference in growth rates between the assisted and digital categories.

First, we believe that our decision to discontinue the free 1040EZ promotion in virtually all markets contributed to the growth in digital returns this year, as low loyalty filers motivated solely by price moved to DIY methods where they could file for free.

Second, the digital category continues to benefit from the migration of pen-and-paper filers, though at a slower pace than in prior years.

And third, based on our experience this year, and consistent with industry results the past several years, we continue to believe there is an increased mix of digital returns filed with the earned income credit, or EIC, due to the inconsistent fraud prevention standards in filing returns containing this credit.

As a reminder, the EIC is one of the largest government social programs in the country, and the IRS estimated that approximately $13 billion to $15 billion of improper payments were made through the EIC in 2013.

This is obviously a significant issue for the US Treasury Department and for the country.

In fact, under federal law, every government agency is required to disclose their highest risk financial transactions, and the EIC is the only risk noted on a consistent basis by the IRS.

Several years ago, the IRS took actions to address this concern that were not comprehensive, creating standards only for returns prepared by a paid tax professional.

Thus, current standards for filing a return with the EIC are different for assisted returns and DIY returns, which has resulted in a shift from assisted to DIY over the past five years.

Importantly, the assisted category would have gained share during that time had there not been a shift in EIC filers.

We have taken an industry leadership position against tax fraud and continue to advocate for consistent standards in both assisted and DIY tax returns in all respects, and in particular, those that contain the EIC.

Until such parity standards are in place, we believe the improper payment issue will persist and the industry will continue to see a shift in returns containing these credits from assisted to DIY.

With that overview on the industry, let's turn to our performance for the year.

We executed very well against our multiyear Tax Plus strategy in 2014.

You'll recall from our conference call in March and our Investor Day in December that we are squarely focused on this strategy, which is centered on delivering value for our clients and driving higher revenues and profits through a balance of improved return mix and increased product attachments.

Put simply, we served our clients better than ever, and in the process, drove profitable growth.

In retail, we discontinued our free 1040EZ promotion in virtually all markets, which, as anticipated, contributed to a significant increase in revenues despite lower return counts.

We also made changes to our pricing this year to be more strategic in how and when we provide discounts and what we charge for filing extensions.

Despite theses price increases, retention of non-EZ filers was essentially flat for the year, continuing to outpace our branded retail competitors.

Another important element of our strategy was to improve how we serve our clients by making investments in our retail locations, technology, and in our people.

Specifically, we are nearing completion in our initiatives to update our offices and upgrade our retail tax preparation software.

These investments have enabled our tax professionals to serve our clients better, which resulted in improved service metrics across the board, with walk-outs and wait times down and satisfaction up.

In fact, our Net Promoter Score increased 2 points this year.

These initiatives will require continued investment, which we are committed to making, in order to improve our value proposition.

From a marketing perspective, I'm very pleased with our campaign this year, which served as a reminder that taxes are complex and Americans leave over $1 billion of refunds on the table each year by not seeking professional assistance.

Our simple message of Get Your Billion Back, America resonated very well, and it showed in our results.

In digital, we enhanced the user experience by customizing the product to each client and making it simpler to use.

By better anticipated the needs of our clients and tailoring the user experience, we saw improved conversion and a substantial increase in product upgrades.

I'm pleased that the multiyear effort that Jason Houseworth and his Team have undertaken to redesign the online client experience has been successful.

We will continue to invest in our digital products to customize and simplify our offering, which will result in better retention, conversion, and monetization.

On the Tax Plus side, our strategy is working, and I'm very pleased that we increased the overall proportion of clients who use our financial products.

We made specific changes to how we position our Peace of Mind warranty-like product.

We're successful in increasing the take rate on our refund transfer product, and effectively managed the Emerald Advance program to drive increased profits this year.

We also continued to see improved usage metrics in our Emerald Prepaid MasterCard, with reloader rates and average deposits higher in 2014.

The net result of these efforts was an increase in revenues from our Tax Plus financial services products of 11% this year.

On the international front, we had solid seasons in Canada and Australia, despite significant industry and macro challenges, including the extension of the Canadian tax season into May, considerable changes in the Australian tax law, and the stronger US dollar.

Our teams did an outstanding job of working through these challenges, serving more clients overall and increasing revenues more than 5% on a local currency basis.

And finally, we made progress this year in our healthcare initiatives.

We demonstrated our expertise by providing a tax and healthcare review for our clients on the upcoming changes resulting from the Affordable Care Act.

This effort to educate our clients over the past two seasons has positioned us as the trusted experts that our clients can rely on when navigating the intersection between taxes and healthcare.

We also successfully launched a partnership with GoHealth to provide health insurance enrollment services through online and assisted platforms.

Through these efforts, we continue to learn about the needs of our clients and how we can better serve them in this area during the upcoming season and beyond.

Our goals this year were to continue positioning H&R Block as the expert in healthcare and taxes and to lay a foundation upon which we could build in future years, and we succeeded in these goals.

It's important to note that although the ACA begins to impact the tax event next year, it will take time for the healthcare and tax preparation industries to fully adapt to these changes and for the ultimate opportunity to unfold.

Though 8 million people enrolled through the exchanges in 2014, the CVO has estimated that full adoption will occur over the next several years as individuals make decisions based on their perceived need for healthcare coverage, the overall cost, and potential tax penalties associated with noncompliance.

That said, we know some of our clients will be significantly impacted by the Affordable Care Act, and we believe they will naturally turn to their tax professional as a trusted source for help.

We are working closely with the IRS and have our organization focused on integrating ACA-related changes into our work streams in order to successfully serve our clients next season.

We look forward to sharing with you our thoughts and plans regarding the ACA as the potential impact from this long-term opportunity becomes clear.

In conclusion, we made considerable progress in 2014 toward our long-term objectives and are well positioned for 2015 and beyond as we remain committed to our Tax Plus strategy.

We anticipated that our strategy, which focuses our resources on generating profitable growth, would result in declines in unprofitable return count and unit market share this year.

The net result, however, is that we achieved exactly what we set out to do, deliver higher revenue and earnings by improving return mix, enhancing client service, and increasing the rate at which clients take our best-in-class financial services products.

Additionally, we made progress in our healthcare initiatives this year, educating our clients, improving our value proposition, and in positioning H&R Block as the leader in taxes and healthcare.

I'm excited about the future of H&R Block and look forward to a successful 2015.

With that, I'll now turn the call over to Greg to discuss further details of our FY14 financial results.

Thanks, Bill, and good morning everybody.

From a financial perspective, we executed well, growing revenues and operating more productively, which drove improved margins, earnings, and cash flows for the year.

Total revenues increased $118 million, or 4%, to over $3 billion, and on an adjusted non-GAAP basis, earnings per share from continuing operations increased 5% to $1.67.

On a GAAP basis, our net income from continuing operations was up 7.5%, to $500 million, and our earnings per share from continuing operations increased 7.1% to $1.81.

EBITDA margins expanded 1 point to 31%, with EBITDA increasing $66 million to $940 million.

On a quick side note, we report certain non-GAAP financial measures, such as EBITDA, which we find relevant in measuring our performance.

The non-GAAP financial measures we use are based on well-defined, consistent, and published standards which you can find in our earnings release.

In our tax services segment, revenues increased $121 million, or over 4%, to nearly $3 billion, due to improved mix and changes to our pricing strategy in our assisted channel, increased Tax Plus financial product revenues and product enhancements and improved monetization in our digital tax software.

The largest impact on total revenues came from an increase in US assisted tax preparation fees and royalties, which grew 4% to $2.1 billion, despite the overall decline in returns prepared.

This increase is due to general price increases and an overall improvement in the mix of non-EZ clients.

Additionally, the decision to discontinue our free federal 1040EZ promotion in virtually all markets and other changes in our pricing strategy related to discounts and tax return extensions contributed to the increase.

Let me take a few moments to offer more details on each.

Overall, we had a general price increase of approximately 3% as well as an overall improvement in the mix of other non-EZ returns prepared.

Next, as many of you know, the decision to discontinue the free federal 1040EZ promotion in virtually all markets impacted return counts, particularly related to less complicated returns filed in the first half of the season.

Before coming into the season, we thoroughly analyzed the results of our free 1040EZ promotion from prior years, and I'd like to provide some additional insight behind our thought process and our decision to discontinue the promotion.

First, we know our Free EZ clients quite well and recognize that they had historically been more price sensitive and less loyal than other clients.

Second, because these returns were prepared for free, this was volume in which we made little or no profit in prior years.

Third, our analysis shows the majority of these clients were not likely to be eligible for an advanced tax credit in future years under the Affordable Care Act.

As such, we did not believe a decision regarding the 1040EZ promotion would have a significant impact on our efforts regarding the healthcare reform opportunity.

Finally, by offering our service for free during one of the two busiest times of the year, we were essentially stressing our system, increasing wait times that may have deterred paying clients from completing their returns with us.

The end result was that we were giving our service away for free to clients who were not loyal and who provided limited lifetime value to the detriment of our paying clients.

Considering the support, expertise, and Tax Plus financial services products provided to our clients, our 1040EZ offering is truly the best in the industry.

So this year we decided to charge tax preparation fees for 1040EZ returns at a fair price that is competitive within the industry.

This decision also freed capacity in our tax offices, allowing us to better serve our clients, leading to improved Net Promoter Scores for the season.

From a revenue standpoint, the decision to eliminate the 1040 Free EZ promotion resulting in a one-time increase of over $30 million in 2014, despite the decline in returns.

The final driver of increased tax preparation and royalty revenue came from targeted, one-time changes to our pricing strategy for a limited number of clients who were receiving significant discounts that were not service-break driven.

Such discounts had served as a drag on our top-line performance in prior years.

We also began charging for extensions, and for those clients who file an extension through us and then come back to file their tax return, this charge will be netted against their total tax preparation fee.

Collectively, these and related decisions increased revenues by approximately $50 million this year.

Turning to Tax Plus, as Bill mentioned earlier, our strategy is working.

Revenues related to Tax Plus financial products increased $44 million, or 11%, to $432 million, primarily due to pricing changes in the Company's refund transfer offering, increased revenues in our Peace of Mind warranty-like product, and increased usage in average deposits per card on our award-winning Emerald Card product.

Overall, a greater proportion of our clients are taking at least one financial product during a tax event, and those taking two or more products increased as well.

With respect to our Emerald Card, while volumes were impacted by our decision to discontinue the free federal 1040EZ promotion, I am pleased that we were able to make significant progress in card usage.

Average revenue per card increased 13%, to $44, driven by double-digit increases in both reloader rates and deposits per card.

Looking ahead, the Emerald Card continues to represent opportunity for us, and we will continue our focus on driving more cards and more usage.

Turning to expenses, total tax segment expenses increased at a lower rate than revenues, up 2.9% to $2.1 billion.

This increase was driven primarily by increased compensation and benefits, including variable wages resulting from higher tax prep fees, higher depreciation and amortization expenses, and investment in growth initiatives such as the healthcare opportunity arising from the Affordable Care Act.

Importantly, we were able to offset these expense increases in other areas, and I'm pleased that we were able to drive margin expansion while continuing to make investments in the business.

In our corporate segment, our pretax loss improved by $20 million, or 17%, to $99 million.

This improvement is primarily due to a nonrecurring gain from the sale of residual interest in mortgage loan securitizations that were owned by Sand Canyon Corporation.

Corporate expenses declined by $7.6 million, primarily due to lower interest expense.

Our effective tax rate was 34.8%, due to discrete tax adjustments related to tax settlements and adjustment of reserves taken on uncertain tax positions in prior years.

Although we have now had two consecutive years of significant discrete benefits, we don't anticipate such benefits next year.

Thus, our overall effective tax rate will likely increase, but will be lower than pre-FY13 rates.

Looking at our overall financial position, our balance sheet and liquidity remain strong.

As of April 30, total unrestricted cash was $2.2 billion, and total outstanding debt was $906 million.

Cash flows from operations continue to increase as we continue to focus on smart, profitable business and operational efficiencies.

As mentioned on our call in April to discuss the exit of the bank, we expect to have considerable amount of excess capital on our balance sheet following the closing of the bank transaction.

It is the current sense of the Board and Management to use this capital and also incur some incremental net debt to return capital to shareholders, such as through share repurchases, following consummation of the transaction.

In connection with the incurring incremental net debt, there was also a current sense that there is value in maintaining investment-grade metrics.

The excess capital is the result of several different actions.

First, we have generated significant free cash flow net of dividends in each of the past two tax seasons.

Second, as previously disclosed, upon the completion of the bank transaction, we will unlock capital that has been held at the bank, a portion of which will be immediately available.

Third, there are still unused proceeds from the divestiture of RSM McGladrey.

Finally, we've been efficient in managing our balance sheet over the past 24 months, and through effective tax planning and other changes in our working capital needs, we freed additional capital.

In total, we expect to have between $850 million and $1 billion of excess capital on the balance sheet once the bank transaction closes.

Regarding the bank transaction itself, all required applications have been submitted to each party's respective regulators.

As part of its review, the regulator presents the transaction for public comment.

The public comment period is now closed, and no comments were submitted.

This is an important milestone in the process, and while we don't have additional updates to provide today on the bank transaction or our specific capital structure plans, we continue to expect that the bank transaction will close in time for next tax season.

As always, we will provide updates as appropriate.

Another important component of our capital allocation strategy I'd like to discuss is the capital we invest back into the business.

During the year, capital expenditures totaled $147 million, or 5% of total revenue.

This exceeded our previous guidance of 4%, due to additional investments in office upgrades and information systems, which we felt were necessary due to underinvestment in these areas in prior years.

As I mentioned earlier, we believe further investments back into the business are appropriate to enable us to execute on our Tax Plus strategy in the medium and long term.

Thus, we expect capital expenditures in FY15 to be between 4% to 5% of revenues, with a return to normal levels of around 3% to 4% of revenues thereafter.

Moving to discontinued operations, which include results of Sand Canyon, our net loss of $25 million was $6 million lower than the prior year.

Sand Canyon continues to engage in settlement discussions with the counterparties from which it has received a significant majority of its asserted claims.

Based on continued settlement discussions with these counterparties during the fourth quarter, Sand Canyon reported a provision of $25 million for potential losses related to its representation of warranty obligations, bringing the total accrual at April 30 to $184 million.

As a reminder, Sand Canyon is, and always has been, operated as a separate legal entity from H&R Block.

We believe our legal position is strong on any potential corporate veil-piercing arguments.

In conclusion, from a financial perspective, we've delivered an exceptional year of revenue growth and margin expansion, and I'm pleased that we continue to find ways to operate more efficiently and productively.

We have an exciting few years ahead of us, with substantial challenges taxpayers will face in dealing with an increasingly complex tax code.

We're confident in our ability to help our clients navigate through these changes, and we'll continue to make the appropriate investments to continue executing on our multiyear Tax Plus strategy.

I know we've covered a lot on today's call, so with that, we're now ready for questions.

Operator, please?

(Operator Instructions)

Your first question comes from Gil Luria.

Your line is open.

Thanks for taking my question.

You gave us a lot of great commentary about the market this year and what helped you drive the revenue increases.

As you look to next year, you already gave us a hint that you think that as long as EIC is not handled at the digital level, there should be still some shift in volumes there.

But in terms of the pricing actions that you took this year, is that -- did you come away from the season feeling that you've now exercised that muscle, or do you feel that you could go into next year and make some more moves like that and refine your pricing in some other places to get a similar benefit?

Gil, here's what I would say.

First of all, I'm not going to talk about next year.

We're still digesting this year, running all of our analytics, and next year will be next year.

We continue to work vigorously on the EIC issue and trying to get parity between the documentation requirements between the assisted and DIY.

So again, I wouldn't say that we have much of a comment on any of those points except to say that we have a lot of months between now and the next tax season, and we'll certainly have updates for you as we get toward Investor Day in December.

Fair enough.

And then the excess capital of $850 million to $1 billion, does that include the ability to add leverage, or is that just the calculation you went through of where you would be after a bank sale without taking on additional debt?

The $850 million to $1 billion number that we talked about earlier is just excess capital, and it is independent of any potential additional leverage that we may want to get into.

Excellent.

Thank you very much.

Your next question comes from Thomas Allen.

Your line is open.

Good morning, guys.

Some housekeeping things.

How many racks did you do this year?

And then why was Peace of Mind revenue up so much?

And then can you talk a little about Emerald Advance, revenue was down but bad debt was down.

What did you do in terms of strategy there?

Thanks.

I'll let Greg run through the numbers, but we had a very considered strategy around, as we talked about in December, around what we call Tax Plus.

It was stamped on the head of every field leader, every office leader.

Jason and his Team in digital did a terrific job on that.

And so Tax Plus really became a real operating approach for us throughout the Company.

So that's why you see the numbers that we talked about, and that contributed to Peace of Mind.

With regard to Emerald Advance, I think we just managed the overall process well in terms of our underwriting, our collections, et cetera.

So we're pleased with the effort there, and we think we had a very controlled approach and had a successful season.

Greg, is there anything you want to add?

Yes, so the specific question you asked, Thomas, we did 5.5 million refund transfers this season.

And then I agree very much with what Bill said.

The Peace of Mind is a great product.

It's a product that has not received a lot of attention here at Block for many years.

And under our Tax Plus strategy, we did pay some attention to it, and you got to see the results, what happened from that, which I think is really good news.

And then on the marketing front, you guys obviously had a very planned marketing campaign this year.

It was interesting to see that you had spent less this year than you did this year.

Do you think this is sustainable or whether that one-time thing is going on there?

Obviously, when you have the kind of campaign we had, the awareness we generated in a very short amount of time and the consideration that everyone recognized that this was H&R Block, you get a lot of bang for your buck there.

Again, not going to comment on the marketing strategy going forward or level of spending, but we're pleased with the way the campaign was received, the way we bought our media, we bought it very efficiently.

So overall, I think it was a win all around.

Okay.

I'm going to try to squeeze two more quick ones in here.

On the bank sale, once you do sell the bank, how do you plan to telegraph your capital return plans?

Do you expect to just start executing on buybacks?

I know you have $858 million on your authorization.

Or do you think you'll lay out a plan?

And then second question is, you announced in April a strategic alliance with Xero.

Can you give more color around that?

I don't think you guys have really talked about it since.

I'm not sure we're going to use a telegraph, Thomas, (laughter), but I will let Greg take those two questions.

So I'll start with the bank first.

There's not real much new news here.

I think it was good that the public comment period came and went.

Really, everything sits with the regulator right now, and -- the regulators, plural, I should say.

They have a process they follow.

There's good communication going back and forth between them and us and B of I. As I said in the prepared comments, we continue to believe the best estimate is to have this in place for next tax season.

Ideally, we'd like to get it done as soon as possible, but there is a process and time limit that's going to have to work out here.

There's always risk, though, when you're working with regulators.

Their timelines are different.

Their decisions may not be what we want.

But we still -- that's what our best estimate is.

As things develop, at the point which material things come up, we would share those with you as we have.

That's our normal practice.

On the Xero comment, or the Xero question, so Xero, those of you on the phone who are not familiar with Xero, it's X-E-R-O.

You can go to their website, xero.com.

It's a great company.

And we have, at Block, have been in the business services, small business accounting business for a long time.

And it's not an area that's received a lot of attention; it's not really that big.

We have been thinking about what is the next way to reinvigorate that.

We began thinking about the software and the service offering that we provide to our clients, and we found Xero, and they really have developed what they describe as beautiful software.

It would be software that we would use as part of our value proposition to our clients and new clients.

So it's a new venture.

I would say that we're hopeful, but it's going to take time to build into that, so I wouldn't get too excited by it in the short term.

Okay.

And so just to elaborate on the first question, once the bank sale is done, how are you going to communicate to the street your capital return plans?

So we have -- these are questions that are always contingent upon getting approval from the regulators, so job one is to get approval by the regulator.

We're not sitting idly here at Block for that to happen, but these are things that have to go between our Board of Directors, and then we have to think about it.

But my answer ultimately is going to be at the appropriate time, we'll share those decisions and timelines with you.

Perfect.

Thank you.

Your next question comes from Kartik Mehta.

Your line is open.

Good morning, Bill and Greg.

Greg, I think in your prepared remarks you said price increase of 3%, and I'm wondering, is that 3% excluding the 1040EZ, or is that 3% include the 1040EZ pricing change you've had this year?

It's excluding, Kartik.

So excluding the 1040EZ, all other forms, you had a 3% price increase, and that does not include anything you would do on the rack side or any of the other Tax Plus products, correct?

Yes, the 3% that we communicated would be really, think of its as a base form increase, not anything to do with the products, the additional Tax Plus products.

Kartik, just to put a little bit more context on that, I think what Greg was trying to do in his script was really give you context for some of the operating decisions we took around free 1040.

We didn't raise prices 12%, or in that neighborhood, or 10%.

We wanted to give you some color around the dimension of that, so that's why.

But if you just wanted to quote, unquote, look at what might be called general pricing, that's what the 3% refers to.

And Bill, what will your digital strategy next year be if Intuit goes along with their half-price date like they did this year.

I know you tested that a little bit.

Would your strategy change at all?

Is your thought that you're going to continue on the same path that you did this year?

So Jason, why don't we reveal our strategy for 2015 on digital, and Kartik, you know we're not going to do that.

But why don't I let Jason give his perspective, which is always helpful.

We're not going to get into next year.

But I want him to talk a little about how we're viewing things.

Thanks for your question, Kartik.

This is Jason.

I'll remind you just how we started this season, which was in year one of a two-year redesign, which was a ground-up redesign focused on creating a mobile first and personalized product experience.

And within this, our focus was to figure out how can we continue to improve conversion, improve retention and monetization, our average revenue per user, through an enhanced value perception and customization that the redesign creates.

So for this tax season, we really had a plan to begin to realize part of the benefits of this redesign, and we executed this plan.

We continue to improve our conversion.

And more importantly, as Bill noted, we saw substantial improvement in online monetization, and that was specifically from gains in free-to-basic or free-to-paid upgrades delivering double-digit revenue growth for the digital business.

As far as pricing, we're always testing in order to figure out the right way to monetize and the right way to create an experience that's going to improve our overall product, and we continue to do that, and that will be factored into our product strategy as it always does.

So Bill, maybe a question you might be able to give more -- a bigger answer to or a better answer to would be the Phoenix project.

I know you had tested some stores in Phoenix with GoHealth.

I'm wondering if you could talk a little about how those went, and maybe what you learned, and if you'd be able to expand on that.

Yes, and I'll let Jason weigh in.

Mark Ciaramitaro, who many of you've met at Investor Day, runs our healthcare business, reports in to Jason, so Jason is very intimately involved with the healthcare business also.

So that's our enrollment service.

We ran three pilots last year.

Phoenix was one of them, the in-store piece.

Again, not ready to comment on how we go forward, but suffice to say that I think we learned a lot.

We certainly enrolled thousands of people, and I think our service, our user experience, we got high marks from.

In terms of this being a guided experience versus just going to the exchange, there's a lot of things we're still unfolding in real time, so it was a little bit of a lumpy season, really based on more external than ourselves, but we're very pleased with how our Teams executed against that.

I don't know if there's anything you want to add to that, Jason.

What I would add is, Bill talked about trying to figure out how do we add a valuable service to our clients, but specifically, we were trying to figure out what's the model that best fits into our overall business.

And we looked at a -- we were really testing a number of factors like relevancy, various operational aspects, and even our marketing approach, and we feel like that we gained insights that we can really apply to our offerings in this tax season, and we'll discuss those in more detail in December at our Investor Day.

Thank you very much.

I really appreciate it.

Thanks, Kartik.

Your next question comes from Hamzah Mazari.

Your line is open.

Good morning.

Thank you.

Bill, you touched on pricing, on the 3% figure.

Could you give us some color as to, is that a normalized pricing number we should think about on a go-forward basis?

I know you mentioned you're going to be strategic about pricing.

Just curious how we should think about that number on a go-forward basis.

And is the portfolio pruning over, or do you have more pruning to do as you look forward?

So let me take that, Greg, and if you want to add anything.

In terms of -- I think we've indicated on -- Greg does a great job with our investment thesis, that generally we believe pricing actions in the 2% to 3% range would be consistent with what investors could expect.

So I think we're within that.

We're on the higher end of the range this past year.

We've been on the lower end.

I still think that, Greg, I think you agree, that probably holds as a go forward.

And obviously, we'll talk about that more.

But I think that's consistent with what we've said going forward.

As far as additional pruning, I assume you're talking from a corporate perspective.

We are very -- obviously, we have the bank deal, which we've talked about, and you're all very familiar with.

But no, I think we have the Company we want to have.

We have the strategy we want to have with Tax Plus.

So this is our go forward.

We've got all of our field leaders in this week.

We've been meeting with them.

We are, again, way ahead of where we were last year in terms of planning.

So Tax Plus, as I said earlier, is stamped on everyone's forehead, and that's how we're going forward.

Let me just comment on -- it was the pruning question I wanted to focus a couple comments on.

So Bill said the main point, which is we, in our industry, enjoy a little price elasticity.

That's not changing.

We know a lot about that.

What we're trying to do is evolve pricing from what it's been historically at Block, at least in the last several years, as a tactical weapon and make it more of a strategic opportunity for us.

And so the things that we changed this year were more about getting a system aligned to what we're trying to do more at a macro level, and so those were the outputs, which in this case were very positive in terms of revenue, were good outcomes from that.

But that wasn't the goal, necessarily, of the changes that we made.

So we're going to continue to think strategically about pricing, knowing fundamentally that there's price elasticity in the business, but also fundamentally that we're going to be here another 60 years and we have to think about the client.

What's the right thing for the client over their lifetime?

Right.

And, Greg, just a question on your investment grade comment, that there's value in investment grade.

Could you maybe walk us through the rational of how there is value for your business within investment grade?

And you also said we're not going to sit idle for the bank sale to close.

We're going to continue to do work.

Any conversations you've had with the rating agencies, and maybe talk about how they're going to look at your business differently?

Investment grade can mean a lot of different things in different businesses, so any color around those comments would be very helpful.

Okay.

So we do talk to the rating agencies on a regular basis.

We've got good relationships established with Standard and Poor's and Moody's.

As you can expect and appreciate, getting our 2014 financial results finalized is an important part of the discussion as we shape what's likely to be a busy 12 months ahead of us if our timelines hold up as it relates to the regulatory process and so on.

But that's really the extent of the conversations because really, until we're past the regulatory approval process and getting a closing process finalized, it would be premature for us to get too specific with the rating agencies.

In terms of the justification behind investment grade, what we've said before I'm just going to say again.

We at Block over the last several years, in conjunction with the Board and a lot of external help, have looked at all the considerations that most companies would look at, and then the unique aspects of Block our seasonality and our history, and the conclusion was that investment grade is the right place for us, but we haven't really gone much further than saying exactly what that means at this point in time.

But as things develop we'll update you at the appropriate time.

Hamzah, let me add a little perspective on this, and this is more, if you will, from my chair.

I think there's a lot of talk around investment grade, and I want to make sure everyone understands what we're saying.

We have been very clear that upon the completion of the bank process, we are looking at returning capital to shareholders as we have done -- I'm only going to talk about the time I've been here -- as we had done previously when we raised the dividend 33% and bought back 12% of the shares.

So we want to have a return of capital.

We indicated today that our excess capital expectations are approaching $1 billion.

And as Greg mentioned earlier, we will take on incremental net debt beyond where we are today as part of that return process.

What I've tried to do is be very deliberate, thoughtful, et cetera, and investment grade is obviously a decision any company faces.

Our liquidity needs are real.

So I think shareholders are going to be very pleased as we go through this process that the combination of incremental net debt plus the excess capital return will be very shareholder friendly or whatever term you want to use, and that I think that we can balance everything.

And I think it's very consistent with the approach I've tried to take to the Company.

And obviously, we're going to be, as Greg indicated earlier, we're planning on being here for 60 years or so.

So we're going to manage this Company with both an eye toward an event like that, but also with an eye toward the long term.

That's very helpful.

I appreciate the color.

Just one last question, I'll turn it over.

The push-out of the tax season in Canada, or the extension, any idea how much revenue that is pushed out?

I know Canada is not massive for you, but any quantification of that?

Thank you.

I'm glad you asked that because it was actually an interesting little wrinkle to this year.

With the heart-bleed security weakness that everyone is probably familiar with, the Canadian taxing authority, the CRA essentially said we're going to shut except the e-files what turned out to be five full days.

And the message that was delivered to the taxpayer in Canada was really received as we're -- there's no need to file your taxes until we tell you to.

And as a result of that decision, the CRA, the Canadian Revenue Authority, extended the tax season for all intents and purposes an extra five days.

So it went from April 30 normally to May 5, so we were actually calling it April 35 this year.

So that resulted in us having to keep our stores open longer, five extra days, staffing them.

We actually spent additional marketing money behind that.

There were a lot of operational things that, frankly, the Canadian Team really did a great job with.

But in terms of specifically quantifying that, we're not going to get to that level of detail with you.

It's just not material, and we don't disclose that level of detail.

Okay, Greg.

Thanks a lot.

Your next question comes from Scott Schneeberger.

Your line is open.

Thanks, good morning everyone.

A few questions.

Bill, I would like to start off, this is a re-ask of something we've heard already.

But your level of conviction on growing revenue going forward, was that a one-year strategy?

You've touched on what you think is an appropriate rate increase as we go forward.

I think everyone's just wondering, might we see something where you go back and grab market share?

So just trying to gauge the conviction on the multiyear strategy around that.

Thanks.

Well, you know the answer I'll give you.

We're not going to get into specifics.

But let me just try to answer your question specifically or from a strategic point of view.

We ultimately want to grow revenue, and that does include -- there are various ways you can grow revenue, and it's price and mix and unit volume, et cetera, and we will look at all of those levers as we look to go forward.

But the emphasis on -- that we indicated this year that I talked about with our field leaders this year continues to be Tax Plus revenue growth.

So that will be the focus as we go forward.

And that is the emphasis.

We think we have best-in-class financial services products, so attaching those products to our clients, servicing them, providing that value is an important part of our story.

So I don't know if that specifically answers your question, but yes, we will be very focused in that again as we go forward.

Okay.

Thanks.

And then one of you mentioned earlier in the presentation that the folks that were 1040EZ that you changed pricing on this year are not really core ACA targets.

I was just hoping you could elaborate a little bit on that.

And then second part of the question would be, any discussion on what you're seeing in form creation for ACA that could -- any early insights into next year.

So two parter.

Thanks.

Let me take the first part, and then, Jason, do you want to talk about the form, the situation with the forms?

Again, we're learning about this.

We still don't have a lot of data other than the 8-million enrollee number.

We don't know how many people are staying in, paying, et cetera.

So there's still a lot that needs to happen there.

Specifically, the 1040EZ, a number of very low income people actually would not be subsidy eligible because they're Medicaid eligible, and that puts them into, in effect, a different category.

So while you would think right away everybody would be subsidy eligible, it gets a little tricky, especially when it comes to the Medicaid aspect, and then there are different states who handle Medicaid in different ways.

So that's why it's not a simple 1040EZ equals Affordable Care Act enrollees.

It actually gets cut down pretty significantly from that.

Again, the whole healthcare discussion, you've heard us say this numerous times, I think we are well positioned.

I think we understand this better than anybody.

But this opportunity is going to unfold over the next several years.

Now, specific to the forms, Jason, do you want to talk about broadly what's going on there?

Sure.

Thanks for your question, Scott.

The IRS hasn't released the final forms or instructions related to ACA, but we do hope to get these details later this summer.

What the IRS has shared with us and the industry is that first there will be a new reconciliation form, form 8962, in order to reconcile the advanced tax credit.

And we also know that there will be 1095 series of notices to taxpayers, with the 1095A from the healthcare marketplace, which is required to do a reconciliation, and then the 1095B and C, which are voluntary from employers and insurance companies, which means that clients who may not receive a 1095B or C will actually have to self attest for insurance coverage for their household.

And then finally, there will likely be a combined penalty and exemption worksheet.

We think this will be 8965.

It won't be required to be e-filed with the return for people that have to calculate their penalty or qualify for an exemption.

And we know many of the exemption reasons today, but there will likely be more in the final instructions when the IRS provides the final version of this worksheet.

Thanks.

Appreciate that.

A few more, if I may.

You guys outperformed your EBITDA margin versus last year.

Your goal was to come in at about the same.

So congratulations on that.

Just curious, long term, 32% is the high end of the range, and you're obviously trending well.

Greg, an update, if any, on how you're feeling about that long term?

And what shape or form would it come?

Would it be coming on expense management or more leveraging the top line?

Thanks.

So we're likely to talk about this, obviously, in December, has been more what we've been doing the last few years.

But just the broad thought I would share with you is, our objective is not to maximize margin percentage, but it's to maximize, obviously, revenue growth, and then net income dollars at the end of it at acceptable levels of margin percentage.

And so we'll continue to think about that, but as also I shared, we shared with you and you can see in our numbers, we decided to increase the investment this year into the business.

We did that last year, too.

Those were actually higher than we originally thought, which is actually a good thing because the investments we're making I think are smart for the medium and long term.

But that's going to have a natural pressure going to next year.

We're going to have the bank transaction, ideally, done.

That's going to have impact on margins next year.

So we have to digest that plus other things.

But in terms of a range, at this point, we've guided historically to 27% to 32%.

We were 30% last year.

We were above that this year, and that's a good thing, but we're not at this point prepared to change that range.

Thanks.

And then two more I'll add.

They're separate questions, but just to sneak them in.

One, love to hear about the Sand Canyon accrual increase and how you're going on tolling agreements.

That sounds like interesting update.

And then the last one, hopefully you'll touch on a little bit, but the comments on incremental net debt going forward, would love to hear initial thoughts on shape or form of that net debt.

Thank you.

I'll give those both over to Greg.

So Sand Canyon continues to be in discussions with the majority of its counter parties that have made rep and warranty claims.

They operate those specifically with tolling arrangements, which are -- it's really just an agreement to say let's put the clock, the statute of limitations, on hold while we have productive conversation.

And those conversations continue to develop, and that's why the tolling arrangements continue to be in place, and so I've always viewed that as a good thing.

The fact that the reserve was adjusted upwards, I don't believe it was a huge number, is an indication that there's progress being made in my view, so I saw it a as a good step forward because, well, at least I can speak for Management.

The objective here is to really allow Sand Canyon to wind down its affairs in an orderly way, and that's, by the way, will still take years at this point, but the fact that they're able to continue to make forward progress is a good thing.

The second question is really on the incremental net debt.

At this point, we're not going to talk very specifically about that.

We've indicated that we're prepared to take incremental net debt.

It will be involved at the point at which the bank transaction is closed, and then at the point at which we have more information, we'll share that with you.

Great.

Thanks for taking all my questions.

Your final question comes from Michael Millman.

Your line is open.

Thank you.

Maybe you can discuss some of the differences in terms of monetization, or lack of monetization, between the EZs and the free online and semi-free online products that the industry has been using.

So the EZ client, we're talking very specifically, Mike, about the people that come to our stores that were under the promotion for Free EZ.

We ran a program for three years, and so we were able to track at a client level our experience with them, and we modeled out their propensity to take additional products and ages and how long we think they'll be in the system, retention rates, et cetera, et cetera.

Some people, we had spillover.

They thought they were Free EZ; they weren't.

So we modeled all that out, and we calculated lifetime values, and we just found that the program was useful for a point in time, but it was really declining pretty quickly.

I think we provided broader thoughts on that, specifically related to -- these were people coming in the first peak when the stores are quite busy, we just felt for a lot of reasons this was the right decision.

And I think it was very much the right decision.

Compare that to what Jason does within the digital channel.

It's just a different business model because the variable costs involved there are negligible.

There's no service issues because they're doing it themselves.

That's something Jason would talk at length about, AB testing, and we've jut learned a lot over the years, as our competitors have, that these are offers that are compelling for people, and it's something that's an important part of how we build our presence in the DIY space.

I see.

And semi-related, I suppose, can you talk about what your assisted and online retention rates were last year, how they changed, increased from previous year?

You want to talk about DIY?

DIY was relatively flat.

Overall, it's about 64%.

Software is substantially higher, and online is a little bit lower.

When it comes to retail, there was a slight decline, driven almost entirely by the Free EZ discontinuation.

But as I said with our customers' SAT scores and our NPS, which is, frankly, two of the biggest measures we're looking at right now, and all the operating metrics Greg talked about earlier with walk outs down and wait times reduced, I'm very pleased with how we -- our client service, overall, I think was outstanding.

We're very satisfied with the retention rates this season.

And when you look forward, do you see that there's profitable growth online for -- it's dog eat dog at this point, and that both -- that you've received from paper and pencil has disappeared?

I think, and Jason if you want to comment, I think we pride ourselves on a simple principle, which is we want to serve clients the way that they want to be served.

As we talked about a lot, there are people who -- about 60% of the world wants to have assistance and about 40% of the world wants to do it themselves.

As the name synonymous with tax preparation, we want to be there to provide those services however we want.

So we are very pleased with our digital business.

Jason and his Team have done a remarkable job.

As he said, we have double-digit revenue increases.

We have enhanced user experience metrics.

I think the redesign, which is only going to get better, is terrific.

And our core business, our main business is the assisted retail business.

We're very proud of that.

We understand it well.

And we'll continue to operate both businesses because it's -- our focus is on the client.

I think the only additional color I would add.

This is obviously a category that is the fastest-growing category within tax prep, and the digital category grew about 6%.

And we grew revenue a lot more than that.

But what we see shifting, actually, within digital is really the growth of mobile, and that was the primary reason why we stepped at the redesign and looked at trying to make our product something that is completely flexible upon different form factors, from a tablet to a smartphone, et cetera.

And this year, we saw the mobile access to our online product increase about 165%, which says we're well ahead of this curve, even after big gains last year, and so we feel like we're well positioned as we look ahead to finish the redesign and really look to have nice gains in retention as we go into next year.

Is there significant -- just to bring it up -- revenue per return on the mobile versus the desktop?

We don't break out the revenue between the -- actually for digital at all, but certainly not between desktop and online users.

But one thing I would say is that when I talk about mobile, it's really hard to differentiate between a mobile user and online user because really, we see even a -- what I would call a prototypical online client, or one that acts in a browser, also using a mobile device in some aspect of the tax preparation experience.

So we're seeing this blending of an omni-channel experience.

And that's why we redesigned our product, and that's why we feel like we're well positioned going forward.

What I was asking, and just to make sure, is that the thought that the mobile user was typically a simpler return, and therefore, a lower price return.

I wouldn't say that, Michael.

Thank you.

Appreciate that.

There are no further questions at this time.

Okay.

Thank you everyone for joining us today.

That will conclude today's call.

Thank you.

This concludes today's conference call.

You may now disconnect.