H & R Block Inc (HRB) 2015 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the first quarter earnings conference call.

(Operator Instructions)

Thank you.

Mr. Brown, you may begin your conference.

Thank you, Kyle.

Good afternoon, everyone, and thank you for joining us to discuss our first quarter FY15 results.

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

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 will discuss today are presented on a non-GAAP basis.

We 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 fiscal 2014 and our other SEC filings.

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

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

Thanks, Colby, and good afternoon.

I hope everybody had a great Labor Day weekend.

Earlier today, we announced our first quarter results for FY15 which ended July 31.

As many of you know, our first quarter results are not indicative of our financial performance of the full year given the seasonality of our business.

As such, our prepared remarks will be relatively brief.

I'll provide a few initial thoughts on the year ahead, and then Greg will take you through the details of our first quarter results.

We have been hard at work this summer continuing to move forward with our planned bank transaction with BofI and are refining our short and long-range plans for the upcoming tax season and beyond.

We're looking forward to the upcoming tax season as we continue to demonstrate our value and expertise through our Tax Plus strategy and as our clients begin to face complexities in their tax situations resulting from the Affordable Care Act.

While there's a lot of work to do, I'm confident that we are poised to take advantage of the long-term opportunities that lie ahead.

We had a strong year in 2014, and we're ready to carry that momentum into next year.

We'll have much more to say about this during our investor conference in December, but today I'd like to offer a few thoughts regarding H&R Block Bank, the upcoming tax season and our efforts regarding healthcare reform.

First, let me provide a brief update on H&R Block Bank.

As most of you know, in April we announced an important step in our effort to exit the bank and cease being regulated as a savings and loan holding company.

H&R Block Bank entered into a definitive purchase and assumption agreement to sell certain assets and liabilities to BofI Federal Bank.

The parties also agreed to the terms of a program management agreement to form a long-term relationship in which BofI will offer core financial services products.

The Emerald advanced line of credit, refund transfers and our general purpose reloadable debit card, the Emerald Card, to H&R block clients.

Our transaction with BofI remains subject to regulatory approval, and we continue to expect to complete this transaction in time for tax season 2015.

I understand that many of you are interested in specific dates and timelines for the completion of this transaction.

We'll issue a formal announcement once we receive all required decisions from the regulators regarding their review.

If approved, we then expect it will take approximately 30 days following regulatory approval to close the transaction.

As has been our practice, we will continue to provide relevant updates when it is appropriate to do so.

Turning to the next tax season, after returning to normal growth levels in 2014, we expect total IRS filings to continue to grow between 1% to 2% in 2015.

We expect the assisted category to grow modestly and the digital category to outpace overall industry growth due to continued migration of those who previously filed using pen and paper and earned income credit filers.

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

Until such priority standards are in place, we believe the industry will continue to see a shift in returns containing these credits from assisted to DIY.

Aside from the EIC shift, we continue to expect the mix of assisted and do-it-yourself filers to be relatively consistent with prior seasons.

Our primary goals in 2015 will be to continue executing on our Tax Plus strategy and growing our business profitably.

We will also continue making investments to enhance our service offering and to update our offices and technology to ensure we are well positioned to continue offering best in class service to our clients in coming years.

In digital, we are entering the second year of a multi year effort to enhance our product and drive improved market penetration, conversion and monetization.

I'm confident that Jason Houseworth and his team will continue to execute on our strategy to simplify the user experience and to grow the business.

From an operational perspective, we're in the midst of preparing our network for the changes resulting from the Affordable Care Act, updating our systems, training our people and finalizing our strategy for 2015.

As most of you know, the IRS released many of the draft forms in late July, offering the industry its first glimpse of how lull will be implemented from a tax perspective.

Additional worksheets and instructions are anticipated which will enable us to gain a clearer understanding of how the ACA will impact tax returns.

Thus, we won't cover too many details on today's call, but we will highlight some key takeaways from the draft forms released in July.

First, as expected, the forms are very detailed and can present significant complexity depending on a filer's coverage status during the year, income level, and household composition.

Depending on their situation, there are instances where filers may need to file multiple new tax forms and complete additional worksheets.

Second, while 1040-EZ filers may not necessarily be the primary demographic impacted by the ACA, those that received an advanced tax credit will no longer be eligible to file their returns on a 1040-EZ.

Third, many filers who did not have qualified health insurance coverage for the full year will either face a tax penalty or will be eligible for an exemption.

Depending on the type of exemption, the process to claim it could be quite cumbersome and time consuming.

Finally, for this coming tax season, those filers whose households are covered by qualified health insurance plans will be able to self attest to their coverage status on their tax returns without the need to provide additional documentation.

After analyzing the early drafts of these new forms, we continue to believe that healthcare reform will impact our clients and in turn present some opportunity for H&R Block to demonstrate our value.

As we've said all along, however, it's going to take a few years for the opportunity presented by healthcare reform to develop.

This is a long-term play, and we are making smart investments now to ensure we are prepared to serve our clients and meet their needs when they turn to us for help in understanding how the new law impacts them.

We believe we have committed more resources to this initiative than anyone in the tax industry, and I'm confident we will offer unmatched value as Americans seek assistance.

We'll provide further detail regarding our efforts during our investor conference in December.

With that, I'll now turn the call over to Greg to discuss the first quarter financial results.

Thanks, Bill, and good afternoon, everybody.

Earlier today, we reported our results for the first quarter of FY15.

As a reminder, due to the seasonal nature of our business, these results are not indicative of our performance for the full year.

Adjusted net loss from continuing operations was unchanged from the prior year quarter at $108 million, or $0.40 per share.

GAAP net loss per share from continuing operations was also $0.40 per share, representing a $0.02 improvement over the prior year.

Turning to our segment results, tax services revenues increased $7 million to $129 million.

This increase was driven by the extension of the Canadian tax season into May, which shifted revenues from FY14 into the first quarter of FY15.

On the expense side, total operating expenses increased $14 million total to $280 million, higher depreciation and amortization from planned office and technology upgrades, increased wages and higher occupancy costs drove most of the increases and expenses.

This was partially offset by lower foreign exchange currency losses and legal fees compared to the prior year.

The segment's pretax loss increased $6 million to $151 million.

In corporate, revenues declined slightly due to lower interest income from HR Block Bank's diminishing mortgage loan portfolio.

Operating expenses declined $16 million, primarily due to lower provisions for losses on mortgage loans, held for investment and lower expenses related to the pending sale of our bank.

Accordingly, our pretax loss in corporate improved $15 million to $25 million.

Turning to discontinuing operations, which includes results of Sand Canyon, our net loss of $7 million was $5 million higher than the prior year.

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

Based on continued settlement discussions with these counterparties during the first quarter, Sand Canyon recorded a provision of $10 million for potential losses related to its representation and warranty obligations, bringing the total accrual at July 31 to $194 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 argument.

I will now turn the call back to Bill for our closing remarks.

Thanks, Greg.

In conclusion, I am pleased with the progress we have made this off season in preparation for tax season 2015.

This year, we will continue to focus on driving profitable growth and maximizing our value offering to our clients.

There obviously remains much to do.

But as we look ahead, I like our competitive position and believe that we have the right people, resources and expertise to continue to provide best in class service to our clients.

We look forward to sharing additional plans with you at our investor conference on December 9 in New York.

With that, we're now ready for questions.

Operator?

(Operator Instructions) Kartik Mehta, Northcoast Research.

Good afternoon, Bill.

A question on the digital side of the business.

You lost market share in the most recent tax season.

How important is it for you to maintain the momentum you had in the two previous seasons and continue to gain market share as you go into the next tax season?

Yes, it was three previous tax seasons.

And then last year, Turbo grew faster than we did on a unit basis and we grew faster than they did on revenue basis.

I think it is important.

I do think we made some great strides last year in terms of our user experience.

Jason and his team did some great things in terms of getting more people to upgrade to different levels of the product.

I'm not going to get into all of the marketing details, but we remain committed to be a very strong number two in this category and will compete vigorously as we go forward into next year.

So, Bill, does that mean that if price competition continues to accelerate, that you would also have to adjust your prices?

Yes.

I'm not going to get into any specifics at this point, Kartik, you know that.

But we're certainly mindful of what Turbo did last year, and we'll be ready for this year.

Greg, can you talk a little bit about the bank in terms of, what does the drop dead date have to be for you to get approval?

If for some reason something happens and you're not able to get approval, what would be the contingency plan?

Well, I think it's important to start with, really, the broader point here, which is we really are targeting getting rid of our bank, that's job number one.

And in conjunction with that is to do it in a seamless way from our client's perspective, and that continues to be our focus.

We continue to believe that we'll get this done by tax season.

The drop dead date, that's kind of a very black-and-white term, but we believe we still have adequate time to get this thing done for this tax season.

All right, thank you.

Thomas Allen, Morgan Stanley

Not to push you too hard on that last point, but if it takes 30 to 40 days to close the bank transaction, and you typically start the Emerald Advance product around Thanksgiving, does that mean that you're going to need to sell the bank around mid -- or get regulatory approvals by around mid-October in order to have the bank, either be BofI or stay with you for EA, or can you push it to close to the actual tax season?

Let me answer and then, Greg, if you want to add anything -- let's go back to what Greg's first point is.

Job one is to exit the bank and cease being regulated as a savings and loan holding company.

We still believe that we will be able to do that in time to have a seamless experience for our clients this tax season.

I'm not going to get into specific dates.

But obviously, we have talked to everybody about upon approval, assuming we get approval, which we believe we well, it will take about 30 days to close.

You can do the math, but what we continue to remain focused on is working closely with our regulators and with BofI, we have formed a great partnership with BofI.

Our relationship with our regulators, they're completely professional, they're thorough.

You all should be thankful of the job that they do.

I think we believe that this will still remain on the timeline we have talked about previously.

Okay.

And then just in your prepared remarks you mentioned that you expect the assisted category to continue to grow modestly and digital category to outpace overall industry growth due to continued migration of pen and paper.

But I think that some of us are hoping that there is going to be a shift from do-it-yourself to digital, just given the complexity of ACA.

Does that -- do those comments suggest otherwise?

I wouldn't read too much -- I think what we're talking about overall is we believe that the category, we believe is normalized now and the 1% to 2% overall growth is correct.

I think we have been pretty consistent on saying that until we get -- we still haven't gotten into a tax season where the Affordable Care Act has had an impact.

It's going to take a few years to see how that all shakes out.

That's why we're cautious on trying to predict any increase in the number of tax -- we just have to see how this plays out.

I do think what's important for us is to have our tax pros ready, have them trained, have our office standards up high.

And we're ready to certainly serve clients as they face into what we believe, to your premise, Thomas, is correct, that this is going to be much more complex.

I'm sure a number of you have looked at the forms, and we do believe that people are going to need help in filling out these forms.

But again, until it plays out, we're not going to get ahead of ourselves on this.

Okay, and then just finally, I saw in the quarter you announced the partnership with BMRG, and you've been expanding your small business footprint.

You did that deal was zero too.

How big of an opportunity is this?

And if you can elaborate on it at all, that would be really helpful.

Thanks.

Yes.

Again, I want to be transparent but also say this is a pilot for us.

We are actually very excited about some of the steps we've taken.

We've been in business services in a relatively small way for many years.

We have a few thousand offices who offer business services, and this is an attempt for us to have a best in class service for small business.

We will be piloting it this year, so I would say stay tuned.

But it is certainly something that we want to see if we can get a best In class offering and see what that does for us.

Okay.

Thank you.

Gil Luria, Wedbush Securities.

Now that you've had a chance to look at the new forms, it sounds like you've done analysis.

You shared great analysis with us last analyst day about how many people you expect to be in some of these categories.

What is your updated view over how many people are going to need -- what proportion of overall customer base and then your customer base is going to need to fill out any number of these new forms?

We don't have an update today, Gil.

I think what we're planning on is updating as we get the full worksheets, the -- all of the rules, et cetera.

We are planning on doing that in December at the investor day.

We -- as I think when we were traveling with you I said we probably aren't going to do as much disclosure as you'd like, but we will -- I think we will be similar, we're planning on [Mark Timataro] presenting again, and I think we will give you an update at that point.

We really want to get the full offering, if you will, from the IRS.

We're working through how that matches up.

There's not a lot of data at this point.

We know 8 million people enrolled, but we still have -- and there are things coming out all of the time.

So, I think we can give you a much better feel for that in December.

Got it.

And then in terms of the health insurance product.

Are you going to try to do a few more pilots this year in your physical stores now that we're in year two and hopefully the systems are -- the government systems are working a little bit better?

Or are you going to stick with the online distribution for this next tax season?

We're going to stick with the online distribution.

We like the relationship we have with GoHealth, we think the user experience is excellent.

The Phoenix pilot, we're not going to continue with.

Many of the clients who came in were more Medicaid clients and didn't -- weren't able to sign up on the exchanges.

I think we're going to focus on -- we think that that experience is actually the best for our clients and so for this tax season, that's what we're going to focus on.

I just wanted to make it clear, I know, Gil, that you understand this, but we said the online experience to mean -- what we're doing is using the in-store experience as a way to have a discussion with our clients about their healthcare needs.

If there is an identified need, then we would then basically forward them on, encourage them to go contact GoHealth through a phone number or through the online experience.

But if you went to a store, you'd see in-store merchandising, you'd see signage, the actual tax software that sits there in front of the client.

There's information available to them and of course, the tax professionals will be able to then talk about it in a meaningful way.

They are, of course, not licensed or appointed, so they can't, quote unquote, sell insurance, but certainly we're going to use that as an opportunity to encourage the client to move over into the GoHealth opportunity.

Ultimately, we have an enrollment service, which is the GoHealth opportunity.

We will be engaging with millions of clients.

Obviously, on the tax implications in doing their 2014 tax returns on what the Affordable Care Act has grown -- has brought.

Then finally, on Tax Plus, Emerald Card, how do you feel about the post-tax season performance in terms of the reloads and the number of cards outstanding?

And where is that headed over into next tax season?

We continue to think that's a good story.

We showed you good progress on the year-round usage for the last two years.

We've gone roughly from $35 a card, We're into the mid $40s now, so that's $10 per card over a two-year period.

We haven't given specific numbers over the summer at this point.

You'll probably see some more information on that at our December conference, but I would say in general that we still feel very good about with the bank team and our broader marketing team is doing around that area.

Scott Schneeberger, Oppenheimer.

Following up on the partnership with GoHealth, and sounds like you're going the online route versus the pilot you did in Arizona.

Greg, how should we think about that being accretive or dilutive?

You gave some guidance on that last year on what that initial pilot was, the whole shebang.

Can you give us a little feel for a little less so, now that you're out of locations with humans or maybe a little bit more spend on the online?

Yes.

I think it's important, we're interested in this area.

We think there's value for our clients, and we think we've got relevancy here.

The fundamental issue from a forecasting perspective is last season was so unusual with the delays with the government, it was hard for us to use that information and to extrapolate.

But we're prepared to put resources behind the GoHealth this year.

GoHealth is a good partner, as Bill mentioned earlier.

This is going to unfold, just like the broader healthcare opportunity.

But we are interested, and that's why we are talking about it.

All right, thanks.

The -- obviously you mentioned the late July, the update on the forms, and we'll obviously get an update on investor day.

I think the one question folks are looking to get, and you probably don't have the answer, but I'm asking anyways is, how much incremental change you anticipate coming to the forms?

Or do you think you have -- you think this is largely what you're going to look like entering the season, barring anything from (inaudible).

I think we have a majority of information, would be my guess.

But I don't want to speak for the IRS in terms of the complete array, if you will, Scott.

And that's why we're being a little cautious in terms of going forward.

We're not making any pronouncements about monetization or how this is going to impact our interview.

Obviously, the forms are more complex.

There are a number of avenues that you can take because given that the law of the land now is to have health insurance.

If you have it, that's one path; if you have it through the exchange, that's another path; if you don't have it, that's another path, to pay a penalty or get an exemption.

So, we're working through all of that.

And like I said, we plan to hopefully give you a more -- much more complete picture as we have what we believe will be all of information by the time we meet with you in December.

The one specific area I would say that we are still very curious about is the penalty process and how that's going to be actually handled as it relates directly to the tax events, and that's really the main open question that's available to us.

I'm curious to get your take on -- we have now gone two years where instead of mid-January start we've had a late January start.

Do you think that's going to be the new norm and reasons why or why not?

And then just any thoughts on whatever your answer is on how we may think about modeling third and fourth quarter.

Thanks.

Yes, I think -- I don't think we know at this point.

I think the plan is the IRS sometime in the fall will give us an indication of when e-file will open.

Obviously, the last two years there was some mitigating circumstances around the fiscal cliff and then the government shutdown.

Whether or not anything comes out of -- this is an election year, they will be lame-duck session.

But I think we may know before that.

I think -- I'm sure the IRS is working closely, but we have not gotten any official word on that at this point.

Thanks, and then just a couple more quick ones.

I know it's in the release in regard to the elevated expense and the seasonally soft quarter year-over-year.

Just curious, Greg, if you could address higher wages, higher occupancy costs and then offset by the legal fees part.

Is everything going as planned at this point in the year?

Should we think of anything more or less with regard to spend on modernization of stores or anything else to think about?

Thanks.

Yes, there were a lot of moving pieces in the expense line.

I think normally our 1Q and 2Q, we do spend more time talking to you all about our expense plan.

What we're going to do, though, is really in December give you a better idea of where we think margins are going to be.

We continue to articulate the 27% to 32% range.

31% last year EBITDA margins and 30% the year before, just for those of you keeping track.

We did see expenses up in the first quarter.

Part of that was timing.

We refer to the revenue shift in Canada because of the delay there past the April 30 cutoff for their fiscal -- for their tax year 2014 that also have some expenses that moved from the fourth quarter to the first quarter.

We had some wages increase, which was really some additional headcount that we have added to the system really around some of these growth initiatives, some things we've talked to you all about before.

Other than that, we saw a lot timing things.

Of course, D&A was up, which was CapEx has been up the last couple of years.

It's more just math.

We have seen some of rent costs goes up a little bit enough, and I think that's mostly a function of just inflation combined with, we're probably going to have -- gotten through our shrinkage period with Walmart and Sears and we're more stable to maybe adding slightly number of new stores.

So, there's a lot of moving pieces, but that's the highlights for you.

And then lastly, the tolling agreements.

This is, I think, the second quarter in a row where there's an increase to the loan loss reserve.

Clearly, you have a lot of discourse occurring.

I know you probably can't share too much, but I guess Greg, you're the right guy to ask.

What -- two quarters in a row, how should we think about that?

Is there anything dramatic going on?

Is the end near?

Well, my point of view on this, the people behind this, really Sand Canyon, right?

So, I'll give you my point of view.

I have infrequent regular communications with them.

I see it as a positive.

The tolling arrangements that Sand Canyon has entered into are almost exclusively short term in nature, and that's measured in a couple of months, usually.

The fact Sand Canyon and its board of directors feels there's value and therefore renews them is a good sign, in my view.

If they thought it was a waste of time, then why would they renew them, would be my thinking.

The fact that there's -- again, in my perspective, a small amount of change to the reserve because in the grand scheme of things, it's pretty small, to me suggests they're probably getting close to some resolution.

But time will tell.

These things take longer than we always want them to.

In my mind, it has always been a positive step forward.

Okay, thanks for taking my questions, guys.

Ang Singh, Credit Suisse.

From a complexity perspective and the draft forms that are available, it seems the 8962 is a lot more complex than the 8965.

If there are minimal changes from this juncture, do you foresee a pricing opportunity on both of these forms?

If you could just help us think about that, I'd appreciate it.

Yes, thanks, Ang.

The -- again, I'm going to frustrate everybody by saying we are looking closely at all of this.

We want to make sure that we look at this question as opposed to form by form, what could we price this at?

We're looking at it in the totality of the entire tax return and what might be -- what might the life -- the best use cases on life situation be in conjunction with these forms.

It's a little more complex than just saying, yes, 8962, we can get X amount for that.

That work is underway.

And as I said, it's a combination of what we know now in trying to model that out and then knowing that there may be additional information.

Again, I think that what we'll -- what you will see in December is more clarity from us.

I doubt we're going to give you a pricing schedule, but we haven't gotten to that level of specificity because I don't think for competitive reasons we should do that.

But I do think we're going to give you a better feel for how we see this whole thing unfolding.

And again, Greg and I are not trying to just kick everything to December, but it actually is very really good time for us.

Our plans are done, our conventions are done with our Company operations and our franchisees, we're very close to tax season.

So, it really does work well in terms of being able to disclose to our investors where we see the tax season unfolding.

Okay, that's helpful, and one more for me.

On the digital side, what is your thinking on retention of your current mix of customers if, let's say Intuit was to be aggressive on price again?

And if you can share any changes or investments in the product experience for the 2015 tax season?

Yes.

I think Jason laid out last year at investor day a two year plan in terms of user experience and upgrading the product.

That is on pace.

You will see further enhancements here.

I'm very excited about the work that he and his team have done.

You'll certainly see an enhanced product with regard to pricing.

Like I told Kartik, I'm not going to comment specifically on that.

But obviously, we've done a lot of analysis on last tax season, and we're formulating our plans as we speak for next year.

Michael Millman, Millman Research

Thank you, following up on some of the things.

In terms of return count for both you and the IRS, it would seem 1% to 2% is below where employment was this year.

And if you take into account something, 2% from ACA, industry should grow faster than that.

And I would think that Block, considering last year cut some returns for profitability reasons, the numbers should be better.

Would you like to comment on that?

Maybe Mike -- and thank you for the question.

The guidance that we gave a little bit earlier that Bill outlined is really -- think of it as a normal expectation based on employment and some other factors we have in our model.

We, from an ACA perspective, didn't really take position on that forecast.

Okay.

In terms of pricing, excluding the ACA pricing, last year your prices were up importantly because you reduced low-priced products.

Should we think about this year's revenue per return as being greater than that?

Liberty, [Don], you had talked about 5%.

Can you comment as to anything that might help us think about your revenue per return thinking?

The revenue per return is also a function of mix, it's not just a function of price.

But I will isolate price for you.

We will tell you as an industry, that we have pricing power on the assisted side.

We know what the elasticity curves look like quite well.

We have pricing power in the DIY business.

It's not quite as strong, but I'll focus really on the retail side.

We had Block in the last 10 years have increased our pricing, all things being equal other than price, a little bit greater than the rate of inflation.

That's our expression of pricing power.

Last year we did a lot of cleanup things, more discount controls, eliminated some promotional campaigns like Free EZ that had a price impact, but it's not in a traditional way of pricing.

In terms of the go forward look around ACA, as Bill had mentioned before, we're not prepared to talk about that at this point.

Maybe ask, can you talk about whether you believe that ACA is going to result in any refund delays this year, this tax season?

I don't know, Mike.

It's a good question in terms of how we anticipate things playing out.

I do think the IRS, given that this is the first year, I don't think I would mess around -- I wouldn't underestimate the IRS.

I wouldn't mess around with trying to see if you can beat the system because I think they're going to be very keen to make sure that people are answering their -- answering -- putting the forms together the right way.

I think they'll be very attuned to this area.

Whether that will delay refunds, again, I think if you take some liberties, you're going to be in special processing, and nobody wants to go there.

I don't know.

Again, I want to -- we have got to see that how this plays out.

This is the first year of that.

There will be some shakeout.

But it's an interesting observation, and we'll just have to see how it plays out.

There are no further questions at this time.

I'll now turn the call back over to management.

Thank you, everyone, for joining us today.

This concludes today's call.

This concludes today's conference call.

You may now disconnect.