H & R Block Inc (HRB) 2015 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the year-end earnings call.

(Operator Instructions)

Thank you.

Colby Brown, you may begin your conference.

Thank you, Carol.

Good afternoon everyone, and thank you for joining us to discuss our full-year FY15 results.

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

Jason Houseworth, President - US Tax Product Strategy and Development, and Mark Ciaramitaro, Vice President of Health Care, will be available during our 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 will discuss today are presented on a non-GAAP basis.

We have 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 FY14, 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 afternoon, everyone.

Earlier today, we would announced our FY15 results.

This is been a challenging tax season as the first year-implementation of the Affordable Care Act and the continued and growing issue of tax fraud impacted the industry as a whole.

We expected industry volume unit growth of approximately 1% to 2%, consistent with growth in employment.

Instead, total filings increased less than 1%, and assisted returns were essentially flat to the prior year.

I'm pleased that despite these challenges, we delivered top line revenue growth for the third consecutive year.

We saw positive changes in our assisted return mix.

Our DIY business did very well, delivering 12% revenue growth on volume growth of 8%.

Our tax professionals delivered expert ACA advice to our clients, and our position is to be trusted ACA advisors for years to come.

We also successfully launched a timely new product, Tax Identity Shield, designed to combat the growing threat of tax identity theft faced by all Americans.

Greg will provide more details on our fiscal year-end results later, but now I'd like to focus on three specific areas: First, the implementation of the Affordable Care Act and its impact on the industry and our results.

Second, the growing reality of fraud within the industry.

And third, our performance.

Let's start with the ACA.

Taxes and healthcare intersected for the first time this year, causing confusion and affecting refunds for millions.

Prior to this season, we anticipated that 25% of our clients would be impacted in some way by the ACA, whether by completing an advance premium tax credit reconciliation, claiming an exemption, or paying a penalty.

Actual results were below expectations, and we completed the season with 16% of our clients impacted, as a greater number indicated that they were covered by non-marketplace insurance than expected.

Remember, this year a taxpayer did not have to provide documentation to make this claim, but that will change next year, when a 1095 B or C notice form will be required for a taxpayer to claim coverage.

The vast majority of our clients who were impacted either paid a penalty or claimed an exemption.

The average penalty was $178, which was much higher than the $95 many taxpayers expected.

For the small percentage of clients that completed an advance premium tax credit reconciliation, almost two-thirds underestimated their annual household income, and had their refunds reduced an average of $729, representing a full 30% of their refund.

25% overestimated their household income, and received, on average, an additional refund of $425.

As we have been saying for quite some time, it will be several years before the full impact of the ACA is felt.

In fact there are several important changes coming in, just the next year.

First, total marketplace enrollment is expected to increase over 65% to nearly 12 million people.

Next, penalties for not obtaining healthcare will essentially double to $325 per adult, or 2% of household income, whichever is greater.

And finally, new documentation requirements will impact those taxpayers claiming to have employer-provided or private insurance.

It's clear that taxpayers will continue to feel the impact of the ACA through their tax returns for years to come.

Because of the clients we serve, we believe H&R Block is the best positioned tax-preparation company to meet taxpayers' ACA needs, and the work we have done has positioned us to be their trusted advisor going forward.

Next, tax fraud continues to have a significant and growing impact on our country.

Specifically, there are two areas in which our industry has seen significant trends over the past several years: tax identity theft and EITC fraud.

We'll start by talking about tax identity theft.

To fully understand how tax identity theft occurs, let's walk through a typical scenario.

A taxpayer prepares his tax return and electronically files it with the IRS.

This return is rejected by the IRS, because someone else, a fraudster, stole his personal information, prepared a fraudulent tax return in his name using a DIY product, and filed it with the IRS to improperly receive a refund.

The legitimate taxpayer then faces substantial paperwork to prove the return is fraudulent, which leads to lengthy interactions with government and legal authorities.

It may take several months or even years of effort to resolve the theft, resulting in significant delays in receiving his tax refund.

In just one year, from 2012 to 2013, tax identity theft occurrences increased over 60% from 1.8 million to 2.9 million.

This increase of over 1 million returns is roughly the same amount as the assisted to DIY shift for the same time period.

The stories I've heard from discussions with others in the business community regarding people impacted by tax identity theft has been shocking, and while we don't yet have official numbers from the last tax season, we believe the overall growth in this type of fraud will be stunning.

Turning to the earned income tax credit, in 2014 the government estimated that 27% of all EITC returns contained errors, and that improper payments related to the EITC cost the US Treasury $16 billion to $19 billion annually, up from an estimate of $13 billion to $15 billion just one year earlier.

We believe this number will be even higher this year.

Additionally, for those obtaining the EITC, the disparity in requirements between assisted and DIY tax filings has been a factor influencing the material shift in the EITC client's tax preparation methods.

In fact, without the shift in EITC filings to DIY, assisted tax filings would have grown over the last several years.

Additionally, as we have seen through our acquisition and development efforts, fraudulent or inaccurate payments are not limited to the DIY space.

There are numerous independent tax preparers whose tax preparation methods illegally achieve higher EITC payments and overall refunds for their clients, at the expense of tax law compliance.

Whether these efforts are purposeful or due to lack of understanding of tax regulations, it places those completing accurate and compliant returns, such as H&R Block, at a disadvantage.

H&R Block has been advocating for actions to address tax fraud for several years.

Now, meaningful attention within the tax-preparation industry is finally being paid to these issues, that continue to cost taxpayers billions of dollars.

We have led the industry's fight against fraud, and we remain focused on advocating for change that benefits consumers by strengthening anti-fraud measures.

There are some common sense solutions that should be implemented immediately, including minimum standards for paid tax preparers, parity between assisted and DIY returns for claiming refundable credits, and more stringent information security measures within DIY tax software, such as uniform authentication requirements.

I will be in Washington, DC later this week with the IRS Commissioner and others in the industry to continue this discussion with the hope of implementing real change before the 2016 tax season.

As investors and analysts, we believe that it's important that you understand how serious this growing problem is.

These matters require immediate attention, and we will continue to lead the charge to bring solutions to the industry.

Now that I have provided some context on the season, I'd like to focus on our performance.

For the third consecutive year, we grew the top line and delivered strong margins, despite a decline in returns prepared by and through H&R Block of 0.1% to 24.2 million worldwide.

This was primarily the result of a 4.4% decrease in returns prepared through our US assisted offices to 13 million, which was mainly driven by the continued decline of returns containing the EITC, and to a lesser extent, the second-year impact of the Company's decision to discontinue the free federal 1040-EZ promotion.

The decline in volume also negatively impacted volumes of some of our Tax Plus products, including refund transfers, and the H&R Block Emerald prepaid MasterCard.

Despite these challenges, we had numerous successes this season.

Our DIY products had a very strong year, increasing revenues, return counts and market share.

Considering the market pressure placed by our top competitor, who gave away certain products for free, I'm very pleased with our revenue and volume share gains, which demonstrates H&R Block's outstanding user experience and effective marketing.

And while we achieved an 8% increase in accepted e-files, I'm especially pleased in our 12% revenue growth, which outpaced the industry.

Our advertising and promotion efforts were strong, increasing product awareness 6 points, and by improving our product and the overall user experience, we are better able to monetize and improved our mix.

Internationally, our operations in Canada and Australia continued their strong performance, growing local currency revenue by 8%.

Our Tax Plus products continued to provide tremendous value to our clients.

We launched Tax Identity Shield, a timely product that helps to protect our clients from the growing threat of tax identity theft.

Sold as a bundle with Peace of Mind, the product met our expectations, and helped to drive Peace of Mind attach rates, which improved 2 points.

Other products such as the Refund Transfer and Emerald Card were negatively impacted by the decline in volume and the shift away from the EITC returns, but continue to be profitable offerings that our clients value.

And, on an operational note, we were ready for the ACA.

Our significant investment in training, systems, and marketing ensured we were well-positioned to assist our clients, who navigated the intersection between tax and healthcare for the first time this year.

We also focused on our infrastructure, to ensure we are well-positioned for success going forward.

We implemented a new tax preparation tool in our assisted channel.

The new software allows our tax professionals to better use their tax knowledge, while providing an improved client experience.

The majority of Company-owned offices have now been upgraded to achieve a more welcoming, professional look and feel.

And we purchased and integrated approximately 340 franchise offices into the Company management structure, that we believe are best suited to become be Company-run locations.

In summary, although this season had its challenges, we achieved much of what we set out to accomplish.

We served our customers well, continued to deliver value to our shareholders, invested wisely with an eye toward the future, and advocated for improvements within the industry.

As we head into FY16, we will capitalize on our successes and continue our focus on profitable growth, ensuring we continue to provide value to our clients and deliver for you, our shareholders.

With that, I'll now turn the call over to Greg to discuss our results in more detail.

Thank you, Bill, and good afternoon, everybody.

This year, we were able to achieve both top line and strong EBITDA margin growth despite a decline in total returns, the growing impact of fraud in the industry, and the negative effect of foreign exchange rate fluctuations.

Total revenues increased $54 million or 1.8% to $3.1 billion, and our adjusted EBITDA margin of 30.8% was slightly better than our guidance, and was consistent with the prior year.

Earnings per share from continuing operations on an adjusted non-GAAP basis declined 2.2% to $1.75.

Free cash flow totaled $283 million, and the Company ended the fiscal year with unrestricted cash of $2 billion.

In our tax services segment, US assisted tax preparation fees and royalties combined increased 2.3% to $2.1 billion.

This was the result of pricing increases, improved return mix, and the impact of franchise acquisitions, which together offset a 4.4% decrease in assisted returns prepared.

I would like to spend some time walking through the details of the increase in tax preparation and royalty revenues.

First, we achieved price increases of approximately 3% this year, in line with our plans.

We were pleased with the results of our pricing efforts, which were consistent in both our Company-owned and franchise network.

This does not include the impact of pricing related to the ACA, or offers such as the 50% off promotion.

Second, we saw a mix improvement of approximately 2.4% due to declines in EITC and EZ returns, and the impact of ACA-related forms.

Finally, the remaining increase was due to the impact of franchise buybacks and discount controls offset by the mid-season 50% off promotion.

Now as Bill mentioned, our DIY business had a very successful year.

Increased product awareness and improved user experience, and well-designed promotions contributed to 8% client growth and improved monetization.

The overall result was a 12% increase in digital tax return preparation revenue to $228 million.

International return volume increased 4%, and local currency revenues increased 8%.

The negative impact of foreign exchange rate translation, however, reduced current-year revenues by $18 million.

For the second consecutive year, Canada's tax season was extended to May 5, which resulted in a similar revenue shift out of FY15 as we experienced the previous year.

Turning to our Tax Plus products, both Refund Transfer and Emerald Card units were negatively impacted by lower assisted volume.

Additionally, with fewer EITCs and 1040-EZ clients, attach rates declined for both products.

Overall, we sold approximately 5.1 million Refund Transfers and issued 2 million Emerald Cards.

Offsetting the decline in volume and attach, Emerald Card average deposits and usage increased, which resulted in revenue of $51 per card, up from $44 in the prior year.

This is a continuation of our multi-year effort to drive usage, which has resulted in a 40% increase in revenue per card since 2012.

Additionally, Peace of Mind attach rates increased 2 points to 26.5%, and we achieved strong take rates with our new product, Tax Identity Shield.

Because revenue is recognized over multiple years for Peace of Mind, and over two years for Tax Identity Shield, the majority of the financial impact on increased volume for these products is not realized in the year of sale.

Operating expenses increased 5.1% to $2.2 billion.

Franchise acquisitions drove much of the increase, specifically resulting in higher occupancy and equipment expense of $12 million and amortization of $18 million.

Additionally, the office upgrades Bill discussed increased depreciation and amortization by another $17 million.

Because of the acquisitions and other infrastructure investments, depreciation and amortization is expected to remain elevated for the next few years at $170 million to $180 million.

Approximately one-third of this amount is attributable to amortization of intangibles related to the repurchase of franchisees or acquisition of other businesses.

Marketing costs and increased variable compensation also contributed to the increase in operating expenses.

In our corporate segment, pretax loss decreased $19 million to $80 million, mainly due to lower interest expense as a result of repaying the $400 million note in October 2014.

Additionally, the provision for losses related to our mortgage loans held for investment decreased, as loan performance improved and property values increased.

Finally, our effective tax rate was 34.5%, which was consistent with the prior year.

Turning to discontinued operations, the net loss of $13 million was an improvement of $12 million from the prior year.

As we discussed during the third-quarter call, Sand Canyon entered into a settlement agreement with a counterparty related to certain of its representation and warranty obligations.

The settlement was fully covered by prior accruals, and was paid in the fiscal third quarter.

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

At year-end, the representation and warranty accrual was $150 million.

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

We continue to believe our legal petition is strong on any potential corporate veil-piercing arguments.

Turning to cash flow and our balance sheet, we continue to maintain a strong financial position.

By focusing on expense management, we have been able to invest significant dollars back into the business while achieving a 30.8% EBITDA margin.

After dividends, we achieved free cash flow of $283 million in FY15, and as of April 30 total unrestricted cash was $2 billion and total outstanding debt was $506 million.

As we mentioned previously, until the bank sale was complete, we will continue to maintain a considerable amount of capital on our books due to regulatory requirements.

While this year's free cash flow increased the amount of available capital, the pay down of our $400 million note in October offset that increase.

As such, we continue to expect to have approximately $1 billion of excess capital on the balance sheet when the bank deal closes.

It is a desire of the Board and management to use this capital, and also incur some incremental net debt, while maintaining an investment-grade rating, to return capital to shareholders.

More details regarding the capital plan will be shared after the bank deal closes.

Before concluding, I would like to spend a few minutes talking about a key metric in the tax-preparation industry, unit count.

Unit, or return count, is widely used to evaluate performance in our industry.

It is generally viewed as a proxy for market share, so given the differences in tax filer complexity and methods of filing, we believe that revenue share is a more relevant measure.

And while unit count is viewed as an important measure, it is not clearly defined.

One may assume that a unit equals a tax return, but this is not always the case.

Consider the example of desktop software sold in a box at a retail location.

When sold, it can be clearly counted as one unit; however, one box can be used to prepare multiple returns.

Further, the unit count method used by one tax preparation company may differ from other tax preparation companies or even from the IRS.

As tax preparation fraud becomes more prevalent, without a defined methodology we were not able to clearly quantify the impact identity theft and other irregularities are having on unit counts.

For more than 10 years, taxpayers have used an assisted tax preparation method approximately 60% of the time, and a DIY method, including software, the remaining 40%.

And the past five years, however, there has been a slow gradual shift from assisted to DIY.

Considering that the vast majority of tax identity fraud occurs through the DIY channel, in our opinion, this is impacting unit counts.

For example, from 2012 to 2013, the number of tax identity theft victims increased by 1.1 million.

In 2012, following the 60/40 filing pattern, approximately 700,000 of the returns would have been filed using an assisted method and approximately 400,000 using a DIY method.

Then, when the identity thefts occurred in 2013, virtually all 1.1 million of those returns would have been filed using a DIY method, effectively decreasing the returns prepared in the assisted channel by 700,000 returns.

To be crystal clear, we believe the shift from assisted to DIY is driven by fraud.

In fact, if you took a reasonable position on the level of fraud in the DIY category, including tax identity theft and EITC fraud, the DIY category actually declined over the past five years.

Said differently, despite the increasing number of free DIY options, if we were to exclude the impact of fraud, we believe the proportion of DIY returns would have actually decreased while the proportion of assisted returns would have increased.

Having said all of this, there is some benefit in providing unit counts.

For this method to be valuable, however, it's important that it's clearly defined.

Thus, we are taking a lead in fully disclosing how we define a unit.

A key element of our count methodology is the need for a payment, which we believe discourages fraudsters.

For assisted returns, a unit is defined as an individual tax return that has been accepted by the client, who has either paid for our services or settled with a refund transfer, regardless of whether the return is electronically filed or printed and mailed.

This includes returns for both the current and prior tax years.

Also included in our assisted returns are extensions and business returns, each of which count for less than 1% of assisted returns.

For desktop and online returns, we define a unit as a return that has been electronically filed and accepted by the IRS.

We also count online returns purchased with a credit card and printed for mailing, which constitute a very small portion of our total.

We do not count state only returns as part of our desktop and online returns.

Now that we have taken the first step and shared our unit count methodology, we strongly encourage others in the industry to provide transparency into the methods they used to record and report tax return units.

Now with that, I'd like to turn the call back over to Bill.

Thanks, Greg.

Before we conclude, I would like to comment on H&R Block Bank.

Let me be clear: While we respect the work of the regulators we are frustrated by this process and the length of time it is taking for the transaction to come to conclusion.

We continue to work with BofI and our regulators and believe that on its merits this transaction should be improved.

We also understand your desire for additional information as the approval process time line lengthens, and appreciate your patience throughout this process.

At this time, however, we do not have any additional information to share.

We remain committed to providing updates when appropriate.

To wrap it up, we were pleased with our performance this year, growing revenues, gaining share in DIY, maintaining strong margins, and advocating for industry-wide fraud controls.

We're already hard at work on next tax season, and are excited about what the future has in store.

With that, I'll now open it up for your questions.

Operator?

(Operator Instructions)

Scott Schneeberger, Oppenheimer

Thanks, good afternoon.

Bill, following up on the bank, realize no update at this time, just curious though, are you in regular dialogue with the regulators?

Has it been radio silent for a while, or is there interaction back and forth?

Yes, Scott, I'm not going to comment on the specific work we're doing with the regulators.

Suffice to say that any questions they have we answer timely and quickly.

The discussions have been professional and courteous, thorough, and like I said all along, on its merits, we believe the transaction will be approved.

Okay, thanks.

Curious on ACA, I think in the press release you mentioned 15% of Block clients ACA affected, I think that was a little lower than what Block anticipated going into the season.

I'm just curious, is that in fact accurate, and what drove that?

What do you think was the dynamic affecting it, if so?

I'll let Mark comment in a second.

I do want to say that while we did think that it was going to be upwards of 25% of our clients impacted, we had said repeatedly that this is going to unfold over a few years.

That with all the consumer confusion, and all of the newness of taxes intersecting with healthcare, that this was going to take a while to unfold.

Now specifically, I will let Mark speak to the difference between the 16% that actually occurred and the 25% we were anticipating.

Scott, this is Mark.

We came up with that figure of 20% to 25% based upon survey market research work, and what we found this past tax season is that more of our clients actually filed indicating coverage, non-marketplace coverage for them and their household members.

We think this is related to the fact that the IRS had really limited mechanisms in place really, to enforce compliance, and a lot of people used the check box process as a way of avoiding ACA related penalties.

Great, thanks.

A couple more, if I may.

The franchise, the acquisitions of the franchisees in the Company-owned stores, Greg, any quantification of impact of that, and to the extent you can comment, and following up on that, what is the strategy going forward with regard to M&A and perhaps buying any additional franchises?

Yes, so as we outlined back in the last quarter and again in December, we had a unique opportunity this year to buy back a number of our franchise locations that at one point were actually Company-run territories.

We think that the total population of those is somewhere in the 600 office range.

This past season, we completed 341 store acquisitions, so that was the old territory that we bought back.

For the most part, we think that program is coming to the end of it, and we go back to our normal level of independent acquisitions, which we're in every season.

And while that ebbs and flows a little bit, we think it will be in line with historical experience.

Scott, I think this is a healthy piece for a franchisor to enable franchisees to have an exit strategy.

In addition to some of the acquisitions we made, we're also working with some of our franchisees who are looking to buy other franchisees, so this is a pretty dynamic environment we think is going to ultimately lead to a healthier system.

Thanks, one final one, and I think I get it.

Bill, you have a quote in the press release saying tax season challenging, impacted by changes in the timing of tax filings, and I think Greg may have answered it with regard to Canada, but I'm curious, should we read in any more to that?

Is that what that comment was, or where you were alluding to something else?

Thanks.

No.

I think that's consistent with what we were getting at.

And Scott, it's actually one of those important details; it's just an industry thing.

But this season, there were a lot more balance due clients than we had seen in the last several years.

This is a situation where many Americans had an amount due to the IRS, and we know from many years ago when that's true, they tend to wait later in the season to file.

That's one of the reasons there was more of a back-end load this year.

As an operational statement, that obviously, if we had known that better in advance, we would have had better, the way we marketed in terms of timing, our labor model and things like that.

But in the grand scheme of things it wasn't a huge issue, but it was one of those things that we spent a lot of time talking about.

Understood.

Great, thanks.

I will turn it over.

Thanks.

George Tong, Piper Jaffray

Return volumes were impacted this year by EITC-related filings.

Can you discuss what your expectations are for the behavioral shifts associated with EITC filers, and if you expect stabilization, or if this is a structural issue where volumes will need to be made up from elsewhere?

I think, and Greg if you want to add anything, there is a couple components here.

One is the shift from EITC filers from assisted to DIY that has occurred over the last six or seven years, which we think is driven in large part by the disparity in documentation requirements between having to file with a paid preparer and having to file yourself.

The other piece is the increase in fraud or improper payments, whatever term you want to use, that we have seen occurring with EITC filers specifically.

We continue to study this.

Part of why I am going to Washington so frequently for is to look at ways to -- this is not good for anybody to be having fraudulent returns filed, having improper payments taken from the US Treasury, so I do think it's combination of both of those issues, both of which can be solved with some common sense solutions.

I don't know, Greg if there's anything you want to add to that?

Maybe, I will address the broader question you are asking, as well, George.

So on an EITC form, and the clients that use them, the reality is this is an area that has a traditional strength for H&R Block.

We have a lot of experience with this type of client, we have got retail locations in a lot of the neighborhoods that bias that way.

This is a complicated form that has very real consequences getting it wrong, and has very real consequences getting it right, as well.

It represents a very significant refund amount for those clients who are eligible.

The fact that there is a problem here is not something that, in addition to the government strategy that Bill talked about, is not lost on Block.

And we are spending a lot of time talking about other solutions, which for competitive reasons, we are not getting into right now.

I will say in December you will probably hear a more robust answer to this question.

Very helpful.

And drilling deeper into the ACA impact, assuming that 25% of your clients were impacted by the ACA this year, how much of an additional mix benefit do you estimate you would have seen on a percentage basis?

I'm not going to get into hypothetical numbers here for you.

What we do know is that Block is the best positioned in the tax industry to take our clients through this challenging time this year and years to come here.

The Block client himself is twice as likely to be impacted by the ACA, we don't think that, as a general idea, is going to change much.

I think that many people for the first time began to realize that their tax and health care decisions are related, and we believe that Block is in the best position to take advantage of this.

Mark, do you have a comment?

Probably, George it would be good to mention that next year we believe that things are going -- the ante is going to be upped even more, we'll have penalties increasing.

But one of the big substantial changes next year is, we expect IRS compliance to increase, because really everyone who has received any kind of coverage is going to have to provide that verification through a 1095-A, B, or C. So we do think the combination of increased enrollment, increased penalties and really this verification process is going to increase the number of filers impacted by ACA going forward.

Got it.

And you mentioned that about 2.4% mix impact is attributable to a combined combination of EITC, the 1040-EZ and the ACA.

Is it possible to split out that 2.4% between those three components?

We'd say roughly that two-thirds of the loss is more on the EITC and one third is the EZ.

Offsetting that, of course, was we had a very successful mid-season promotion, the 50% off promotion that was really targeted between the first peak and the second peak.

So we call that the trough in the industry.

And that was a very successful program and we found that we were able to attract a lot of high-value clients for the first year, with the understanding that a high number of those will be retained for year two, three, and beyond.

Got it, and lastly, digital is doing well in both sales and monetization.

Can you discuss what product and marketing initiatives over the next 12 to 18 months you have in place to help drive the same share gains in digital?

George, we aren't going talk specifically about the future, but I will let Jason address generally the journey we have been on, which I think has been quite successful.

He is done a remarkable job leading that business.

Why don't you talk in general terms about what we have been trying to do?

Sure, and as you said, George, our goal every year is to outpace the industry in digital growth, and improve our average revenue per user.

And our results this year, plus 8% unit growth, plus 12% revenue growth, they really demonstrate the strong execution by our product team, delivering on what has been a multi-year product redesign.

It really started out as a journey just to make our product responsive, but what we have seen along the way is product innovation.

And highlighted this year was our refund reveal feature, and I'm not going to give away a lot of where we are going, but I think that that's really a great example of what I call intelligence as a service, and what we will continue to see as features, which help the user not only understand how they get the most refund back with H&R Block, but also how the software really helps make the process a lot easier as they do their taxes.

Very helpful.

Thank you.

Gil Luria, Wedbush Securities.

Good afternoon.

A couple of related questions.

In your prepared remarks you talked about the fact that the regulator hasn't approved -- or doesn't seem to have any merits for not approving the bank sale.

It sounds like you are maybe implying that there are other factors at hand here, and if that is the case, and even if it's not the case, and the regulator is going to take an unknown period of time to approve it, doesn't that make this the new normal?

And if it is the new normal, and keeping in consideration of everything that you talked about in terms of volumes and unit accounting, how do you generate earnings growth on a continual basis going forward without a bank sale?

Units in assisted, regardless of accounting, declined.

Is that sustainable for you to be able to generate earnings growth for a prolonged period of time with declining units within assisted, especially where this year, you've seen it drag down your Tax Plus product as well?

And then on margins, you talked about a range in the past, you're still at the high end of that range with less revenue growth, and again, the inability to buy back shares.

Wouldn't you want to stretch that margin target upwards in order to generate sustainable earnings per share gains, even without the ability to get rid of the bank?

All right.

There is a lot there, Gil, so thank you for that.

Let me take the beginning part, and make sure that we're clear on what we are saying in terms of the bank update, and then Greg, I think if you want to take them in general, and I will pipe if there's something I want to add.

I don't think we want to indicate anything other than there is no information at this time.

And while we are frustrated by the pace of the project, we don't see any reason why this transaction would not be approved on its merits.

So there is no signaling, there is no nothing other than this seems to be taking long.

That is, from our perspective, and probably many people would view it the same way.

I'm not sure the regulator does, and for those of you who deal with other banks and this whole industry, things are taking a long time in terms of any kind of deals that are being approved.

I don't want to speak for the regulators, but I don't think they think this is -- I think they feel they are being thorough and complete, as they approach this transaction.

So while it's frustrating, while I would have thought we would have had an answer by now, there is nothing, and hopefully we have gotten this through, there is nothing to indicate that anything other that this will move forward.

However the timing is something that is still in the hands of the regulators, and I think from their perspective, and again I can't speak for them, and I don't think they will speak about this, I think the timing is consistent with some of the ways they look at other deals.

As for what the implications of that are, and again I think everyone of us, also, I want to be very clear, we are not going to change our mind, if you will.

We do not want to be regulated as a savings and loan holding company any further, and we are -- our intention is to exit on holding and owning our own bank.

In terms of share counts and things like that, we will get to that at the appropriate time, but our intent has never wavered on this.

This is a particular transaction, we believe it will be approved, but that is not going to waver.

As for the long-term growth let me turn that over to Greg.

The broader point you are making really is about the investment thesis, and what I would say is that we continue to believe very strongly that our investment thesis remains true, specifically the growth levers that we've got, international growth, our digital growth, our Tax Plus strategy, we believe is on a favorable tailwind in this business.

We've had a good story on pricing, we've had a good story on mix.

The unit count has been disappointing, but we're narrowing down the issue, and actually if you neutralize this past season for EITC and EZ, we actually grew, and that's exactly what we wanted to do.

Importantly, and something that we have talked about before is, and that's why it got in my prepared remarks, is that all units are not created equal.

In fact, if you look at a lifetime value, there's a major discrepancy between a more sophisticated tax return client and one that has a more simple return.

So as an example, our decision to get rid of EZ was the right decision then, and we continue to believe was the right decision.

We gave up a lot of units but the overall client experience for those client who are left are better.

We will have a deeper relationship with them, and they are higher-value clients from a financial perspective.

The EITC solution is one we are working on, there's multiple solutions that we are talking about.

We talked about a couple of them publicly, we've got a couple of other ideas there.

That's one that we will be addressing more formally as we get into the next tax season, but overall, we believe very much that the investment thesis around the growth company remains solid here.

Let me just follow up on one aspect here.

Great to hear that you're resolve about not wanting to be in the bank charter business is unchanged.

Is there not a possibility for you to unwind the bank without having to sell it, and therefore not have to go through that same regulatory approval cycle?

Is that not a possibility that you would have, if this process keeps going on or ends with an unfavorable ruling?

Yes, so, important point number one, is what Bill said, is we're getting out of this business, right?

That's just something we've committed to, we will get it figured out, it's been frustrating but we believe that the transaction we entered into with BofI and talked about with all of you many times is the way to go.

As a hypothetical, in the event that doesn't work out, was the next backup, there is a way to separate the going forward bank support that this Company needs to continue to sell Tax Plus products, which we're very committed to, and the actual formalities involved with having a bank balance sheet.

So effectively, we still want to be in the business of offering bank products, and we need a partner bank to do that, so think of that as one transaction.

We do have a legacy bank.

We've got deposits, we've got liabilities, other liabilities, we've got assets, that require a bank charter.

So we need to find a home for those, so that would have to be a second step of that transaction.

And frankly, it's really the second part that's the hang-up in terms of getting that taken care of, because whoever buys those will need to get approval from the regulator.

But clearly if you keep it small and go to a much larger bank, it makes it a little bit easier, so these are considerations that we've got.

But to finish up my response to your question, the plan we have with BofI is the right plan, and we believe on its merits will be approved.

Very good.

Thank you very much.

Thomas Allen, Morgan Stanley.

On the bank sale, at the end of April on their earnings BofI said that believed that positive resolution would happen relatively soon.

Do you share their timing optimism at all?

I'm not in the forecasting business.

I think what we share, and we continue to work very closely with BofI, we are committed to them, I think they are a terrific partner.

We think the deal is going to be approved but as for timing, we've been wrong a couple of times on this, that's why I'm out of the timing business.

You have to keep in mind that we can be optimistic, they could be optimistic, but we're not the ones making the decisions here.

It's up to the regulator, so our position on this is it's better not to comment.

Greg and the BofI guys can do what they want to do, but I don't think there's any difference of opinion overall, it's really just how we want to represent the decision that regulator has to make.

Okay, and then Greg, as an answer to the last question, you talked about potentially winding down or restructuring the transaction.

As it stands, if I remember correctly, you estimated it would be about -- the sale to BofI, the dilution would be about $0.07 to $0.09 a year.

If you were to go down plan B any help in how to think about the ongoing dilution?

Yes, just to be clear, I talked about it as a hypothetical, I didn't say we're making plans to restructure by any means.

And I guess the specific answer to your question is, the best estimate I can give you is in line with what we currently understand, the $0.07 to $0.09, but it would clearly be a reflection if there was feedback from a regulator, a different party may have a different viewpoint, we may structure it differently, but I couldn't answer those questions specifically right now, so I'd say $0.07 to $0.09 is still the right number.

Okay, and final question for me.

So your survey work had suggested that 25% of your filers will be impacted by ACA, came in at 16%.

You obviously invested some money, both one time and then ongoing, in terms of ACA.

Have you thought about at all about right-sizing the investment?

You are very good at driving efficiencies a few years ago, just wondering if you think you're going to do something similar now?

I think, Thomas, we're obviously looking, starting our planning for 2016, and we'll take a look at that.

I do think the investment we made in training, in marketing, really established us, certainly from the research we have gotten back, as the people to turn to when it comes to this issue.

I think our people were very well-prepared, handled all of the simple and complex areas of this tax law change.

I think our feedback on our marketing efforts was very strong.

So it was an investment, I think that we've established that.

Therefore do we have to spend that same level?

Probably not, but we're not prepared at this point to get into specifics going forward.

You'll obviously hear more about that in December.

Just to be clear, that is not a reflection.

We continue to be very bullish about the ACA in our business.

Reduction in investment is a reflection of the one-year startup costs going away, theoretically.

And also I think, and also all the feedback we got, which I think showed that investment was worthwhile.

Thank you.

Anjaneya Singh, Credit Suisse.

First off, I wanted to touch on the decline attributable to the EZ clients.

Do you have any sense as to how these clients may react next year?

Do you foresee any sort of carryover impact you saw this year into next, or do you believe that we have worked through most of that decline?

We think most of the impact of the decision has been worked through the system at this point, so it's going to be mostly a non-issue for us last year.

And just as a reminder, we ran this free EZ promotion for several years.

It had a life, we did a lot of financial assessment of the value those clients, retention of those clients, propensity to buy new products.

We believe that the program had run its life.

We terminated the product, of course there was that one year benefit, because we started charging for it again, but we lost a lot of units.

There was a bit of an echo effect this year, but to be clear, our research and our belief is that a lot of those clients that left us are extremely price-sensitive, and all they will do is continue to shop around.

They are not loyal to any particular company, so any company declaring victory over capturing a bunch of those units I think is a little bit misguided as to what the real value of those clients are, unless they keep their prices at the low end.

Okay, got it.

And sorry to belabor this point, but the 25% of your clients being impacted that you talked about at the Analyst Day versus the 16% you saw, do you still think the true number is 25%?

Was the result this year just impacted by really no control around documentation?

Just wondering if you still believe the 25% figure is the accurate one, or if it is closer to the 16%?

I will take the first part, and Mark, you should add your perspective.

I do think it is.

I think it's a combination of not only the documentation requirements that will enhance next year, but also the sheer number of people who are going to be enrolled in the exchanges, coupled with, I think, a greater awareness that this is something you have to comply with.

Go ahead, Mark.

I think the Supreme Court ruling notwithstanding, that if you look at the drivers of volume going forward, Bill already mentioned them, compliance is a big factor.

We think that explained one of the big areas of the shortfall this year, but the doubling of enrollment, and the continuing climbs in enrollment, if you look at the CBO estimates, eventually climbing close to 20 million, will have a significant impact on the number of people impacted by ACA.

So we absolutely believe over the long run that it will be in the 20% to 25% range.

And again if you go back to our statements, we believed all along, we kept hedging on the first year, we weren't sure where it was going to land, so now we have, if you will, a baseline.

So we have felt all along that this would take a few years to really unfold, and we will see if that's true, but we do believe it will be.

Okay.

Got it.

And I'm not sure if I missed this, but another one on ACA.

I realize there was a lot of confusion and delay in mailing out the forms from the IRS, but did the profile of the clients that were ACA-impacted, could you discuss how many of those were assisted versus DIY?

Was there any share shift from those clients that were H&R Block clients last year?

Just hoping to better understand what the dynamics are between assisted and DIY as it relates to the ACA impacted population?

What I would say, and then Mark correct me to augment this.

There was, the impact was about the same between both assisted and DIY.

There was not much of a shift either way, I think primarily because, as people walked into using their filing methods, and many, many people, a high, high percentage in this industry stay within their filing method.

There is some degree of switching, but I think that contributed to that.

There was not a material shift.

And the impact was about the same, whether you sought assistance or did it yourself.

I think just slightly higher in the assisted side, Bill, because of the client mix there, but I agree, we did not see any significant evidence of shifting going forward.

That doesn't mean that as complexity increases with more people having to go through the reconciliation process, and really facing the refund impacts of that, that we aren't going to see the potential for some shifting going forward.

What we have learned this year is when people do see refund impacts, and we do see delays in issuing of forms and corrected forms, that does have the potential to alter both filing behavior, timing and method, but we didn't see substantial impacts this year.

Okay, got it.

And one final one from me.

If you could help us with what retention rates look like in DIY and assisted, or in the latter, particularly the non-EZ filers and how that might have compared to your branded retail competitors?

Do you want to take that?

We were actually very pleased with our retention rates overall on the assisted side, they crept up, it wasn't quite a point, but a little bit shy of that.

So all things being equal, which included by the way, the issues we talked about, so that's actually a very good result.

And Jason, why don't you talk about DIY?

On the online side, although I still think we have a lot of room for growth, in online we were up about 200 basis points, and in desktop software, we were up about 160 basis points.

Okay, great.

That's all for me.

Thanks a lot.

Thanks, Anj.

Jeff Silber, BMO Capital Markets.

Thank you so much.

I apologize for going back to the bank for just a couple quick follow-up questions.

If the deal does go through, can you remind us what steps are needed and the time line for any potential capital return?

Happy to.

Upon receipt of regulatory approval, what would happen is at that point, we would have what I would call mechanical close process with both the steps themselves that are really administrative in nature, we don't have for example financing contingencies and things like that.

The amount of time, there's like client notices, there's like Articles of Incorporation you have to exchange, there is some bid transfers that have to go through, and just very mechanical things.

That would be somewhere between 30 to 45 days.

Our preference is typically to try to close a transaction at the end of a month, it just makes all the accounting easier.

So that might have to factor in, but the 30 to 45 days would take to close the transaction, and then we would take effectively, effectively means not precisely, but effectively at the same point we would then no longer be deemed a savings and loan holding company, so call that concurrent as it were.

And at that point, we would wash our hands.

BofI would then be responsible for our tax products going forward that are bank related, and we'd look forward to a successful tax season with them really running the engine for us.

That would be how the process works.

And then again, after that, is there any issue in terms of timing for you being able to return capital to shareholders?

There's obvious considerations, we have historical blackout periods and things like that, but these are things that we well understand.

And our intent would be of course, just given the time line we have already gone through, to be fairly quick and expeditious in getting information back to you, the shareholder base, about what our plans and thinking would be.

So I'd say it's fairly much when we close, until we start talking to people more publicly what our plans and thinking are.

Okay, that's great, and if the deal does not happen, do the restrictions on the share repurchase and any increase in dividends, are they still in force?

We are stating, as the holding company, at the parent company level, and we're actually regulated by the Federal Reserve Bank, that's the parent company regulated, the bank itself is regulated by the OCC.

So we follow the parent company under all the capital requirements and the things that bank holding companies typically are.

We have been in a period now for two years effectively, where we've been building capital to meet those requirements.

We don't believe there's any issues with the pace at which we're doing that.

So that's one thing I just want to set aside.

And of course, when the bank transaction completes, at that point, we would start with the $1 billion number we mentioned earlier, and any potential incremental debt we may want to raise, and of course, it also has impact on go forward capital policy at that point.

Okay, and then if I could focus back on the core business, I know it's still too early to look at FY16, with the caveat you gave us regarding looking at volume growth.

But with that being said, is there any reason that we should not expect the industry volume growth to increase 1% to 2% next year, as we thought might have occurred in 2015?

Jeff, that's a great question that obviously we're contemplating right now.

We were surprised this year that the unit count was under 1%, so we are studying that, and I'm not trying to kick the can down the road, but I guess I am, to December.

We will look at that.

There is no obvious reason why it wouldn't.

It's been pretty consistent for 50-plus years, and pretty much in line with non-farm employment but we have to study when we get the full information, which frankly from the IRS perspective, we really don't get until the fall, that we can really understand why it was short this year.

More to come, but I think your supposition is not a bad one.

But we were surprised this year with the growth in the employment and everything that it didn't -- even to some extent, go towards the higher end of the 1% to 2% range.

Fair enough, and just a couple quick modeling questions for FY16.

What tax rate should we using and what should we be modeling for both capital spending and any potential franchise repurchases?

Thanks.

We can certainly get a more detailed conversation off-line, but in general, I would say that at this point, we've had great success in the tax rate.

This year, we had 34.5%, in line with last year.

A lot of reasons for that were special one-off type things.

We had a couple good years there, and we're pretty happy with that.

What we said is the core-based tax rate for the Company continues to be 38% to 39% range.

At some point in the near future, we will give you a better indicator what we think that will be long-term, but for now I would keep it there.

And as we have said consistently, we think the right CapEx level for this Company is between 3% and 4% of revenues.

It's been a little higher than that, or trended towards the high-end, really as we made up a few years several years ago that were under spent.

We think we revert back to the 3% to 4%; that is the best guidance I can give you.

Okay great, and any potential franchise repurchases built in?

Nothing like we have seen this year would be my position.

We will continue on that path, as Greg said, in terms of -- we're in discussions right now.

That usually occurs after the tax season, it takes a while, so we really don't have anything to report except we will probably proceed in that manner again.

But as Greg said, not to the level that we did this past year.

Okay, got it.

Thank you so much.

Michael Millman, Millman Research Associates.

Following up on a couple things that have been discussed, one is ACA.

Could you give us the cost that you incurred this year for ACA?

And secondly regarding the balance due increase, do you think, or I would think that would be beneficial to Block, beneficial to assisted, probably decremental to do it yourself, and certainly suggest that the economy is improving.

So we have that unknown factor, but going forward what does more balance due suggest to you?

Well, it's an interesting question, Mike.

I'd be anxious to hear Jason's comment, would the balance due impact?

I can't see a reason why would impact do-it-yourself versus assisted, but maybe I'm missing the point there, because I think it's a matter of, no matter how you file, the balance due was higher this year for a variety of reasons.

In terms of the specific cost, we're not going to break out specifically what it cost.

Obviously, you can see in some of our numbers, we did increase marketing, we did increase training, we felt it was an important investment, we think it was a good investment.

But we are not going to break out anything specific

I can break the cost in three buckets for you, and Bill mentioned a couple of them.

The marketing cost for sure, which include merchandising, in-store merchandising, signs, and things like that.

That may be a season to season type of thing, it may not go up, it may not go down, because we continue to be very bullish about ACA.

The second bucket is really all the changes we had to make to our systems, programming changes that required a fair amount of hours, and those cost money.

Those for the most part are one-time in nature, we're not going to have that same level this coming season and beyond.

And then third is really the training, and there was, as you can imagine, a big blitz up front to get people up to speed on the law itself, the changes, but that's fairly durable now.

So most of that will go away next year.

We're not going to, as Bill said, quantify specifically, but these are not immaterial amounts of money that are in the non-recurring buckets.

So getting back to the balance due I would expect that Block would generally do better than the retail firms.

On the other hand, maybe the CPAs take market share.

Do have some thoughts regarding that?

Jason, do you want to give a perspective on that?

I think when we talk about complexity change, complexity is perceived.

If I have a balance due change, and ultimately I feel like because of that, I am now more complex than that's something that, I think getting back to your original question, Michael, that is something that I can stand, or I can understand.

But as far as how we approach the CPAs and the independents, not just on balance due, but in every aspect, we think about this as how do we create a superior experience, and that's something that we're certainly designing for as we look forward to next year and beyond.

I will say that, we mentioned it briefly, but I'll repeat it.

The 50% off promotion worked out really well from our perspective, and it was probably somewhat because of the balance due clients.

People saw that and felt that it may be a good chance to come talk to us, and so we were -- saw those intersection points quite clearly.

Thank you.

This concludes today's Q&A session.

I will return the call back over to Mr. Colby Brown for concluding remarks.

Okay, we would like to thank everyone for joining us, and this will conclude today's call.