H & R Block Inc (HRB) 2016 Q4 法說會逐字稿

Good afternoon.

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

At this time I would like to welcome everyone to the H&R Block FY16 earnings call.

(Operator Instructions)

Thank you.

I'll now turn the call over to Colby Brown, Vice President, Investor Relations.

Please go ahead, sir.

Thank you, Laurel.

Good afternoon, everyone, and thank you for joining us to discuss our fourth-quarter FY16 results.

On the call today are Bill Cobb, our President and CEO, and Tony Bowen, our CFO.

Greg Macfarlane, Senior Vice President US Retail Products and Operations, will also be available during our question-and-answer session.

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

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

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

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

Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance.

Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict.

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

You can learn more about these risks in our Form 10-K for FY15 and our other SEC filings.

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

At the conclusion of our prepared remarks we will have a Q&A session.

During Q&A we ask that participants limit themselves to one question with a follow-up, after which they may choose to jump back in the queue.

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

Thank you, Colby, and good afternoon.

Earlier today we announced our results for FY16.

Clearly, this was a disappointing season on many fronts.

Our assisted tax preparation business continued to lose returns, and for the first time in several years, our digital do-it-yourself business did, as well.

Let me be clear.

We will change the client loss trajectory and are hard at work to make this happen.

Next season will not feel the same.

So, with that as a back drop, here is what we will cover today.

First, I'll spend a few minutes looking back at tax season 2016.

We did not deliver the results we wanted and for that I take full responsibility.

We have learned some hard lessons and will change how we do business going forward.

Next, I'll share our expectations for tax season 2017 and beyond.

We are fully committed to doing what it takes to turn our results around.

Arresting the client decline, and ultimately growing clients is our number one objective.

We cannot continue the client trajectory we've seen.

Finally, I'll review the steps we are taking to achieve these objectives.

Some have already been completed, many are in process and others are yet to start.

I'm excited about the plans for FY17 and beyond, and I'm confident we will execute on those plans to deliver better results.

Let me, however set some expectations up front.

I will not be able to provide full details regarding these plans given how far out from the tax season we are and the competitive environment, but I can tell you that we are taking a broad look at our options and we will be making meaningful changes in both the short and long term.

First, let's start by looking back at tax season 2016.

From an industry perspective the season started very slowly and, consistent with the past few years, did not reach its expected growth level until the last week of the season.

And the results seen this season were disappointing for most of the branded players, including H&R Block.

One branded competitor, however, had an exceptional season.

TurboTax Absolute Zero promotion won the tax season and likely took share from all major branded competitors.

Despite their success, however, the industry shift from assisted to DIY was relatively consistent with the last few years at approximately 90 basis points.

Although the assisted category grew slightly we believe H&R Block and our assisted branded competitors lost share to independents.

Based on our analysis, the independents' share of the market appears to have grown by approximately 80 basis points in tax season 2016, continuing the trend we have seen for the past several years.

Finally, this season we saw increased fraud prevention measures at both the federal and state level.

Stronger information security protocols in the DIY space were introduced as a public/private security summit.

Refund processing slowed at the federal level, and states implemented measures designed to prevent and detect fraudulent activity.

We will have a better idea of the impact these changes had on the industry when the IRS releases more information.

In the meantime, our government relations team will continue to focus on fighting fraud in all its forms, including tax identity theft and improper earned income tax credit payments, while my management team will be fully focused on running the business.

Fraud is not the only issue we face and, as such, a solution to fraud is not the only answer to client growth.

Now that we've discussed what happened in the industry, let's talk about H&R Block's results.

We lost 6% of our clients in the assisted channel or 1 point of share.

The majority of the client loss again came from the early season filers obtaining the earned income tax credit and those filing the 1040 EZ form.

Those losses have come while our retention levels have held steady over the last several years.

What this means is that we are not driving new clients into our offices at an acceptable rate.

So why are we declining in clients?

While there isn't a single simple answer for this question, there are a few things we can point to.

This includes aggressive and compelling consumer promotions, and product and service offerings from both independents and DIY competitors, including the recently reintroduced Refund Anticipation Loan, or RAL-like product, in the assisted channel.

But we cannot just look externally in our assessment.

The truth is we did not perform well as a Company.

We saw poor execution in all areas of our business -- sales, marketing and field operations.

I intend for this to be the last time you'll hear me say this.

We do not intend to be outplayed again.

In order to move forward, we need to understand what didn't work, which I've just described, but we also need to capitalize on what has worked.

In the past, we talked to you about the four components of revenue -- price, mix, volume, and product attach.

Although volume was down the other three components positively impacted results.

We achieved the 3% average price increase we had planned.

Overall, form mix continued to improve, contributing an additional 1% in revenue growth.

Overall product attach also increased, driven by our peace of mind and tax identity shield products.

And despite the fact that we declined the most in early season clients, which impacts Emerald Card and refund transfer unit sales, attach rates for these two products in our retail offices were strong at 15% and 33%, respectively.

We also had a strong first season with our new bank partner.

The transition of our products was efficient, resulting in a seamless experience for our tax professionals and clients.

Finally, in the assisted space, we are pleased with the launch of our new brand, Block Advisors, and we look forward to growing that business to over 350 locations in FY17.

As we mentioned before the season, this is a long-term investment for us though I'm pleased with the progress to date.

In our DIY business, returns declined 2.6%, resulting in a 1 point loss of share.

Yes, Turbo had a great season, but we also know that we did not market our product appropriately, demonstrated by the fact that our DIY awareness continues to linger in the mid 60s range.

This actually represents a great opportunity for us.

We have seen in the past that with the right marketing we can drive client and revenue growth.

Our average revenue per client in DIY increased due to pricing enhancements to the product, improved monetization and an increase in product attach.

Conversion rates also increased 1 point and our mobile usage increased significantly.

Moving to the Affordable Care Act, we did not see the impact we expected, as early season client losses disproportionately affected ACA-related volume.

In addition, IRS compliance efforts around ACA penalties were not yet visible to taxpayers, which we believe led to continued and potentially increased tax filer non-compliance.

As such, the percent of ACA-impacted clients decreased slightly from 16% to 15%.

In the ACA impacted client base we did see an increase in the number of clients completing the premium tax credit reconciliation as expected, which is the most complex of the three ACA forms or worksheets.

The ACA impacts an important segment of our client base and we believe will result in growth over time.

However, that growth is dependent on three things -- first, our ability to grow clients who are impacted by the ACA, particularly early season filers; second, overall growth in marketplace enrollment; and, third, increased IRS compliance enforcement, which we believe will start to happen later this calendar year.

Now, with that overview of the business, let me provide a couple of additional thoughts on our financial performance.

Coming into the year with the divestiture of H&R Block Bank, we had anticipated a 1% drop in revenue and a 1 point decline in adjusted EBITDA margin.

Actual results were in line with expectations, resulting in a $35 million reduction in EBITDA.

We also encountered additional headwinds due to foreign exchange rate fluctuations that negatively impacted revenues by another point.

Excluding the 2 point decrease due to these impacts, overall revenues for the year increased compared to the prior year.

Turning to the balance sheet, we made great progress in aligning our capital structure with our business model this year.

We divested our bank to provide capital flexibility and have been able to return a significant amount of capital to shareholders.

In FY16, we repurchased 56.4 million shares, representing over 20% of outstanding shares since the beginning of the fiscal year.

I am also pleased with the announcement today that the Board of Directors has approved a 10% increase in our quarterly dividend.

Tony will speak to our dividend approach later in the call.

With FY16 behind us, it's now time to look to the future.

Going forward our number one goal is to arrest the client decline and ultimately achieve client growth.

To do this we must improve the value we provide to our clients and do a better job of communicating this value.

We will fix this, both in the short term and the long term.

In the short term, we will make significant aggressive changes aimed at driving client volumes.

As we approach next season, we are reviewing our marketing efforts, product offerings, promotions and service delivery models.

Understand, however, that we will not sacrifice the long-term good of our Company for a short-term gain.

In the long term, we must consider the tax preparation needs of the market overall.

We are the only company that can serve clients however they want to be served, and have the opportunity to expand our offerings to appeal to the very needs in the market today.

You will see innovative solutions designed to leverage our ability to serve clients any way they want to be served.

To deliver on these goals we are investing in research and development.

These investments will be funded through our cost reduction efforts, which I'll talk about in a moment.

So, now that we know what we need to do how will we do it?

There are three main pieces to our FY17 strategy.

First, we will implement programs specifically designed to drive new client growth.

And I'm excited about what we will bring to the market next season.

Next, we have evaluated all aspects of the business and identified cost savings throughout.

This includes realigning our field management and identifying efficiencies at our corporate headquarters, allowing us to reduce headcount and sharpen our focus on delivering client growth.

Additionally, we'll spend less on marketing and have taken out IT, infrastructure and support costs.

Collectively, these actions will enable us to ensure strong free cash flow going forward while funding our client acquisition initiatives and the R&D efforts mentioned earlier.

Given how far we are from the next tax season and the competitive environment, it is too early to share specifics regarding both our FY17 initiatives and our margin expectation.

That said, we are not moving away from our long-term EBITDA margin guidance of 28% to 32%.

We will provide more details on the operational changes and financial expectations at our investor conference in December.

Finally I have reorganized my management leadership team.

I have flattened the organization, divided it into more discrete areas of responsibility, taken on more direct reports, increased individual leader accountability, and ultimately assumed a more operational role.

Overall, I am very pleased what this team has achieved in the first 50 days since the changes were implemented.

They are focused on the right objectives and are working diligently to achieve them.

Karen Orosco, a nearly 17-year veteran of H&R Block, will lead the sales side of the Company-owned assisted business, and Kip Knight will lead the franchise side.

Heather Watts, an experienced DIY professional, will lead our DIY business.

In line with our research and development efforts, I'm pleased to announce that Jason Houseworth is now our Chief Innovation Officer, tasked with bringing solutions to taxpayers in new and creative ways.

In this role, Jason will lead a cross-functional organization that is focused on innovation in the tax industry, specifically around the clients' tax filing experience.

And I have moved Greg Macfarlane into a role where he will be responsible for all products and operations that support our retail business.

Greg's operational mind set and business acumen will enable us to leverage his talents in an even more meaningful way going forward.

Which leads me to Tony Bowen, who has taken on the role of CFO.

Tony has held a variety of finance roles throughout his 12-plus years at H&R Block.

Most recently he led the US tax finance organization working very closely with Greg and me.

His institutional knowledge makes him a great addition to my leadership team, and his strong financial acumen makes him an excellent choice as CFO.

I'm excited about what Tony brings to our organization and I'm confident that you will appreciate working with him in the months and years ahead.

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

Thanks, Bill, and good afternoon.

First, I would like to thank Bill and the Board of Directors for this opportunity.

I would also like to thank Greg for his guidance and support.

He has been a great mentor to me during my time on his team and has left big shoes to fill.

I'm excited about being the CFO of H&R Block.

Despite having a difficult season, I know from my 12 years here at this great Company with great people, and what we do for our clients is important, helping them with what for many is their largest financial transaction of the year.

This is a great business with a solid financial model that generates strong free cash flow and provides an excellent return on capital.

I believe in the future of this Company and look forward to serving as CFO.

Today, I'd like to talk about FY16 results, the financial strength of the Company, and my thoughts around capital structure.

First, let's talk about our results.

In essence this was a reset year regarding our financials given the divestiture of the bank and the subsequent capital structure changes.

Revenue decreased 1.3% to just over $3 billion, primarily due to lower tax return volumes.

As we stated at our investor conference, we expected the bank divestiture to have a 1 point annual impact on revenues and a 1 point impact on EBITDA margins.

The actual impact was consistent with this guidance.

In addition to the impact related to the bank divestiture, total revenues were negatively impacted 1% due to foreign exchange rate fluctuations in our Canadian and Australian operations.

Excluding the impact of the bank divestiture, and foreign exchange, revenues would have increased by approximately 0.5% over the prior year.

Turning to assisted, return volume declines of 6% were partially offset by price increases of about 3%.

In addition, we had a 1% increase due to improved mix as most of our volume losses were in less complex returns in the early part of the tax season.

Lower tax return volume also resulted in lower overall product revenue.

Despite the volume loss, however, we were able to increase product attach per client.

This was driven by increases in attach rates for our peace of mind and tax identity shield products.

We also issued 1.8 million Emerald cards in tax season 2016, and revenue per card increased 2% from the prior year to $52 per card.

DIY tax preparation revenues increased 1.1% to $234 million despite a reduction in return volume.

Improved pricing and monetization efforts through an enhanced product flow contributed to the revenue increase.

Additionally, we improved our refund transfer product attach in our DIY online offering.

Internationally, local currency revenues increased slightly compared to the prior year, while US dollar revenues were negatively impacted $26 million by foreign currency translation adjustments.

Turning to expenses, operating expenses increased 5.3% from the prior year, mainly due to expenses resulting from independent and franchise acquisitions and increased marketing expenses related to the early season sweepstakes promotion.

This was partially offset by the decline in compensation and benefit expenses driven by the decrease in tax return volume.

We completed the year with an adjusted EBITDA margin of 28%, which is in line with the guidance provided in the mid season volume update.

With the issuance of an additional $1 billion of long-term debt in September 2015, and the increased borrowings under our lines of credit, total interest expense for FY16 was $69 million.

This represented an increase of $24 million from the prior year.

We were pleased that our effective tax rate decreased approximately 2 points to 32.6% mainly due to favorable discrete items.

Notwithstanding that, we expect our long-term base rate to be in the 35% to 36% range.

Finally, the Company's overall free cash flow for the year declined 14% to $432 million and adjusted earnings per share was $1.59.

Turning to discontinued operations, Sand Canyon's accrual for contingent losses related to representation and warning claims was $65 million as of April 30.

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 position is strong on any potential veil-piercing arguments.

Next, I'd like to discuss capital allocation.

After divesting the bank last September, we returned to our historical practice of repurchasing shares and increasing our dividend.

We repurchased 3.9 million shares during the fourth quarter, bringing our fiscal year total repurchases to 56.4 million shares or more than 20% of outstanding shares.

We remain committed to returning capital through share repurchases and, though we aren't going to discuss specific plans for this year, we will give more guidance later in the call.

Turning to leverage, we previously shared that we intend to maintain investment grade metrics.

We believe that to do this we need to maintain an adjusted gross debt to adjusted EBITDA ratio of 2.5 to 3 times.

Based on this year's fiscal results we are now in that range.

As such, we don't plan to issue any incremental debt in the near term to finance share repurchases.

We will continue to evaluate the appropriate debt level as part of our overall capital structure plans going forward.

Regarding dividends, the Board of Directors approved a 10% increase in the quarterly dividend.

This increase represents a bit of a catch up given our inability to increase the dividend during the past few years while we were regulated as a savings and loan holding company.

Going forward, we are committed to an annual review of our dividend after each fiscal year.

Any decisions regarding future dividends will depend on our operating results, market conditions, and capital needs, among other factors.

Turning to FY17, while we are focused on arresting the client decline, we've also completed a comprehensive review of our cost structure and implemented many of the cost reduction efforts Bill mentioned earlier.

Because we are still in the planning process we will provide more specifics for FY2017 at our investor conference in December.

And with that I will now turn the call over to Bill for final comments.

Thanks, Tony.

We've covered quite a bit of information today.

I want to emphasize that although we had a disappointing tax season, H&R Block continues to be a strong company with an experienced focused management team that will deliver better results going forward.

We are taking full responsibility and are addressing the issues of last season.

You've heard me say it before but it bears repeating here -- I own what happened.

And to that end, I will not receive a performance bonus this year.

Looking forward, my senior leaders and I are a very competitive group.

We do not like to lose.

We are smarter than we were at the beginning of the season and the lessons learned from tax season 2016 will benefit us in the long range.

We are aggressively focused on arresting the client decline going forward and we will deliver strong results in tax season 2017.

I look forward to sharing more about our specific plans as we get closer to the start of the tax season.

We are now ready to open the call for questions.

Operator?

(Operator Instructions)

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

Good afternoon, thanks.

Not much color on what's going to happen next year at this juncture.

Bill, you said at the beginning, growing clients was the number one objective, and clearly in the early season.

You also said that marketing will be an area of expense reduction, and you specified initially.

I'm curious, what is the spend thought on marketing next year?

I would imagine you probably are going to have to consider some pricing reductions, perhaps around 1040 EZ, or a loan product being offered new.

So, a lot in there but if you could just address all of the above, thanks so much.

Scott, you always have a lot in there.

Let me address a couple of the comments you made.

One is overall, yes, you're right, I'm not going to get into specifics.

Everything is on the table.

I wanted to be very clear with all of you what our objective is, and we're starting that right now and are putting plans together.

I do think we can be more efficient in marketing.

I can think we can be more impactful.

So, that's why we will spend less next year, but I'm not going to quantify the exact number.

So, that's the overview program-wise, et cetera.

But let me address pricing, because I do think that if you think about where the pricing piece goes, this gets to be a complicated issue.

I think that it's very strategic in the response we have to take.

But let me try to lay out where I think we are.

One is, I do think that we are in line with our competitors.

With some independents we are higher priced.

With our branded competitors in the assisted channels we are beneath them.

But I do think that we do have pockets of clients where it's clear that we are going to have to take a different approach to our pricing because I think there are some value initiatives we're going to have to look closely at on a surgical or strategic basis.

I think, having said all of that, I do believe we still have the ability to take price increases but I do think that they are going to be modest as we go forward.

Bill, just following up, any consideration -- not sure what you'll provide -- but next year for EITC clients there's a mandate that refunds will be delayed until February 15, and that will likely cause probably a bit of a change in behavior and also potentially an opportunity.

You did address some of the products out there in the early season.

Just what are your high-level thoughts on that dynamic?

And not that you're going to share too much about consideration for such a product, but anything that you're thinking on that level.

Thanks.

Again, no specifics, but I do think you're on to what I think is going to be a big change in the market next year.

I think this is going to be well known in the market.

I think this will be in the mainstream press, that refunds are delayed, due to the PATH Act, past February 15.

I do think that is going to have an impact on the market and we plan to take advantage of that.

Okay, thanks.

I'll circle back.

Your next question comes from the line of Thomas Allen, Morgan Stanley.

Hi, good afternoon.

When you talk about your initiatives to improve, you noted they will be funded through the cost reduction plan.

Should we take this as the cost reduction plan will be X dollars and all that will be put into incremental ways to drive an improvement in top line?

I think what I was trying to convey, Thomas -- and, again, we're not going to quantify this, when we get to the investor conference we are usually much more specific on our plans and the puts and takes -- but I did want to make it clear that we did take an aggressive posture on cost reductions because we knew, as the season started to unfold, that this was not turning out the way we wanted it to.

So, I moved quickly in March and April to be aggressive on cost reductions.

But I also wanted to convey to everybody that as you go aggressively at client growth or arresting the client decline, that's going to cost us something.

So, I wanted to be able to balance the savings we get from cost reductions with what we believe will help to offset the cost of trying to drive our client growth up again.

Okay.

And then my follow-up question, I understand your reasoning for not wanting to give more detail on the plan given competitive rationale.

But, in reality, your assisted volumes have been down 3% to 6% for each year for the past four years.

So, just for the benefit of investors, can you give us any more anecdotes on how you think you can turn that around given the fact that there's been a four-year decline not just a one-year decline?

I think you even noted this in one of your recent reports, we were very focused on profitable growth.

That obviously needs to continue to be part of our arsenal.

But the decline in the early season has been tough for us so I think we have to address that most specifically, the decline in the 1040 EZ client and the EITC client.

So, that is where a lot of our efforts will be spent.

Thanks, Bill, helpful.

Your next question comes from the line of Gil Luria with Wedbush Securities.

Yes, thank you.

Obviously you're not going to talk about what your product decisions are going to be for next year, but how much of a factor do you think the refund advances were in terms of what your competition did vis-a-vis the volume declines?

And is there a path forward that doesn't include matching that offering?

And the same on the DIY side -- is there a path forward that doesn't include matching fully free given the impact that's had the last couple of years?

With regard to the first question, we believe our estimates are, and it's a little hazy, but we think about 1 million RALs we're done between the independents and JH and Liberty.

So, we think the number was in the range of about 1 million RALs.

So, I think it did have an impact on us and I think we have to bring that into consideration.

With regard to Absolute Zero, if you go back to this time last year, we were reporting results in line with Turbo in terms of the number of returns, and our revenue on a percentage basis was actually higher.

We chose to stay with the same strategy for this upcoming year and it didn't work.

They outplayed us, as I said.

Again, I'm not going to comment specifically but we are quite mindful that Absolute Zero is here to stay and we'll have to figure out how we're going to react to that.

And obviously we are in the process of doing that right now.

And then it sounded like you may have wanted to provide more guidance on the buyback.

Should we assume that if you're not raising new debt that means that the plan for the buyback going forward is for it to be at the level of free cash flow less dividends or something less than that?

Why don't I let Tony handle that.

As we said in the comments, we're still committed to share repurchases.

We don't feel it's appropriate right now to issue additional debt to do it.

We're not going to talk about specific timing or amounts of our share repurchases in this upcoming year, though.

But I do think with regard to buybacks, Gil, I think we had indicated in our conversations previously that we would be tempering that going forward, really having nothing to do with the debt load.

We think we are substantially complete, there's opportunities here and there on the franchise side.

But I think overall we'll be looking at doing less acquisition and buybacks in FY17.

And then a quick modeling question, how much did the franchisee acquisitions contribute to revenue growth this year?

We haven't disclosed the specific amount but it wasn't a material amount to our revenue this year consistent with FY15.

Thank you.

Your next question comes from the line of George Tong with Piper Jaffray.

Hi, thanks, good afternoon.

Can you elaborate on what's changed this year in the independent market that's allowed them to capture more market share from HRB compared to earlier years?

And are there new structural trends that perhaps you haven't talked about that are emerging that concern you?

George, it is harder to get information about the independent market.

We generally have to wait for further information from the IRS, so I don't have a great insight for you on that.

But we are anxious to dive deeper into that.

Okay.

You've indicated that Absolute Zero is likely here to stay.

Can you discuss your interest in capturing volumes if they are not connected with material revenues?

Is this a pivot from your earlier decision to move away from the 1040 EZ offering free filing?

I'm not sure I fully understood your question.

Can you either repeat it or rephrase it?

Yes.

Are you interested in capturing volumes that really have low monetization value?

Here is what I would say.

The volume decline we saw in both sides of our business last tax season, we cannot sustain that.

We do not want to be in that direction.

So, we have got to be aggressive on recapturing clients.

We're calling it arresting the client decline.

We do believe the early season client has been a particular problem for us and we are committed to try and reverse our trends in that area specifically, but overall.

Again, not going to say specifically what we're going to do but I think what I'm trying to do is provide what our objectives are, what our priority is, where our focus is, and then we'll talk to specifics as we get to the tax season.

Got it.

Thanks.

Your next question comes from the line of Anj Singh with Credit Suisse.

Hi, thanks for taking my questions.

Bill, on the commentary that you made on the execution issues, you referenced that you guys have aggressively moved to resolve them or have resolved some of them.

Can you give some more specific examples of the mis-execution or things that went wrong?

And when do you think you guys can get to market-like growth in assisted?

Is 2017 the year that we perhaps see you guys maintain share and grow in line with the market?

And perhaps this is further out, but do you guys think that these initiatives are setting the stage for perhaps even above market growth?

Again, Anj -- I'll get to your execution point but let me address -- I'm not going to at this point give any specific numbers on what we think it will do in terms of client growth.

We have to stop the bleeding, we have to turn north, and have to ultimately, as I said in the script, we have to grow clients.

So whether that's in 2017, we're still modeling everything out, but the direction of my team has been to be very aggressive.

On the executional front, as I said, I own this, I drove all these initiatives.

We missed on the sweepstakes.

It underperformed.

I don't think this is our best year in marketing.

I think that from a sales perspective our field team -- everybody worked hard, everybody did their best, but we did not capture new clients at the rate that we have in the past.

So, I don't think our efforts at the local level were very strong.

I think there was some executional hiccups also.

And on the DIY side, while I think we're very pleased with our product performance and our reviews continue to show what a strong product we have that matches up very well with Turbo Tax, we just didn't -- the combination of marketing and really attracting new clients -- worked.

I was talking to somebody recently and I said normally in business, a few things hit and a few things miss, you hope you move ahead and every once in awhile you hit on everything.

Well, this was a perfect storm the wrong way.

Virtually everything, whether it be foreign currency, the reset year with BofI, everything went the wrong way here.

That's why I think ultimately this was a bad tax season, is the way I'm approaching it.

We are going to turn this around, we are going to fix this.

But it was one bad season, is the way I really look at it.

I think in other seasons we've had some plus and minus stuff and we've been able to move forward with a credible result.

This year they were unacceptable and we're committed to turning that around.

Okay, got it.

And as we think about the timing of the initiatives that you guys are putting in place, is it right to think that all of them will be done in place for FY17 tax season?

And I'm also trying to understand why were they not previously done?

Were they deemed too insignificant to be done and now you found more opportunity or is it something else?

Frankly, I'm not going to look back.

I can kick myself all day for I should have done this and I should have done that.

We didn't.

We missed.

We are going forward aggressively.

My plan is to have everything in place.

Now, as I said there are also tests we're going to put in place because I want to make sure that we are set up for FY18, because I think that we have to look at this on a multi-year basis in a highly seasonal business like this.

And you've heard us talk about that.

Our most seasonal business in the S&P 500, when you miss it hurts and it hurts a lot.

So, we will not only be looking to -- I think that anything we want to do in 2017 on a national basis we will be able to do.

I don't see any impediments to that.

And in addition to that we're going to be testing some things that I think will have some great impact in 2018.

Okay, got it.

And one final quick one for me, you mentioned the portion of your client base that you may have to take a different approach on.

Can you help us understand what portion of that client base, what portion of that comprises of your client base?

And do you think that may compromise your ability to get pricing of 3% that you've been able to get the past few years?

Thanks.

I do think, as I said earlier, the early season client is one that we will be addressing aggressively.

I also stated earlier, I think I was talking to Scott, that we do believe, and we've got to be strategic, that we will have an ability to still have pricing as a positive aspect of our revenue.

But I think it's going to be more modest as we go forward and much more surgical in terms of the way we apply that.

Okay, thanks a lot for your time.

Your next question comes from the line of Michael Millman with Millman Research Associates.

Thank you.

Following up on some other things, other questions, talking about the independents, obviously, their shares assisted was up.

To what extent do you think it's pricing that's doing this or red tape, much more than, say, RALs, for example?

And, also, you've talked about how clients are weak for the last several years.

Could you talk about, on the other side of the coin, retention, particularly retention in different categories, EZ and 40A and the total 40.

And then, finally, ACA, should we lower our sights very significantly on the impact that ACA is going to have on you and the industry?

Thank you.

Okay, thanks, Michael.

Let me try to take them one at a time.

On independents, I think a couple of things are at play there.

You mentioned pricing.

I think that has an impact.

I think, as I said earlier, we need some more information on exactly what has happened there.

It's tougher to get in the independent space.

I think the lack of minimum standards, which I continue to talk about as one of our top two government relations initiatives, continues to hurt us because I think part of independents is fraudulent providers.

But, again, I don't want to spend a lot of time on fraud.

We continue to work on our government relations initiatives.

But we have to focus on executing better.

So, we need more analysis on the independent space but obviously, we don't like to see them growing while we're not.

With regard to retention, our retention continues to be very strong.

There was no change.

Our issue this year was the lack of attraction of new clients.

We were not able to get the new client push that we've seen in the past, but our retention continues to be quite strong.

And then, finally, from an ACA perspective, I do think, frankly, we were surprised by this year's results.

The number of enrollees had gone up almost [50%] to 11.7 million.

And, frankly, we had very little change in the amount of clients that are impacted.

Last year we had 16% client impact, this year it was 15%.

We did have more clients who were completing the premium tax credit.

But to say this was expected is not true.

We were surprised ourselves.

I do want to say, though, a few things.

One, the exchanges continue to grow.

There's another 1 million people enrolled in the exchanges this year.

It's almost 13 million people enrolled in 2016.

I think there has been some non-compliance, some checking of the boxes, because IRS auditing efforts haven't begun.

They are going to begin this summer.

The IRS is going to be able to match with all of the 1095s to people who did not file correctly.

So, I think you will see more stepped up awareness that the IRS is coming after this.

I also think that with our focus on early season volumes, I think that is going to help us also.

I think with our miss in the early season it's hurt us on the ACA piece.

So, I believe that in the long term this is still a tail wind for us.

I think this is going to continue to grow, I think it's still going to be a positive for us.

Frankly, I think we had a bump this year that we're a little surprised at, but I think in the long run this is still a benefit to H&R Block.

So, as a benefit in volume, do you think this also has as much price benefit as you may have once thought, particularly since Turbo Tax talks about basically how they just fold in the questions into their software.

If I understand the point you're making, I think that we have not seen a shift between DIY and assisted in terms of people seeing more complexity.

And we'll just have to keep evaluating that as we go forward.

Thank you.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Thanks so much.

Bill, earlier you said it was a perfect storm in terms of things going the wrong way.

But, yet, at the beginning you talked about the HRB Bank divestiture going well.

Were there any issues there that might have hurt you this tax season that you can improve next year?

No.

And, again, nothing ever completely goes -- no, that was actually good.

I think the results were within our expectation.

We had said we thought it would be in the $35 million to $40 million impact on EBITDA.

It turned out to be $35 million.

So, from a financial perspective it worked fine.

I think our partner BofI executed very well.

I think it was seamless for our clients.

So, no, there was no impact from the BofI relationship with regard to our results.

We just, with the client decline, had less Emerald Cards, less refund transfers.

But that was not an impact because of our relationship with BofI.

Okay, that's good to hear.

On the increase in dividend, I'm just curious why 10%.

Is there a specific target in terms of dividend yield or other metrics that we're looking at that we should use going forward to see what potential dividend increases you might have?

Thanks.

Let me just step back on this because I think it's an important aspect.

And I think many of you have been asking for us to comment on our dividend policy.

For years, we have not been able to issue any change in dividend because of our being tied up with the bank and Dodd-Frank.

So, we have not commented on any dividend policy or the like.

When we left the bank in September and came out with our capital plan, we said we would talk about dividends at the time when we think it's appropriate, which is every June.

And what we've committed to is we will have an annual review of the dividend in June because that's the time of the year, three-quarters of our revenue or more are in the fourth quarter, that's the appropriate time for us to be discussing any change in the dividend.

So, we are committing to investors that we will have that annual review.

Specific to this year, we felt that early on in my tenure, we did increase the dividend 33%.

We hadn't done it for almost four years, so we thought it appropriate for us to do a 10% increase at this moment.

That will be effective with the dividend payable July 1. So, that's what we announced today, was a 10% increase, and then we'll have an annual review of the dividend every June.

And, I'm sorry, is there a certain payout ratio that you're targeting that you came up with a 10% number?

We have not, Jeff come up with -- let me put it this way.

We've committed to an annual review.

We're not going to get into payout ratio or anything else.

We'll take an assessment of how the tax season went, what our situation is, what are market conditions, and then be transparent in terms of what our position is going forward.

Fair enough.

Thanks so much.

Your next question comes from the line of Scott Schneeberger with Oppenheimer.

Thanks for taking the follow-up.

I'm curious, certainly there was some execution flaws this year and it's been well highlighted on the call.

But I think there's more speak of that and less onus or discussion of maybe some structural industry pressures, possibly tied to fraud prevention, that might have disproportionately impacted the large branded storefront assisted providers relative to those mom and pops.

And, Bill, you mentioned you don't have great data but could you just address that as far as those two dynamics vis-a-vis each other in magnitude?

Thank you.

Yes, I think, Scott, this issue of fraud is having an impact, a big impact, on the assisted business.

If you start with EITC and the disproportionate documentation requirements, and all the improper payments tied to the EITC, it is very clear that people are using a DIY method because they don't have to answer the same questions.

It makes no sense to me.

You heard me talk about this.

So, that's one piece that I think has impacted the assisted business.

And also the lack of minimum standards.

I think that's the other piece we talk about.

Now, I do think there are some things that are going to happen -- not wishful thinking -- that is going to help the assisted business and ultimately, I believe, help us.

With the IRS moving to matching income, matching W2s to tax returns that's going to come into place this year, that will have a positive impact on the assisted business.

Also, as we talked about earlier, with the PATH Act, with refunds being delayed through the middle of February, that can have a benefit to the assisted business if done in the right way.

So, so I think there are some things that are going to start to happen that may lessen the impact of fraud on the assisted business.

But at this point I think it's still, until those documentation requirements are equalized, it's tough for the assisted business.

Thanks for that.

And one more, if I could.

Still maintaining the long-term margin guidance, you didn't touch on FY17.

I'm guessing we'll get some magnitude at Investor Day in December.

I think, and it was under your tenure, the last time there was a large OpEx reduction.

You quantified it as year over year.

I believe it was $85 million to $100 million, which you achieved, and it was in the context of we're going to reduce the operating expense this much year over year.

It didn't touch on revenue or anything else so it was safe to provide without sharing too much information.

I'm just curious why you chose not to share any magnitude on this call and provide it in that nature like last time.

You have a great memory, Scott, and a great database.

But, no, that's fair.

We chose not to because I think we're in a different situation.

I think we're in a situation where, as we amend our strategy to say we're going to get much more aggressive on the client side, we need to figure out the balancing act between the cost reductions flowing through and those that are going to help us fund the client acquisition efforts.

Obviously you answered your own question.

In December I think we'll certainly be very forthcoming in terms of how we think the whole thing adds up.

But at this point, I/we chose not to give that specific number as we work through the balancing act here.

All right, thank you.

Ladies and gentlemen, that brings us to the end of today's question-and-answer session.

I'll now turn the call back to the presenters for closing remarks.

Thank you, everyone, for joining us on today's call.

And this will conclude the call.

This concludes today's conference call.

You may now disconnect.