H & R Block Inc (HRB) 2017 Q1 法說會逐字稿

Good afternoon.

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

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

(Operator Instructions)

Thank you.

It is now my pleasure to turn the call over to Colby Brown, Vice President, Investor Relations.

You may begin your conference.

Thank you, Marianna.

Good afternoon, everyone, and thank you for joining us to discuss our FY17 first-quarter results.

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

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

Some of the figures that we'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'll 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 FY16 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 results for our FY17 first quarter, which ended July 31.

As a reminder, given the highly seasonal nature of our business, the first quarter is not indicative of our performance for the full year.

To put it in perspective, first-quarter results typically represent less than 5% of our annual revenues and less than 15% of our annual expenses.

Tony will walk you through the first-quarter results in greater detail shortly, but overall, they were in line with our expectations.

Our financial results varied from the prior year, primarily due to the impact of the divestiture of H&R Block Bank and the increased interest expense due to the issuance of long-term debt last September.

With that context on the quarter, I'll now spend a few minutes providing an update on our preparations for the upcoming tax season.

As I shared during our call in June, our focus for tax season 2017 is to arrest the client decline, and I can you assure you that the entire Company is laser-focused on achieving this goal.

To understand the drivers behind the client loss, we have analyzed data from the 2016 tax season.

This work confirmed that we maintained relatively stable retention rates year over year, and that our challenge remains attracting new clients.

With greater competition, both from aggressive offers in the industry and an increase in the number of independent tax preparers, our value proposition struggled to resonate with new clients.

With a better understanding of the issue, we then evaluated all aspects of the business -- products, promotions, pricing, marketing, service, delivery, operational processes -- everything.

We have spent the summer developing a multi-faceted plan to appeal to new clients.

What we have developed for tax season 2017 will result in an H&R Block that will look very different from what you've seen the past several years.

We will be aggressively going after clients in both the assisted and the DIY categories.

We will have compelling product offers and an improved client experience that we believe clients will value.

And we will make sure the marketing message appropriately communicates that value.

Our marketing campaign will be fundamentally different from last year.

Also, we are making progress on our cost-reduction efforts.

But given the nature of our business, we don't expect to realize the majority of those benefits until later in the fiscal year.

And as we discussed in June, we intend to use a substantial portion of the savings to fund our operational objectives for the upcoming tax season.

While I look forward to delivering a strong 2017 tax season, we will not sacrifice the long-term health of the business to achieve short-term success.

Rather, the changes we are implementing will further strengthen our overall value proposition.

We remain a strong Company with a history of delivering for our shareholders, and I look forward to continuing this practice going forward.

I am excited about the future of H&R Block and the opportunity to demonstrate strong performance for our clients and for our shareholders.

With that, I will now turn the call over to Tony to review the quarter's financial results.

Thanks, Bill, and good afternoon, everyone.

As Bill mentioned, the first-quarter results represent a small percentage of our annual revenues and expenses, and are not representative of our full-year performance.

With that as a backdrop, I'd like to provide additional context on the quarter.

Revenues decreased $12.5 million to $125 million, primarily due to the impact of the divestiture of H&R Block Bank.

This included the reclassification of mortgage portfolio interest income to other income, the loss of investment income from available-for-sale securities, and lower Emerald Card revenues resulting from payments to our third-party bank partner.

Lower US tax return volume and the impact of foreign exchange rate fluctuations in our international businesses also negatively impacted revenues.

Turning to expenses, total operating expenses decreased $2 million to $310 million, primarily due to cost-reduction efforts which were partially offset by occupancy cost and amortization expense related to franchise acquisitions in the prior year.

Not included in operating expenses is interest expense, which increased $13 million from the prior year due to the issuance of long-term debt in September 2015.

Pretax loss increased $16 million to $203.5 million.

The increase in pretax loss was driven by the increased interest expense and changes related to the divestiture of the bank.

Excluding these two items, pretax loss would have improved $3 million compared to the prior year.

Notwithstanding the changes discussed, EBITDA loss increased just $2.5 million to $141 million and, again, was entirely due to the bank divestiture.

Income taxes were less favorable during the quarter due to the discrete tax benefits we recognized during Q1 of the prior year.

We continue to expect our full-year tax rate to be in the 35% to 36% range.

Finally, our loss per share increased $0.20 to $0.55.

Approximately half of this increase was due to the reduction in share count, which will be accretive on a full-year basis, but negatively impacts those quarters in which we have a net loss.

The remainder of the change in loss per share was due to the increase in pretax loss mentioned earlier.

Turning to discontinued operations, Sand Canyon's representation and warranty accrual decreased $40 million from the prior quarter, to $26 million, as a result of a settlement with a counterparty.

The settlement was fully covered by existing accruals.

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 corporate veil-piercing arguments.

Turning to our capital structure, we repurchased an additional 2 million shares during our first quarter, at an aggregate price of $48.6 million, bringing total repurchases under the current $3.5 billion authorization to over $2 billion.

There are a number of factors that impact our share repurchase decisions, including our financial position, market conditions, blackout periods and operational considerations.

We are committed to returning capital to shareholders through share repurchases, and going forward, will continue to be opportunistic in our approach.

With that, I'll now turn the call back over to Bill for some closing comments.

Thanks, Tony.

Before we move to Q&A, I'd like to address one other item.

Historically, we have held an investor conference in December in conjunction with the release of our second-quarter results.

Given our stated objective of arresting the client decline and the work it will take to get there, it's imperative that the management team stay focused on executing against this goal.

Additionally, we will not reveal the majority of changes we are implementing in advance of the tax season, given the industry's competitive environment.

Thus, we will not be holding an investor conference this year.

That said, we will include guidance on a select number of financial metrics during our second-quarter call in December.

This is the right decision.

It is essential that we remain focused on flawlessly executing our plan for the upcoming tax season, and it also saves us some money, which is always a good thing.

With that, we are now ready for questions.

Marianna?

(Operator Instructions)

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

Your line is open.

I really do understand the competitive nature of your business and your reluctance to give us a little bit more color about some of the changes.

But is there anything you can tell us at a high level why this next tax season will look different than the last one?

Well, I think, Jeff, what I've said is, we're going to be much more aggressive on both the assisted and DIY channels, in our offers.

We're going to be moving forward with some client experience enhancements.

And again, for competitive reasons, I'm not going to go into the details of that.

But you're going to see a very different H&R Block in tax season 2017.

Okay.

And just continuing on the theme, I know you talked a little bit about the change in the EITC refund policy for next year.

I just was wondering if you've had a little bit more time to study that and what impact it might have on your business next year?

Thanks.

Do you mean the PATH Act?

Yes, please.

Yes.

To the PATH Act == I mean refunds will be delayed on certain credits, like the EITC and child care credits, until February 15.

And we're still studying that, what the impact of that is.

Obviously I think it will have a disruptive effect on the tax industry, and we're going to obviously be looking for initiatives to take advantage of that and support our clients during that timeframe.

All right, I'll jump back in the queue.

Thanks so much.

Thanks, Jeff.

Your next question comes from Gil Luria with Wedbush Securities.

Your line is open.

I wanted to ask if you could provide us a little more detail on the cost measures that you've taken?

Have you quantified how many full-time equivalents have been reduced, and on what basis you have such a variance in terms of the seasonal accounts?

Have you completed those measures at this point in time?

I understand you're saying that they won't really kick in until tax season, and that even then, a lot of it's going to be reinvested.

But have those been completed at this point?

Go ahead, Tony.

Yes, hey, Gil, thanks for the question.

I think -- you were cutting out a little bit, but I think you were asking about how many positions we reduced as part of the cost-reduction effort that we went through last April.

We did reduce by about 250 full-time positions, both at our corporate offices as well as in our field.

Those are essentially behind us.

We did do a number of other cost-reduction efforts, which you're seeing part of the benefit in Q1, but there was a couple of numbers going against us.

We had some amortization, as well as some additional rent that we're paying on behalf of our franchise buybacks from deals we did last year that now are impacting us in Q1.

We also have some payments that we're making to our bank partner as part of that transaction.

So those are all essentially moving the wrong direction.

And despite that, we did reduce our operating expenses about $2 million during Q1.

So the other point to add on, though, is, there are -- some of the cost-reduction efforts that are going to be more impactful during the tax season, we're still deciding which of those cost reductions we're going to be reinvesting in the business.

But given the nature of where 75% of our revenue and a significant amount of our expense comes in Q4, there is going to be a delay to some of our cost reductions.

I think the only thing I'd add to what Tony said, Gil, is that the way the expenses are rolling out, and obviously with the oddity of our highly, highly seasonal business, the expense plan -- or the actuals in Q1 were in line with our expectations.

Great, thank you.

Thanks, Gil.

Your next question comes from Scott Schneeberger with Oppenheimer.

Your line is open.

Following up on Gil's question.

Tony, your quote in the press release was, expenses are down slightly this quarter, the majority to occur after the first quarter.

And Gil framed his question on most of it's going to probably come in the tax season.

I'm just curious, might we see a bigger improvement in the fiscal second quarter, or are we waiting until tax season?

And maybe a little bit more color around those headwinds you outlined in the first quarter, how they might impact the second quarter?

Thanks.

Yes, I think -- thanks, Scott, for the question.

I think we're going to see a continuation of some of those headwinds.

The rent that we're now picking up for the buybacks we did last year -- franchise buybacks, that is -- as well as some increased amortization expense, as well as just an ongoing payment to our bank partner.

Which, part of that -- that mainly impacts us more during the first quarter, as far as the bank partner relationship, because, you remember, we closed that transaction during August of last year.

So we're going to essentially have that year-over-year variance behind us after we move out of Q1.

We'll still have about a month in Q2, but most of it will be behind us.

So I don't think you're going to see a much different story on the cost line in Q2, because we still are going to have the increased rent and a few other things that are essentially headwinds.

So most of that will still impact us during the tax season.

The other thing is, Scott, with our business, as you know -- you've covered us, the industry, for a number of years -- as the IRS lands on when the e-file date is, et cetera, January can look a little funky.

So it's all about our complete fiscal year and seeing how that nets out.

We have said that we will have a lower expense line on marketing.

Where that falls relative to last year, I'm not going to try to manage to Q3 earnings.

We're trying to manage through to a full fiscal year.

So that's why it's difficult for us to really comment on the quarterly piece, except to say that as we have looked at Q1, as we look to Q2, to Tony's point, then you get into Q3 when things can be more determined by externalities.

That's why it gets difficult on a quarterly basis to really give you a really specific answer.

Okay, thanks.

And then for the follow-up, obviously a positive development here for Sand Canyon.

Could you guys please elaborate on what that settlement was?

And obviously there's a remaining reserve, so what exists out there?

And just update on where the tolling agreements are?

Thanks.

Yes, Scott, it's Tony.

Overall, we're pleased with the progress the Sand Canyon team has made.

They did have a positive settlement during the quarter.

We don't speak specific to the counterparty that they did settle with, but it was a $40 million settlement, as I mentioned in my opening comment.

So they still have about $26 million remaining under the representation and warranty accrual.

That being said, there are some other contingent liabilities that our SEC disclosure and our 10-K do a good job of outlining what those are, so I would just refer you to those.

We still think this is going to be measured in a matter of years, not months.

It's going to take some time to wind down.

They're making great progress, but it's just one of those things that's still going to take some time.

If I could just clarify that, Tony, I was under the impression that there was one large group with which the tolling agreements were occurring, and that was everybody.

And it looks like something just got settled.

So is it kind of piecemeal, a bunch of groups?

Or is that -- we have to check the K, or not something you can elaborate on?

Yes, Scott, we don't want to talk about specific settlements.

I'm not sure exactly what you're referring to.

But it has been great progress, but it's still going to take some time to wind down.

All right, fair enough.

Thanks, guys.

Your next question comes from Kartik Mehta with Northcoast Research.

Your line is open.

Good afternoon.

I wanted to get your perspective on what you expect for overall industry growth in terms of tax returns for next year?

Yes, Kartik, at this point -- and as we get closer to tax season, we may refine this -- but at this point, we expect a continuation of the trends we've seen over the past couple of years.

I think we're anticipating total industry growth between 1% and 2%.

It does seem that filing happens later rather than earlier.

I think DIY will grow faster than assisted.

I think DIY will be in the 4% or so range, assisted in the zero or 1% increase range.

So I think right now, in terms of our planning, we're anticipating it being in line with the past couple years.

And Tony, I just want to get your thoughts on margins as we look to this year.

You've talked about cost cuts, you've talked about being aggressive, just going after clients.

I'm wondering, how does that translate to EBITDA margins for this year -- and I guess, either growth or a contraction?

Yes, Kartik, so we're going to share more information on our Q2 call, as Bill mentioned.

So we're not going to talk specific about it.

At this time, we're still sticking to our long-term guidance of 28% to 32% for EBITDA margin.

But we're going to share more information on our Q2 call.

All right, perfect.

Thank you, I appreciate it.

Thanks, Kartik.

Your next question comes from Michael Millman with Millman Research Associates.

Your line is open.

When we look out at, I guess, the first half of the tax season, second half of the tax season, should we be looking for the Company to decelerate their declines, or in fact, be able to put up some increases in one or both of those periods?

And sort of related to that, is there a focus more on volume or more on revenues?

Thank you.

Yes, I'll start off, Michael, and then Bill can add on.

I would say our main focus is on arresting the decline.

Obviously growth is the ultimate goal.

But coming off the year we just had in both the assisted and the DIY channel, our main kind of step one, if you will, is arresting the decline.

Obviously we're hoping for growth, but not necessarily targeting it at this point.

So that's -- and what was your second question, Michael?

So just on that, would that be true for both the first half, where you do have a lot of the newer taxpayers, and the second half as well, when you have existing -- more existing?

Yes, I think -- go ahead, Mike.

Sorry.

So maybe we could go there, and I'll get back to the second half, the second question.

Yes, with regard to the first half, second half, I don't think we're in a position yet to comment on the split or where we would -- where that will land.

I think Tony laid it out well, that the goal here, we can't afford to have another year where we're down almost 1 million clients.

So job one is to arrest the decline, and that's where our focus is.

So that may answer the second question, which was, is the focus more on volume than on revenues?

I think sometimes that's an artificial construct.

But clearly, we have to be focused on the client number.

So I'm not going to comment more specifically than that, but just that our primary focus is to arrest the client decline.

Thank you.

(Operator Instructions)

And your next question comes from George Tong with Piper Jaffray.

Your line is open.

Hi, this is Adrian Paz on for George Tong.

Given the industry's increasing use of RAL-like products, what is your position on offering a fee-free RAL product?

And if you could perhaps provide some color on where you are in discussions with potential bank partners?

I'm not sure I heard the second -- did you hear the second part?

Just partners for offering (multiple speakers)

I just want to see if you were having discussions with potential bank partners on offering the RAL-like product?

Okay, so now I understand.

So obviously with the expansion in RALs that were offered last tax season, our estimates are that there are over 1 million of them offered, primarily through the independent channels.

So we have certainly taken a look at that.

We are continuing to look at that.

Whether we will have one or not is certainly something that we're not ready to comment on this year.

We would be in a position where we would partner on this.

I'm not going to say what we've done with regard to any discussions with partners.

But as I've said, in terms of having an aggressive tax season, in our mind, everything is on the table, and at the appropriate time we'll reveal what our plans are.

All right, just one more.

Now having some time to reflect on the 2016 tax season, can you discuss how your thoughts have evolved on the ACA impact, and why it didn't really materialize in 2016?

And what your thoughts are for 2017 for the ACA?

Yes, as I said on the Q4 call, we were surprised that the impact was not growing in tax season 2016.

Every indicator was that it would be, but it didn't happen.

The number of people in exchanges, again this year, has gone up.

The IRS now has all the 1095 forms that everyone had to file last year.

So everything is set up for an increase in terms of the impact on the tax season.

But we'll just have to wait and see.

I still believe that over time, this will be a net benefit to a Company like H&R Block.

But hard to say what it will be in 2017, given that we were surprised.

But all the indicators would show that the impact will be higher in 2017.

Great, thank you.

Thanks, Adrian.

There are no further questions at this time.

I will turn the call back over to the presenters.

All right, thanks, Marianna, and thanks, everyone, for joining us on today's call.

Hope you have a great day.

Thank you.

This concludes today's conference call.

You may now disconnect.