H & R Block Inc (HRB) 2017 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen.

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

At this time I'd like to welcome everyone to the earnings call.

(Operator Instructions)

Thank you.

It is now my pleasure to turn today's conference over to Mr. Colby Brown, VP of Investor Relations.

Mr. Brown, you may begin.

Thank you, Shannon.

Good afternoon, everyone, and thank you for joining us.

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

Today we will discuss our FY17 third-quarter results, our thoughts on the tax season, and our financial outlook.

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 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 could 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 jump back into the queue.

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

Thank you, Colby.

Please bear with me, I've had a terrible cold.

But I'll get through it.

Good afternoon, and thank you, everybody for joining us.

I am really happy with our season results to date.

In December, we outlined an aggressive plan to arrest the client decline this tax season, and I am pleased to report that we are delivering what we promised.

To date, we have seen an improvement in our overall client trajectory, which has resulted in early season share gains, in both the Assisted and DIY categories.

Our approach to the season was planned in three distinct chapters: Chapter one was designed to generate pre-season interest in the brand by clearly differentiating us from our competitors.

We introduced our new marketing campaign with Jon Hamm, and our new value proposition of Get Your Taxes Won, both of which have been very well received.

Next, chapter two focused on our aggressive targeted offers, designed to drive new clients.

We introduced a no interest, no fee, Refund Advance loan, and launched free Federal 1040 EZ in our retail locations.

And in DIY, we beat our top competitor's offer with H&R Block More Zero.

Finally, in chapter three, which we launched on Super Bowl Sunday, we enhanced our value proposition by rolling out a new reinvested client experience in our retail offices, backed by the power of IBM Watson's cognitive computing technology.

We are very pleased with the results we've seen thus far, as they represent a significant change from the early season results of the past several years.

We're achieving our goal of arresting the client decline, and we also gained market share in both the Assisted and DIY tax preparation categories during the first half of the season.

And our strong client satisfaction and brand health scores provide additional evidence that we are delivering compelling value to our partners.

While I'm proud of what we've accomplished so far, there is still a lot of season ahead of us, and we are laser focused on executing our plans for the second half.

Although overall industry and Company volume is expected to improve during the second half of the tax season, our performance relative to the industry is expected to moderate, given the conclusion of our Free Federal 1040 EZ and Refund Advance promotions on February 28.

That said, we are on track to accomplish our desired results for FY17, which we outlined for you in December.

With that overview, I will now review the areas that we will cover on today's call.

First, we will provide our perspective on what we've seen in the industry to date.

Next, we will review our retail and DIY strategies and early season results.

Then, we will discuss expectations for the second half of the season.

And finally, Tony will review our third quarter financial results and our outlook for the fiscal year.

Now, before I discuss the industry results, I feel compelled to touch on a topic receiving a lot of attention, and that's tax reform.

As we discussed in the second quarter, there are a lot of open questions about corporate and individual tax reform, and their potential impact on our business.

As we look at the proposals being discussed, I am surprised as to why some may conclude that this entire matter would be bad for H&R Block.

In fact, we see potential benefits.

The centerpiece of corporate tax reform is a significantly lower tax rate.

As you know, H&R Block's historical tax rate has been in the mid 30% range, so under virtually any scenario being discussed, corporate tax reform represents a net benefit to us.

Moving to individual taxes, there are a range of proposals including lowering rates, and streamlining the number of income brackets, limiting or eliminating the AMT, changing filing status options on the standard deduction, adding additional education and child care credits, and under draft legislation of the American Healthcare Act introduced in the House just yesterday, age-based refundable credits would be reconciled to the tax code.

Frankly, I'm puzzled as to how this could be seen as a net negative for H&R Block.

Regardless of the outcome of these various changes, we know from our experience that people will still want and need help with their taxes, and we will continue to provide that help, serving taxpayers however they want to be served, just as we have for the last 62 years.

That just covers taxes.

I haven't even touched on regulatory reform, which given the suite of financial products we offer, could be beneficial as well.

In fact, I haven't seen any proposals in the area of regulatory reform that would negatively impact H&R Block.

So while nothing is yet concrete, I believe this will also be a net benefit to us.

Now, everything I've just discussed will take time, and we're obviously watching it very closely, but let me be clear: On balance, we believe many of the proposals being discussed are a tailwind to our Company, and in my opinion under any scenario, H&R Block remains a great investment.

Now let's turn to the industry, which is off to a slow start.

Although the industry has seen volume improve since the start of the season, through February 24, total IRS E-files were still down 10%.

Over the past few years, early season filers have been filing later in the season, but this year's results were even more delayed.

It's likely that this was due to uncertainty regarding the implications of the PATH Act as taxpayers who typically file in January and early February appear to be less motivated to file quickly, given that their refunds may be delayed.

We continue to expect total federal filings to be up 1% to 2% this tax season.

Consistent with prior years, there is a slight shift within the industry from assisted tax preparation to DIY methods in the first half of the season.

As early season filers are more likely to change tax preparation methods, this shift in the early season is typically greater, and then moderates in the second half.

By season's end, we expect any industry shift to be consistent with and possibly slightly lower than the previous few years.

Turning to our performance, we anticipated a strong first half of the season, driven by our promotional offerings and our enhanced marketing effectiveness.

We're pleased to report that results are in line with our expectations.

We are executing on our objectives to drive clients into our offices, and to our DIY products.

New client growth is the highest it has been since 2011.

In short, we are delivering on our promise to arrest the client decline.

Let me talk through some of the specific results, measured against what we outlined for you in December.

Focusing on the Assisted business first, we developed a plan that included aggressive promotional offerings, increased sales efforts, and an enhanced client experience designed to appeal to a broad range of tax filers.

I'll provide more color on each of these areas, starting first with our newest product, the Refund Advance.

This free no fee loan was offered to our Assisted tax preparation clients to bridge the gap between when they file their taxes and when they receive their refunds.

Given the provisions of the PATH Act, this product was especially relevant to those tax filers who faced a delay in receiving their refunds this year.

The goals of this product were to attract new clients to our offices, and to ensure that the process for obtaining a loan was integrated seamlessly into the tax interview.

We've delivered on both fronts, and the results were positive, as we've seen growth in new clients.

In particular, we saw an increase in new clients obtaining the Earned Income Tax Credit, or EITC, an area in which we've seen client declines the last several years.

Tony will provide additional details on Refund Advance later in the call.

Next, in early January, we rolled out our Free Federal 1040 EZ offer in our retail offices.

Given the competitive market conditions, and our stated objective of driving clients into our offices, it was the right time to relaunch this offer.

It has successfully attracted new clients to the brand, and given that we've enhanced our product offering since the last time we ran this offer, we also had more opportunities to monetize than in previous years.

Understanding that we couldn't rely solely on promotions to drive traffic to our offices, we also embarked on a multi-year effort to instill a sales culture at the field leadership and tax professional levels.

To that end, we stepped up our B2B sales efforts, partnering with local and national businesses during the off season.

We've been hard at work converting these businesses' employees to H&R Block clients, and while we anticipate the benefits of this effort to be realized over the next several years, I am pleased with the overall level of engagement that we are seeing.

Of course, none of the promotional and sales efforts matter, if we don't deliver quality service at the tax desk.

Coming out of last season, we focused on enhancing our client service delivery model, which really has not changed in decades.

We redesigned our tax preparation process to make it an interactive and educational experience for the client, while still allowing the tax preparer to gather the necessary data.

To help with that client experience, on Super Bowl Sunday, we launched our strategic relationship with IBM Watson, that brings the power of cognitive computing technology, together with the expertise and experience of our tax professionals, to deliver tax preparation in a new and exciting way.

IBM Watson has been changing industries such as healthcare and education, but this has been the first time its advanced technology has been utilized in a consumer retail business, let alone tax preparation.

And through our exclusive multi-year agreement with IBM, this experience will be unique to H&R Block.

To achieve this new client experience, we installed over 65,000 client dedicated monitors in our offices, so our clients can be engaged and better understand the value that their tax preparers are delivering, and we shared over 600 million data points with IBM, to help Watson learn taxes.

Feedback on the new experience has been very positive, and client satisfaction scores from our early season pilot showed meaningful improvements.

Collectively, these efforts have translated into positive results in our Assisted business.

Client volumes have improved, and we are achieving share gains in the overall Assisted category, with IRS E-files down 13% since February 24 and comparable H&R Block volume down just 8%.

In short, we are delivering on our promises.

Turning to DIY, as we have commented before, FY17 was a reset year for us.

We had to realign our product lines and pricing with the market to effectively compete, and we didn't just want to compete, we wanted to win.

So we took an aggressive posture with the intent of growing clients.

I am thrilled to say that we are delivering the desired results.

Initially, we announced we would match the free federal free state offerings in the market.

Then in early January, we launched H&R Block More Zero.

This offer was broader than the category leaders, as it included deductions such as mortgage interest in the free product.

Additionally, we made significant product enhancements to our software.

We added a drag and drop feature, that made importing W2s and 1099s, as well as prior year tax returns from our competitors quick and easy, and we significantly improved our photo capture capabilities.

We've been saying for several years that our user experience is competitive with the category leader, and now independent reviews, such as those published in the New York Times article earlier this season, confirm that.

The early results are compelling.

We are taking share in the DIY category, with IRS E-files down 8% from February 24, and comparable H&R Block volume down just 5%.

Our efforts are delivering the results we anticipated.

In summary, we are very excited about our results so far in both Assisted and DIY.

Our promotions, coupled with our product and service enhancements, have performed as designed and driven the early season new client growth we needed to deliver strong results.

With that, I'd now like to turn the call over to Tony to discuss our financial results and outlook.

Thanks, Bill and good afternoon, everyone.

As Bill articulated, other than the industry delay, the tax season is progressing as planned, and we are pleased with our early season results.

Client trajectory in both Assisted and DIY is heading in the direction we had hoped, and we picked up share in both categories during the early part of the tax season.

From a financial perspective, we are achieving our expense reduction goals, which have allowed us to invest in our aggressive client acquisition initiatives, and we are on track to achieve the financial outlook we provided in December, which I'll detail later in the call.

Before doing so, let me provide some specifics regarding our fiscal third-quarter financial results.

As a reminder, we typically report a seasonal loss during the fiscal third quarter, and this year is no exception.

In fact, this year's third-quarter results have been further impacted by the implementation of the PATH Act, resulting in a shift in revenue and earnings from the third quarter into the fourth quarter.

Starting with revenues, we saw a year-over-year decrease of $23 million or 4.8%, to $452 million.

This is primarily the result of lower return volumes in our Assisted business, due to the delay in the tax season, and price reductions attributable to our early season promotions.

These were slightly offset by payments received from franchisees, related to Refund Advance.

Switching to operating expenses, we are starting to realize the benefits of our cost reduction efforts we announced in June.

These savings have allowed us to invest in client initiatives, including our early season Assisted promotions and our new DIY pricing structure.

Compared to the prior year, operating expenses in the third quarter declined $18 million or 3%, despite a $16 million investment in Refund Advance.

The decline was primarily driven by lower compensation and benefit cost and reduced marketing spend.

Let me take a minute to provide further details regarding the Refund Advance.

As Bill mentioned, we are very pleased with the promotion's results.

We were able to add value for our clients with an offer that met their needs, while driving early season traffic into our offices.

When the program ended on February 28, applications for the Refund Advance totaled 1.1 million, and overall approval rate was approximately 78%.

Total funded loans amounted to approximately $700 million, and while the total capacity of the program was not exhausted, the mix between new and prior clients was favorable compared to our expectations.

Total direct program costs in February 28 were approximately $30 million, of which $16 million were recorded in other cost of revenues in our fiscal third quarter.

Considering our investments in early season promotions, as well as the overall industry filing delay, I'm pleased with our bottom line results for the quarter.

Pretax loss from continuing operations declined just $4 million from the prior year to $151 million.

Our income tax benefit was $49 million, which declined from the prior year, primarily due to favorable discrete items in last year's fiscal third quarter.

We continue to expect full-year effective tax rate to be approximately 34%.

Shifting gears, in December, we mentioned that we were in the process of selling our mortgage loan portfolio.

I'm pleased to report we were able to close that transaction in the fiscal third quarter, resulting in proceeds of $188 million, which approximated carrying value.

The proceeds from the sale of this non-core asset were used in part to fund share repurchases during the quarter of $100 million.

Year to date, we have repurchased 14 million shares for $317 million.

With $1.2 billion remaining on our authorized share repurchase program through June 2019, we will continue to be opportunistic in our approach to share repurchases.

Finally, loss per share increased $0.15 to $0.49.

The increase was due entirely to the reduction in both the tax benefit and shares outstanding, as discussed earlier.

In quarters with a seasonal loss, lower share count negatively impacts the loss per share, but will be accretive to earnings for the fourth quarter and on a full-year basis.

Turning to discontinued operations, Sand Canyon made payments during the quarter of $21 million, in connection with settlements of its representation and warranty claims.

These payments were fully covered by prior accruals.

Sand Canyon's remaining representation and warranty accrual balance was $5 million as of January 31.

As a reminder Sand Canyon is, and always has been operated separately from H&R Block.

We continue to believe our legal position is strong on any veil-piercing arguments.

With the third quarter now behind us, I'll now turn to our overall financial outlook.

From a full-year perspective, we expect results to be in line with the outlook we provided in December.

In Assisted, I want to be very clear about how we are thinking about our return volume.

The season-to-date decline in returns is primarily due to the delay in the industry, and as such, we expect volume to improve during the second half of the season.

That said, we believe that our performance relative to the IRS will moderate.

Overall, the net result will be a significant reduction in client losses, consistent with our expectations in December.

From a pricing perspective, given that our early season promotions have ended, we will start to see an increase in our Assisted net average charge over the next six weeks.

We now expect to deliver an Assisted net average charge that is flat to slightly up, due primarily to better pricing in our franchise network.

This is an improvement from what we outlined in December.

In terms of DIY, we continue to expect an increase in return volume this year, and consistent with our expectations, net average charge will decrease compared to the prior year, given the H&R Block More Zero promotion discussed earlier.

Finally, from a profit perspective our EBITDA margin outlook is unchanged.

Our cost reduction efforts have enabled us to invest in our early season promotions, resulting in a healthy bottom line.

We continue to anticipate coming in at the low end of our long term guidance range of 27% to 30%, which is comparable to last year's adjusted EBITDA margin of 27.6%.

Overall, we are very pleased with our early season, with our results to date and are on track to achieve the financial outlook we provided at the beginning of the season.

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

Thanks, Tony.

In summary, we are delivering what we promised.

We said we would be very aggressive, and the results to date show we are executing.

It has taken a tremendous effort by my team and all of our hard working associates and franchisees to get us to where we are.

For that, I thank them.

As I've said before, we are playing to win, and although we do expect results to moderate in the second half of the season, relative to the IRS, we believe we will end the season strong.

I look forward to talking with you all again in June.

With that, we'll now open the line for questions.

Shannon?

(Operator Instructions)

Your first question comes from Kartik Mehta with Northcoast Research.

Bill, obviously a good start to the season, and I just wanted to make sure I understood your comments about the client count for the remainder of the year.

I think, a lot of time, when you had the conference call, you indicated that you won't get all of the declines back this year.

But it sounds like from what you're saying, you could end up being flat, even though the IRS is up 1%.

Is that a fair way to think about what this season could look like, from an Assisted stand point?

Yes, I don't think we're ready to project specifics.

Obviously, the delay in the season has altered some things.

We do think that it's going to come back, we think with how well employment has done, and we don't see any reason why overall filings wouldn't stay in the 1% to 2% range.

So I'm not ready to give any specifics around that.

I think what we're saying is the promotions ended, both the Refund Advance and the 1040 EZ.

I'm talking about Assisted specifically here,.

So relative to the IRS, which we had a great start to the season, we think we're just trying to give some insight that we think they will moderate.

But again, I don't think I'm ready to put a pinpoint on this.

Tony?

Is there anything you'd want to add?

The only thing I'd add, Kartik, is, we reaffirmed our outlook that we expect Assisted to be down in returns, now a much better result than what we saw last year, and much better trajectory, and we're showing that with the early season results.

But our outlook for the season is still that Assisted will be down slightly.

And then Bill, the RAL program obviously had a lot of success, and I'm wondering, is this a program that can be expanded, or are you at a point where this is the maximum amount of borrowings you could do for the program, and it can't be expanded?

Well you know, I've got enough criticism for not talking about what we are going to do this year, before really things happen, so I'm not about to talk about it in March.

I do think we're pleased with year one, is what I would say.

It's the first year of the program, and the first year of product.

I think to have close to 1.1 million people apply for the loan is a really great start to actually be able to bring our clients $700 million worth of loans.

We're very pleased for them.

So again, we'll have lots to talk about going forward.

Right now, we're focused on executing the second half of the season, and I'm not going to comment on where we go from here, other than to say I think we're very pleased with our first year with this product.

And then just the last question, Bill.

Who do you think you're taking market share from, both on the Assisted side and digital side?

You know that's hard to say because we don't get insight into others, other than we saw Intuit's results a couple weeks ago.

So I'm not really going to comment.

Right now, our heads are down, we're trying to execute our programs, and at the end of the year, we'll have better insight into that.

All right, well thank you.

Appreciate it.

Your next question comes from Thomas Allen with Morgan Stanley.

Just following up on a comment you made on the last round of questioning, Bill.

So you said nothing to date would suggest that industry volumes wouldn't be up 1% to 2% this year, but you have experienced over seasons where volumes have been down.

We know that has increased fraud prevention in the system.

Don't you think that could drive the whole industry down, or you're saying you're seeing it was just otherwise?

Thanks.

Yes, Thomas, obviously we are all trying to assess this with regard to fraud, I think last year, the industry was pretty healthy.

I think it came in at 1.7% or 1.6% in terms of filings, and fraud was down over 50%.

The IRS and the whole industry came together, and really reduced that.

Which is why I would say that I think last year was more of a reset with regard to that.

But again, the indicators are in the last 65 years, it's only been nine years the IRS has been down, given the health of the economy, we find it very curious that anyone would think the industry will be down, but we're tracking it week by week.

Right now, I'd have to say our goal is to stay above the IRS in terms of week over week, and we've been able to do that consistently.

Great and then on the Refund Advances, we can do some rough math but it would be more helpful if you just told us.

How many Refund Advances did you do, what percentage of the clients were new?

And any other color would be helpful, thanks.

Yes, we had approval rate of about 78% on the 1.1 million, so it's about 800,000 Refund Advances.

At this point, Thomas, we are not sharing the break out between new and prior for competitive reasons, but I would say the mix was more favorable towards new than we originally expected, so it was definitely a positive program from our perspective.

Perfect, and just my last question.

As you think about the cost for the rest of the tax season, I know you touched on the costs were running down 3% in the third quarter.

But can you just parse that out between volume-based costs that were down, and actual cost cuts that should flow into the rest of the year?

And if you could think of kind of a core cost cut would be helpful, as we think about modeling for the year.

Thank you.

If you look at, and Tony, I'll let you weigh in, but if you look at some of the fixed costs like wage, wages beyond field wages, marketing and advertising, we had real fixed cost leverage during the third quarter, and we expect to have that in the fourth quarter, also.

So I would -- to assume that this was all volume based would be erroneous.

I agree.

We talked about this in the summer, that we went through a number of cost reduction efforts, really started last April, and we expected those to come to fruition during the tax season, and we're seeing that now in Q3, and we expect those to continue in Q4.

The areas you're seeing them in Q3 will continue, and while there is a little bit tied to the delay in the season, the vast majority of it is really tied back to the cost reduction efforts that we put in place last year.

Okay so is there any number we should think about as we model like the fixed cost basis of your business, how much that was cut year-over-year?

The key number that I would think about is the EBITDA margin guidance that I just reaffirmed in my opening comments, and basically in line with what we saw last year, which is around 27.6%.

Okay cool, thank you.

Your next question comes from Scott Schneeberger with Oppenheimer.

I'm just curious, with the two client acquisition tools turned off, the Refund Advance loan and 1040 EZ for free at the end of February, yet the early season still down 10% year-over-year at the IRS for the industry.

Could you elaborate on the decision now, and is there a concern that with those turned off at that juncture, that you're going to be leaving a lot on the plate in the month of March?

Or do you think you have obviously seen more a week or two after February 24, which is your cutoff point for this year, so could you please elaborate on the decision process there?

Thanks.

Yes, I think we're comfortable with the decision.

I think one of the things is constantly extending promotions doesn't drive any drive to get people into the office, and I'm really pleased with how the field teams, franchisees and our sales and service team executed against the February 28 date, in terms of bringing clients through the door.

So I think we're comfortable with that, and with our program.

Obviously, we still have on the digital side H&R Block More Zero is still out in the market.

On the Assisted side, obviously we're very pleased with our partnership with IBM Watson.

So I'd say at this point we're very comfortable with where we stand.

Thanks, and we appreciate the RAL data, the update on that.

Tony, is there any data you could provide with regard to the 1040 EZ for free, especially comparing and contrasting it to FY11?

Thank you.

Yes, I think the performance is different, Scott.

Obviously at that time, it was the first year we launched the program, the competitive landscape was different both in the Assisted and the DIY space.

We didn't expect it to have the same results that we had in 2011, and we're basically in line with those expectations.

So we're pleased with the results, it's definitely having an impact on our early season performance.

It's one of the reasons we're taking share in the early part, but it's not the only reason.

Refund Advance is also driving a lot of traffic in, and it's a two-pronged approach on the Assisted side.

And Tony just to follow on that.

It was clear from Kartik's question, with regard to what you're expecting for full year on Assisted client loss.

The net average charge for Assisted, flat to slightly up, versus down in the prior guidance.

Could you just elaborate on what's driving that, and any more color perhaps on magnitude?

Thank you.

Yes, there's a few things.

It's obviously mix driven.

The other thing we're seeing is franchisees, the math is up more than we expected, and that's for a couple reasons.

One, the participation in free EZ is less on the franchise side, that's the main reason we're down on the Company side.

Absent that, our net average charge would be up slightly, consistent with what we shared in December.

So as those franchisees don't participate, they are just not having as big of an impact.

Second thing we're seeing is franchise offices are, just their base price increases is out pacing what we're doing on the Company side this year.

As a reminder, franchisees still have a net average charge, it's quite a bit less than Company, so we're seeing a little bit of that catch up, but it's not a material change.

Thanks very much.

Your next question comes from George Tong with Piper Jaffrey.

In the Assisted category, H&R Block outperformed the industry, with lower declining volumes through the end of February, thanks in large part to Refund Advance.

Given now Refund Advance is completed as of the end of February, can you discuss what levers you have to drive recovery in Assisted growing performance in the second half of the tax season?

I know you had mentioned Watson, but are there any other drivers that you see that can help the performance volumes?

Yes, as I said, our sales culture, the initiatives we've taken to drive our business development efforts and our conversion efforts, along with Watson, and then I'm not going to comment on if there's anything else we'll do, but we know we have to execute some things in the second half.

That's generally a client that is stickier for all of us.

Ourselves as well as it's a little more difficult to drive new clients in the second half.

But we're pleased with where we stand today, so that's where our efforts are right now.

The other thing I'd add is we know a lot of the delay is just that.

It's simply delay.

So we think a lot of these clients that absolutely plan to come see H&R Block are just delayed with the rest of the industry, and as that catches up, we're going to benefit as well.

Got it.

In the early season, can you share with me-- (technical issue).

George we're having trouble hearing you.

I don't know whether you're on a headset or something but can you try to make some adjustment?

Yes, is this better?

Yes.

Great.

So in the early season, can you talk about what you're seeing with EITC productivity given the implementation of the PATH Act and if you are seeing reduced market share at the independents this year?

Yes, it's hard for us to gauge how other competitors are doing, or any other branded players.

We don't have much information on that.

The PATH Act has clearly probably had an unintended consequence of delaying filing for a lot of people as opposed to, the IRS did the best job they could in terms of saying don't change your filing pattern, but clearly the filing pattern changed.

So I don't know whether that's impacting independents any more than anybody else.

To date, like I said, I'm pleased with what we have done.

We've seen nice traffic to our offices, and that's what we are focused on.

Got it, that's helpful.

And lastly, can you talk a little bit about the visibility you now have on the cost savings from restructuring, now that you're further into the tax season, and how those things will compare with costs to fund your pricing and promotion, and what the implications are for margin?

I know you had indicated you're on track to achieving guidance on relatively flat EBITDA margins, but just a little bit more color in terms of the puts and takes, with regards to funding the promotions and the costs from the restructuring?

George, this is Tony.

Obviously, there's a lot of math that goes into all of the changes we implemented this year, from our reduced pricing structure in DIY with More Zero, going out for EZ, offering Refund Advance, and essentially all of those programs were funded by the cost reduction efforts that we made last year.

We aren't going to go through the ticket and tying all those numbers, other than to say, we are very pleased we're able to hold our EBITDA margin guidance essentially in line with where we ended last year.

Great.

Thanks very much.

Your next question comes from Anjaneya Singh with Credit Suisse.

I appreciate all of the color on the new client acquisition, but just wondering if you have any preliminary sense of how retention is trending on your existing clients, or your prior clients?

I know you gave some statistics on the RAL uptake of your previous clients.

Just wondering, how is retention trending for those clients, especially in light of this RAL promotion?

Tony, if you want to add anything.

I would say in general, retention has been one of the tougher things for us to gauge this season, due to the delay.

So that has probably been one of the tougher things to analyze, in terms of retention.

As Tony said, we do believe when it comes to prior clients, we've always been pretty good at predicting how they will come in, and obviously for everybody in the industry, priors were delayed.

So that's been a little tough to see.

I think what we have seen is that on the early season client, we have seen some retention gains for the EZ and the EITC client.

I don't know if you have anything to add?

Similar with DIY, I think all three of our promotions that were in the early part of the season aren't just a new client offer, they are available to prior clients as well, so we would expect some retention benefits on both sides of the business.

Okay, got it.

And for a second question, it sounds like the RAL promotion, or the promotions in general have helped your first half of tax season performance, but could you rank order how the RAL product did versus the EZ product, in attracting new clients?

Was one more impactful than the other?

And with the noise around the PATH Act delay, did you have less of an uptake on RAL versus what you may have expected?

I'll let Tony answer the second part.

I think to rank order them or anything like that, I think they worked well together.

It was clear that there was something for everyone, and that was really the design, was that for an EZ client we had the free product.

For the EITC client and others who have larger refunds, there was a Refund Advance.

For the 1040 client, more sophisticated client who comes in February on, there's the Watson program.

So I think that's the way we designed it, was to have broad appeal for the -- across the entire industry.

I was just going to say, any time you're launching a new product like Refund Advance, it's challenging to figure out what the interest level will be, and what the take rate will be.

Obviously we did research, but any time it's a first year program, it's challenging to predict that.

That being said we couldn't be more pleased with the performance.

We had a lot of excess capacity, which we wanted to make sure that we didn't run out of money if we had that demand there, but given it was a variable program, and we essentially paid for the volume we used, the costs were less than it otherwise would have been.

We saw significant benefits from a new client growth perspective, specifically for EITC clients, which is really what the program was designed to do.

So overall, couldn't be more please the with the performance, year one of the Refund Advance.

Okay that's helpful, and a final one from me on your Financial Services products, it was nice to see the revenue for Emerald Card and Peace of Mind being up pretty dramatically year-over-year.

I realize just three seasonally lighter quarters.

But what would you attribute that increase to?

Has it just been the monetization of the clients that you got on the RAL side?

Just wanted to get any thoughts on there, and if you expect that to continue for Q4?

Yes, Emerald Cards was clearly driven by the Refund Advance.

We're up across-the-board.

We think that was one of the benefits of this program, was the increase in the number of cards, the number of deposits, the number of reload dollars, take rate, those are all well north and we'll report out on those specifically at the end of the fiscal year.

And then on Peace of Mind?

Yes, Peace of Mind we actually defer the revenue and recognize it over about a 40 month period, so that's really the benefit we've gotten from the last few years of increasing our take rates in sales for Peace of Mind in previous seasons, that we are now recognizing in this fiscal year.

Thanks a lot.

Your next question comes from Hamzah Mazari with Macquarie Capital.

Just a question on the balance sheet.

How are you thinking about current leverage?

Has the philosophy changed at all on still being investment grade?

I know you only borrow for a short amount of time in the commercial paper market, and the reason I ask is, if you hadn't sold the mortgage portfolio, is it fair to say you would still be aggressive on the buyback?

Let me answer the first part and then Tony can take it.

The philosophy on investment grade has not changed.

Thanks, Bill.

Yes, we absolutely want to maintain investment grade.

We're a seasonal business, we have a line of credit that we have to maintain to fund our off-season which is a significant amount of cash spend.

We aren't going to comment on specifically our approach going forward on share repurchases, or even our capital plan for next year.

We'll share additional thoughts when we get to the end of the fiscal year but we're still committed to investment grade.

No change.

Okay, and just to follow-up question.

Bill, I know you talked a lot about regulation and the new regime and potential impact to your business.

Do you have any early views on the Republican plan on Obamacare going away, and how that impacts your business, or is it too early to say, and it's a net neutral?

Any thoughts on that would be helpful, thanks.

Yes, I said in the prepared remarks, when it comes to ACA specifically, the American Healthcare Act that was introduced into the House yesterday which has a fair amount of controversy around it, and many of the proposals of it, even leading up to that, were part of it or a large part of it was grounded in refundable credits, so it would go through the tax code.

I think that will be part of any final plan that comes together.

And then when it comes to individual taxes, there are a lot of ideas around taxes, and I think in the end, frankly, wherever it nets out, people are going to be confused.

I think they are going to turn to us for help, and I think that given all of the competing agendas, it will come out to where I think the rates will be lower.

I think that the President is pretty clear, that he wants that.

With regard to everything else, that's why frankly I'm puzzled as to why people think this is a negative for us, and I think they need help sorting through that.

And as I said, what's getting lost in this, the most important benefit to H&R Block ultimately could be the corporate tax reform.

Everything I've seen is, the centerpiece of that is to lower the rates, and given we run 35% tax rates, plus or minus, all the numbers I'm seeing, that's going to be a lot of money for us.

So I continue to be puzzled as why people write that this is going to be some big negative for H&R Block, I think it's a tailwind for us.

All right.

What do you do with the tax savings, do you buy back stock?

What do you do?

There's no real acquisitions.

Do you have a sense of that or do you pay down debt?

Oh, Hamzah you know better than that.

When the money comes, we will definitely figure out something to do with it.

So I'm not going to jump ahead.

There's a long white tail in Washington on this, so when that comes it will be a pleasant discussion we will have internally, and then certainly with all of you.

Okay, great.

Thanks a lot.

I appreciate the color.

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

You mentioned the partnership with Watson.

Can you give us a couple of specific examples as to how the whole experience has changed with Watson?

Yes, so what happens, you come into our offices now, and we realize we've had to really start with an enhanced client experience.

I think Apple changed the retail landscape forever, that people want to be engaged, they wanted to do something that's more involving, and that's what we set out to do.

And once we decided to partner up with IBM Watson, and really Watson is about, what I love about their philosophy is they call it augmented intelligence, man and machine.

And that really fits our profile completely which is, how do we enhance the tax pro, how do we come out with the best outcome for our clients.

So I think the best way to think about it is, when you come in, the client will come through and sit there and look at the monitor, and Watson, along with the tax pro, feeds in a very visual manner, various deductions and credits that could apply to that particular situation, to get the best outcome.

Think of it, Jeff, as putting a bunch of yellow stickies on a board to say, has this been part of your life in the past year or what?

Watson is also a learning environment.

Watson is getting smarter along the way.

Watson, we invested Watson with the US tax code.

We invested Watson with the 13 million tax returns that had 600 million data fields, so it is learning along the way, and it is going to be smarter next month than it is right now, it's going to be smarter next year.

And that's why a multi-year agreement was so important to us.

This isn't about a promotion.

This is about ultimately getting the best outcome for our clients, and that ties back to our marketing slogan, if you will, of Get Your Taxes Won.

So do you think over time this could increase the accuracy of your returns, potentially less errors, et cetera?

Yes, that's exactly what it does.

It does a couple of things.

One, its goal is to find every deduction and credit applicable to that individual tax situation.

And also whether you are the most experienced and best tax pro or a first year tax pro, it's going to enable that, whatever level of tax pro you're at, to give you a partnership, a machine if you will, the Watson, the IBM people, Watson is a living breathing entity.

So Watson is there to help the tax pro to come up with the best outcome, and that's what we plan to do.

It ultimately to us was about having the best product in the industry to come up with the best outcome for our clients, whether that's to reduce the amount of tax you owe, or to get every dollar you owed in your refund.

Great, and just one clarification.

The H&R Block More Zero promotion, that is still going on; correct?

That is correct.

Okay, great and I'm going to ask you, do you expect that to continue for the rest of tax season?

You know the answer to that.

It is going on as we speak.

Thanks so much.

We will figure that out, but it is continuing.

Okay, great.

Thank you.

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

So it seems like for the first time, you have, or the Company has or maybe only you, Bill, have as part of your compensation a specific goal in terms of returns.

So could you, since that's public knowledge, could you go one step further and fell us what that number is?

So Mike, I'm a little insulted by what you wrote the other night.

I have never run this Company to benefit myself.

I did not receive a bonus last year, and the Board and I worked very closely together on the strategy first, which is what happens, and then the compensation is set from there.

This year as you well know, our goal was to arrest the client declines, which means as a component of the top line and the bottom line.

It is not the majority component.

It is a part of that component.

It is part of my entire senior team, and the Board has high integrity, when they set those compensation parameters.

Fair enough.

Could you tell us what that number is, however?

We never reveal that until after it's done, but believe me, my goal is shareholder value.

Okay, and looking at the numbers comparisons, I think in 2013, you gave a day to day number.

Could you give the day to day number for the IRS to make the numbers comparable with your day to date numbers?

I assume your day to date.

So the numbers we share in the opening comments and actually in the press release are day-to-day through the 24th, relative to the IRS, so they are on an apples-to-apples basis.

And then the results in the back of the table, Mike are through the 28th and those are date to date.

So excuse me, the number in the press release are day-to-day comparable to the IRS, and in the back of the table they are date to date.

I see, okay.

So the IRS number you used was down 13?

Correct.

Okay, and in 2013, I think that was last year until now doing Free EZs, I think you'd indicated then that you had difficulty [monitorizing] that.

Could you talk about how you expect to monetize that going forward into the next couple of tax seasons?

Well, first of all, the industry has changed.

There are more free offerings out there.

And we now have over the past few years done a much better job of attaching our product, so to use your term that is the way we are monitorizing our ability with Free EZs, and we have an ability to attach more products to those clients.

And for example, we now have Tax Identity Shield, which is a product that we didn't have in 2013, so to Bill's point, better at selling products and attaching products, we also have an incremental product that we didn't have then.

Thank you.

And on Watson, are you paying full freight, or is IBM paying a substantial amount to get into the retail business?

I'm not sure I understand the question.

I guess bottom line is, what are you paying for Watson?

I'm not going to go into the details of the relationship with IBM.

Is it fair to assume that there's some sort of sharing of the cost?

It's fair to assume that we have a very healthy partnership that is exclusive and multi-year, and I'm very pleased with the relationship.

Okay, great, thank you.

Your next question comes from Scott Schneeberger with Oppenheimer.

I was wondering if you could elaborate a little bit on marketing spend, advertising spend, and timing.

You've maintained the EBITDA guidance for the year.

I'm curious, a little bit of behind the curtain, on the flexibility you had, as you were discovering the delayed industry tax season?

Thanks.

Yes, Scott, we said all along we would have reduced marketing spend for this year.

We were purposeful in wanting to rollout, we launched our marketing campaign Christmas night.

We wanted to make sure we signaled to everybody that this was going to be a very different H&R Block this year, and so we launched that.

On the margin, we were able to move some media around once we saw the delay, but we had such good momentum that we didn't tinker with it too much.

So I'm pleased with the way the media team did a terrific job of buying, we're obviously pleased with the creative, we're pleased with the brand health scores.

So we were able to adapt somewhat to the delay, but I wanted to make sure that people really got the message, that this is going to be a very different H&R Block this year.

Thanks, and just one quickie for the last one.

CapEx a little bit higher year-over-year.

I imagine some of that has to do with the Watson process, the additional monitors, it sounds like a lot of new monitors for the store front.

I'm curious, are we still looking at a 3% to 4% of revenue range for this year and going forward?

Thanks.

That's exactly right.

It's in line with what we shared in the Q2 outlook, Scott.

And we were able to take into account the investment in monitors and the Watson relationship into our CapEx outlook now, that we provided at Q2.

We moved some things around, but we're very consistent.

That number or guidance of the 3% to 4% is unchanged.

Great.

Thanks very much.

There are no further questions at this time.

I will now turn the call back over to Colby Brown.

Thanks, everyone again for joining us today.

This concludes today's call.

This concludes today's conference call.

You may now disconnect.