H & R Block Inc (HRB) 2018 Q1 法說會逐字稿

Good afternoon.

My name is Mike, 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.

I will now turn the call over to Colby Brown, Vice President of Finance and Investor Relations.

You may begin your conference.

Thank you, Mike.

Good afternoon, everyone, and thank you for joining us to discuss our fiscal 2018 first quarter results.

On the call today are Tom Gerke, our Interim President and CEO; and Tony Bowen, our CFO.

We 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 remind everyone that this call will include forward-looking statements as defined under the securities laws.

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

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

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

You can learn more about these risks in our Form 10-K for fiscal 2017 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.

(Operator Instructions)

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

Thank you, Colby.

Good afternoon, and thanks, everyone, for joining us.

Earlier today, we announced the results for our fiscal 2018 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.

Tony will walk you through the first quarter results in greater detail shortly.

But overall, they were in line with our expectations.

Now I'd like to provide an update on our CEO transition, our overall strategy and our preparation for the upcoming tax season.

Starting with our leadership transition.

We announced last week that Jeff Jones has been appointed our new President and CEO effective October 9. Jeff brings 27 years of executive management experience, creative leadership and operational excellence to H&R Block, having held key roles at top companies in the retail, consumer products, agency and technology industries.

The management team will actively work with Jeff over the next several weeks in advance of his arrival to ensure a seamless transition.

We are delighted by the board's selection of Jeff as our new CEO.

And in addition, we'd also like to give a final thank you to Bill Cobb for all he did during his tenure at H&R Block.

During this time of transition, the leadership team has been and will continue to be laser focused on delivering a strong tax season '18.

We have largely completed our planning efforts and are working to operationalize those plans.

While we're not prepared to discuss details regarding our expectations for the upcoming tax season, our long-term goal continues to be achieving client growth in both the assisted and DIY channels.

And our strategy to get there remains unchanged.

So here's what you should expect from H&R Block this year.

We will continue to aggressively go after client growth through compelling promotions and product offers.

We'll continue to invest in innovative solutions designed to leverage our ability to serve our clients anyway they want to be served.

And we will continue to improve the value we provide to our clients and will effectively communicate that value.

Again, while we're not prepared to provide a lot of specifics today regarding our tax season '18 plans, we can talk in a little more detail about a key product in operating lineup: the Refund Advance.

After successful launch in tax season '17, we're excited to have this product in place for tax season '18.

Last month, we reached an agreement with BofI to be our exclusive Refund Advance provider this year.

This expands our relationship with BofI, which also provides our Emerald Advance, Refund Transfer and Emerald Card products.

And by reaching this agreement in July, we solidified the terms of our Refund Advance program much earlier than last year, giving us more time to enhance our execution of the program as well as to focus on other initiatives.

Refund Advance continued to be a valuable product for the early-season clients looking to access their refund faster and it rounds out our Tax Plus product suite, which is the most robust in the industry.

Our products, combined with the expertise of our tax professionals and Watson, offer compelling value for taxpayers.

Beyond Refund Advance, we have many exciting plans for the upcoming tax season as we continue to look for ways to innovate and provide our clients with outstanding promotions and product offerings.

We look forward to sharing more details regarding our tax season '18 plans on our second quarter earnings call in December.

And with that, I'll hand the call over to Tony.

Thank you, Tom, and good afternoon.

As Tom mentioned, due to the seasonality of our business, first quarter results are not representive of our full year performance.

Considering that perspective, first quarter results typically represent less than 5% of our annual revenues and less than 15% of our annual expenses.

That said, our results were largely in line with our expectations.

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

Revenues increased $13 million or 10% to $138 million, primarily due to increased U.S. tax preparation fee and revenues from prior year sales of our Peace of Mind product.

Turning to expenses.

Total operating expenses increased $13 million or 4% to $323 million.

Increases in amortization expense and occupancy costs were due to acquired franchise and independent businesses in the prior year.

We also saw inflationary increases in both occupancy cost and compensation expense.

Pretax loss increased approximately $2 million to $205 million as increases in revenue were offset by increase in operating expenses.

Additionally, other income declined due to the sales of the mortgage loan portfolio, which occurred in the third quarter of fiscal 2017.

The quarter's income tax benefit was less favorable compared to the prior year due to a lower base tax rate as well as lower discrete tax benefits.

Finally, loss per share increased $0.07 to $0.62.

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

The remainder of the change in loss per share was due to the decrease in income tax benefit.

Turning to capital.

We remain committed to our practice of returning excess capital to shareholders through dividends and share repurchases after making appropriate investments in the business.

Regarding share repurchases, there are a number of factors that impact the amount and timing of repurchases, including our financial position, market conditions, trading ranges, blackout periods and operational considerations, so we will continue to be opportunistic in our approach.

There were no repurchases in the first quarter, and we currently have approximately $1.2 billion remaining of our $3.5 billion share repurchase authorization effective through June 2019.

Turn to dividend.

Last quarter, the board authorized a 9% increase in our quarterly dividend to $0.24 per share.

We remain committed to paying a quarterly -- to paying quarterly dividends, which we have done every quarter since becoming a public company over 50 years ago.

Turning to discontinued operations.

Sand Canyon's accrual for contingent losses related to representation and warranty claims was unchanged from the prior fiscal quarter at $4.5 million as of July 31.

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.

As Tom mentioned, our plans for fiscal year '18 are well underway, though we are still working on certain areas that may impact our financial outlook for the year.

Consistent with last year, we will provide additional details during our second quarter earnings call.

That said, I would like to provide some color around our operating expenses, which is an area many investors have asked about during the past few months.

As we've stated previously, we do not plan any large-scale cost reductions this year, but you can expect us to be diligent about cost management.

As we discussed during last quarter's call, fiscal year '17 represents a new baseline for expenses.

That said, we had onetime benefits of approximately $15 million last year that will not recur in fiscal year '18.

Additionally, expenses will be impacted by variable costs and inflationary increases in areas such as compensation and occupancy costs.

We will provide details on expenses, margin and other elements of our financial outlook during our second quarter call in December.

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

Thanks, Tony.

In summary, we're on the right path to deliver for tax season '18.

We're aggressively building off of last year's momentum.

We're excited about the arrival of Jeff Jones and are working to ensure a smooth transition.

We look forward to sharing more in December on our Q2 earnings call.

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

Operator?

(Operator Instructions) Your first question is from Kartik Mehta from Northcoast Research.

Tony, I think you talked about the RAL program or the bank's products program going with 1 bank.

I'm wondering if you anticipate any other changes in the RAL program.

It seemed like you had some success last year.

I'm wondering if you're going to make any changes and anticipate those changes having greater success.

Yes, Kartik, thanks for the question.

Obviously, our goal is to try to improve on the success we had last year for Refund Advance.

As far as what those specific changes will be, obviously we're not going to talk about it for competitive reasons, but we are really pleased with the performance that, that product had last year in driving new clients.

We're hoping to build on that performance in the second year.

But as far as the details, more to come.

And then what would you -- what do you anticipate for total tax market growth both for the total market and the dividend in DIY?

So last year, as you know, was a bit of an anomaly from our perspective.

We think the fraud controls at the IRS put in place both the PATH Act as well as the AGI PIN change that they made in DIY definitely had an impact on industry volume.

If you take last year out and you look at over the last 60-plus years, the growth is highly correlated with employment.

Right now the economy is strong, employment is strong, so we would expect the IRS returns to return to more historical growth patterns of around 1%.

And then, Tony, just your thoughts on the assisted market and DIY market.

What do you anticipate growth-wise from those 2 markets?

Yes.

So -- sorry, I missed the second part of your question.

I think last year was a bit of an unusual year.

We saw that migration from assisted to DIY be about half what it was in the prior years.

I think part of that had to do with some of the fraud controls I mentioned before.

I think part if it had to do with the product offerings that you saw in the assisted side of the business, specifically Refund Advance.

We expect that there will be a migration from assisted to DIY next year.

Exactly what that is really depends on a lot of factors including competition, different offers in the marketplace, et cetera.

And I think overall, we would expect assisted to be relatively flat and see positive growth on the DIY side.

Your next question is from Scott Schneeberger from Oppenheimer.

I'm a little curious to hear that no share repurchases in the fiscal first quarter.

Just Tony, any commentary on that?

Is that something where you're going to hold off before tax season?

Or just happenstance?

Or any commentary surrounding that?

Yes, so -- thanks, Scott.

Obviously, we remain committed to turning returning capital to shareholders through both share repurchase and dividends.

I mean, we've returned over $2.3 billion over the last couple of years in share repurchases.

We've had 2 consecutive years of raising the dividend.

So we definitely feel like we've returned a significant amount of capital.

As a matter of practice, we don't comment on the levels or timing of share repurchases either in the past quarter or on what we're expecting in the future.

But if we really think about it as trying to be opportunistic for our shareholders, not programmatic and so we'll continue that approach in the future, but I can't speak too detailed about why we did or didn't buy during this last quarter.

Right.

And a primary competitor recently mentioned kind of 3 thematic focus areas for the upcoming tax season.

And number one was the focus more in early-season segment and effect -- and compete effectively in the free segment.

Clearly, you're bringing back RAL 1040EZ was the first time this -- for free was the first time this past year.

Should we anticipate that, that would likely perpetuate?

And that's question one.

And part 2 of it is just taking a step back, what do you see with regard to the competitive environment, you can approach that however you like, for the upcoming tax season?

Thanks, Scott.

So I think your question was do we plan on continuing free EZ as well as Refund Advance?

So Refund Advance is the easy one.

The answer is yes.

We've already announced that, so that will be in the assisted channel.

1040EZ was a program we reintroduced last year.

We had some good success bringing clients in, driving trial to the Assisted brand, and I think it just provides a nice offer for us to bring clients in and then ultimately monetize in future years.

As far as what competition does, obviously, the tax base is highly competitive right now, especially on the DIY side with new entrants like Credit Karma and others.

So we would expect that competition to continue.

That being said, competition was pretty fierce last year, and we were able to outpace the market on the DIY side, gain market share, outpace TurboTax, for example.

So we feel like we're well positioned to do that again next year.

We're focused on continued product innovation being aggressive in this space and having an offer that we think competes effectively.

The next question is from Anj Singh from Crédit Suisse.

The first one, last summer, you guys had focused on developing a strategy around arresting the client decline, fully realizing you share more details on your 2Q call.

We're curious to share -- see if you can share any high-level thoughts on direction of strategy you have in place for fiscal '18.

Is it more about getting flattish volumes in assisted?

Is volume growth in assisted that -- is something that you can try and achieve in '18?

I'm asking because I know in the past, you've been pretty upfront that assisted volume growth wasn't likely in the foreseeable future.

Declining volumes were the bigger focus and arresting those were the biggest focus.

So just trying to get sense of how your targets are evolving there.

What I would say is we obvious had good progress in changing our client trajectory last year.

And at this point, we're planning to improve from that level.

I'm not going to say whether or not that's plus 1 client or 0 or minus 1, but there's definitely an improvement from last year is our expectation on the assisted side.

In DIY, we gained market share.

We outpaced the market.

We had positive growth.

We would continue to do the same on the DIY side as well.

And I guess -- this is Tom, the things that I would add, there's been a lot of things this last year that are things that we can clearly build upon.

So we've talked about the Refund Advance.

We've announced the Watson relationship and enhanced the client experience by drawing them into that experience with a devoted monitor for them.

And that's just a couple of examples of some things that you're going to see us build upon.

Also thought on cost, but also just operational effectiveness.

We made some improvements in efficiency and effectiveness, and we had a senior lead team where every member of the senior lead team is back at what they were doing last season and in many cases, for many seasons before that.

So despite the transition at the CEO office, we've got a pretty incredible degree of stability as we prepare our plan for execution of the upcoming season.

Okay.

That's helpful.

I appreciate it.

As for a second question, I wanted to just ask on the hire of Jeff Jones.

Clearly, his experience in retail, consumer, digital, all speak volumes.

But curious to see if you can share any thoughts on why the board didn't pursue someone with more tax industry experience.

Is it simply a matter of wanting fresh eyes on the business?

Is it something else?

Any thoughts you can share there?

Sure.

Well, just taking it up a little bit of a high level, the board had the opportunity and took the opportunity to do a very disciplined broad search, recruit -- retained recruiter and then looked at all of the attributes.

Given the size of the tax industry, at least as Block plays in at both assisted and digital and again, at the level of expertise that we believe we operate at.

I think you look at all the different attributes, and you touched on a couple of them but proven leadership, the broad retail and digital experience, a comfort level with innovation, probably driving emergent technologies both into the client offering but into your operations.

And I think when you look at us and the available pool of people's to even tax, that probably recedes and some of these other attributes are far more important.

And then you can get up to speed on the nuances of the tax industry and especially when you got somebody of Jeff's kind of proven talent to do that.

Your next question is from Mark Savino from Morgan Stanley.

Just on the expense side with the 4% cost growth in the quarter, wondering if -- I know you guys mentioned you plan to be diligent on cost management, but is that level of growth indicative of what we should expect for the full year?

Yes, thanks, Mark.

I would -- what I would say is we're going to provide more clarity on what our full year kind of margin impact would be given all of our financial plans for this upcoming year on our Q2 call.

I wouldn't read too much into Q1.

It's obviously not a large quarter for us, especially on the revenue side, but we'll provide more clarity once we get to Q2.

Understood.

And then just following up on that a little bit.

You did talk about occupancy costs as being a bit of a headwind.

Given the retail environment is generally weak, do you think -- is there an opportunity for you guys to potentially renegotiate some of your leases across the owned store base?

Yes.

We have about 20% of our leases that come up for renewal every year, typically execute those in the spring in the early summer time frame.

And we've got a lot of people ask us about the weakness in the retail space and if we're benefiting from that.

And the reality is there's some, but not a lot.

I think a lot of that weakness is happening more in the big-box retailers, maybe the more anchored tenants.

And the places that we operate in more strip centers, for example, we're not seeing a lot of weakness.

We're not seeing a high level of inflationary increase.

It's more in the 1% range.

Part of that occupancy cost you saw increase this year, probably the bigger chunk was due to the fact we have more locations on the company side due to buybacks.

So we're moving from franchise to company, and we're now paying the full year of rent expense.

That's probably the bigger chunk.

There's a little bit of just inflationary increase in there as well.

Your next question is from Jeff Silber from BMO Capital Markets.

Actually just a quick follow up from that last question.

Are you still in process of repurchasing franchises on relatively fast scale compared to prior years?

Yes, Jeff.

It's happening at a lower rate.

So you remember, we had peaked at over 300 offices in 2015.

That number is continuing to come down.

I think last year, we did about 170 offices.

Expect that number to come down even more this year, but we are continuing to repurchase franchise locations that make sense.

Okay, great.

And then going back to the discussion on the Refund Advance loan.

I'm just curious, was this your conscious decision just to go with 1 bank?

Are you comfortable that BofI can handle it?

I think if you can give a little bit more color on that decision, that would be great.

Sure.

Well, we're very comfortable that BofI can handle it, and we believe based on our arrangement that we'll have ample funding for the upcoming tax season.

I also think about the other products that we have and just the complexity of having multiple parties involved.

And so we were satisfied to go this route.

Meta was a good partner and played a great role last year, so we have a lot of respect for them but we had this existing relationship with BofI and we're very comfortable with how we've extended it and that it will allow us to do what we want to do with that product offering.

One more.

Are you planning an Investor Day in December like you typically do?

No, Jeff.

We're going to plan to do the same thing we did last year, which is do an extended Q2 call, including slides and additional financial outlook information.

The next question is from Hamzah Mazari from Macquarie Capital.

The first question is just if you could maybe update us on what you're hearing on potential tax reform in terms of simplification of the tax score?

Or anything else you may be hearing on the regulatory front, positive or negative.

Just update us there.

Sure.

Thanks for the question.

This is Tom.

I guess, I'd probably start by saying it's always difficult to predict.

If anything, it's going to happen in the legislative process.

And that's especially true now, frankly, probably varies by the week.

And the only thing that's emerging is that there's definitely a lack of consensus around any single proposal.

But I kind of then go back to what do I know, what do we know at H&R Block.

We know we've been doing taxes for 60-plus years, and the tax code has had all different degrees of complexity and whatnot during that and people have consistently needed help and people have consistently wanted help.

So if something happens here, it's conceivable, I guess.

It could be simpler, but there's no scenario where it will be simple, the U.S. tax code.

And then there are credits under discussion.

There's child care credits.

There are other things like that, that are being discussed.

So it's not just that.

It's like every time we get into one of these reform processes, we can't resist adding to it as well.

So there's certainly those kinds of additions that are being considered.

The other thing is that any time there's change, change equals uncertainty, uncertainty equals a desire for certainty that they're maximizing the refund, maximizing, taking advantage of a new credit or any change in the way the tax law works.

So that can often and will materialize in desire for assistance.

So again, I'd probably finish that comment on these taxes about where I started 60-plus years.

People need help.

People want help.

I guess that's why I finish on individual taxes.

On corporate taxes.

I think it's really important to remember that a 25% or a lower corporate rate would result to substantial reduction to H&R Block's taxes and provide us a considerable tailwind.

And you asked your question more broadly you used the word regulation.

I guess, the other thing that I would say is that we're just not seeing new regulation come out of DC at the pace we have in the past.

And I think we probably benefit from that the way everybody, who has a abroad consumer offering products benefits.

So that's, I guess, that's what I would -- how I'd sum it up.

That's very helpful.

Just a follow-up question, I'll turn it over.

Any sense of how you're thinking about your nontax related revenue?

I guess, it's 15% or so of your book of business.

Is the Block Advisors initiative still alive?

Is it -- how do you think about the Tax Plus strategy?

Or is that something we wait for the new CEO sort of to do -- figure out whether the -- whether there's a focus on nontax related book of business?

Yes.

So Block Advisors would be reported tax prep revenue, just as a clarification, and it definitely is still a focus.

It's now in its third year of having that brand out in the marketplace.

We knew it would be a slow build to get that to a place where it was adding significant contribution to the business, but still positive things happening and more to come on that front.

As far as Tax Plus products, we feel like we made a lot of progress over the last several years from both on a cash perspective as well as best functionality and features in the marketplace.

We include Refund Advance in that set.

Even though it's not directly attributable from a revenue perspective, it brings clients into the door.

They get to experience that product, and we think that's an overall benefit to H&R Block.

Your next question is from Michael Millman from Millman Research Associates.

I guess a couple of questions.

And regarding some of the costs, you said 4% in the first quarter, was wondering however if the $15 million cost benefit from the end of the year isn't somehow included in that?

Or that was a onetime deal?

Related to cost also, both the -- will they be charging the same $32, $34 to do RAs?

And...

Yes.

Go ahead, Michael.

Did you have another part?

I was going to go ahead, but go ahead.

That was that part.

A separate question, might as well get it out.

I'm not sure I heard your answer to Scott's question on Intuit's talk about going after Assisted.

And then you mentioned tax reduction.

What is your actual cash tax rate?

Yes, we've got a lot of questions, so we'll try to take these one at a time.

The first one on expenses.

So the $15 million -- so we reduced expenses a significant amount last year.

We view most of that expense reduction to be essentially permanent in nature.

There was $15 million approximately of benefit that we got last year that we don't expect to recur in FY '18.

So that's the $15 million.

So part of that reduction last year will be coming into the P&L as essentially a headwind or increase in expense over the next 4 quarters.

So that's kind of that piece.

As far as BofI and what we're paying them, we're not sharing the specific details at this point.

At the end of the day, the key number to think about is what is the total amount we're spending in origination cost to offer the Refund Advance program.

That's both the combination of what we're paying on a per loan basis as well as the total volume of loans that we're giving out to our customers and then ultimately how many customers we're driving in as a result of offering that product.

We feel like we're in a good place but we're not sharing specific details on each of those buckets at this point.

Yes, I'll jump in.

On Intuit, there really isn't anything new to the industry trying to have various hybrid models or have assisted as part of DIY.

We expect that to continue frankly, especially in the light of the fact that you saw even less than half of the 70 to 90 basis points of shift we've seen in the prior 2 seasons.

I'd just focus, I think Block for a long time now has been talking about and I think is well positioned to serve our customers anywhere, anyhow, anyway they want.

And we've got the experience of 70,000-plus tax pros to provide and have ample base to provide any assisted whether that's on its own or in a blended fashion.

And we look forward to continuing to bring those offerings forward and enhance them.

And so we'll continue to fare quite well, it's our belief, in that space.

And back to Tony.

Yes.

So then I think, Michael, your last question was on cash taxes versus essentially GAAP taxes.

Our effective tax rate last year is around 33%.

Our cash taxes were less than that.

We've put some things in place that we haven't fully realized from a GAAP perspective.

Obviously booking some provisions along with those benefits, so it is less than our 33% of our effective tax rate.

So a 25% tax rate.

You wouldn't get the difference between that and the 33% in effect?

Yes.

Well, first of all, there's state taxes implied in the 33%, so that's another factor to take into effect.

But I mean, part of the difference between the cash and the GAAP basis is some timing and things that are yet to be realized.

So there's obviously a lot of complexity that go into exactly what the changes are from a corporate perspective before we'd realize what the full benefit would be.

I think Tom's point is that anything south of 25% would, and really under any scenario, would be a positive for H&R Block, definitely from a GAAP perspective but even from a cash perspective.

That was our last question at this time.

I will turn the call back over to the presenters.

All right.

Thanks, everyone, for joining us.

This concludes today's call.

This concludes today's conference call.

You may now disconnect.