H&R Block, Inc. (HRB)

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H&R Block (HRB)

Q2 2013 Earnings Call

December 06, 2012 8:15 am ET


Derek Drysdale - Director of Investor Relations

William C. Cobb - Chief Executive Officer, President, Director and Member of Finance Committee

Jason Houseworth - President of U.S. Tax Services

Susan P. Ehrlich - President of Financial Services

Gregory J. Macfarlane - Chief Financial Officer

Amy McAnarney - President of Retail Client Services


Michael Millman - Millman Research Associates

Kartik Mehta - Northcoast Research

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Thomas Allen - Morgan Stanley, Research Division

Vishnu Lekraj - Morningstar Inc., Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Hale Holden

Efraim Levy - S&P Equity Research

Christopher J. Marangi - Gabelli & Company, Inc., Brokerage Arm

Steven J O'Brien - Jefferies & Company, Inc., Research Division

Adam Liebhoff

Charles Stedman Garland - Hamlin Capital Management, LLC


Derek Drysdale

Good morning, everyone. On behalf of the entire H&R Block management team, it's my pleasure to welcome all of you here today, as well as all those listening in on the webcast to our 2012 investor conference. Before we get started, we do have a few housekeeping items to get out of the way. First, earlier this morning, we released our fiscal second quarter results for 2013. Some of the figures in that release were presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP figures in the schedules attached to the press release. You can find both the release and the schedules on the Investor Relations website at hrblock.com. I'd also like to remind everyone that today's presentation and various comments made in connection with it will include forward-looking statements as defined under the securities laws.

Such forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions, and our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2012 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. Now shortly after this morning's presentations conclude, we'll post the slides to our IR website. And as a reminder, our webcast will be available on our website around 1:30 Eastern today.

To give you a sense of today's agenda, our opening presentations will run until about 9:30, give or take a few minutes, and then we'll take about a 15-minute break. We expect Q&A to begin around 11 Eastern, and following Q&A, we'll head to lunch in the Rits Salon [ph], which is right out the door to your right. We hope you'll be able to join us for lunch, as there, you'll have an opportunity to meet with various members of our senior management team. And one last note, if you haven't found them already, which I'm sure most of you already have, the restrooms are also out the door, just to your right, past the registration table. So again, welcome, everyone. It's our pleasure to have you here today. We hope you enjoy the presentations. And with that, let's get started.


William C. Cobb

Good morning, everybody. Thanks for attending our 2012 investor conference here in New York City. Our goal today is to ensure you leave here with a thorough understanding of how we see the industry, where we see opportunities going forward, how we plan to capitalize on those opportunities and ultimately, why we believe HRB is a good investment.

Now I've spent a lot of time thinking about the company, obviously, and the way I look at it is we are trying to restore H&R Block as a great company. It's been a great company for many years. It did lose its way for a while, and my goal and my management team's goal is to restore it to be a great company. In order to do that, we need to understand where we've been, where we are today and importantly, where we're heading.

And we have a great starting point, and that is the guidance I get on a regular basis from our co-founder, Henry Bloch, 90 years young, who every time he sees me, he says, "Bill, the client always comes first. Focus on quality service, prepare error-free returns and clients will return again and again." His simple formula is the basis for everything you will see today. Now if we think about our journey that we're undertaking, and I've tried to capture this in a really simple way.

Phase 1 was when Mr. Bloch and his brother, Richard, ran the company in the early days and for many years thereafter. It was a family-run business, had a deep knowledge of the tax business, and everything was centered on the client. The company then moved into a phase in the 90s and early 2000s where outside management came in, where diversification was the watch word. H&R Block had a mortgage business, a broker-dealer business, an accounting firm. And, yes, a tax business. That was primarily an assisted business with some financial service, but it paid very little attention to digital.

Essentially, H&R Block was a holding company. Today, we moved the company to a much simpler approach. We are centered on tax preparation. We are a tax company that also offers financial services. And essentially, we are now an operating company. Where that leaves us is an operating company that is the largest tax preparer in the world. Over 12,000 offices worldwide, staffed by nearly 100,000 tax professionals. In the U.S., we prepare about 1 in every 6 tax returns.

We have 98% brand awareness. We're the only preparer capable of serving clients anywhere, any way and any time they choose. We offer complementary tax and financial services. For example, our Emerald Card is the third largest U.S. general-purpose reloadable debit card. And finally, we have a global footprint. We have well-established operations in Canada and Australia, and we just entered Brazil and India. So that is us and some.

Now what I thought I would do before we move forward is to look back over the last 12 months. We were able to make real progress in a number of areas. First, we grew clients and share. We outpaced our largest competitors in both assisted and digital. We have set the tone on improving service and the client experience. We grew the number of Emerald Cards issued and the deposits loaded on to those cards. We delivered on what I believe is a shareholder-friendly capital allocation strategy. And sixth, we laid the foundation for significant EPS growth in fiscal year 2013 and beyond.

So let's take a look at each of these. Our top priority this past year was to grow clients. We served a record 25.6 million clients worldwide and just the last 2 years, we have grown the number of clients by 10%. We also increased our market share in the U.S. by over 30 basis points to 16.4%. We also outpaced our largest assisted competitors, taking share over the last 2 years from independents by over 100 basis points and improving our own share by 70 basis points. Similarly in digital, over the same time frame, we outpaced our largest digital competitors by taking share from both Intuit and TaxACT, while growing our own share by over 70 basis points.

Our third accomplishment was an important one, to set the tone on improving service and the client experience. We had a significant improvement in our key metrics. Assisted client satisfaction was up over 500 basis points to 87%. The digital Net Promoter Score was also up over 500 basis points, and awareness that we have a digital offering rose plus 11 points to 62%. And we continue to drive industry-leading innovation through platforms like Block Live and a number of mobile applications, meeting our expectation and also surpassing the expectations of some industry experts.

I'd like to show you a quote from a keen observer of the tax business, the CEO of Intuit, Mr. Brad Smith, who said on September 18 in Intuit's own Investor Day, "H&R Block is a wonderful competitor. What I think they did really well last year is they were fantastic in terms of connecting with the hearts and minds in their marketing message. I thought they had an interesting set of new technologies, which they came out with." We thank you, Brad. And Mr. Turtledove, our Head of Marketing sends a special thanks to you for the shout out for his marketing efforts. Now fourth, we also grew the number of Emerald Cards we issued and how much money was loaded on to those cards. By the way, they're doing construction next door, so I'll try to shout over them.

Last year, we reached almost 3 million Emerald Cards issued, and we loaded almost $10 billion worth of deposits on to those cards. We also delivered on what I believe is a shareholder-friendly capital allocation strategy. Since I became CEO in May of 2011, and if you count the dividend we announced that we will pay on January 2, we will have returned almost $900 million to shareholders in the form of share repurchases and dividends. And finally, we have laid the foundation for significant EPS growth in fiscal year '13 by making some tough decisions.

We have rationalized our cost structure and refocused our organization on the client experience. Plus our efforts here will lead to an $85 million to $100 million increase in our earnings in fiscal year '13. We discontinued the free RAC initiative we will charge for this product this year. We resolved a lot of litigation, and we shed noncore assets like McGladrey and EXPRESSTAX. In the end, all of these company -- all of these efforts will lead to a company of higher margins, which Greg Macfarlane will speak to later. So that's looking back.

Now I want to look ahead, but I want to look ahead from the CEO's chair, if you will, not only in 2013 but beyond. And I want to talk to you about what I'm calling shifts in our business mindset that I'm driving throughout the system and throughout the company. Because this is a company that has done business a certain way for a very long time. And we do want to build on off that effort, but we also want to evolve our business model in the following ways: tax plus, global, year-round and consistent service quality. So let me tell you what I mean by each of these.

Tax plus. We are a company that is centered on tax preparation. That is what we're known for. That is what we're best-in-class at doing and we want to continue to do that legacy by being a client-centric company that continues to serve tens of millions of clients through tax-preparation. But we also want to have an emphasis on the services that we can provide to these clients. And you will hear Susan Ehrlich talk later this morning about the variety of ways that financial services and products can serve our client base. That's what we mean by tax plus.

Second, global. The company has been very U.S.-centric. We need to become a global player. And ironically, international is our fastest-growing business with $233 million in revenue in fiscal year '12. We have well-established international markets. Our largest is Canada where we had a 10% share in fiscal year '12, and where we grew returns by 6% and revenues by 10%. In Australia, where we just completed our tax season and announced our results earlier this morning, we grew returns by 8%, revenue by 11% and share to 5.9% in fiscal year '13. Those are '13 numbers.

We're also looking to expand our global footprint with small low-risk investments focused on profitable and sustainable client growth. The world is not ending, I don't believe, by the way. It's sort of with all the noise in the background.

Now earlier this year, we entered Brazil. Brazil has a total population -- I can just talk really loud so -- of 200 million people, and at this point, the total tax filers of 25 million. And this number of filers should double over the coming years. We also entered India with a total population of over 1 billion people. And a total tax filer base of 35 million. Now this number of filers is going to explode in size over the next 5 to 10 years. Now we'll continue to carefully evaluate additional expansion opportunities but do it in a way that is deliberate, focused and purposeful.

Next, year-round. Taxes have become a year-round focus. We increasingly need to provide tax support to our clients year-round, and you will hear from Jason Houseworth in a little while about an initiative we call My Account, which is going to enable people to access their tax information on a 24/7 365-day basis. As we look to extend our financial products usage, we'll also need to be able to support products like our Emerald Card year-round. Plus, there is a tailwind coming, and that's the Affordable Care Act here in the United States, and the advice people are going to need year-round on this very confusing subject. Jason will expand on this in a few minutes. But this is not as substantial a shift as you may think.

Today, we already have about 45% of our offices in the U.S. open year-round. And we will build on that number, but we will do it deliberately by extending this season with products like Emerald Advance, which we launched 2 weeks earlier this year before Thanksgiving and before Black Friday. So stay tuned here.

And last, consistent service quality or what we're calling in the company, CSQ. CSQ is about our zeal for delivering consistent service quality in all of our products and services to give our clients more than they expect, anywhere, anyway and anytime they would like it. We need to drive CSQ in everything we do, whether it's Emerald Cards, mobile initiatives, online and digital offerings, and of course, at the tax desk in our 12,000 locations worldwide. So those are some of the shifts in our business mindset that we are driving.

But there are 2 other critical responsibilities that I believe a CEO must take on. First, setting the tone at the top. With a company that has had a revolving door of CEOs, this needed to be a deliberate and thoughtful exercise to determine what kind of company we wanted to be. We spent a lot of time on this effort, and I put my personal stamp on this. We have taken this message out to the system the last couple of months. It's on our badges. It's on our website. It's everywhere, and it's taking hold.

First of all, our purpose, the reason we get up in the morning. And the words we settled on were, we look at your life through tax and find ways to help. This was an important statement for us because I wanted this to be something only H&R Block could say. That's what we do at Block. We look at life through tax, and reflecting the humble ways of Henry Block, we simply find ways to help our clients. This purpose has resonated very well in our company.

Next, our vision. To be the leading global consumer tax company bringing tax and related solutions to clients year-round. You can see the shifts that I talked about earlier embedded in this vision. We are about tax, consumer tax. We're about global, and we want to bring tax and related solutions, or tax plus, to clients and we will do this year-round. That is our vision. So we now have our purpose that describes us, our vision that leads us. But we also wanted to define how we want to act our values, and we have settled on a very simple statement, we do the right thing. This is our bedrock for how we want to operate in our offices, our call centers, in our client support center in Kansas City, in India. Wherever we operate in the world, we want to be guided by this simple statement: we do the right thing. And what we do the right thing really means is we believe in our people, we take care of our clients and we deliver for you, our shareholders.

Now laying out these guideposts may be the most important thing I've done to date. I believe we have crafted these words appropriately, and I believe they truly reflect what and who we are at H&R Block. And finally, I now have the right leadership team in place here at Block. I have a set of executives I'm very proud of. They are a combination of people from the outside and people from within the company. And they are meshing beautifully as you will see throughout the day.

The first executives I will introduce are our functional leaders. Kush Saxena is our Chief Strategy Officer. He joined us 9 months ago from McKenzie right here in New York. He is a brilliant young strategist who has served multiple Fortune 500 companies in high-tech, financial services, retail and health care. He has led our strategy work, much of which you will hear about today.

Our Chief People Officer, Aileen Wilkins, is a veteran of H&R Block. Aileen leads the strategies that make the most of our talented associates, including workforce planning, talent management, organizational capabilities and company culture.

Tom Gerke, Chief Legal Officer, brings years of executive and legal experience to the company. He recently served as Executive Vice President for CenturyLink, President and CEO of Embarq, and General Counsel for Sprint. To have an attorney of Tom's stature join us is a huge plus for this company.

Next, our Chief Information Officer, Rich Agar. Rich runs all of our strategic technology and operational initiatives that support our retail and digital tax businesses. His background in business operations, Six Sigma and global enterprise technology has been instrumental in improving quality and operational excellence at H&R Block. Prior to that, Rich spent 23 years at GE.

And of course, many of you know our Chief Marketing Officer Robert Turtledove, who I've known for 25 years. I have tremendous faith in him as he leads our marketing efforts with brand, client acquisition, research and field marketing strategies and initiatives. And these leaders are complemented by people who are driving our businesses.

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