H&R Block, Inc. (HRB)

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H&R Block (HRB)

Q3 2011 Earnings Call

March 09, 2011 4:30 pm ET

Executives

Phil Mazzini - Retail Tax President

Jason Houseworth -

Derek Drysdale -

Kathy Barney - Chief Executive Officer of H&R Block Bank and President of H&R Block Bank

James Ash - Interim General Counsel

Alan Bennett - Chief Executive Officer, President, Director and Member of Finance Committee

Jeff Brown - Chief Financial Officer and Principal Accounting Officer

Analysts

Michael Millman - Millman Research Associates

Vance Edelson - Morgan Stanley

Michael Turner

Vishnu Lekraj

Scott Schneeberger - Oppenheimer & Co. Inc.

Grant Keeney

Bill Carcache - Macquarie Research

Michael Grondahl - Northland Securities Inc.

Presentation

Operator

Good day, and welcome to today's Web Conference. [Operator Instructions] At this time, we'd like to welcome everyone to today's web event titled H&R Block's Fiscal Year '11 Q3 Earnings Call. It is my pleasure to turn the floor over to Mr. Derek Drysdale. Mr. Drysdale, you have the floor.

Derek Drysdale

Thank you, Kristen. Good afternoon, everyone, and welcome to our Fiscal 2011 Third Quarter Conference Call. I'm joined by Alan Bennett, our President and CEO; Phil Mazzini, President of Retail Tax Services; Jason Houseworth, President of Digital Tax Services; and Jeff Brown, our Chief Financial Officer. In conjunction with today's call, we have posted our accompanying press release and slide presentation to the Investor Relations website at hrblock.com.

Before we begin, I'd like to remind everyone that today's remarks will include forward-looking statements as defined under the Securities Exchange Act of 1934. 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 the press release we issued earlier this afternoon, our Form 10-K for fiscal 2010 and our other SEC filings.

H&R Block undertakes no obligation to publicly update such risk factors or forward-looking statements. Some of the numbers today we will reference are presented on a non-GAAP basis. We have reconciled the comparable GAAP and non-GAAP numbers in today's press release. With that, I will now turn the call over to Alan.

Alan Bennett

Thank you, Derek, and good afternoon, everyone. As you all know, this tax season started off very slow across the industry. Millions of taxpayers were unable to file their returns prior to February 14 due to IRS delays in processing certain forms. As a result, the first peak of tax season shifted well into February. We estimate total tax filings at the IRS through February 28 were down about 2%, and believe we've gained share both in the retail and online markets. By year end, we estimate total filings at the IRS will be about flat to last year due to sustain high levels of unemployment. We are now more than halfway through the tax season, and I'm very pleased with our performance and execution to date.

As you recall, I articulated my top priority heading into this tax season was to stem the significant early season client losses we experienced in each of the last two seasons. Then on December 23, we lost our access to the important RAL product. And as we began the 2011 tax season, we faced the marketplace where our competitors were aggressively advertising their RAL availability to our disadvantage.

Despite that challenge, the growth initiatives that we implemented had proved to be effective and our execution is improved considerably. As Phil will explain in more detail, our free federal 1040 EZ offer and a new and more compelling marketing message served to drive more traffic into our offices. For existing clients, our retention to the brand and client satisfaction scores have improved over last year. Our level of new H&R Block client growth is the largest we've seen in at least six years.

In Retail, total returns prepared through February 28, grew 3.2% from last year.

With respect to our Digital business, as Jason will discuss in more detail, we fulfilled our pre-season promise is simplify our website, which has improved navigation and ease of use. We've leveraged our free offer to drive new clients and have improved our overall digital conversion rates. These actions have been effective through February 28, as we have had nearly 13% growth in total digital returns prepared, including growth of more than 30% in the strategically important online category.

As expected, the decline in our retail net average charge, or NAC, has improved by 90 basis points since February 15. Year-to-date, through February 28, the NAC declined by 7%, primarily due to the success of our free federal 1040 EZ offer. Also contributing to the NAC reduction through February was the loss of some Form 1040A clients due to the lack of a RAL product.

Excluding our 1040 EZ products from both years, our NAC actually increased by nearly 3%. As we enter into the second half of the season, we should see continued and gradual improvement in the NAC as we serve clients with more complexity, and due to the discontinuation of our EZ promotion which ended February 28.

However, primarily due to the strong success of the EZ promotion, we expect a full-year decline in the NAC of two to four percentage points. The EZ promotion was a targeted initiative, which we were able to do because of our financial strength, our scale and our ability to aggressively message this offer. We firmly believe this program will provide a pipeline of new filers to the H&R Block brand for future years, allowing us to monetize these clients as they transition to more complex returns.

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