H&R Block, Inc. (HRB)

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H&R Block (HRB)

Q4 2011 Earnings Call

June 23, 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

William Cobb - Chief Executive Officer, President and Director

Robert Turtledove - Chief Marketing Officer and Senior Vice President

Jeff Brown - Chief Financial Officer and Principal Accounting Officer

Analysts

Vishnu Lekraj - Morningstar Inc.

Sloan Bohlen - Goldman Sachs Group Inc.

Michael Millman - Millman Research Associates

Michael Turner - Compass Point Research & Trading, LLC

Michael Turner

Kartik Mehta - Northcoast Research

Scott Schneeberger - Oppenheimer & Co. Inc.

Michael Grondahl - Northland Securities Inc.

Presentation

Operator

Good afternoon, my name is Zetania, and I will be your conference operator today. At this time, I would like to welcome everyone to the H&R Block Fourth Quarter and Fiscal 2011 Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to today's host, Mr. Derek Drysdale, Director of Investor Relations. Sir, you may begin your conference.

Derek Drysdale

Thank you, Zetania. Good afternoon, everyone, and thank you for joining us. Today, Bill Cobb, our President and CEO; and Jeff Brown, our CFO, will review our fiscal 2011 results. Several other executives including Phil Mazzini, President of Retail Tax Services, Jason Houseworth, our President of the Digital Tax Services and Kathy Barney, President of H&R Block Bank will be available during the Q&A session.

In conjunction with today's call, we have posted the press release and slide presentation to the Investor Relations website at hrblock.com. We also plan to file our 10-K for fiscal 2011 later this afternoon.

Before we begin, I'd like to remind everyone that today's remarks may include forward-looking statements as defined under the Securities and 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 could learn more about these risks in today's press release, our Form 10-K for fiscal year 2010 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. Finally, I'd like to remind everyone that some of the numbers we reference today are presented on the non-GAAP basis. We have reconciled the comparable GAAP and non-GAAP numbers in today's press release. At this time, I'd now like to turn the call over to Bill.

William Cobb

Thank you , Derek, and good afternoon, everyone. It's a pleasure to be here today on my first earnings call as H&R Block's CEO.

Earlier today, we announced fourth quarter and fiscal 2011 results and I'm pleased to say that we have a lot of momentum going into fiscal 2012. Today, I'll talk a bit about that momentum. I'll also give you a sense of what I've learned during my first 6 weeks on the job. Let's start with our fiscal 2011 results.

First, total returns prepared worldwide were up nearly 6% to 24.5 million. In the U.S., we grew returns by 6.5%, our best growth since 2001. We estimate that industry-wide IRS filings grew about 1%, so that we gained about 80 basis points of share in the U.S.

In retail Tax Services, Phil and his team drove much stronger results than many expected. We gained more than 500,000 clients, and we estimate that we gained 60 basis points of share in the assisted category. We also showed significant improvement in key leading indicators, including client retention, satisfaction and new client growth. So how did we grow share?

In retail, our growth this year was led by improved execution, client service and aggressive client acquisition programs, such as free federal 1040EZs and Second Looks. We also capitalized on industry-wide consolidation to convert competitive returns to H&R Block.

I'm particularly excited about the success of the free federal 1040EZ program. Introducing young filers to the benefit of assisted tax-preparation is a critical component of our long-term growth strategy.

Remember, the majority of these filers migrate to more complex tax returns within 2 years. Thanks to the program, we now have a solid pipeline of new and younger clients and the word of mouth referrals they generate. Expect more of this kind of innovative marketing in 2012.

In digital, our share gains were the result of improved marketing, the redesign of our website and product simplification. Smart advertising and a clear call to action drove customer acquisition and trial. Our website turned visitors into clients and an improved product experience help clients achieve completed returns.

As a result, our client base increased by nearly 800,000, led by online growth of nearly 29%. Thanks to the fabulous work from Jason and his team, we estimate that we gained 90 basis points of market share in online and about 60 basis points in software.

In financial services, we leveraged H&R Block Bank this year to offset the loss of RALs. The bank processed nearly 6 million RACs and approximately 2.3 million Emerald Cards with $8 billion in total deposits.

Finally, on the international front, total returns in Canada and Australia grew about 1%. International revenues increased about 8% to $206 million, largely due to favorable exchange rates. All together, our adjusted non-GAAP net income from continuing operations was essentially flat to last year, and we generated free cash flow of $450 million.

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