H&R Block, Inc. (HRB)

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H&R Block (HRB)

Q2 2012 Earnings Call

December 01, 2011 4:30 pm ET


Jeffrey T. Brown - Chief Financial officer and Senior Vice President

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

Derek Drysdale - Director of Investor Relations


Michael Millman - Millman Research Associates

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

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

Vishnu Lekraj - Morningstar Inc., Research Division

Kartik Mehta - Northcoast Research

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



Good afternoon. My name is Kristen, and I will be your conference operator today. At this time, I would like to welcome everyone to the H&R Block Second Quarter Earnings Call. [Operator Instructions] At this time, I'd like to turn the call over to our host, Mr. Derek Drysdale, Director of Investor Relations. Please go ahead.

Derek Drysdale

Thank you, Kristen. Good afternoon, everyone, and thank you for joining us today. Bill Cobb, our President and CEO; and Jeff Brown, our CFO, will review our second quarter results. Before we begin, I'd like to remind everyone that today's remarks may 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 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 2011 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements.

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

William C. Cobb

Thanks, Derek, and good afternoon, everyone. Next tax season is quickly approaching, and we believe we've developed the right strategy for continued market share growth in tax season 2012 and beyond. Today's announcement by Intuit that it now needs live chat tax advisors to grow TurboTax validates our confidence in the assisted tax business. We look forward to sharing our plans and outlook with you next Thursday at our Investor Conference in New York City. We hope all of you can make it.

Now today's call will be centered on our second quarter results. Earlier, we announced a net loss from continuing operations of $0.41 per share. As we shift our focus to growing clients and market share in our core tax business, we've taken significant steps to dispose of non-core assets, such as RSM McGladrey and ExpressTax. While this has led to onetime charges in each of the past 2 quarters, we're essentially clearing the decks for long-term earnings growth and higher margins.

On an adjusted non-GAAP basis, our second quarter net loss was essentially flat to last year, and Jeff will provide more details on this later in the call. In more recent developments, I am very pleased to announce that we closed on the sale of RSM yesterday. Jeff will walk you through the details of the transaction, but the key takeaway is that the final terms and conditions were consistent to those previously announced in August. I'd like to wish our friends at McGladrey the very best. For 12 years, they were our partners and worked by our sides. I'm confident that these outstanding professionals will prosper in the years ahead.

Another exciting development this past quarter was our renewed partnership with Wal-Mart, the largest retailer in the country. We will operate in approximately 300 offices this year. And while this does not materially impact our fiscal 2012 results, we certainly hope to grow this partnership in the coming years.

Now before I turn the call over to Jeff, I'd like to take a moment to address Sand Canyon, our discontinued mortgage subsidiary. Sand Canyon saw increased third quarter -- third-party activity last quarter. In light of this activity, I believe it was prudent of them to increase the reserve for estimated losses on rep and warrant-related claims. It's important to note that as a subprime originator, Sand Canyon's reps and warranties were more limited than would be typical of Alt-A or prime originations. Because Sand Canyon is no longer in the business of originating or servicing loans, it is under no pressure to maintain any ongoing mortgage relationships. This means Sand Canyon has and will continue to review each claim on a loan-by-loan basis and will only pay valid claims.

I want to emphasize 3 main points. First, the additional provision announced today does not change how we think about Sand Canyon's exposure to rep and warrant-related claims. This is a critical point and I hope all of you hear. Whether or not claim activity remains at elevated levels in the near future, we believe Sand Canyon's financial position is sufficient to satisfy all valid claims.

Second, Sand Canyon is a separate legal entity from H&R Block. We believe our legal position is very strong in any potential corporate veil-piercing arguments. In other words, what happens at Sand Canyon stays at Sand Canyon. We're confident that H&R Block's future will not be impacted by rep and warrant claims of Sand Canyon.

And finally, none of this activity changes how we think about capital allocation. In fact, I am pleased that we're able to take advantage of the market volatility this past quarter to repurchase and retire more than 4% of outstanding shares at an average price of $13.61 per share.

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