H&R Block, Inc. (HRB)

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H&R Block Inc. (HRB)

F1Q2011 Earnings Call Transcript

September 2, 2010 4:30 pm ET


Derek Drysdale – Director, IR

Alan Bennett – President & CEO

Jeff Brown – Interim CFO

Jim Ash – Interim General Counsel


Scott Schneeberger – Oppenheimer & Co.

Michael Millman – Millman Research Associates (Soleil)

Bill Carcache – Macquarie Research Equities

Vikram Malhotra – Morgan Stanley



Good day, and welcome to today’s web conference. During today’s event for those dialed into the audio bridge, all lines have been muted to prevent background noise. This event is being recorded. There will be a question-and-answer session after the formal comments.

At this time, we would like to welcome everyone to today’s web event titled, H&R Block Q1 Earnings Call. At this time, it is my pleasure to turn the floor over to Mr. Derek Drysdale. Mr. Drysdale, you have the floor.

Derek Drysdale

Good afternoon, everyone. Thank you for joining us to discuss our fiscal 2011 first quarter results. Presenting on the call today are Alan Bennett, President and CEO; and Jeff Brown, our Controller and Interim Chief Financial Officer. Other members of our senior management team will also be available during the Q&A session.

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 those relating to matters that are not historical facts and 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, and as a result, actual outcomes and results could materially differ.

Please see the Risk Factors included in our most recent periodic reports and other filings with the Securities and Exchange Commission. H&R Block undertakes no obligation to publicly update such risk factors or forward-looking statements.

After our prepared remarks, we will open the call up to Q&A. We ask that you limit your query to one initial question and then one related follow-up if needed.

With that, I’ll now turn the call over to Alan.

Alan Bennett

Thank you, Derek, and thanks to all of you who have joined us on the call today. Earlier today we reported our first quarter net loss from continuing operations improve to $0.36 per share prior to a $0.04 per share charge for severance cost related to a recent restructuring.

These results were generally in line with our expectations but they don’t tell too much given the seasonality of our businesses and the fact that we make almost all of our earnings during the last four months of the fiscal year. However, our results do reflect some progress in reducing embedded cost from our company and I believe with the right people in place, we can accomplish much more in the future.

Jeff will go through the details of our quarterly results later on the call. One area that appears to be causing concerns in the market is the issue of contingent loan repurchases obligations arising out of our former mortgage business; an area where we are receiving several questions from investors and it seems to be subject to some speculation that is not based on fact.

Before Jeff provides that detail, I would just note that we made no change to our aggregate reserve this quarter. Recent market speculation regarding potential losses does not relate back to any facts that we have observed. We have not seen any adverse change in our level of claimed payments.

In fact, since we established a reserve of $243 million in the spring of 2008, we have not added to our aggregate reserves. Of course, it is always difficult to prove the absence of a negative and ultimately time will resolve this issue. The bottom line is that we believe our financial reserves here are adequate.

Now, I’d like to make a few opening comments regarding H&R Block in terms of our overall positioning. As most of you know, I served as Interim CEO in 2007 and 2008. My prior role here was primarily to reposition the company by shedding our subprime mortgage origination and servicing business as well as our brokerage operations.

Both of these businesses were losing money, were heavy users of cash and were non-core to our primary business of taxes. With the sale of these operations, we were also able to reduce our overall debt and restore our balance sheet to very healthy levels.

Since that time, I have served on the Board of Directors, so I have a good understanding of our current situation and the work that’s needed to change the trajectory of our recent client losses. I chose to return as President and CEO in this permanent role because I believe in the future of this company, our clients and our associates. We have a very strong balance sheet and consistently generate significant free cash flow.

We are fortunate to have one of the highest brand awareness scores in the world and our biggest asset continues to be our more than 100,000 highly trained tax preparers who collectively reflect the highest quality standards of expertise and professionalism.

I am optimistic about our company and our prospects for increasing revenue and earnings in the future. In July and August, I’ve spent a significant amount of time in the field with our franchisees and our field associates. I have had the opportunity to reacquaint myself with many of our talented experienced leaders, as well as meet some of our new recruits. I am pleased but not satisfied with the progress we are making in preparation for the upcoming tax season, as we have much more to do to be fully ready.

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