H&R Block, Inc. (HRB)

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H&R Block, Inc. (HRB)

F2Q2011 Earnings Call Transcript

December 7, 2010 4:30 pm ET

Executives

Derek Drysdale – Director, IR

Alan Bennett – President and CEO

Phil Mazzini – Retail Tax President

Jeff Brown – CFO

Jim Ash – General Counsel

Kathy Barney – President, H&R Block Bank

Analysts

Grant [ph] – FTN Midwest Research

Scott Schneeberger – Oppenheimer

Michael Millman – Millman Research Associates

Vance Edelson – Morgan Stanley

Vishnu Lekraj – Morningstar

Mike Turner – Compass Point

Presentation

Operator

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 Fiscal Year '11 Q2 Earnings Conference 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, and thank you for being with us today. I am joined by Alan Bennett, our President and CEO; Phil Mazzini, our President of Retail Tax services and Jeff Brown, our Chief Financial Officer. Other members of our senior management team will be available during the Q&A session.

In conjunction with today's call, there is an accompanying press release and slide presentation, which are posted to the Investor Relations section of our website at hrblock.com. Before we begin, I'd like to remind everyone that comments made today may 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 risk factors, uncertainties and assumptions that are difficult to predict, and as a result, actual outcomes and results could differ materially. 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

We do have lot to cover today in our prepared remarks, so we anticipate this call will go beyond one hour, following our remarks we will open up the call to questions.

I'll now turn the call over to Alan.

Alan Bennett

Thank you Derek, and thanks to all of you who have joined us today. Earlier we reported a second quarter net loss from continuing operations of $0.35 per share, a $0.03 improvement to the prior year. Given the seasonal nature of our business and that we generate all of our earnings in last four months of the fiscal year, our second quarter results generally do offer much color on our full year results.

In recent months, Jeff, Derek and I have met with many investors and we clearly realize that the outlook for both settlement products for core tax business and rep and warrant related repurchases obligations for our discontinued mortgage subsidiary are areas of concern and speculation in the marketplace.

Before we get into plants for the upcoming tax season, I will briefly address both. First remain in negotiations and litigation with HSBC our provider of financial settlement products. As a result we are absolutely limited in what we can say at this time. This is a complex situation and we are working hard to have refund anticipation loans available this season.

While we can speculate as to how this matter will ultimately be resolved, we currently see two possible outcomes. The first possible outcome is that refund anticipation loans or RALs will be available, but the economics for us would be lower than previously anticipated.

Under this outcome, while RAL margins would decline, consumer demand for this product would be fulfilled. Whether the availability of a RAL product would impact our tax return volumes would be heavily influenced by the competitive landscape of financial products.

A second possible outcome is that a RAL provider will not fund refund anticipation loans, but we will still be able to offer refund anticipation checks or RACs to our clients. Under this scenario, the economic impact of clients switching from RALs to in-house RACs is relatively neutral to us. However, it is difficult to estimate the overall impact to H&R Block's tax return volumes, which could be significant if the playing field is uneven and competitors have RAL.

Some of this potential client loss may be offset by the success of our product promotions and advertising as well as the limited RAL product offering in the overall marketplace. Due to this uncertainty, we cannot determine what the earnings impact might be at this time. Clients do value our no cash out-of-pocket and faster access to funds benefits associated with our refund anticipation checks as well as our industry leading H&R Block Emerald Card. We are diligently pursuing all available avenues and we will provide timely update as this matter concludes.

Moving to our discontinued mortgage business, Sand Canyon has not seen any adverse change in the level of its claims or payments. In fact, new claim activity during the second quarter was just $21 million and rep and warrant-related losses were approximately $3 million. Sand Canyon's reserve at October 31, 2010 was $185 million and we have not added to aggregate reserves since the initial reserve of $243 million was established in the spring of 2008. Later on in the call Jeff will provide a broad overview of Sand Canyon to address many of the questions we have received from shareholders during the quarter.

With that update, I'd like to address the external market environment. As you know, we have not been immune to the sluggish economy and it continues to present us challenges. At RSM McGladrey the accounting, consulting and tax industry as a whole remains somewhat soft. Billable rates and hours remain under some pressure within the industry. While these forces are pressuring McGladrey's top line, we still expect to substantially grow earnings and margins at McGladrey this year, primarily due to the lack of one-time charges that we incurred last year and improved cost controls.

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