H&R Block, Inc.
Q2 2013 Earnings Call Transcript

Published: 7 Dec 2012

Derek Drysdale:

Good morning, everyone. On behalf of the entire H&R Block management team, it's my pleasure to welcome all of you here today, as well as all those listening in on the webcast to our 2012 investor conference. Before we get started, we do have a few housekeeping items to get out of the way. First, earlier this morning, we released our fiscal second quarter results for 2013. Some of the figures in that release were presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP figures in the schedules attached to the press release. You can find both the release and the schedules on the Investor Relations website at hrblock.com. I'd also like to remind everyone that today's presentation and various comments made in connection with it will include forward-looking statements as defined under the securities laws. Such forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions, and our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2012 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. Now shortly after this morning's presentations conclude, we'll post the slides to our IR website. And as a reminder, our webcast will be available on our website around 1
William C. Cobb:

Good morning, everybody. Thanks for attending our 2012 investor conference here in New York City. Our goal today is to ensure you leave here with a thorough understanding of how we see the industry, where we see opportunities going forward, how we plan to capitalize on those opportunities and ultimately, why we believe HRB is a good investment. Now I've spent a lot of time thinking about the company, obviously, and the way I look at it is we are trying to restore H&R Block as a great company. It's been a great company for many years. It did lose its way for a while, and my goal and my management team's goal is to restore it to be a great company. In order to do that, we need to understand where we've been, where we are today and importantly, where we're heading. And we have a great starting point, and that is the guidance I get on a regular basis from our co-founder, Henry Bloch, 90 years young, who every time he sees me, he says, "Bill, the client always comes first. Focus on quality service, prepare error-free returns and clients will return again and again." His simple formula is the basis for everything you will see today. Now if we think about our journey that we're undertaking, and I've tried to capture this in a really simple way. Phase 1 was when Mr. Bloch and his brother, Richard, ran the company in the early days and for many years thereafter. It was a family-run business, had a deep knowledge of the tax business, and everything was centered on the client. The company then moved into a phase in the 90s and early 2000s where outside management came in, where diversification was the watch word. H&R Block had a mortgage business, a broker-dealer business, an accounting firm. And, yes, a tax business. That was primarily an assisted business with some financial service, but it paid very little attention to digital. Essentially, H&R Block was a holding company. Today, we moved the company to a much simpler approach. We are centered on tax preparation. We are a tax company that also offers financial services. And essentially, we are now an operating company. Where that leaves us is an operating company that is the largest tax preparer in the world. Over 12,000 offices worldwide, staffed by nearly 100,000 tax professionals. In the U.S., we prepare about 1 in every 6 tax returns. We have 98% brand awareness. We're the only preparer capable of serving clients anywhere, any way and any time they choose. We offer complementary tax and financial services. For example, our Emerald Card is the third largest U.S. general-purpose reloadable debit card. And finally, we have a global footprint. We have well-established operations in Canada and Australia, and we just entered Brazil and India. So that is us and some. Now what I thought I would do before we move forward is to look back over the last 12 months. We were able to make real progress in a number of areas. First, we grew clients and share. We outpaced our largest competitors in both assisted and digital. We have set the tone on improving service and the client experience. We grew the number of Emerald Cards issued and the deposits loaded on to those cards. We delivered on what I believe is a shareholder-friendly capital allocation strategy. And sixth, we laid the foundation for significant EPS growth in fiscal year 2013 and beyond. So let's take a look at each of these. Our top priority this past year was to grow clients. We served a record 25.6 million clients worldwide and just the last 2 years, we have grown the number of clients by 10%. We also increased our market share in the U.S. by over 30 basis points to 16.4%. We also outpaced our largest assisted competitors, taking share over the last 2 years from independents by over 100 basis points and improving our own share by 70 basis points. Similarly in digital, over the same time frame, we outpaced our largest digital competitors by taking share from both Intuit and TaxACT, while growing our own share by over 70 basis points. Our third accomplishment was an important one, to set the tone on improving service and the client experience. We had a significant improvement in our key metrics. Assisted client satisfaction was up over 500 basis points to 87%. The digital Net Promoter Score was also up over 500 basis points, and awareness that we have a digital offering rose plus 11 points to 62%. And we continue to drive industry-leading innovation through platforms like Block Live and a number of mobile applications, meeting our expectation and also surpassing the expectations of some industry experts. I'd like to show you a quote from a keen observer of the tax business, the CEO of Intuit, Mr. Brad Smith, who said on September 18 in Intuit's own Investor Day, "H&R Block is a wonderful competitor. What I think they did really well last year is they were fantastic in terms of connecting with the hearts and minds in their marketing message. I thought they had an interesting set of new technologies, which they came out with." We thank you, Brad. And Mr. Turtledove, our Head of Marketing sends a special thanks to you for the shout out for his marketing efforts. Now fourth, we also grew the number of Emerald Cards we issued and how much money was loaded on to those cards. By the way, they're doing construction next door, so I'll try to shout over them. Last year, we reached almost 3 million Emerald Cards issued, and we loaded almost $10 billion worth of deposits on to those cards. We also delivered on what I believe is a shareholder-friendly capital allocation strategy. Since I became CEO in May of 2011, and if you count the dividend we announced that we will pay on January 2, we will have returned almost $900 million to shareholders in the form of share repurchases and dividends. And finally, we have laid the foundation for significant EPS growth in fiscal year '13 by making some tough decisions. We have rationalized our cost structure and refocused our organization on the client experience. Plus our efforts here will lead to an $85 million to $100 million increase in our earnings in fiscal year '13. We discontinued the free RAC initiative we will charge for this product this year. We resolved a lot of litigation, and we shed noncore assets like McGladrey and EXPRESSTAX. In the end, all of these company -- all of these efforts will lead to a company of higher margins, which Greg Macfarlane will speak to later. So that's looking back. Now I want to look ahead, but I want to look ahead from the CEO's chair, if you will, not only in 2013 but beyond. And I want to talk to you about what I'm calling shifts in our business mindset that I'm driving throughout the system and throughout the company. Because this is a company that has done business a certain way for a very long time. And we do want to build on off that effort, but we also want to evolve our business model in the following ways
Jason Houseworth:

Good morning. I'm Jason Houseworth, and it's my job to drive continued growth in our tax services by creating best-in-class tax products and a great client experience for all current and future H&R Block U.S. tax clients, assisted and do-it-yourself. These products and services are delivered both through our digital channel, which we call DIY tax services, as well as our 11,000 retail locations, which are led by my colleague, Amy McAnarney. This morning, I plan to provide you with an overview of the entire tax industry, along with Block's leading position within it, and then we'll look ahead to 2013 and beyond. I hope that when I'm done, you'll understand our position in the tax industry as the only business that can serve the entire population of all 145 million tax filers anywhere, anyway and anytime they choose, a business that has a strong fundamentals and innovation mindset and just as important, momentum as we move into the upcoming tax season. A business that is maniacally focused on creating a great and consistent client experience, a technology-enabled client experience, personalized to meet the unique needs and varying complexity of our clients, and how this focus on our client experience and delivering consistent service quality within it can drive real and sustainable growth to the bottom line and set up our tax plus offerings, which you'll hear more about from Susan Ehrlich after the break, assuming the whole building doesn't come down. I'll start by taking you through our view of the tax preparation industry and where it's headed. U.S. tax filings chartered here since 1951 demonstrate a remarkably straight line of 1% to 2% annual growth, one so straight you could nearly take a ruler to draw over time, even though this charter have experienced a recession and great economic prosperity. This is an industry that has consistently demonstrated predictable growth.
William C. Cobb:

Hey, Jason.
Jason Houseworth:

Yes?
William C. Cobb:

Let me give you an update. We're going to power through, all right? So bear with us with the slides. This is not the Palace, it's another building next door. We have all of the Palace working to get -- but they don't control this building. This is a total screw up by the hotel. Their head of security is over there. They at times work with them and move to the other side of the building. This is not the hotel. It's -- this is New York City. So we might take up our collection and make some payments in through New York style but anyway, I don't know what else to do except to just say we're just going to power through. And I really apologize, this is very unfortunate.
Jason Houseworth:

So the IRS growth is highly correlated with non-farm employment and growth we believe will continue in the upcoming tax season with IRS returns expected to grow 1.5% to 2%. Within the tax industry, there are really 2 fundamentally different types of consumers or tax filers
Susan P. Ehrlich:

Good morning, everyone, and welcome back from the break. I'm Susan Ehrlich, and I'm delighted to be with -- to be here with you today to share with you the evolution we've made over the last 12 months in developing and executing on our strategy for financial services. My presentation to you this morning will focus on 4 key areas. I'll begin with an overview of our business model for financial services, then I'll spend some time on our observations regarding the marketplace and the competitive landscape. This will then lead into a review of our products and our program enhancements for this tax season. And then finally, I'll finish with a discussion of H&R Block Bank and its role with respect to the future delivery of our strategy. H&R Block possesses several unique assets for developing and delivering a successful consumer financial services program. There is tremendous leverage in our exclusive distribution channel. We possess an extensive footprint of over 11,000 offices and an army of bank agency-trained tax professionals who provide us with a near-0 cost of acquisition. Through this channel, we will introduce our clients to differentiated products of exceptional value and build on our clients' use of these products to grow year-round relationships with H&R Block. This is delivering tax plus. So in looking at the tax plus model, which Bill and Jason have introduced you to, how do we take this critical tax preparation experience and leverage it into creating tax plus relationships with tens of millions of our clients? Our competitive advantages are exclusive distribution and seamless integration. Our goal will not be to try and serve everybody but instead to focus on the over 22 million clients in the U.S. who know our brand and our tax professionals and whom we've come to know through the tax interview. Among these clients, H&R Block holds a special place as a trusted adviser to them and their families for handling one of the most important financial transactions of their year. By seamlessly integrating our financial products directly into the client interaction points of the tax interview experience itself, we introduce our clients to the additional value we can provide them. From here, we can expand our services, support and contact management strategies through online and mobile delivery platforms outside of the tax office and give our clients 24/7 year-round access to H&R Block and our products' exceptional features and benefits. Through this kind of relevant year-round engagement, we provide more value, deepen our relationships and grow our revenue. The result is an H&R Block able to meet the -- our clients' money management needs anywhere, whether that's through the office, online or over the phone; any way, whether that's kiosk, live or mobile app; any time, creating a delivery capability that rivals any in the marketplace today. The fulfillment of this evolving consumer financial strategy will take us from a company exclusively focused on settlement products to one more broadly focused on an array of financial services, from a company focused on the 3 to 4 months of tax season to one that's serving clients all 12 months year-round, and from a company serving the financials needs of primarily unbanked customer to one with the capabilities of meeting the money management needs of all mainstream Americans. Now let's spend some time reviewing the market and competitive landscape for executing on this strategy. We've spoken with you over the years about the consumer segment referred to by the FDIC and others as the unbanked or underserved. As reported, the segment represents 34 million households and 68 million people. These households have modest incomes. 68% earn $50,000 a year or less. They're younger, 9.5 million are between the ages of 17 and 30. And their credit is less well established. Only 25% have prime credit scores, and many have no credit scores at all. H&R Block serves millions of these clients today. But today, there are millions more mainstream consumers who are looking for a better solution and are now up for grabs in the marketplace for money management. Following recent changes in account policies and pricing practices, it's estimated by the FDIC that 1 in 10 Americans have closed a bank account and left the traditional banking system. At the same time, customer loyalty to a single banking relationship is in decline, with nearly 6 in 10 Americans now handling their money management with more than one company, up 9 percentage points from last year. And new technologies and new entrants have further encouraged consumers to explore nontraditional alternatives, with 3 in 10 Americans now having and using a nonbank payment account of some kind. These transitions and upheavals are not limited to the deposit side of the household balance sheet either. Access to credit and the availability of consumer credit is in decline. Home equity and credit card balances are down. In fact, lending is down in every major category, with the notable exception of student lending which continues to show gains in nearly every quarter since early 2007. This reduction in access to credit gets more pronounced the further down the FICO score bands you go. These secular changes in the consumer financial services marketplace are driving changes in consumer behavior and product usage. Prepaid is now the fastest-growing segment in the retail financial services -- in retail financial services today. Not only is it an attractive alternative to cash for the underserved, offering convenience and spending control, it's also an attractive alternative to a checking account for mainstream clients, helping them avoid overdraft and other fees. And while prepaid is growing fast, it's still significantly smaller than either credit or debit, enabling the category to potentially sustain this level of growth for quite some time to come. And within the market for credit, with traditional supply reduced, consumer demand for alternative forms of credit is on the rise. For example, H&R Block continues to see strong demand for our Emerald Advance line of credit in the holiday season. So across the board, we're well positioned to take advantage of these market opportunities and trends. With that, let's now transition and spend some time talking about our product suite for fulfilling on this strategy. H&R Block's products comprise 4 types of financial services
Gregory J. Macfarlane:

Hi, everyone. I want to spend my time with you today actually summarizing a lot of what you've heard from Bill and Susan and Jason. I want to do that, though, from a financial perspective, of course. And also, because I've only been here in H&R Block for about 6 months, I want to provide you some -- maybe some new-guy perspective as well. Before I do that, though, I do want to talk about the second quarter. As you know, earlier today, we filed our quarterly SEC registration -- sorry, quarterly SEC filing, and I want to hit some of the highlights with you. From continuing operations, we reported revenues of $137 million last year, and we improved that by $8 million this year to $129 million. The main driver of this was H&R Block Australia. As Bill mentioned to you earlier, they had a great tax season. They were up high single digits for the number of returns, and that translated to double-digit revenue increases. We're quite proud of the work that the H&R Block Australia team delivered this year. From a pretax loss perspective, we reported a loss of $162 million, which is a big improvement from last year's loss of $204 million. Now, of course, we get some of the benefits from the revenue improvement from last year -- or excuse me, from H&R Block Australia. But mostly, what's driven this is actually expense favorability. There is really 3 things that drove the expense variability. There's roughly $2 million of sort of small positive cats and dogs and then roughly $34 million combined of 2 other main drivers. The first one was really about 50% of that, and that was really favorable legal progression within our overall business model. We had a number of legal issues that resolved this year successfully. And also last year in the second quarter, we incurred a lot of expenses that didn't reoccur this year. We also had continued favorability from our cost-reductions efforts. That was about $17 million as well, and we'll talk about that more here in a minute. In terms of EPS and shares outstanding We reported a loss of $0.37 a share, a $0.04 improvement from last year's second quarter. The main driver there, of course, was the expenses with a small amount from the revenue side. Now as you know, we also have a lot less shares outstanding, and that's roughly 10%. In those quarters, like the second quarter where we lose money, we actually have a negative impact from that. But later this year as we turn to profitability, you will see a benefit on the EPS due to these 10%-less shares from a year-to-year perspective. On the Sand Canyon side. Sand Canyon reviewed $10 million of new claims in the second quarter -- I'm sorry, they received $10 million more claims in the second quarter and reviewed $257 million of claims within the quarter. The result of that after all those reviews was a very immaterial change to the reserve, and that reserve stands at basically $129 million. At the end of the quarter, they also had $28 million of reserves -- excuse me, of loans that still need to be reviewed. Specific and probably more broadly to Sand Canyon, we've talked to you a lot historically about the statute of limitations. As you know, this is the time frame in which a buyer can submit a representation of warranty claim against loans that have been sold by Sand Canyon whether they were done through securitization or direct whole loan sales. Now there's some variation within the statute of limitations, but we generally believe that to be 6 years. Within the next year, Sand Canyon will be materially through that statute of limitations for loans that have been sold. Sand Canyon at the end of the quarter had $129 million in reserves and approximately $300 million in equity. Now historically, claims have come in, in what I consider to be more of a chunky manner. There have been some quarters when the rep and warranty claims have come in quite high, and there have been some quarters where it come in quite low, very much like the last 2 quarters. But importantly, over the last 2 years, the absolute loss rate has been less than 1.5% on those claims. In the event that this is a worst -- worse-worst scenario, when you believe that the reserves get used up, as well as the equity, we believe that any arguments around corporate veil-piercing would not be successful. Sand Canyon has been and continues to be run as a separate legal entity. Let me talk now about our cost program. Earlier this year, management outlined to you an $85 million to $100 million commitment to the bottom line as a direct result of cost-focused efforts. I'm happy to report, halfway through the year, we continue to track to the $85 million to $100 million. Now because I have you here in person, I thought it would be helpful to spend a bit more time on the cost structure and as it relates to the $85 million to $100 million cost program. This is a picture of my cost base at the end of last year. Roughly, we have about $2.3 billion in costs and I've segmented them here by the main categories. As you can see compensation people cost, occupancy and marketing are my big 3 expenses. Our cost program was a top-to-bottom review, and there wasn't a single dollar that wasn't challenged through this process. If we actually look at it, on main sort of 3 items which I've summarized here for you, that foot out [ph] to the $85 million to $100 million of commitment. Year-to-date basis, which is a combination of the second quarter and the first quarter, were at $35 million. Now because due to the seasonal nature of our business and the fact that we're just ramping up expenses, we expect to receive the remainder of the $50 million to $65 million to get to the total $85 million to $100 million for the year. The additional, and this is some new information for you, as I looked at the details of the program, there's actually 51 work streams that sit behind us. And when we look at the annualization benefit, we see additional benefits in 2014 of $15 million. This is really the summary comments that I have in the second quarter. Later today, we'll have a chance in the Q&A, if you've got some more specific questions to ask. I'll be happy to handle them. And of course, after today, both myself and Derek are available for any further follow-up questions. But with that, I do want to kind of turn it more to the broad picture here, which is really what we're here in New York to share with you all. Now I did join H&R Block 6 months ago. And before I joined the company, I thought long and hard about what makes H&R Block special. And now after having been here for company for a while, I've been able to validate and think about that further. And I want to share with you the model and how I think about H&R Block. At the same time, I think this is the same reasons that I think H&R Block is a great company that you as investors or potential investors should too. There's no doubt that H&R Block is a value company. We have a predictable and growing core business. The tax preparation industry is a remarkable industry. When I look at the amount of capital that we required to support a large retail footprint and as well as a large technology part of our business I consider to be generally capital light, we have a long track record of generating strong free cash flow. And we've used that free cash flow to pay a very healthy dividend. We've increased that dividend, and we've bought back a lot of shares. Now in addition to being a good value company, I think we've got real growth opportunities. We need to start with the fact that our core business is growing every year. To complement that, though, we believe we've got international leverage. We have scale businesses in Australia and Canada, and we are looking forward to additional countries down the road. Within the digital space, H&R Block was a late entrant here, but we're making up ground quickly. And I think you saw today a lot of smart investments and things we're excited about and believe we got a lot more room to grow there as well. Financial service is an area that I have a lot of background in and I'm excited about. I can spend in all these areas more time, but this is the one area that I'm most excited about from a growth opportunity for the company. Now not only are we a value company that has some growth opportunities, but I think, from a risk perspective, we also got some things we can talk about. I think we're generally low risk as it comes to mortgage now. We talked about Sand Canyon a little bit. In my view, as time goes on, that risk actually will resolve itself. There has been management turnover at the top, but importantly, you need to recognize that, that isn't all that runs a company. There's actually 50 key people that run the company, and as Bill mentioned, we have over 300 years of experience running a tax business. I've been very impressed the quality of people at H&R Block, as well as some of the new people that have joined the company. So now let me jump into this in more detail. This is information from the IRS, and what we're showing you here is the number of tax returns filed in the United States every year back to 1951. There were 9 periods over this time frame where the number of returns actually declined. And in almost every circumstance, the next year, it went right back up again. As Jason said, you can put a ruler to this and almost get a straight line. I've not shown you Australian or Canadian data here, but if I did, you'd find the same trend. Another interesting thing I find about this tax industry is the pricing power that we enjoy. We have generally very low price elasticity in the tax preparation industry. In fact, the only industry that we can find that has similarly low price elasticity is the auto body collision business. What do we have in common with them? Well, first of all, you have to get the service done. The second thing is the client has -- doesn't really understand the amount of experience or skill required to complete the effort. And third is we typically present the price at the end of the transaction. The industry enjoys this as a fundamental part of doing business. H&R Block, over the last 10 years, has increased price at a greater rate than inflation. I want to be very clear with you today, though, that I'm not giving you an idea of what we're going to be doing going forward, specifically for this season. Instead, I think, as you think about the future, modeling plus 1% annual price increase is a very reasonable thing to do. We are not giving you specific pricing guidance for the season, however. Also this tax chart, the price chart here on the right-hand side of the page, is what you would see if you went to an H&R Block office. This is what a client actually sees. This is last year's poster. If you want to see this year's one, we have an office on 3rd Avenue or right off of Times Square, and please feel free to go down there and take a look at our pricing structure. If you take this pricing power and you combine that with the fact that the core business is growing at 1% to 2% per year, and then you apply that to H&R Block that has a level of fixed costs, you should expect to see consistent earnings growth. And that's what you're seeing. And this is a chart that goes back to 1981.It is not lost on me, Bill, the Board of Directors or the management team that earnings have been down in the last 3 seasons. In addition to the $85 million to $100 million of costs that we're taking out that we're committing to, we're very much focused on driving the top line. And a lot of what you heard today are the plans in which we're going do to execute that. This is a slide that Jason shared with you. This is the tax preparation business in total. It's a $19 billion market, a very large market, and I'm showing you here how it subsegments into the 2 smaller markets of the DIY space which is 10% of the revenues and the assisted space which is 90% of the revenues. I'm just taking that same $19 billion market, and I'm now showing it by competitor. You can see H&R Block here, Intuit, the other brand and competitors and so on. I have 2 observations here. The first observation is that H&R Block is the only company that can serve clients any way they want to be served, whether it's DIY or assisted. The second observation is, although we are the largest tax preparer in terms of single name in the industry, we do 1 in 6 returns in the United States, we only do 15% of the revenues. The industry is still dominated by independents and CPAs at 71% market share. And we have room to grow there, as well as take some share from our branded competitors. We do that through our competitive advantage. We deliver the best-in-class tax professionals to the industry year in and year out. We have unmatched scale. We have 11,000 distribution points in the United States, an additional 1,000 in Australia and Canada, as well as pervasive online presence. Our brand is unmatched in the tax industry, no one can come close to it. And then within the industry, not only did H&R Block invent the industry, but I think we continue bring new ideas that add value to clients every day. Ultimately, H&R Block is the only tax preparation company that serves clients anywhere, any way at any time that they want to be served. This is actually my footprint here in United States. I am not really sure, frankly, why we don't show Alaska, Hawaii, Canada and Australia, but the reality is we've got stores there, too. What I find impressive about this is that we've been doing this for a long time. We have a lot of experience running retail. For me, to open up a new store costs $60,000. It takes me about 1 year to break even on that store. To get to what I consider to be a reasonable level of profitability takes about 3 or 4 tax seasons. A cool and interesting statistic from my side is 46% of our offices have been opened up for more than 30 years. That's amazing. Now specific to the number of stores we have and the mix between franchisee and company-owned, we will every season look hard about what make sense for us, but in general, we're quite happy with that footprint. This is an interesting piece of analysis, what I'm showing you here is our staffing levels. During our slower season, which is really the spring and summertime, we have about 9,000 people. Now to be clear, year-round, we already are open year-round in many locations. That typically is a couple of days a week, that type of thing. And as we think about what year-round means, I think you've could be online, it could be through the stores, it could be through the kiosks. And it really, at some point, it comes down to a labor kind of conversation. We don't expect any material shift in this labor patterns in the near term. As we get ready for the tax season, which is what we're doing right now, we begin to staff up. And when we finish, we'll end up with over 90,000 people. You may not appreciate the infrastructure and the skill required to do that, but let me tell you, it is an amazing skill that H&R Block has to be able to staff up this many people that quickly. What makes us even more amazing is these are not seasonal Christmas people that stand there helping you get a sweater. These are people who are computer savvy, they understand the IRS guidelines, they know how to do customer service and for H&R Block, this is what customers seek. This is H&R Block, and we deliver the best tax professionals to the industry. 34% of our tax professionals have more than 10 years of experience, and over 1/2 have more than 5 years of experience. For a tax professional to leave H&R Block after a few years is very difficult because if they do, they lose all their clients. They cannot bring their clients with them because they're not their clients, they're H&R Block clients. They don't have access to their records, their phone numbers. And if they were to try to do that, we would sue them. In addition to that, we invest a lot of money into them, and they know that. And they can make a lot more money, as Jason said, through the productivity and the amount of tax returns that they can do. Our brand is unmatched within the tax preparation space. In fact, when you think about it more broadly, we have the same level of awareness as Coca-Cola, McDonald's and Walmart. We've invested over $3.5 billion in that brand since 1962. Also importantly is not only do people know about the brand, but when you ask them what is it that you think about when you think about H&R Block? They talk about taxes, they talk about expertise, and they talk about trust. Why does that matter? Well, it matters because for all intents and purposes, we're only open for a part of the year. Every season, people switch tax preparers, that happens. There are also new entrants to the marketplace, and we think that our brand is an important way to make sure that we're considered in every step of that. It's something we take a lot of pride in, and we believe this is a big differentiator within our space. It's fundamentally grounded in the fact that tax preparation relationship is a very profitable one. And if you're able to establish that relationship and deliver consistent service quality, you can establish a lifetime relationship with them. We will spend money here, and we think it's a good investment. Retention is another thing around the industry that I think is quite positive. There's a number of reasons for that. I've summarized some of them here for you. Historically, H&R Block has compared ourselves to the main branded competitors on the assisted side and felt pretty good about the fact that we're in the 72% range, and they're in the low 60% range. We should be proud because we've invested a lot of time there, and we do a good job for our clients. What we need to do is look to what can we do in terms of entitlement, and we actually look at the CPAs, they typically have retention in the 90% range. Now there's some reasons for that from a mix perspective. They tend to be more complex type of tax forms, which does lends itself to higher retention because of the deepness of their relationship and the expertise it's provided. But at the same time, there's no reason that H&R Block cannot continue to grow its retention. We're also showing you, on the digital side, that we've got room for improvement as well. We've made progress here, but when you look at the best competitor in the space, which is Intuit, we can see a dramatic opportunity for us to improve our results, and we're very focused on that. Why this matters is because for every point of retention improvement, I generate an additional $0.04 a share of earnings. It's a big deal for us, and we're very focused on it. Here's some additional information for you. Last season to this season, we continue to see consolidation within the industry. There are a lot of reasons for that. There's increased pressures on revenues. We think the RAL profitability has pretty much been squeezed out of the industry. We think the cost structure is going up, and ultimately, it's grounded in the fact there's more competition from people like H&R Block. We think, as we look out over the next few years, that may actually accelerate for several specific reasons. The IRS is very focused in what they see as a real threat around fraud. Part of their response is increasing the certification requirements for tax professionals. It'll be higher cost, it'll be harder to pass, there'll be ongoing educational requirements, and we think this will put pressures on marginal players within the industry. RALs, we think, are pretty much gone from the industry. The third point, and this is perhaps more anecdotal in nature, is that there's a demographic favorability that we're looking at. A lot of independents, in particular, established their business in the 1970s and '80s once they saw that H&R Block was legitimizing the category that they could make money. Those individuals need to retire. They have a difficult time finding a place to sell their business due to the seasonal nature of their cash flows and the fact they have very little tangible assets. We believe, overall, that H&R Block is well positioned to take advantage of this. We have the financial capital to be able to do these transactions. We've been doing these transactions for many years. We know what to look for, and we know what makes success look like in a transaction. Importantly, and this is specific to the independent channel, these are people that have built their clients over decades, and they take a lot of pride in that relationship. And when they do want to leave their business, they want to make sure their clients will be taken care for -- taken cared of. H&R Block has that reputation and we have the brand. And lastly, and this is perhaps most selfish from my perspective, is we're likely just down the street from these competitors. And what that means financially for me is if I buy them, I typically can consolidate them and take some costs out of the transaction. And I can be more competitive. On the digital side, we are now the second largest digital provider out there, and we take great pride in that. Jason and the team have worked quite hard on developing a full suite of digital offerings, and going into tax season '13, we're quite excited about what we've done. We continue to make investments here and frankly, I'll continue to make disproportional investments here, and we've resulted in actually taking market share, and we think that trend will continue. Now importantly, we believe that the digital and assisted are ultimately a complementary type of offering. There are synergies between the 2. And at the same time, we continue to believe there are 2 distinct subsegments here, the DIY space and the assisted space. If you disagree with us and believe over time that may end up being more overlap between the 2, I think fundamental to that assumption is that the DIY providers will need to provide more assistance to their clients. H&R Block is best positioned to do this. Last season, we completed 15 million returns in the assisted side, and we did that with 90,000 people. If I'm an at-scale digital player and believe I need to increase the amount of assistance that I need to provide to my clients, how many tens of thousands of people they need to hire and how will they do that? This is another slide that Jason shared with you, and I'm not going to go through all the details about some of the things that we're investing and focusing on. The point of this page is at 16.2% market share, we believe that H&R Block has further room to grow within the digital space. Let me talk about financial services now a little bit. I spent a lot of my career at GE Capital, in fact, actually mostly worked at GE Money, and that's really their consumer lending business. When I look at H&R Block, what I see is a tremendous opportunity in financial services. I'm not sure how many people actually understand the relationship that we have with our clients. A client will come to our location, will sit next to a tax professional for 45 minutes. During that 45-minute interview, they will share very intimate information financially and about their personal situation with us. From a financial services perspective, that is golden information and a golden relationship. What makes us even better is the vast majority of our clients get a refund. And for most of those people, that's 10% to 20% of their annual income. That also is quite interesting from a financial services perspective. The third thing about this relationship is they come back next year, 70-plus percent of the time. And that, for me, as you can imagine is also a great thing from our overall financial services opportunity. This is a great relationship, and as long as we have the right products and we position them properly, we think we have a real opportunity to grow here. What's also really neat is who walks through our door. Susan shared some of this information with you, but our clients do tend to skew towards modest incomes. They're a little bit younger, and they have less well established credit. Historically, we have talked about the non-bank and under banked as a primary focus for H&R Block. And I think that as time goes on, we own -- or actually reposition and think about that differently. There are fundamental changes that are happening in the United States around access to credit from a regulatory perspective and overall risk return relationship. The financial services provider, specifically traditional ones, are thinking about it differently. And H&R Block has a role to play here. In terms of the right products, these are our products, the main one's that we're going to market with the share -- the refund transfer products, the Emerald Prepaid MasterCard or general-purpose reloadable debit card as well as the Emerald Advance line of credit. These products are complementary to the tax relationship that we've established. And it's a natural part of the discussion we're going to have with our clients. Our ability to sell these products has a direct benefit not only to the client, where we can increase satisfaction and retention, but translates to my bottom line. One financial services product on average results in 55% more margin for me in the first year, and the overall lifetime value that client's also gone up by 32%. Let me talk about each product here a bit more specifically. For a lot of clients who walks through our doors, paying $180 for their tax preparation is a big deal. That's the average roughly cost that we charge them. Instead, because most of our clients receive a refund, 87% and it's also quite large, two thousand six hundred of odd dollars, we have the ability for them to pay that $180, 2, 3 weeks later when the IRS actually refunds their money. That's what a refund transfer is. Last year, we gave away that product as a promotional opportunity effectively for free. This year, we're not. And we expect that our revenues from the refund transfer product in 2013 will approximately -- like that we did we did back in 2011. It will be a good source of improvement from a year-to-year perspective. On the Emerald Card, this is the one product that I'm personally most interested and most excited about. When you look at ourselves, the current program that last year issued 2.9 million cards and compare that to both NetSpend and Green Dot, we have a tremendously large program, it's the third largest in the United States. We issued that many cards. I find that quite impressive. What we've not done a good job at is convincing our clients that they can use these cards year-round. And you can see that clearly here on the revenue per account, which is really the main driver that the more they use it, which is really a year-round statement, the more money we make. Susan and the financial services team have increased utility of that program, we'll provide better education and ongoing incentives for clients to understand that they can use this card year-round. We're also, of course, focused on issuing more cards but in particular, what I'm watching is I want to see how the number of times they use that card per year. You can now do some quick math if you see us doing $36 per year, compare that to Green Dot and NetSpend, and understand that we have a huge opportunity here. It's something we're focused on, and it's something we're investing in. Ultimately, our financial products are going to be a core part of our tax preparation strategy. They are adjacent and they make sense from our clients perspective, and we're very focused on them. It all starts, though, with the tax origination activity. Let me now talk about our cost structure a little bit. What this page is showing you is actually my EBITDA margins over the last 4 years here. I've also shown you -- and ours is in green -- what I'm also showing you is the S&P 500 EBITDA margins as well as the S&P 500 Consumer Index margins for comparative purposes. And I said, "Hey, let's throw up Intuit there as well." We have good EBITDA margins in this company. They're strong and they're healthy. We're very focused this year in taking an initial $85 million to $100 million cost out, and that will benefit my 2013 margin percentage. I get a lot of questions about what happens after that, and so instead of giving you a specific number for 2014 and beyond, what I want to talk to you about more is a concept. Our objective at H&R Block is not to have EBITDA margin percentages at 100%, it's not possible. Instead, our goal is to drive EBITDA dollars at acceptable margin percentage rates, and we spent a lot of time talking about that concept, analyzing our cost structure, comparing ourselves to the industry, looking at the individual sources of revenue, and where I come out at is we should be in a target range between 27% to 32%.Two main points here
Derek Drysdale:

Okay. As we get the stools up on stage, I want to just point out 2 things quickly. The slides again will be posted about 25 minutes, so about 11
Michael Millman:

Michael Millman, the Millman Research Associates. So this week Liberty Tax on its conference call said that you think that the opportunity for price increase is about 5% to 6% a year, that they thought that block held us back. You, today, said that you find it nonelastic, and yet you're guiding to around 1% over time. Can you tell us why you're not more aggressive on pricing?
Derek Drysdale:

Greg, you want to start?
Gregory J. Macfarlane:

Yes. So first of all, I think Liberty increased their prices by 5% or 6%, that would just be great, and so please pass it onto them. Our belief is that from a competitor perspective, it's a mistake to forecast what our price is going to be, we would really just say wait and see the season -- how the season goes and see how we do this in 2013. Beyond this, Mike, what we've talked about is a 1%. And frankly, as a CFO, I'm a conservative guy so to me, that sort of represents the floor. As you well know historically, H&R Block has been more aggressive on pricing, and we very much recognize that this low price elasticity in the marketplace.
Kartik Mehta:

Kartik Mehta, Northcoast Research. Susan, one of the things for Emerald Cards is, last year, you had a free refund transfer. Does that obviously drove a lot of Emerald Cards for you this year, you will not? How do you make up the gap to make sure that you have growth in Emerald Cards?
Susan P. Ehrlich:

Kartik, we are introducing a number of different programs this year, built around trying to incent acquisition and usage of the card. I think the rewards program is going to be a strong future for folks who may not have considered Emerald Card in the past to see the benefit that clients will receive from having their refund on the card and take advantage of year-round usage. We're also in the digital channel this year, which is new for us and represents a sizable portion of our tax clients. So that's all fertile territory for us this season, so...
William C. Cobb:

We've also driven some improvements with Amy's team in terms of the flow within the -- our software contract professionals are lead there. We're also driving some incentives to the tax [indiscernible] we'll also do that.
Kartik Mehta:

And then just one last one for you, Greg, remiss if I didn't ask this, but any thoughts on timing as to when you get to that EBITDA goal you've laid out looking at, you have the industry growth and block growth and cost-cutting?
Gregory J. Macfarlane:

I mean, job number one is to deliver the $85 million to $100 million of cost out, and as I shared with you, that will happen this season. The 27% to 32% is a very important concept for us. I'm not giving specific guidance, though, about when we'll be able get to there.
Derek Drysdale:

Right here, Scott.
Scott A. Schneeberger:

Scott Schneeberger with Oppenheimer. Starting off with the tax season. Is there any concern with regard to likely a later start to the tax season as you've outlined with regard to preparation and perhaps loss on financial products, which are often geared towards earlier season filers, might there be a decrease in need, if the season gets later, increase? Just thoughts around that and preparation.
William C. Cobb:

Yes, I'll go first, and then if anyone wants to add anything. I think -- I don't think decreasing need is a particular concern. I think the need will be there. I think this is an industry issue, it's not a block issue. We've been equipped in the past. We've dealt with issues like this in the past. So it will cause some discontinuities, I think. But Amy's team and the rest are prepared for that. We have people ready to hear whatever the final resolution and some of the issues is. So as Greg pointed out in his presentation, in the end, we're fortunate with this industry, everybody has to file, and in the end, it's going to be more about the total tax season as opposed to some movement between January and February.
Scott A. Schneeberger:

And Greg, 2 questions for you. One, you mentioned your most frequent inbound question is, why not lever up and return capital? I was just hoping you could address leverage credit rating and your thoughts on that? And I have one more. I'll let you get there first, please.
Gregory J. Macfarlane:

Yes, and I should tell you about, actually most popular question I got is, did you really move to Kansas City? Okay, and I did, so just to be clear. The second question was around capital allocation. So I mean, I'm not sure of this sort of new information to share, but I'll kind of hit what I think the key points are. We think about it a lot, no doubt. In the first 6 months that I've been here, I mean, I've only been here 6 months, we did the CLOC and we redid the notes, which frankly were time-focused. We had to take care of them, and that took a lot of our time. I was quite satisfied with both how we resolve the CLOC and by the bonds by the way for what it's worth. In terms of liquidity profile, I haven't been through a tax season yet. I want to see how that works. I think it's important, and then hopefully, we've all learned a lesson from a liquidity perspective. When you need liquidity, so does the rest of the world. And there is about 4 or 5 months in the year that if I don't have access to liquidity, I can jeopardize the overall value of this company very quickly. So it's something that I take very seriously and very deeply. Now having said that, there are many solutions to that problem. And I think by making progress in the CLOC in particular, we were able to solve a key part of that, so we continue to think about that. The investment-grade, we've used that historically. It's been a way we've accessed through commercial papers. We need that to support that. And not saying we're going to keep it; I'm not saying we're giving it up. It's something we're considering and thinking about deeply.
William C. Cobb:

And I think, Scott, also, the reason we can't what seems like a relatively straightforward question, we are now regulated by the Federal Reserve as a savings and loan holding company. And obviously, one of the reasons why we're seeking alternatives is that, as Greg put it, we'll be in a position where we can make autonomous decisions across a whole range of issues.
Scott A. Schneeberger:

That's a great segue into my question. But before, nice job on the CLOC. Yes, I was just curious on the strategic alternatives on the bank, a better feel for timing on when that may occur. Also, to the extent you can share on partnering with others for some of the financial products.
Gregory J. Macfarlane:

Yes, I'll talk about timing and maybe Susan talk about the ideal partner sort of profile or whatever part of the question. What's important to us is get the right deal and not the fast deal. The other part that I mentioned within the strategic considerations is we want to minimize the amount of client impact. We, in terms of the tax season for all intents and purpose performance of the year, we can't do anything, right? So we end up having windows that open up, okay. And so you need to be -- I mean, I think most of you are aware of that. So in terms of actually getting a transaction completed, you have a window that opens up next spring and summer and then you basically have to go to the next year. We're going to figure that out. We don't know what the answer right now.
William C. Cobb:

I'd add one thing and then Susan, you should talk about the partner. Bear in mind that this isn't just the selection of a partner. It will be a regulatory approval process that is very hard to predict how long it will take. We hope to -- we work very well with regulators. We have good relationship with them. The Federal Reserve is very open. But we're at the mercy at the regulators also on that particular topic. Do you want to talk about ideal partner?
Susan P. Ehrlich:

Yes, I think from a structure standpoint and a partnership standpoint, I mean, there's -- I've worked with small banks and I've worked with large banks in these kinds of partnering arrangements for financial services in the past, and they bring different skills and benefits to them, right? A large bank is going to have a well-developed product set, that we should be able to accelerate in our channel. A small bank gives us the benefits of more of the program management control that Greg spoke to. So I think we can structure it either way. I think we're just looking forward to the continuing dialogue with potential partners, the structure -- the program that's going to be the best for us and right for our clients.
Derek Drysdale:

Thomas?
Thomas Allen:

Thomas Allen from Morgan Stanley. Two questions. First, on the refund transfer revenue. You said you expect to be flat to fiscal '11. What does that imply in terms of volumes and pricing? And then the second question, in your 27% to 32% EBITDA margin goal, does that include the impact of outsourcing the financial product? So assuming that would mean that you would get less revenue and a higher margin, is that built into that assumption or is that -- could that push your range higher?
William C. Cobb:

So let me take the first part, and Greg, why don't you take the second. I would stay with what Greg kind of have in the slide that he's giving you an indication that we expect revenues to approximate fiscal year '11. We're not going to go through volume and mix. You want to go to the second part?
Gregory J. Macfarlane:

Yes. So I was -- I think hopefully, I was or maybe I wasn't clear, but the 27% to 32% is what we think right now as things change, as mix changes, then we'll continue to reevaluate that. So the specific, Thomas, the answer to your question is, it does not include any of the unwinding of the bank and things like that.
Derek Drysdale:

Vishnu?
Vishnu Lekraj:

Vishnu Lekraj, MorningStar. The question here on -- sorry, the long-term pricing. You said 1% moving forward. Can you give us some thoughts behind that given the price points at DIY, assisted, along with some of your competitors price points? And how you're thinking about furthering that number?
Gregory J. Macfarlane:

So let me say something generally, we're not going to talk about pricing. We have -- as our pricing board is out, we price -- you go back to Jason's thesis, which is, everyone's situation is complex. We price according to each individual. Their needs can be moved around. We -- this is not a Happy Meal that we're going to drive around the price up 5% or 6% like others have talked about. So we have our pricing board, we spent a lot of time on the modeling of that. That's a situation that we have set up for this year, and we're not in a business of forecasting that. Greg was giving you an indication that in the long-term, if you want to look at an expected model, we gave you industry growth, we gave you an expected area for pricing. So I don't mean to be -- but it is a decision that we've taken as a company and certainly shared with the board. I don't know, Jason, do you have anything else you want to add?
Jason Houseworth:

Well, I think the other thing is that the way we look at our clients and really the productivity that they drive to the bottom line is not just about price. I mean, we do look at their individual needs in order to determine the price, but we also look at the mix of clients, as well as the financial products that we can offer our clients to provide a more value. And overall, we look at how that revenue adds up and how we can build it, not only in assisted but also in DIY.
Scott A. Schneeberger:

So looking at the other side of the equation, given your cost reduction programs, how do you look at staffing then in terms of trying to retain the most experienced folks to make sure that you're driving customer retention and then their comp along with that, if that's possible?
William C. Cobb:

So Amy, why don't you take that?
Amy McAnarney:

We have focused effort over the last couple of years to continue our -- retention of our most experienced tax professionals. And in fact, just about 75% of our client see our most experienced tax professionals, and that's grown from maybe about 400 basis points over the last couple of years. We have found that, again, it's a strong brand that we have, not only attracts the clients but our tax professionals continue to stay with us more year after year is that incremental investment that we're making in training and preparation so they can serve our clients. So we're very pleased with our retention rates, our best tax professionals.
William C. Cobb:

The only thing I would add is we incent our more experienced tax pros at a higher rate than the first year. We have actually, this year, with the tax pro compensation system, if you will, accelerated that, so that we've made it more lucrative for more experienced tax pros. Because as you saw from the charts that Jason displayed and Greg displayed, it's a direct line. The better and more experienced tax pro, the higher our retention is, and obviously, we are really focused on that area.
Derek Drysdale:

Let's go to Mike Turner and then right here.
Michael Turner:

Mike Turner, Compass Point. Just a couple of questions. On the do-it-yourself segment, and I apologize if I've missed it earlier, what percentage of those clients are on unbanked? Do you know that, or...
William C. Cobb:

I'm not sure we know that org.
Gregory J. Macfarlane:

We certainly haven't released it or discussed in the past. We have to get back to you on that.
William C. Cobb:

I think we've generally looked at -- I don't know. I can try to follow-up with you on that.
Michael Turner:

Okay. And then also on the Emerald Advance, I think -- was it 2 years ago, you opened it to new clients, and then last year, I think you shut that down just to the existing clients, in your open and back up. Have you -- maybe you could talk about the underwriting or the things you've changed because I seem to remember you took a couple of losses when you open it to the new clients. I'm guessing you made some adjustments. Any color there will be helpful.
William C. Cobb:

I mean, we feel good about steps. Susan, why don't you go through it?
Susan P. Ehrlich:

Yes, it's a program that -- as I was joining H&R Block last year, it was right into the season, and so it gave me an opportunity coming off my experience in credit and credit card lending to take a look at how we were running the Emerald Advance program. And one of the things that affected the performance 2 years ago was the fact that we really did not have a robust collections focus outside of the 3 to 4 months that our offices were open, and that's really been the biggest enhancement that's been put in place. So we've really established what look like more traditional credit collections activities that really begin with even the friendly reminder that a payment on your loan program is due. And that continues for the life cycle of collection. And that was really not a strength of ours 2 years ago, and that has been completely overhauled and a better foundation has been set. In addition, we've done some work on the underwriting on the front and bringing in some folks that, in my experience, I've worked with over the years who do a phenomenal job, focused on middle-market segment, which is where we're collectively focused. And so we feel good that we've improved both on the front end and on the back end of the lending spectrum to get better results.
William C. Cobb:

And I'll add, just do a little plug for Susan. Susan has brought in some terrific professionals on her team who have done this, who understand this, who have given us the ability now to do, as you stated, open this up to all clients coming in.
Michael Turner:

Okay. I know it's really early. Any early color on the acceptance or the usage of the Emerald Advance? I know it's really just been...
William C. Cobb:

Yes, we're -- we've -- it's an in-quarter issue, so we've been advised not to discuss it.
Gregory J. Macfarlane:

You're welcome to go apply for one of those.
Michael Turner:

And then last, maybe Greg or whomever, on the capital or money that's presumably in Sand Canyon, call it, $450 million or so, at what point do you say that, okay, we have clarity now, maybe we could do something with that capital. I mean, is it the end of next year when the 6 years expires? Or sort of maybe what's the catalyst or what's -- how do you know you've passed that point?
Gregory J. Macfarlane:

Well, the answer is I don't know truthfully. Sand Canyon is very focused, obviously, and continue to support their obligations, and they handle that very professionally and they're very thorough, and I came -- part of my job at GE, I work in subprime mortgage, so there's -- people at Sand Canyon worry about this. I think time will tell on how this is resolved. But specific to your question, it would be, at some point, happy conversation hopefully, but I still don't know when it would happen, so...
Hale Holden:

I just have 2 quick ones, it's Hale Holden from Barclays. I just want to understand the sequence of events. So the possible bank resolution sometime in the spring or the summer because it can happen during the tax season even in open window. At that point, you made a capital decision of whether investment-grade ratings are core or not. And I think that's a critical point because you just sold $500 million in 10-year notes to the market with NIG rating. So those guys are going to want to know, whether you stay investment-grade or not. And then I have one follow-up.
William C. Cobb:

Is that a statement?
Hale Holden:

No, I mean, I think it's not a statement, but I'm just curious on whether the -- it's unclear to me whether the investment-grade rating is core or not?
William C. Cobb:

Okay, that's a question.
Gregory J. Macfarlane:

Is that your question? Okay.
Hale Holden:

That's the question.
Gregory J. Macfarlane:

Well, I guess my perspective on this is that we have historically used the investment-grade rating as a way to access commercial paper, cheap and available to fund us through that 3, 4 months a year. That was important for the business from an operational perspective. We've made material steps forward this year in renegotiating our CLOC, as well as these notes that we're doing in the new year, and I feel pretty good where that's ended up. We're going to continue to look at doing an investment grade or not. We're certainly well aware of the fact that the people that are in the line of credit, as well as people who lent us money through the notes, went in a certain way, so that's not lost on us. But overall, our focus is doing the right thing for the company. We got to protect, obviously, liquidity needs, but at the same time, we're very focused on what's the right thing for our shareholders.
William C. Cobb:

I would also step back and say that since I've come in to the job, hopefully we've been very consistent and persistent tackling issues. So I hear you jumping out ahead. Right now, we are working through -- we report each quarter on Sand Canyon. We've announced strategic alternatives for the bank. We are working through those. When that partner is chosen, we'll then go through a regulatory process. Greg is giving you some guidelines, but that is not set in stone what the timing is. And as far as any comment or anything on liquidity, we're investment-grade today. We're we do have liquidity needs. We are not here to make a forward-looking statement on liquidity. So I hear you, but I think we're just trying to move along and knock things down as they come along.
Hale Holden:

Okay. And my second question is, the disclosure that's been in the 10-Qs and Ks on AIG litigation. Obviously, there's probably not a lot you can say and it AIG driven not by your driven, but is there a sense of when that could be resolved or move to the next step, or be eliminated?
Gregory J. Macfarlane:

Yes, I mean...
William C. Cobb:

Not only I am not allowed to say, there's actually nothing we can say about that, so stay tuned.
Derek Drysdale:

This right here.
Efraim Levy:

Efraim Levy, S&P Capital IQ. When looking at that video you had before, the gentlemen beginning, he's getting a -- he's not getting a refund, he's actually consuming a lot of services, it looks like. Are you able to recoup that, that -- the cost for that, or is it sometimes you take a loss leader for future gains?
William C. Cobb:

That's a great question, and in fact, the audit services that we have year round for our clients are covered in many cases, and especially for those who take our Peace of Mind guarantee. However, in that case, we are using that as a client acquisition, where we offer audit in order to demonstrate our expertise, as well as to the Second Look product. This is exactly what we find when people come in and they’re shocked at the expertise of our enrolled agents that their tax pro could have done it wrong. And in many cases, for whatever reason, they've done it wrong, and it has a big financial impact for them. And what I really like about that video is the gentleman said, and I told everybody in my church about it, which is exactly how we grow our business.
Gregory J. Macfarlane:

You think about it from an economic perspective, so I mean, yes, there was a big investment time. He's a lifetime client, he has given us great PR. He -- I mean, specifically people, there probably damaged credit, so we have credit products available to them. That's a path to additional products when they have to do, and we believe that it's a good investment overall, because once you get something like that type of relationship, you got a tremendous lifetime value, too.
Efraim Levy:

Sure. And that brought me to my second question regarding the Second Look. Can you disclose what the volume is and what the conversion rate for those who take advantage of that?
William C. Cobb:

Yes, we don't disclose those specific numbers. But suffice to say that the product, the service continues to grow, and we will be doing that again in tax season '13.
Christopher J. Marangi:

Chris Marangi from Gabelli. Two questions. First, can you give us some incremental information on this scale and the pace of the rollout of Money Express, and if there's any additional capital involve there? And then secondly, Greg, I think you mentioned you are happy with the store footprint. Does that extend to happy with the mix of franchise and owned stores at the moment?
Susan P. Ehrlich:

Chris, I'll start with the comments on Money Express. As I mentioned in the presentation, we're in 30 locations this tax season. We think the program's a great program, and that it is a, as you can see, a very functional, very easy-to-use kiosk that is providing an awful lot of services and giving money management to our clients at a very affordable price point. We have 11,000 potential points of distribution currently for the kiosk. We have that real estate year-round, so the ability to make Money Express accessible to clients 24/7, 365 days a year we think is a real opportunity for building revenue from our locations on a year-round basis. Right now, Money Express supports Emerald Card, but it's possible that it can support other prepaid programs as well, as well as be distributed to other locations outside of block. And so, all of those, I think, are in the potential development roadmap for Money Express as we look to what to do with it in the future as we get through the pilot phases. In terms of scaling of that, it's really going to be a function of us continuing to like the economics we see as we get through this season and into the year-round.
Gregory J. Macfarlane:

We have a lot to learn still about Money Express and the business model since it's behind that, because it isn't just simply about putting a machine there. But we want have 7/24, which means directly you may have to have a different footprint in the offices, we have to understand how that would drive traffic. We need to learn a lot more, so I think it's premature to talk about from a capital need because I'm not sure what the business case is yet. Inherent to the question is we're going to be disciplined, we're going to be consistent and we'll always be with a clear view of value we do make investments, okay. The second part of your question about the footprint, we're very happy with the mix between franchisee and company store, and don't expect any major change in that the near term.
William C. Cobb:

And let me just augment that a few years ago, the company had been on the path to re-franchise. That is not a philosophy of the company anymore. We are making the decisions on a trade area by trade area. We are buyers and sellers, so we're trying to optimize that footprint, and Amy and Greg work very closely with the real estate teams on those decisions. But the former, I just want to make sure that it's clear, the former philosophy of re-franchise of a certain amount of stores every year is not part of the company anymore.
Derek Drysdale:

So let's take this one in front, and then we'll go into the back.
Steven J O'Brien:

Steve O'Brien from Jefferies. You're clear on the price points or the pricing strategy. But looking specifically at the DIY filers, is there an opportunity to grow average revenue per filer? What would be the driver? Does it take rates on any file, or potentially this health care situation coming up? And then maybe looking back, how has revenue per DIY filer gone trending?
William C. Cobb:

Okay. Jason, do you want to take a shot of that?
Jason Houseworth:

Well, within DIY, I think there are 3 primary methods. I think the first is better monetization within the DIY product, as we think about how we upsell from a free to basic or deluxe premium. I think the second is adding financial products, and we're obviously doing that by introducing Emerald Card within our online product. And then the third is a continued focus on mix and looking at more complex clients. And that's also where I said within our conversion funnel, I think that we're starting to go deeper and deeper as far as focusing on now the more complex aspects of our interview and really thinking about that. And this is a thing that, that I really like about technology is that we can see within the conversion funnel the exact points where we have clients drop out. And we can then work with our usability team and do AB testing in order to really find the right way to either simplify the screen or to position the value that we need to, to keep clients moving through the conversion funnel.
William C. Cobb:

Jason and his team, and Jason has done a terrific job as leader of this over the past 3 years, and his team just continues to get stronger. They are relentless on user experience, they are relentless on how do we improve as we move up the chain. And I think as we get -- we have now a product that is in line or in some areas Jason believes is superior to TurboTax. We are continuing that kind of relentless assault and how do we improve the user experience, especially as we move forward on more complex returns.
Adam Liebhoff:

It's Adam Liebhoff from Loomis, Sayles. Could you maybe give us a sense for how big the International segment can be over the next 3 to 5 years? And then somewhat related, maybe talk about the go-to-market model there?
William C. Cobb:

Yes, and then, Greg, if you want to add anything. I don't have a number for you. I do believe that as I think companies, great companies today have a footprint beyond the U.S. and beyond the English-speaking world. We are, as Greg mentioned, we'll probably look at a country or 2 to add over the next 12 to 24 months. These are 5- to 10-year plays for us. We're looking for countries that have scale. I think I said this last year, I'll say it again. We're not going to be Apple in 100 countries. We’re going to have large economies, with large middle-class, with governments that are cooperative and trying to collect revenue from their citizens. So I think the mix, the percentage, it's a single-digit part of our business. I think it will go to double-digit, but I don't have a good sense for you in terms of how to model this, if you will, because we are -- because we have chosen to make small disciplined investments. Now, as for the model, we are looking at a variety of ways as we head in the year, in the second year in both India and Brazil. There's a traditional -- what we grew up on in the United States, our retail models, but we're looking at a number of ways through employers, through distance or through digital initiatives. So we don't have a model yet. Right now, we're in the test-and-learn phase. But again, I think part of the responsibility you have leading a company is to start to make investments that are going to pay off in multiple years, and I think we're pleased with -- or I don't know if you have anything else to add.
Gregory J. Macfarlane:

Last year, international was $233 million for the revenues. Canada and Australia both growing at high single digits to low double digits. Brazil and India, as Bill has rightfully said, you should be thinking more 5 or 10 years out. We're happy to experiment for 2 or 3 seasons, maybe 4 seasons till we figure out the right model. I don't think it's appropriate to share that with you right now for competitive reasons, but I can tell you that the main work that we use in these markets is entrepreneurial. Okay, we want to be very flexible, but we don't want to be grounded in what makes us special, which is tax preparation and the things that go around that.
Derek Drysdale:

So let's go back to Scott real quick, and then Thomas.
Scott A. Schneeberger:

Bill, last year, you approached Investor Day with some aggressive OpEx spend into your first year in a role, and you covered some of the primary spends were mobility, sounds like you're happy with the what you achieved and where you are going ahead. We have an update from you on your RT strategy this year and the pricing of that. I'm curious on Block Live and this new My HRB account. Is Block Live still a viable investment and a growth objective, or this is My HRB account kind of point of view?
William C. Cobb:

No, they are 2 different things. I'll let Jason comment on the second. But no, we are very committed to Block Live, and I think it's very consistent with the basic business model we have. But Jason, why don't you comment on that, since you're driving those initiatives?
Jason Houseworth:

Yes, with Block Live, I mean, we have to look at Block Live as part of the overall suite of products, so we have an order to serve all taxpayers, and Block Live fits in as part of that. It's the second year. We feel like we got a great consumer response and we're going to continue to use that in order to fit that piece of kind of virtual assistance. And then, if you look at the account, the account, as I talk about, that whole spectrum of solutions, the account is what binds it all together. It's at the center of it in order to make sure that regardless of what kind of person you are, even if you look now and you bring up the homepage today. In the upper right-hand corner, there's one log-in. We literally used to have kind of a Best of Both log-in, we have a Block Live log-in, the have-not. So we have one log-in. All clients, and what we have is we have that log-in for mobile, we have it for online, we have it for our office clients, and it accesses the same types of services for all those tax clients. And this is what we see as something that using that as a platform. It's going to give us the ability to give assisted and DIY clients a technology-enable experience.
William C. Cobb:

And we think it's also a great manifestation of what we're trying to drive, which is this year-round thinking. Let's not just think about this event during the year, whether it'd be digital or assisted, but that's where the development of My Account do that people can access this, they can -- there are tax events during the year, they're able to load it into My Account. So it's not a product. It's a service that will feed in to the various products and services that we have in our core business.
Scott A. Schneeberger:

And then just shifting from that to this year, obviously, a very good and reiterated cost-reduction approach to the year. I'm curious, usually at these events, we see maybe a glimpse of TV advertisements for the year to come. I'm not sure, I think, these that we saw today were just for this. Curious what the go-to-market strategy is with marketing this year, the media means of how you go to market, what the message will be? Often you have a tagline. And then, advertising spend year-over-year and contemplation of that?
William C. Cobb:

Sure, which one of those I can answer. I'm not going to talk about marketing spend, I'm not going to tell you the message...
Scott A. Schneeberger:

Are you going to be on the commercial?
William C. Cobb:

The research came back and -- No, I mean, Scott, obviously, it's a great question, and we're weeks away. Mr. Turtledove is not here today because he is very busy getting everything, but I think he'll be pleased with our message. It will be a broad range of -- we'll use traditional TV, radio, but we will be very active online, very active in social media, so -- and we're not going to talk about specific messages because some of our friends may be listening.
Derek Drysdale:

Because we were working on the borrowed time, Jack hammer is back. Let's go to Thomas in back up there.
Thomas Allen:

Following up on marketing question. One of your competitors talked about spending more early on to stay in front of their clients during the delays, during IRS delays. Do you expect to do the same thing? Is that something that could drive up costs?
William C. Cobb:

I think from the time, we're going to be -- we'll be active early in the season as we always are, as we were last year. Immediate plans are set. We can move money around. But I think people will see H&R Block, hear our message, so I don't know what that mean. I mean, last year, tax advertising started about 12
Susan P. Ehrlich:

And I would just add on to that. There are other ways that we connect with our clients before tax season. We make -- we reach out to them personally through phone calls and obviously direct mail. But that personal touch that we do before tax season is really a key for us.
William C. Cobb:

And Amy has put a big emphasis on this. As a matter fact, she's taken over. There are changes, such as we have an expression we use a lot of words matter, she no longer calls, people who lead our offices, office managers, they are client service leaders. And again, it just shift, too, and that's why she's been pushing her teams very hard on the proactive outreach for reasons like you said, Thomas. Up here, Ryan [ph].
Charles Stedman Garland:

Charlie Garland, Hamlin Capital Management. Can you describe the in-store technology systems? Maybe tell us the last time the tax professional facing systems were upgraded, and are they happy with those systems?
William C. Cobb:

That's why you want somebody who's been around 16 years or so to do this, because if I answer this question -- no, I mean, this is a lot what Amy and Jason spend time on, so I'll let the 2 of you.
Amy McAnarney:

Right now, we are currently going to be going through a refresh of our tax preparation software that we use in the offices. As we've seen on the digitals and the do-it-yourself side, refreshing that technology and the user experience is great for our business. And we need to keep track in front of that in our -- in office experience. So we are refreshing that technology and the software. It's going to be a multiyear rollout as with any major system that is client facing.
Jason Houseworth:

Yes, and I think the -- this actually gets back to the idea that everything, whether we're talking about the assisted or the DIY side of the -- our tax business, it starts with a great client experience. And the existing tax preparation system that we have on our offices is 20-plus years old. And what we recognize is that if we really want to take it to the next level, we've got to first change out that platform and then evolve it. And I give Bill a lot of credit for coming in and really challenging us with taking the multiyear steps that we need to really make that type of change, that type of transformational change in our client experience.
Derek Drysdale:

Any other questions?
William C. Cobb:

There's one in the back.
Derek Drysdale:

All right, it doesn't look like there are any other questions. Again, thank you all for joining us today and those of you on the webcast. That does conclude our presentation today. Please, we do hope you join us for lunch. Susan, Greg, Bill, Amy, and Jason and others of the senior management team will be there, so we hope you can join us. Thank you.

H&R Block, Inc. Q2 2013 Earnings Call Transcript

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H&R Block, Inc.
Q2 2013 Earnings Call Transcript