H&R Block, Inc. (HRB)
Q4 2009 Earnings Call Transcript
June 29, 2009 4:30 p.m. ET

Executives

Russ Smyth – President & Chief Executive Officer
Becky Shulman – Chief Financial Officer
Sabrina Wiewel – Chief Tax Network Officer
Scott Dudley – VP Investor Relations

Analysts

Kartik Mehta - FTN Midwest Research
Andrew Fones - UBS
Scott Schneeberger - Oppenheimer
Sloan Bohlen - Goldman Sachs
Vance Edelson - Morgan Stanley
Michael Millman - Millman Research Associates
William Carcache – Fox-Pitt Kelton
Todd Young - Morningstar

Presentation

Operator

Good afternoon. My name is Tessandra (ph) and I’ll be your conference operator today. At this time I would like to welcome everyone to the H&R Block year-end earnings conference call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. If you’d like to ask a question simply press * then the number 1 on your telephone keypad. If you’ve already done so please press the pound sign now, then press “*1” again to ensure your question is registered. If you’d like to withdraw your question then press the pound key. Thank you. I would now like to turn the call over to Mr. Scott Dudley, Vice President of Investor Relations. You may begin your conference sir.

Scott Dudley – Vice President of Investor Relations

Good afternoon everybody and thank you for joining us to discuss our fiscal 2009 results. Presenting on the call today are Russ Smyth, President and CEO, Sabrina Wiewel, Chief Tax Network Officer, and Becky Shulman, Chief Financial Officer. They will comment on our results and then we will open up the call for questions. Other members of our senior management team are with us this afternoon and they will be available during the Q&A session. Our call today is planned for about an hour. To start, let me provide our Safe Harbor statement. Comments made on this call may contain forward-looking statements within the meaning of Section 21-E of the Securities Exchange Act of 1934. Such statements are based upon current information and management''s expectations regarding the company, speak only as of the date on which they are made, and are not guarantees of future performance, and involve certain risks, uncertainties, and assumptions that are difficult to predict.

Therefore actual outcomes and results could materially differ from what is expressed, implied or forecast in such forward-looking statements. Such differences could be caused by a number of factors including risks described from time to time in H&R Block''s press releases and Forms 10-K, 10-Q, 8-K, and other filings with the SEC. H&R Block undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or expectations after the date of these remarks. H&R Block provides a detailed discussion of risks factors in periodic SEC filings and you''re encouraged to review these filings. Today we filed our 10-K for fiscal 2009 and issued a press release announcing our results. Both of these documents are available on our website. To give as many participants as possible an opportunity to ask a question we ask that when called upon you limit your query to one initial question and then one related follow up question if needed.

So with that, let me now turn the call over to Russ Smyth.

Russ Smyth -- Chief Executive Officer

Thanks Scott, and hi everyone. As Scott just mentioned we released our earnings for fiscal 2009 and our guidance for fiscal 2010 earlier this afternoon. So I want to start with a brief recap of our strong earnings performance and some of the lessons that we are drawing from this last tax season, and then Sabrina and Becky will go into more detail on our results. And then at the end I will outline some of the factors that are guiding our planning for fiscal year 2010.

We’ve got a number of initiatives that have been in the planning stages since I joined the company last August that we will be rolling out to drive our future growth. And despite some expected challenges in the marketplace in fiscal year ‘10, we feel very good about our outlook and I’m happy to be able to share some of that thinking with you, although for competitive reasons we will have to leave many of the specifics until our Investor Conference which we plan to have later this year. However let me first recap fiscal year 2009. First we improved our year-over-year financial results with income for continuing operations up 15% and earnings up 12.5% to $1.53 per share. We achieved this improvement despite a disappointing decline in retail tax returns prepared and our earnings growth is after the impact of an increase in shares outstanding which reduced EPS by $0.04 and then another $0.12 per share in loan loss provisions related to the bank’s mortgage portfolio this year.

Excluding the loss provisions in both years, EPS from continuing operations would have increased more than 15% to $1.65 in fiscal year ‘09. In digital tax we grew our client base and increased our market share with great success in the online category which we believe is the key battleground within the digital space. We significantly exceeded our targeted levels of cost reductions which helped us deliver our double-digit earnings growth and much higher operating margins in the tax services segment. We continue to narrow the focus of the company on our core tax business completing the sale of H&R Block Financial Advisors. And we took advantage of an investment opportunity to strengthen our tax business acquiring our major Southwest franchise. The integration of this operation went smoothly and the acquisition added $45 million of incremental pretax income this year. Now to put this in context, that’s $12 million more than our largest branded retail tax competitor earned last year.

More importantly we believe we have a great opportunity to further develop this territory by increasing same office returns as well as expanding with some new offices. We also effectively managed the residual loan exposure after the sale of Option One in April, 2008. Combined, all of these efforts enabled us to end the year with a strong $1.4 billion GAAP equity position, unrestricted cash of more than $1.6 billion, and just $1.1 billion of total debt. And at the same time overall net debt improved by nearly $1 billion since last year. Given that our fiscal 2009 was the worst economic year in decades, we’re proud to have achieved a combination of higher earnings, strong cash flow, and a solid balance sheet. However we also recognize that our results could have been significantly better had we avoided the reduction in clients and market share in our retail tax business and the addition of significant loan loss reserves at the bank. The company has been consistent in emphasizing the importance of putting our financial house in order. The first phase was exiting both the sub-prime mortgage and financial advisory businesses which stopped the losses and enabled us to pay off a great deal of debt.

The second phase of our restructuring plan was to attack our cost structure and our financial results in fiscal year ‘09 were favorably impacted by this emphasis. We are determined to drive efficiencies every year going forward and to maintain the cost conscious culture that we’ve begun to establish so that we do become the best value provider of tax services. Sabrina and Becky will go into more detail on our successes in eliminating costs in fiscal 2009, but as we have gone through the process of reevaluating our business model, we have become convinced that there are still considerable cost and efficiency opportunities. In addition to the margin improvement achieved this year, we remain confident that we can increase margins by another 100 basis points over fiscal year ‘10 and ‘11 while still reinvesting for growth as appropriate. I’ll have more to say about our cost reduction efforts when I discuss our future outlook.

Well its good that increasing and profits and that paying off our debt in last year’s difficult conditions and we’re happy with those results, the route we took to get there was not as good as if we had achieved client growth as a part of our mix. We certainly slipped in our ability to attract new clients this year despite a significant increase in marketing spend. The number of tax filers that consider our brand has not improved in the past several years. We’ve taken a hard look at our marketing campaigns and later on the call I’ll touch on some of the many changes that are underway.

Client services, is another area where we believe we can improve. For example, we estimate that 1.8 million clients checked into our tax offices but left without ever starting a return this year. Converting more of the taxpayers already in our offices into paid returns, represents a significant opportunity to improve our performance in tax season 2010, and we believe that better operations can bring this number down substantially in the future and I’m convinced that we can solve this problem quite readily. To discuss more specifically our performance in tax services, I will turn it over to Sabrina Wiewel. I’m excited to have Sabrina now oversee our tax network organization which brings together the franchise and company-owned field operations. As I believe many of you know Sabrina ran our digital business this past year with great success and she previously spent several years in the tax field including running one of our largest divisions in the retail tax business. Sabrina.