Hightlights From H&R Block's (HRB) Q4 Conference Call; FY09 Revenues Grew 1.5%; Guides In-line for FY10

June 30, 2009 1:20 PM EDT

H&R Block, Inc. (NYSE: HRB) reports FY09 EPS from continuing operations of $1.53. Full year revenues were essentially flat at $4.1 billion. Investors are really excited about the strong performance in a weak environment. Shares are up almost 10% today.

Hightlights From Q4 Conference Call:

• Tax Services revenues grew 1.5% to $3.0 billion, compared to the prior period. Business Services revenues declined 4.7% to $897.8 million from $941.7 million in the prior period due to decreased performance in the Capital Markets business, and a change in reporting relating to accounting for leased employees. Core Tax and Consulting revenues grew 4.1% in 2009.
  
• (CEO) H&R Block sees FY10 EPS from continuing operations of $1.60-$1.80 (Consensus is $1.66)
  
• We improved our year-over-year financial results with income from continuing operations up
  15% and earnings up 12.5% to $1.53 per share. 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.
  
• We acquired our major Southwest franchise. The integration of this operation went smoothly and the acquisition added $45 million of incremental pre-tax income this year. Now to put this in context. That's $12 million more than our largest branded retail tax competitor earned last year.
  
• We also effectively managed the residual loan exposure after the sale of Option One in April 1, 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.
  
• 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.
  
• Client Service 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.
  
• (Chief Tax Network Officer) We estimate that this year's IRS volume declined by 0.5 million returns or about 40 basis points after adjusting for their estimated impact of ESA returns in 2008. Excluding ESA impact, we believe that assisted tax preparation market share of total filings in tax season '09 was approximately 62%, which we estimate to be 40 to 60 basis points lower than prior year.
  
• Within the assisted category, our retail tax offices lost 900,000 clients this year excluding ESA or about 90 basis points of share. A large number of our prior clients chose not to file this year, primarily those clients with lower AGI who cited a lack of employment or earnings as the reason.
  
• At H&R Block, we've historically been over indexed in filers with AGIs of less than $20,000. We saw a decline of 7.8% among these low-income filers. Among middle income filers, those with AGIs of $20,000 to $75,000, we experienced a 3.7% decline. However, consistent with our recent success in moving up the AGI ladder, our higher income filers, those with AGIs over $75,000, increased 2.8%.
  
• On the pricing front, we made progress this year. While our net average fee was up almost 7% this year, only 1% of that was driven by list price increases on the company side. This should help with retention rates for next year.
  
• Overall, tax service pre-tax income for FY09 grew nearly 14% reflecting the combined benefit of higher revenues and lower field operating costs and corporate overhead expenses.
  
• Due to the timing of this deal and the resulting lack of off-season expenses in fiscal year 2009, we will have a margin impact of 50 basis points in FY10, which will be absorbed by other cost reductions within the tax segment.
  
• We funded more than one million Emerald Advances in the aggregate amount of $720 million. And we issued nearly 3 million Emerald cards. Compared to last year this reflects an increase of more than 160,000 Emerald Advances, $295 million outstanding, as well as nearly 100,000 more Emerald cards.
  
• As we mentioned last quarter another factor which negatively impacted margin and profit this year was the large number of clients that switched from RAL [Refund Anticipation Loan] to RAC [Refund Anticipation Check], which reduced earnings by nearly $18 million.
  
• Now turning to our digital results. Total returns prepared grew by 4.2% this year. Returns prepared with H&R Block Online and Tax Cut grew by 21%. Our FFA [Free File Alliance] filings were down 46% reflecting that many filers migrated to our digital solution including our free federal filing offer. Overall we estimate FFA filings were down by nearly 30% across the industry.
  
• More than 30% of the clients that started out in free upgraded to a paid federal product. And nearly 40% of all free online filers attached a state return for 29.95.
  
• (CFO) RSM McGladrey grew its fiscal 2009 pre-tax income by more than 8%. Total revenues were down $44 million while total expenses were down more than 50 million compared to fiscal 2008. As a result the business achieved an improved pre-tax margin of 10.7% up from 9.4% in fiscal 2008. While this is short of our original 12% target, we nonetheless made good progress against our objectives in a difficult economy.
  
• Results for RSM McGladrey's core services included good performances in tax and consulting, which achieved revenue growth of 4% and 5% respectively and achieved combined profit growth of $22 million or 27%.
  
• The bank incurred a pre-tax loss of $14.5 million in fiscal 2009 compared to pre-tax income of $11.5 million last year.
  
• The decline in earnings was primarily driven by $22 million of incremental loan-loss provisions. Total reserves recorded in FY09 were $64 million of which $12 million were taken in the fourth quarter.
  
• Full-year enterprise wide expenses and continuing operations were down more than $107 million or 3.2% compared to the prior year despite 55 million of additional expenses due to our Southwest acquisition and 22 million of incremental loan-loss reserves.
  
• We intend to be both thoughtful and opportunistic in repurchasing shares going forward. Also the dividend rate in FY10 will remain at $0.60 per share as our current dividend represents a strong yield of approximately 4%.
  
• Our $2 billion committed lines of credit remain in place through August of 2010 in addition to our unrestricted cash on hand of over 1.6 billion.
  
• Capital expenditures were 98 million in fiscal 2009 and we estimate approximately 120 million in fiscal 2010.
  
• (Q&A) I wanted to ask you a little bit about the guidance you gave at least on a tax side. And you talked about industry being negative, Walmart having, if you don't get anything back, negative 2% impact on your overall filer growth and then you talked about pricing being modest. If you take all that into consideration, would it be fair to assume that you are expecting on the low end for tax revenues to
  be flat to slightly down next year? (A) As I said in kind of the explanation about the guidance, inherent in that is an assumption of single digit revenue growth. In terms of the various specifics that get into that, we really think about our EPS range as a range of outcomes and it's got a lot of different variables, as you know. Client growth, what happens with net average charge, benefits of complexity, assumptions about margin improvements, loan-loss provisions, share buybacks. As a management team we are focused on managing this overall portfolio of variables and we are committed to managing that in a way that hits the earnings guidance that we've given you. And so we need that flexibility in this kind of environment to be able to make the right decisions to number one, hit that - those EPS guidelines we've given as well as doing it in a way that builds our opportunity to have future success in 2011 and beyond. So that's how we're looking at those variables. I know a lot of you would like to have specific assumptions about each one of them, but frankly that's not how we run the business or manage the business. We manage the portfolio to get to the right outcome and that's my view of the job of our senior management team and myself.
  
• And then just a follow up to that Russ, on the margin side you talked about margins for the tax business growing 100 basis points, I believe next fiscal year. Is that just a result of cost containment that you're going to do or do you need to see flow through from a revenue perspective to get to that 100 basis points? (A)First of all, just to clarify the 100 basis points was over two years: fiscal year '10 and fiscal year '011. And again, in terms of where that's coming from, it's a combination of the cost reduction efforts that we will continue to have. It is a combination of some of the P&L reinvestment we will make back into our business to make sure that we can grow our business in 2010 and 2011 and beyond and it also has a component about the flow-through that would materialize as we grow clients and top line revenue. So that margin point improvement is a combination of all those factors.
  
• I was wondering if you could detail the negative impact in the first half of next year for the seasonality of the Southwest acquisition that you did? You mentioned obviously that will be a little bit of a drag during the first half, you know, it wasn't in June, the off season last year. (A)We expect expenses will be about $20 million higher. I think we talked a $55 million number this year. We expect it to be about $20 million higher for the full-year.

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