H&R Block, Inc. (HRB) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen. My name is Shannon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Earnings Call. [Operator Instructions] Thank you. It is now my pleasure to turn today’s conference over to Mr. Colby Brown, VP of Investor Relations. Mr. Brown, you may begin.

Thank you, Shannon. Good afternoon, everyone and thank you for joining us. On the call today are Bill Cobb, our President and CEO and Tony Bowen, our CFO. Today, we will discuss our fiscal 2017 third quarter results, our thoughts on the tax season and our financial outlook. We have posted today’s press release on the investor relations website at hrblock.com. Some of the figures that we will discuss today are presented on a non-GAAP basis. We reconciled the comparable GAAP and non-GAAP figures in the schedules attached to our press release. Before we begin our prepared remarks, I will remind everyone that this call will include forward-looking statements as defined under the securities laws. Such statements are based on current information and management’s expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As a result, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2016 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. At the conclusion of our prepared remarks, we will have a Q&A session. During Q&A, we ask that participants limit themselves to one question with a follow-up, after which they may choose to jump back in the queue. With that, I will now turn the call over to Bill.

Thank you, Colby. Please bear with me, I've had a terrible cold. But I'll get through it. Good afternoon, and thanks everybody for joining us. I am really happy with our season’s results to date. In December, we outlined an aggressive plan to arrest the client’s requirement, tax season and I am pleased to report that we are delivering on what we promised. To date, we have seen an improvement in our overall client trajectory, which has resulted in early season share gains, in both the Assisted and DIY categories. Our approach to the season was planned in three distinct chapters; Chapter one was designed to generate pre-season interest in the brand by clearly differentiating us from our competitors. We introduced our new marketing campaign with Jon Hamm, and our new value proposition of Get Your Taxes Won, both of which have been very well received. Next, chapter two focused on our aggressive targeted offers, designed to drive new clients. We introduced a no interest, no fee, Refund Advance loan, and launched free Federal 1040 EZ in our retail locations. And in DIY, we beat our top competitor's offer with H&R Block More Zero. Finally, in chapter three, which we launched on Super Bowl Sunday, we enhanced our value proposition by rolling out a new reinvested client experience in our retail offices, backed by the power of IBM Watson's cognitive computing technology. We are very pleased with the results we've seen thus far, as they represent a significant change from the early season results of the past several years. We're achieving our goal of arresting the client decline, and we also gained market share in both the Assisted and DIY tax preparation categories during the first half of the season. And our strong client satisfaction and brand health scores provide additional evidence that we are delivering compelling value to our partners. While I'm proud of what we've accomplished so far, there is still a lot of season ahead of us, and we are laser focused on executing our plans for the second half. Although overall industry and Company volume is expected to improve during the second half of the tax season, our performance relative to the industry is expected to moderate, given the conclusion of our Free Federal 1040 EZ and Refund Advance promotions on February 28. That said, we are on track to accomplish our desired results for fiscal 2017 which we outlined for you in December. With that overview I will now review the areas that we will cover on today’s call. First, we will provide our perspective of what we have seen in the industry to date. Next, we will review our retail and DIY strategies and early season results. Then we will discuss expectations for the second half of the season and finally Tony will review our third quarter financial results and our outlook for the fiscal year. Now before I discuss industry results, I feel compelled to touch on a topic receiving a lot of attention, and that’s tax reform. As we discussed in the second quarter, there are a lot of open questions about corporate and individual tax reform and their potential impact on our business. As we look at the proposals being discussed, I am surprised as to why some may conclude that this entire matter would be bad for H&R Block. In fact, we see potential benefits. The center piece on corporate tax reforms is a significantly lower tax rate. H&R Block’s historical tax rate has been in the mid 30% range, so under virtually any scenario being discussed corporate tax reform represents a net benefit to us. Moving to individual taxes, there are a range of proposals including lowering rates, and streamlining the number of income brackets, limiting or eliminating the AMT, changing filing status options on the standard deduction, adding additional education and child care credits, and under draft legislation of the American Healthcare Act introduced in the House just yesterday, age-based refundable credits would be reconciled to the tax code. Frankly, I'm puzzled as to how this could be seen as a net negative for H&R Block. Regardless of the outcome of these various changes, we know from our experience that people will still want and need help with their taxes, and we will continue to provide that help, serving taxpayers however they want to be served just as we have for the last 62 years. That just covers taxes. I haven't even touched on regulatory reform, which given the suite of financial products we offer, could be beneficial as well. In fact, I haven't seen any proposals in the area of regulatory reform that would negatively impact H&R Block. So while nothing is yet concrete, I believe this will also be a net benefit to us. Now everything I’ve just discussed will take time and we are obviously watching it very closely, but let me be clear, on balance we believe many of the proposals being discussed are tailwinds for our company. And in my opinion under any scenario, H&R Block remains a great investment. Now let’s turn to the industry which is off to a slow start. Although the industry has seen volume improve since the start of the season through February 24, total IRS e-files were still down 10%. Over the past few years early season filers have been filing later in the season, but this year’s results were even more delayed. It’s likely that this was due to uncertainty regarding the implications of the PATH Act as tax payers who typically file in January and early February appear to be less motivated to file quickly given that their refunds may be delayed. We continue to expect total federal filings to be up 1% to 2% this tax season. Consistent with prior years, there is a slight shift within the industry from assisted tax preparation to DIY methods in the first half of the season. As early season filers are more likely to change tax preparation methods, this shift in the early season is typically greater, and then moderates in the second half. By season's end, we expect any industry shift to be consistent with and possibly slightly lower than the previous few years. Turning to our performance, we anticipated a strong first half of the season, driven by our promotional offerings and our enhanced marketing effectiveness. We're pleased to report that results are in line with our expectations. We are executing on our objectives to drive clients into our offices, and to our DIY products. New client growth is the highest it has been since 2011. In short, we are delivering on our promise to arrest the client decline. Let me talk through some of the specific results, measured against what we outlined for you in December. Focusing on the Assisted business first, we developed a plan that included aggressive promotional offerings, increased sales efforts, and an enhanced client experience designed to appeal to a broad range of tax filers. I'll provide more color on each of these areas, starting first with our newest product, the Refund Advance. This free no fee loan was offered to our Assisted tax preparation clients to bridge the gap between when they file their taxes and when they receive their refunds. Given the provisions of the PATH Act, this product was especially relevant to those tax filers who faced a delay in receiving their refunds this year. The goals of this product were to attract new clients to our offices, and to ensure that the process for obtaining a loan was integrated seamlessly into the tax interview. We've delivered on both fronts, and the results were positive, as we've seen growth in new clients. In particular, we saw an increase in new clients obtaining the Earned Income Tax Credit, or EITC, an area in which we've seen client declines the last several years. Tony will provide additional details on Refund Advance later in the call. Next, in early January, we rolled out our Free Federal 1040EZ offer in our retail offices. Given the competitive market conditions and our stated objective of driving clients into our offices, it was the right time to relaunch this offer. It has successfully attracted new clients to the brand and given that we have enhanced our product offerings since the last time we ran this offer, we also have more opportunities to monetize than the previous years. Understanding that we couldn't rely solely on promotions to drive traffic to our offices, we also embarked on a multiyear effort to instil a sales culture at field leadership and tax professional levels. To that end, we stepped up our B2B sales efforts partnering with local and national businesses during the off season. We’ve been hard at work in burning these businesses, employees to H&R Block clients. And while we anticipate the benefits of these efforts to be realized over the next several years I am pleased with the overall level of engagement that we are seeing. Of course none of the promotional and sales efforts matter if we don’t deliver quality service at the tax desk. Coming out of last season we focus on enhancing our clients service delivery model which really has not changed in decades. We redesigned our tax preparation process to make it an interactive and educational experience for the clients while still allowing the tax preparer to gather the necessary data. To help with that client experience, on Super Bowl Sunday, we launched our strategic relationship with IBM Watson that brings the power of cognitive computing technology together with the expertise and experience of our tax professionals to deliver tax preparation in a new and exciting way. IBM Watson has been changing industries such as healthcare and education but this has been the first time its advanced technology has been utilized in a consumer retail business let alone tax preparation. And through our exclusive multiyear agreement with IBM this experience will be unique to H&R Block. To achieve this new find experience we installed over 65,000 client dedicated monitors in our offices so our clients can be engaged and better understand the value that their tax preparers are delivering. And we shared over 600 million data points with IBM that helped Watson learn taxes Feedback on the new streams has been very positive, and client satisfaction scores from our early season pilot showed meaningful improvements. Collectively, these efforts have translated into positive results in our assisted business. Client volumes have improved and we are achieving share gains in the overall assisted category. With IRS decline down 13% in February 24 and comparable H&R Block volume down just 8%. In short, we are delivering on our promises. Turning to DIY, as we have commented before fiscal 2017 was a reset year for us. We had to realign our product line and pricing with the market to effectively compete. And we didn’t just want to compete, we wanted to win. So we took an aggressive posture with the intent of growing clients. I am thrilled to say that we are delivering the desired results. Initially we announced that we would match the free federal, Free State offerings in the market. Then in early January we launched H&R Block More Zero, this offer was broader than the category of leaders as they have included deductions such as mortgage interest in the pre product. Additionally, we made significant product enhancements to our software. We added a drag and drop feature, that made importing W2s and 1099s, as well as prior year tax returns from our competitors quick and easy, and we significantly improved our photo capture capabilities. We've been saying for several years that our user experience is competitive with the category leader, and now independent reviews, such as those published in the New York Times article earlier this season, confirm that. The early results are compelling. We are taking share in the DIY category with IRS e-files down 8% to February 24 and comparable H&R Block volume down just 5%. Our efforts are delivering the results we anticipated. In summary, we are very excited about our results so far in both Assisted and DIY. Our promotions coupled with our product and service enhancements have performed as designed and driven the early season new client growth we needed to deliver strong results. With that, I now like to turn the call over to Tony to discuss our financial results and outlook.

Thanks Bill and good afternoon everyone. As Bill articulated, other than the industry delay the tax season is progressing as planned and we are pleased with our early season results. Client trajectory in both Assisted and DIY is heading in the direction we had hoped and we picked up share in both categories in the early part of the tax season. From a financial perspective, we are achieving our expense reduction goals which have allowed us to invest in our aggressive client acquisition initiatives, and we are on track to achieve that financial outlook we provided in December which I’ll detail later in the call. Before doing so, let me provide some specifics regarding our fiscal third quarter financial results. As a reminder, we typically reported seasonal loss during the fiscal third quarter and this year is no exception. In fact, this year’s third quarter results have been further impacted by the implementation of the PATH Act resulting in a shift of revenue and earnings from the third quarter into the fourth quarter. Starting with revenues, we saw year-over-year decrease of $23 million of 4.8% to $452 million. This is primarily the result of lower return volumes in our Assisted business due to the delay in the tax season and price reductions attributable to our early season promotions. These were slightly offset by payments received from franchisees, related to Refund Advance. Switching to operating expenses, we are starting to realize the benefits of our cost reduction efforts we announced in June. These savings have allowed us to invest in client initiatives, including our early season Assisted promotions and our new DIY pricing structure. Compared to the prior year, operating expenses in the third quarter declined $18 million or 3%, despite a $16 million investment in Refund Advance. The decline was primarily driven by lower compensation and benefit cost and reduced marketing spend. Let me take a minute to provide further details regarding the Refund Advance. As Bill mentioned, we are very pleased with the promotion's results. We were able to add value for our clients with an offer that met their needs, while driving early season traffic into our offices. When the program ended on February 28, applications for the Refund Advance totaled 1.1 million, and overall approval rate was approximately 78%. Total funded loans amounted to approximately $700 million, and while the total capacity of the program was not exhausted, the mix between new and prior clients was favorable compared to our expectations. Total direct program costs in February 28 were approximately $30 million, of which $16 million were recorded in other cost of revenues in our fiscal third quarter. Considering our investments in early season promotions, as well as the overall industry filing delay, I'm pleased with our bottom line results for the quarter. Pretax loss from continuing operations declined just $4 million from the prior year to $151 million. Our income tax benefit was $49 million which declined from the prior year primarily due to favorable discreet items in last year’s fiscal third quarter. We continue to expect full year effective tax rate to be approximately 34%. Shifting gears, in December we mentioned that we were in the process of selling our mortgage loan portfolio. I am pleased to report they were able to close that transaction in the fiscal third quarter resulting in proceeds of $188 million which approximated current value. The proceeds from the sale of this non-core asset or using part to fund share repurchases during the quarter of $100 million. Year-to-date, we have repurchased 14 million shares for $317 million. With $1.2 million dollars remaining on our authorized share repurchase program through June 2019, we will continue to be opportunistic in our process share repurchases. Finally, loss per share increased $0.15 to $0.49. The increase was due entirely to the reduction in both the tax benefit and shares outstanding as discussed earlier. In quarters with a seasonal loss, lower share count negatively impacts the loss per share but will be accretive to earnings for the fourth quarter and on a full year basis. Turning to discontinued operations, Sand Canyon made payments during the quarter of $21 million in connection with settlements of its representation and warranty claims. These payments were fully covered by prior calls. Sand Canyon’s remaining representation and warranty accruals balance is $5 million as of January 31. As a reminder Sand Canyon is, and always has been operated separately from H&R Block. We continue to believe our legal position is strong on any veil-piercing arguments. With the third quarter now behind us, I'll now turn to our overall financial outlook. From a full-year perspective, we expect results to be in line with the outlook we provided in December. In Assisted, I want to be very clear about how we are thinking about our return volume. The season-to-date decline in returns is primarily due to the delay in the industry, and as such, we expect volume to improve during the second half of the season. That said, we believe that our performance relative to the IRS will moderate. Overall, the net result will be a significant reduction in client losses, consistent with our expectations in December. From a pricing perspective, given that our early season promotions have ended, we will start to see an increase in our Assisted net average charge over the next six weeks. We now expect to deliver an Assisted net average charge that is flat to slightly up, due primarily to better pricing in our franchise network. This is an improvement from what we outlined in December. In terms of DIY, we continue to expect an increase in return volume this year, and consistent with our expectations, net average charge will decrease compared to the prior year, given the H&R Block More Zero promotion discussed earlier. Finally, from a profit perspective our EBITDA margin outlook is unchanged. Our cost reduction efforts have enabled us to invest in our early season promotions, resulting in a healthy bottom line. We continue to anticipate coming in at the low end of our long term guidance range of 27% to 30%, which is comparable to last year's adjusted EBITDA margin of 27.6%. Overall, we are very pleased with our early season, with our results to date and are on track to achieve the financial outlook we provided at the beginning of the season. With that, I will now turn the call back over to Bill.

Thanks, Tony. In summary, we are delivering what we promised. We said we would be very aggressive, and the results to date show we are executing. It has taken a tremendous effort by my team and all of our hard working associates and franchisees to get us to where we are. For that, I thank them. As I've said before, we are playing to win, and although we do expect results to moderate in the second half of the season, relative to the IRS, we believe we will end the season strong. I look forward to talking with you all again in June. With that, we'll now open the line for questions. Shannon?

[Operator Instructions] :

Hey Bill, hey Tony. Bill, obviously a good start to the season, and I just wanted to make sure I understood your comments about the client count for the remainder of the year. I think a lot of time, when you had the conference call you indicated that you won't get all of the declines back this year. But it sounds like from what you're saying, you could end up being flat, even though the IRS is up 1%. Is that a fair way to think about what this season could look like, from an Assisted stand point?

Yes, I don't think we're ready to project specifics. Obviously, the delay in the season has altered some things. We do think that it's going to come back, we think with how well employment has done, and we don't see any reason why overall filings wouldn't stay in the 1% to 2% range. So I'm not ready to give any specifics around that. I think what we're saying is the promotions ended, both the Refund Advance and the 1040 EZ. I'm talking about Assisted specifically here. So relative to the IRS which we had a great start to the season we think we're just trying to give some insight that we think they will moderate. But again, I don't think I'm ready to put a pinpoint on this. Tony? Is there anything you'd want to add?

The only thing I'd add, Kartik, is, we reaffirmed our outlook that we expect Assisted to be down in returns, now a much better result than what we saw last year, and much better trajectory, and we're showing that with the early season results. But our outlook for the season is still that Assisted will be down slightly.

And then Bill, the RAL program obviously had a lot of success, and I'm wondering, is this a program that can be expanded, or are you at a point where this is the maximum amount of borrowings you could do for the program, and it can't be expanded?

Well, I never got criticism for not talking about what we are going to do this year before really things happened, so I’m not about talking that in March. I do think we are pleased with year one, is what I would say. I think in the first year of program, in the first year of product I think to have close to 1.1 million people apply for the loan is a really great start to actually be able to bring our clients $700 million worth of loans, we are very pleased with them. So again, we’ll have lots to talk about going forward, right now we are focused on executing in the second half of the season and I’m not going to comment on where we go from here other than then to say, I think we’re very pleased with our first year with this product.

And then just the last question Bill. Who do you think you're taking market share from both on the assisted side and digital side?

That’s hard to say, because we don’t get insight into others other than we saw in Intuit's results a couple of weeks ago. So, I’m not really going to comment on who are. Right now, our heads are downward. We’re trying to execute our programs and at the end of year we’ll have better insight into that.

All right, well thank you. Appreciate it.

Thanks, Kartik

Your next question comes from Thomas Allen with Morgan Stanley. Your line is open.

Hey, just up on you comment you made in the last round of question about. So you said nothing to date would suggest that industry volumes will be up 1% to 2%, but I mean, you have experienced of seasons where volumes have been down. We know that has increased fraud prevention in the system. Don’t you think that that could drive volumes down or you’re saying it was just otherwise? Thanks

Yes. Tom, this obviously where we’re trying to assess this with regard to fraud, I think last year the industry was pretty healthy. I think it came in at 1.7% or 1.6% in terms of filings and fraud was down over 50%. The IRS in the whole industry came together and really reduced that, which is why I would say and I think last year was more of a reset with regard to that. But again, the indicators are, in the last, I think its 65 years, it’s only been nine years that the IRS has been down. Given the health of the economy we find it very curious that anyone would think the industry would be down but you we’re tracking a week by week. Right now, I'd have to say, our goal is to stay above the IRS in terms of the week over week and that we been able to do that consistently.

Great. And then on the refund advances we can do some rough math, but it would be more helpful if you guys just tell us how many Refund Advances did you do? What percentage of those clients would new and any other color would be helpful? Thanks.

Yes. We had approval rate of about 78% on the $1.1 million, so it’s about $800,000 Refund Advances. At this point Thomas we’re not sharing the breakout between new and prior for competitive reasons. But I would say the mix was more favorable toward new than we originally expected. So it was definitely positive program from our perspective.

Perfect. And this is my last question, as you are thinking about cost for the rest of the tax season I know you guys touch on the cost we’re running down 3% in the third quarter, but can you just pars that out between like volume based cost that were down and actual cost cut that should flow into the rest of the year and maybe you think about a core kind of cost cut would be helpful as we think about modeling for the year? Thank you.

I mean, if you look at and Tony I’ll let weigh in, but I think if you look at some of the fixed costs like wage, wages beyond field wages, marketing and advertising and we had real fixed cost leverage during the third quarter and we expect to have that in the fourth quarter also. But so I was – to assume that this is all volume based I think would be erroneous.

No, I agree, we talked about this in the summer that we went through a number of cost reduction efforts really started last April and we expected those to come to fruition during the tax season. We’re seeing that now in Q3 and we expect those to continue in Q4. And I think the areas that you’re seeing in Q3 will continue. And while there is a little bit tied to, the delay in the season, the vast majority is really tied back to the cost reduction efforts that we put in place last year.

Okay. So, is there any kind of a number we should think about as we model like the fixed cost basis of your business, how much that was cut year-over-year?

Yes. The key number that I would think about is the EBITDA margin guidance that I just referred to my opening comment and basically in line with what we saw last year which is around 27.6%.

Okay. Thank you.

Hi, Thomas,

Your next question comes from Scott Schneeberger with Oppenheimer. Your line is open.

Thanks. Good afternoon. I'm just curious, with the two client acquisition tools turned off, the Refund Advance loan and 1040 EZ for free at the end of February, yet the early season still down 10% year-over-year at the IRS for the industry. Could you elaborate on the decision now, and is there a concern that with those turned off at that juncture, that you're going to be leaving a lot on the plate in the month of March? Or do you think you have obviously seen more a week or two after February 24, which is your cut-off point for this year, so could you please elaborate on the decision process there? Thanks.

Yes. I think we’re comfortable with the decision. And I think, one of the things that is constantly extending promotions doesn't drive any -- drive, get people in the office and I’m really pleased with how the sales team, franchisees and our sales and service team has executed against the February 28 date in terms of bringing clients to the door. So, I think we’re comfortable with that and with our program. Obviously, we still have on the digital side H&R Block More Zero is still out in the market. On the Assisted side, obviously we're very pleased with our partnership with IBM Watson. So I'd say at this point we're very comfortable with where we stand.

Thanks. And we appreciate the RAL data, the update on that. And Tony's is there any data you could provide with regard to 1040EZ for free especially comparing and contrasting it to fiscal year 2011? Thank you.

Yes. I think the performance is different, Scott. Obviously at that time is the first year we launch the program. I think the competitive landscape was different both on the Assisted and the DIY space. We didn’t expect it to have the same result that we had in 2011 and we’re basically in line with those expectations. So, we’re pleased with the result. It’s definitely having an impact on our early-season performance. It’s one of the reasons we’re taking share in the early part, but it’s not the only reason. I think Refund Advances is also driving a lot of traffic in and it’s kind of two-pronged approach on Assisted side.

And Tony just a follow on that, it was clear from Kartik’s question with regard to what you're expecting for full year on Assisted client loss, the net average charge for Assisted flat to slightly up versus down in the prior guidance. Could you just elaborate on what's driving that and any more color perhaps on magnitude? Thank you.

Yes. There’s a few things. I mean, it’s obviously a mix driven. The other thing we’re seeing is franchisees math is up more than we expected and that's for a couple reasons; one, the participation in free EZ is left on the franchise side and that’s the main reason we’re down on the company side. Absent that, our net average charge would be up slightly consistent with what we shared in December. So, as those franchisees don’t participate they’re just not having as big of an impact. Second thing we’re seeing is franchise offices are just their base price increases is outpacing what we’re doing on the company side this year. As a reminder, franchisees still having a net average charge. It’s quite a bit less than company, so we’ve seeing a little bit of that catch-up but it’s not a material change.

Thanks very much.

Thanks Scott.

Our next question comes from George Tong with Piper Jaffray. Your line is open.

Hi. Thanks. In the Assisted category H&R Block outperform the industry with more decline volumes for the end of February in large part to Refund Advance. Given now Refund Advance is completed as of the end of February can you discuss what leverage you have to drive recovery in Assisted growing performance in the second half of the tax season? I know you mentioned Watson. Are there any other drivers that you see that helps the performance volumes?

Yes. As I said, our sales culture, the initiatives we pick in to drive our business development efforts and our conversion effort along with Watson. And then, I’m not going to comment on if there’s anything else that were going to do, but we know we have that execute some things in the second half, that’s generally a client that is sticker for all of us, ourselves as r sales as well as first of all, more difficult to drive new clients in the second half, but we’re pleased with where we stand today, so that’s where our efforts are right now.

And the other thing I would add is, we know a lot of the delay it’s just that its simply delay, so we think a lot of these clients that absolutely plan to come see H&R Block are just delay with rest of the industry is and if that catches up we’re going to benefit as well.

Got it. In the early season [Indiscernible]?

George we’re having trouble hearing you. I don’t know whether you’re on headset or something, but can you try to make some kind of adjustment. We really have difficulty to hear you.

Is it better?

Yes, it’s better.

Great. So in the early season, can you talk about what you're seeing with EITC productivity given the implementation of the PATH Act and if you are seeing reduced market share at the independents this year?

Yes. it’s hard for us to gauge how other – how independents are doing or any other branded players, we don’t have much information on that. The PATH Act has clearly how we had an unintended consequences of delaying filings for a lot of people as opposed to, the IRS did the best job they could in terms of saying don't change your filing pattern, but clearly the filing pattern changed. So, I don't know whether that's impacting independently anymore than anybody else. To-date like I said I’m pleased with what we have done. We see a nice traffic to our offices and that’s where we focused on.

That’s helpful. And then lastly, can you talk a little bit about visibility you now have on cost savings from structure now that you’re further into the tax season and how those things will compare with cost of funds in the pricing and promotion, and what are the implications are for margins. I know you dedicated your on-track guidance relatively are flat EBITDA margin, but just little of much more in terms of the puts and takes with regard to that funding to promote promotion and the cost from restructuring?

Yes, George, it’s Tony. Obviously there's a lot of math that goes into all the changes we implemented this year from our reduced pricing structure in DIY with more zero going out free EZ, offering Refund Advance and essentially all of those programs were funded by the cost reduction efforts we made next year. We are going to go through that that taken in tying all those numbers other than to say we are very pleased we’re able to hold our EBITDA margin guidance essentially in line with where we ended last year.

Great. Thanks very much.

Thanks, George.

Your next question comes from Anjaneya Singh with Credit Suisse. Your line is open.

Hi, guys. Thanks for taking my questions. Appreciate all the color on the new client acquisition, but just wondering if you have any preliminary sense of how retention is trending on your existing clients or your prior clients I know you gave some statistics on the RAL uptake of your previous clients. Just wondering how is retention trending for those clients especially in light of this RAL promotion?

Yes, and Tony if you want to add anything. I mean, I’m saying general retention been one of the tougher for us to gauge this season due to the delay. So that is probably been one of the tougher things to analyze in terms of retention. As Tony said we do believe when it comes to prior clients we've always been pretty good at predicting how they’ll come in and obviously I think probably for everybody in the industry prior to delay. So that’s been a little tough to see. I think we have seen is that on the early season client, we have seen some retention gains for the EZ and the EITC client what they have been there.

No. And similar with DIY, I think all three of our promotion run yearly part of season are just a new client offered. They are available to prior clients as well, so we would expect retention benefits on both sides of business.

Okay, Got it. As far as second question it sounds like the RAL promotion or the promotions in general have had helped your first half of tax season performance, but could you rank order how the RAL product did versus the EZ products in attracting new clients was one more impactful than the other? And with the noise around the PATH Act delay did you have less of an uptake on RAL versus what you may have expected?

I’ll let Tony answer the second part. I think the rank order number anything like that I think they work well together. I think it is clear that there was something for you everyone there are numbers really to design with for a EZ client, we have the free product for EITC clients and others who have larger refund was the Refund Advance for the 1040 client more sophisticated client who come s in wine who comes in the February on. There’s the Watson programs. So I think that’s the way we design it was to have broad appeal for the across the entire industry.

I was going to say, any time you're launching a new product like Refund Advance its challenging to figure out what the interest level be and what the take rate. We obviously did research, but any time at the first year program its challenging to predict. And that being said, we couldn’t be more pleased with the performance. We have a lot of excess capacity which we wanted to make sure that we didn’t run out of money if we have that demand there if we have that demand there, but given it is a variable program and we essentially paid for the volume we used. The costs were left in, it otherwise it would have been. We saw significant benefits from our new client growth perspective, specifically for EITC clients versus really what the program was design to do. So overall couldn’t be more pleased with the performance year on the Refund thing.

Okay. That’s helpful. And a final one from me on your financial services products. It was nice to see the revenue for Emerald Card and peace of mind being up pretty dramatically year-over-year I realized just three seasonally lighter quarters, but what would you attribute that increase too as it just been the monetization, declines that you got on RAL side, just wanted to get any thoughts on there and if you expect that to continue for Q4?

Yes. Emerald Cards, it was clearly driven by the Refund Advance. We’re up across the board. We think that was one of the benefits of this program was the increase in number of cards, the number of deposits, the number reload dollars, take rates, those are all well north and we’ll report out on those specifically at the end of the fiscal year. And then on peace of minds.

Yes, peace of mind we actually, the future revenue and then recognize it over about 40 months period. So that’s really the benefits we gotten for the last three year. We’re increasing our take rates and sales and peace of mind in previous seasons that were now recognizing in the fiscal year.

Okay, great. Thanks a lot.

Thanks.

Your next question comes from Hamzah Mazari with Macquarie Capital. Your line is open.

Good afternoon. Thank you. Just a question on the balance sheet, how you guys thinking about current leverage, has the philosophy changed at all on still being investment grade. I know you only borrow for a short amount of time in the commercial paper market and the reason I ask you as if you hadn’t sold sort of the mortgage portfolio, is it fair to say you would still be aggressive on the buyback?

So, let me answer the first part and then Tony take it the philosophy on investment grade has not changed.

Thanks a lot.

I mean, we absolutely want to maintain investment grade, I mean, we’re seasonal business we have a line of credit that we have to maintain to fund our off-season which is a significant amount of cash spent. We’re not going to comment on specifically our approach going forward on share repurchases or even our capital plans for next year we’ll share additional thoughts when I get in the fiscal year, but we we're still committed to investment grade no change.

Okay. And just a follow-up question, Bill, I know you talked a lot about regulation and the new regime and potential impact to your business. Do you have any early views on sort of the Republican plan on Obama Care going away and how that impacts your business or is it just too early to say and its net neutral. Any thoughts on that would be helpful? Thanks.

Yes, I said in the prepared remarks, when it comes to ACA specifically, the American Healthcare Act that was introduced into the House yesterday which has a fair amount of controversy around it, and many of the proposals of it, even leading up to that, were part of it or a large part of it was grounded in refundable credits, so it would go through the tax code. I think that will be part of any final plan that comes together. And then when it comes to individual taxes, there are a lot of ideas around taxes, and I think in the end, frankly, wherever it nets out, people are going to be confused. I think they are going to turn to us for help, and I think that given all of the competing agendas, it will come out to where I think the rates will be lower. I think that the President is pretty clear, that he wants that. With regard to everything else, that's why frankly I'm puzzled as to why people think this is a negative for us, and I think they need help sorting through that. And as I said, what's getting lost in this, the most important benefit to H&R Block ultimately could be the corporate tax reform. Everything I've seen is, the centerpiece of that is to lower the rates, and given we run 35% tax rates, plus or minus, all the numbers I'm seeing, that's going to be a lot of money for us. So I continue to be puzzled as why people write that this is going to be some big negative for H&R Block, I think it's a tailwind for us.

All right. What do you do with the tax savings, do you buy back stock? What do you do? There's no real acquisitions. Do you have a sense of that or do you pay down debt?

Oh, Hamzah better than that. When the money comes, we will definitely figure out something to do with it. So I'm not going to jump ahead. There's a long white tail in Washington on this, so when that comes it will be a pleasant discussion we will have internally and then certainly with all of you.

Okay, great. Thanks a lot. Appreciate the color.

Thanks, Hamzah.

Your next question comes from Jeff Silber with BMO Capital Markets. Your line is open.

Thanks so much. You mentioned that the partnership with Watson, can you give us a couple of specific examples as to how the whole experience has changed with Watson?

Yes, so what happens, you come into our offices now, and we realize we've had to really start with an enhanced client experience. I think Apple changed the retail landscape forever, that people want to be engaged, they wanted to do something that's more involving, and that's what we set out to do. And once we decided to partner up with IBM Watson, and really Watson is about, what I love about their philosophy is they call it augmented intelligence, man and machine. And that really fits our profile completely which is, how do we enhance the tax pro, how do we come out with the best outcome for our clients. So I think the best way to think about it is, when you come in, the client will come through and sit there and look at the monitor, and Watson, along with the tax pro, feeds in a very visual manner, various deductions and credits that could apply to that particular situation, to get the best outcome. Think of it, Jeff, as putting a bunch of yellow stickies on a board to say, has this been part of your life in the past year or what? Watson is also a learning environment. Watson is getting smarter along the way. Watson, we invested Watson with the U.S. tax code. We invested Watson with the 13 million tax returns that had 600 million data fields, so it is learning along the way, and it is going to be smarter next month than it is right now, it's going to be smarter next year. And that's why a multi-year agreement was so important to us. This isn't about a promotion. This is about ultimately getting the best outcome for our clients, and that ties back to our marketing slogan, if you will, of Get Your Taxes Won.

So do you think over time this can be increase I guess the accuracy of your returns potentially less errors etcetera?

Yes, that's exactly what it does. It does a couple of things. One, its goal is to find every deduction and credit applicable to that individual tax situation. And also whether you are the most experienced and best tax pro or a first year tax pro, it's going to enable that, whatever level of tax pro you're at, to give you a partnership, a machine if you will, the Watson, the IBM people, Watson is a living breathing entity. So Watson is there to help the tax pro to come up with the best outcome, and that's what we plan to do. It ultimately to us was about having the best product in the industry to come up with the best outcome for our clients, whether that's to reduce the amount of tax you owe, or to get every dollar you owed in your refund.

Okay, great. And just one clarification, the H&R Block more zero promotion, that sill going on, correct?

That is correct.

Okay, great. And I’m going to ask you, I mean do you expect that they continue for the rest of tax season?

The answer to that it is going on as we speak.

All right. Thanks so much.

Well, I’ll figure that out, but it is continuing.

Okay, great. Thank you.

Thanks, Jeff.

Your next question comes from Michael Millman with Millman Research Associates. Your line is open.

Thank you. So it seems like for the first time you have what the company has or maybe only you build have as part of your compensation a specific goal in terms of returns. So could you since that’s a public knowledge could you go into further and tell us what that number is?

Mike, I’m little insulted by what you wrote the other night. I have never run this company to benefit myself. I did not receive a bonus last year and the board and I work very closely together on the strategy first, which is what happens and then the compensation is set from there. This year as you well-known, our goal was to arrest the client decline which means that a component of the topline and the bottomline. It is not the majority components. It is a part of that component. It is part of my entire senior team and the board has high integrity when they set those compensation parameters.

Fair enough. Could you tell us what that number is however?

We never reveal that until after it’s done. But believe me, my goal is shareholders value.

And looking at the numbers comparisons I think in 2013 you gave had date-to-date number, could you give the date-to-date number for the IRS to make the numbers comparable with your date-to-date numbers, I assume you're a date-to-date?

So the numbers that we share in the opening comments and actually in the press release are date-to-date through the 24th relative to the IRS, so there on an apples-to-applies basis. And then the results in the back of the table Mike are through the 28th and those are day-to-day. So excuse me. The number in the press release are day-to-day comparable to the IRS and the back of the table they are date-to-date.

I see. So, the IRS number you use was down 13?

Correct.

Okay. In 2013, I think you – that was last year until now doing free EZ, I think you’ve indicated then that you had difficulty modernizing – monetorizing that. You talked about how you expect to monetorize that going forward into the next couple of ex seasons?

Well, first of all the industry has changed. There are more free offerings out there. And we now have over the past few years done a better job of attaching our product. So if you use your turn that is a way we’re monetirizing our ability with free EZs that we have an ability to attach more products to those clients.

For example, I have now have taxes identity shield which is a product that we didn't have in 2013, so not only are –as to Bill’s point I think better selling products and attaching product, we also have an incremental product that we didn't have then.

Thank you. And on Watson are you paying full freight or is IBM and a substantial amount to get into the retail business?

I’m not sure, I’m understand the question.

I guess bottom line is what you’re paying for Watson?

I’m not going to go into the details of our relationship with IBM.

And is it fair to assume that there is some sort of sharing in the cost?

It’s fair to assume that we have a very healthy partnership that is exclusive in multi-year and I'm very pleased with the relationship.

Okay, great. Thank you.

Thanks Mike.

Your next question comes from Scott Schneeberger with Oppenheimer. Your line is open.

Thanks for taking the follow-up. Tony, I was wondering if you could elaborate a little bit on marketing spend, advertising spend and timing. You maintain the EBITDA guidance for the year, I’m curious little bit of it the kind behind the curtain on the flexibility you had as you are discovering the delayed industry tax season? Thanks.

Yes. I mean we said along that we would have reduced marketing spend for this year. We were -- we were purposeful in running to roll out and we want their marketing campaign Christmas night. We wanted to make sure we signal to everybody that this is a very different H&R Block this year. And so, we launch that. On the margin we were able to move some things around once we saw the delay, but we have subsequent momentum that we didn’t think over it too much. And so I’m pleased with the way the media plans, the media team did the terrific job of buying we are obviously pleased with the creative, we are pleased with the brand health scores, so we were able to adapt somewhat to the delays. But I want to make sure that people really got the message that this is going to be a very different H&R Block this year.

Thanks. And just one quick one -- for the last one. CapEx a little bit higher year-over-year, I imagine some of that has to do with the Watson process, the additional monitors it sounds like a lot of new monitors for this store front. I am just curious is – are we still looking at a 3% to 4% of revenue range for this year and going forward? Thanks.

Now that’s exactly right. It’s in line with what we shared in the Q2 outlook Scott and we were able to take into account the investment in monitors and the watch in relationship into our CapEx outlook that we provided at Q2.

Yes, we look for bigger outlook, we are very consistent. That number or guidance of the 3% to 4% is unchanged.

All right. Great, thanks very much.

Thanks Scott.

There are no further questions at this time. I will now turn the call back over to Colby Brown.

All right, thanks everyone again for joining us today. This concludes today’s call.