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Saturday, 4 September 2010

image for H&R Block Bullsh-ts its Way Through Their Q2 Earnings Call. (Part 1)

H&R Block broke it to The Street that they were posting a loss of 40 cents a share during their Earnings conference call.

Here is the transcript of the call, complete with translation (in red):

H&R Block CEO-du-jour Alan Bennett: Earlier today we reported our first quarter net loss from continuing operations improve to $0.36 per share prior to a $0.04 per share charge for severance cost related to a recent restructuring.

"We're posting a 40 cent loss. Sleep well, shareholders."

These results were generally in line with our expectations but they don't tell too much given the seasonality of our businesses and the fact that we make almost all of our earnings during the last four months of the fiscal year. However, our results do reflect some progress in reducing embedded cost from our company and I believe with the right people in place, we can accomplish much more in the future.

"We never make money in the first 3 fiscal quarters, and we're OK with that. We'll financially rape our three remaining clients next tax season."

One area that appears to be causing concerns in the market is the issue of contingent loan repurchases obligations arising out of our former mortgage business; an area where we are receiving several questions from investors and it seems to be subject to some speculation that is not based on fact.

"We've been absorbing sh-t Option One mortgage after sh-t mortgage into H&R Block Bank, and we've been caught."

Recent market speculation regarding potential losses does not relate back to any facts that we have observed. We have not seen any adverse change in our level of claimed payments.
"The sh-t has not yet hit the fan. But it will."

In fact, since we established a reserve of $243 million in the spring of 2008, we have not added to our aggregate reserves. Of course, it is always difficult to prove the absence of a negative and ultimately time will resolve this issue. The bottom line is that we believe our financial reserves here are adequate.

"That $243 million will eventually go to cover bad debt via our sub-prime mortgages and class-action suits, but we don't have to consider it lost money. Yet."

...We are fortunate to have one of the highest brand awareness scores in the world and our biggest asset continues to be our more than 100,000 highly trained tax preparers who collectively reflect the highest quality standards of expertise and professionalism.

F--k! Even Bennett's sucked down the H&R Block Kool-Aid. Brand recognition is wonderful, IF the brand represents value. Mere recognition means f--k-all! I recognize the Charles Manson brand, but I ain't spaying him to sing at my daughter's birthday party.

I am optimistic about our company and our prospects for increasing revenue and earnings in the future. In July and August, I've spent a significant amount of time in the field with our franchisees and our field associates. I have had the opportunity to reacquaint myself with many of our talented experienced leaders, as well as meet some of our new recruits. I am pleased but not satisfied with the progress we are making in preparation for the upcoming tax season, as we have much more to do to be fully ready.

Fix the pricing, stop raping clients with 36% RAL loans, pay the tax pros a competitive wage, and banish Turbo Tax to the Phantom Zone. Everything else is bullsh-t.

Since our June earnings call, and my arrival in July, there have been several new and impactful developments on the regulatory front. Let me update you on these recent developments.

As most of you know, last months, the IRS announced it will no longer provide the debt indicator to tax preparation firms and financial institutions. We are very concerned about this decision, because the debt indicator is an important underwriting tool that lenders use to determine whether there are any leans against a taxpayers refund.

"How can we give these deadbeats usury-level loans when we don't know the depths of their deadbeatery?"

By eliminating this tool, lenders will be hampered in determining appropriate credit worthiness, causing lower approval rates, higher credit risk and higher cost for our most vulnerable taxpayers. In addition, the IRS does not provide direct real time access to the debt indicator for taxpayers, but we hope they will move quickly towards creating real time 24/7 access for taxpayers to their own financial information.

"Because we'll ask the taxpayer to get the information, and then we'll use it for underwriting decisions. Check and mate, IRS!"

We believe that every American should have the right to access the information regarding their IRS credit status, 24/7. This isn't a privilege in our view, but a right of citizens to their own information.

"Did I mention that we'll ask the taxpayer to get the information, and then we'll use it to our advantage? I did? Good."

This move by the IRS will not eliminate clients demand for financial products, but most, all of the 8 million consumers with financial products in tax season 2010 will only learn of the IRS decision when they visit our office this tax season, and learn they cannot qualify for credit as they have in the past or their amounts of credit are less and in any case likely more costly.

"So they'll pick up their W-2s and beat feet over to Jackson Hewitt, which'll give a RAL loan to a radish. We'll lose more market share to the competitors, and then call it 'Lessons Learned' while preparing for Tax Season 2012."

In many cases consumers may opt for other less optimal financial products. The IRS actions with regard to the debt indicator will not prevent H&R Block from offering financial products to serve the needs of our client.

Yeah, right.

While the structure and cost of the products may change, we believe the decision on whether to use a financial product and if so what type should be a choice for our clients to make. As previously announced, we estimate that this decision will reduce our fiscal 2011 earnings per share by about $0.05.

"While the structure and cost of the products may change..."

...Over time, we believe we have a substantial opportunity to attract even more independent tax preparers to the H&R Block family, particularly those who maybe looking for strong training in infrastructure support to meet these new requirements, who are those who are worried about settlement product availability.

"Is this Joe's Deli and Tax preparation company? Have you ever considered selling your business to H&R Block?"

Our pipeline of qualified franchisees continues to grow as a result of these issues and we have stepped up our franchising efforts to supplement our new client growth initiatives. We also continued to sell certain tax offices that we believe can be better operated by franchisees.

During the first quarter, we saw 127 offices and we expect to sell approximately 150 additional offices before the tax season begins. Gains on the sale of these offices have been deferred and will most likely be realized in the fourth quarter. The rationale for this activity is not around profits today, but rather around location considerations and long-term growth optimization.

"Is this Joe's Deli and Tax preparation company? Have you ever considered buying an H&R Block franchise? We're getting out of the company-owned office business."

Turning to the market environment; we know this year will be another challenging year for the tax preparation industry. Unemployment continues to be extremely high in general and disproportionately high in our early season core client base.

"It isn't Turbo Tax that's undermining our business. That's ridiculous! We're H&R Block, dammit! That's like saying Blockbuster Video is losing business to Netflix and Redbox. That is... Wait, what?"

Our internal plan assumes a slight decline in IRS filings this year, given the sustained high level of unemployment. For us to be successful, we must attract new clients by improving our execution against a few impactful initiatives, which leverage our strength.

"It isn't Turbo Tax that's undermining our business, its unemployment! Unemployed people don't need a tax refund! Because... Wait, what?"

Over the past two tax seasons, we have experienced a loss of approximately 2 million retail tax clients. Nearly two-thirds of our client losses have occurred during the early season in January and February, primarily among lower income clients, who tend to also to take a financial settlement product.

"We had Jackson Hewitt on the ropes! All we had to do was service all the people that were leaving them to get a RAL. So, what did we do? We cut Tax Pro labor hours!"

While aggregate tax revenues and earnings growth are more important for the long run than the raw number of clients, it is clear that this level of client loss over a short two-year period is unacceptable and needs to be addressed now, and given our client retention to the brand is in its 70% range. This means we must be successful in attracting significant numbers of new clients to H&R Block just to stay even.

"Damned Turbo Tax."

As we prepare for the upcoming tax season, on the retail side of the business, we are placing an emphasis on the following. Driving further improvements in our office readiness and client service initiatives, marketing our settlement products, using more focused and compelling marketing to drive increased traffic in our retail offices and improve our value proposition, aligning incentives to focus on client count and profitability, and increasing the number of clients to utilize the Emerald Prepaid Debit Card.

"See, these rubes will pay anything for their tax refund as long as the bathrooms are clean. Right?"

As you may recall, a key component of our tax season 2010 plan was to focus on office readiness. Our goal was to significantly improve the client service experience and the overall environment in our offices.

"And that worked so well, we're doing it again!"

For tax season 2011, we will build on our front desk coverage investment from last year by having more associates who are better qualified and with coverage hours more aligned to key office activities.

"We'll still cut hours for the person who actually does the tax return, but, dammit, there'll be 28 people waiting to ring you up."

In 2010, this investment improved our walk out rate by one-third and we think we can improve on that again this year. We also upgrade the look and feel of many of our offices and launched a flagship office in New York.

"So... office decoration is more important than the quality of advice clients received from their tax professionals.And that Times Square office is damned pretty!"

Additionally, we worked last year to move 800,000 clients to our stronger tax professionals, those that retained clients at higher rates. By better matching client needs with tax professional skill sets, we expect to see, and in fact, did see increases in client satisfaction. Here again, we believe we can improve our initial steps in this area.

"We called it our 'Rearranging Deck Chairs On The Titanic' philosophy."

Together, these initiatives led to a 130 basis point increase in client retention to the brand, which is encouraging given that this metric steadily declined for a number of years. We expect increased client satisfaction to translate into further retention in referral gains in 2011.

"So, instead of a huge hole in the side of the boat, it's a tiny one. It'll still sink, but slowly."

In a settlement product space, we did not capitalize on the opportunity that was created last year when some of our competitors' funding was limited. Simply put, we were late in getting our message out last year, and we didn't direct enough of our marketing resources to take advantage of this opportunity.

"But we had shiny new signs printed up, telling the world about the RALs we had to offer. We didn't ship them until MARCH, but our heart was in the right place."

It is also becoming clear that our Emerald Prepaid Debit Card program is an increasingly valuable asset. Our Emerald program had approximately 2.5 million users last year and over $8 billion in annual deposits. Currently, the card is being used by less than 20% of our retail tax clients, primarily as an inexpensive way to facilitate tax refunds.

"So, 81% of our clients tell us to shove the Emerald Card up our ass. At H&R Block, batting .190 is a success!"

However, the Emerald Card gives clients who do not have a traditional bank account, an opportunity to handle their personal financial transfers and basic banking needs. We believe we have opportunities to expand the card's usage and related revenues.

"More users = more 'related revenues' = more cash to piss away on sub-prime loan buyouts! Yay, us."

Market valuations for companies that compete in this space are generally at market multiples far exceeding that of H&R Block's, which makes our program even more interesting.

"Look, over there: They suck more than us!"

Another key area that I'm focusing on is leveraging our strong brand with more focused and compelling marketing to drive increased traffic into our retail locations and improve our value proposition.

Bullsh-t. See H&R Block: Cardboard? No. Delicious? Yes!

Frankly last year's message was not compelling enough, and we did not execute well in any case. So this is an area where we need to make significant improvement. What you will see this tax season, within both our retail and digital channels, are clear messages and reasons why taxpayers choose H&R Block for their tax preparation needs.

"Choose H&R Block: It's what Jesus would want."

While our marketing plan is nearly complete, including our pricing strategy (HA!), we will refrain from going in to further details of those plans for competitive reasons, but I am very encouraged by our direction and our progress.

I am also focused on ensuring that we have complete alignment of responsibility, accountability, measurement and reward throughout our workforce. I've recently aligned our field incentives to focus on client counts for a leadership closest to the office and closest to the client, as this is the metric they can most influence.

RUSS SMYTH: "I'll put Phil Mazzini back in the field, and send Tom Weatherhead to Michigan, and... gotcha, four across."

ALAN BENNETT: "Let's put Phil Mazzini here, and fire Sabrina Weiwel, and make Sandi Romero irrelevant and...

DICK BREEDEN: "Here, I won."

ALAN BENNETT: "Where, I don't...

DICK BREEDEN: "Here, diagonally."

ALAN BENNETT: "Pretty sneaky, sis."*

Last season, our marketing efforts led to a 25% increase in our Web site visits, but our capture or conversion rate declined, which led to only 4% growth in our online clients.

"More people visited our online store, but far fewer of them actually bought something. Yay, win for us!.

* No more 'Connect Four' references, I swear.

The story above is a satire or parody. It is entirely fictitious.

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