Q4 2022 H & R Block Inc Earnings Call

August 9, 2022

Okay.

You for standing by and welcome to H&R Block's yearend fiscal 2022 earnings conference call.

At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone.

I would now like to hand, the call over to Vice President Investor Relations Mccalla Galena. Please go ahead.

Thank you operator, good afternoon, everyone and welcome to H&R block full year fiscal 2022 financial results Conference call.

Joining me are Jeff Jones, our President and Chief Executive Officer, and Tony Bowen, Our Chief Financial Officer.

Earlier today, we issued a press release and presentation, which can be downloaded or viewed live on our website at investors Dot HR block Dot com, our call is being broadcast and webcast live and a replay of the webcast will be available for 90 days.

Before we begin I'd like to remind listeners that comments made by management may include forward looking statements within the meaning of federal Securities laws.

Statements involve material risks and uncertainties and actual results could differ from those projected in any forward looking statement due to numerous factors.

For a description of these risks and uncertainties. Please see H&R Block's annual report on Form 10-K, and quarterly reports on Form 10-Q as updated periodically with our other SEC filings.

Now some metrics we will discuss today are presented on a non-GAAP basis, we've reconciled the comparable GAAP and non-GAAP figures in the appendix of our press release and presentation.

Content of this call contains time sensitive information accurate only as of today August nine 2022.

H&R block undertakes no obligation to revise or otherwise update any statements to reflect events or circumstances. After the date of this call with that I will now turn it over to Jeff. Thank you Mikael good afternoon, everyone and thanks for joining us.

Fiscal 2022 marked another year of strong performance.

The multi year trend of improved results.

We delivered another great tax season, and achieved meaningful milestones in our block horizons journey, including a record year in small business launched.

Launching our new mobile banking platforms Bruce.

And more than tripling the use of virtual tools among tax clients.

As a result of the strength in our business. We are pleased to also announce another increase to our dividend and new share repurchase authorization.

I'll begin as usual by discussing the progress we have made across our strategic imperatives.

They're more on the tax season, and then Tony will provide details on our results and discuss our fiscal 2023 outlook.

In small business tax we are delivering exceptional results.

We saw strong growth in both assisted and DIY clients as well as improved mix, which led to a double digit revenue increase this tax season versus last year.

Our various client acquisition and retention efforts are working including enhanced marketing efforts and the introduction of an advanced certification for tax professionals.

In addition, we are building out our bookkeeping and payroll offering and testing new services.

Overall, it was a record year and we're focused on building upon the momentum we saw in fiscal 'twenty two.

Turning to wave, we had another solid year of performance.

Revenue grew 28% over last year and average revenue per user or <unk> continued to accelerate on both a sequential and year over year basis.

I am excited about the ongoing innovation, including the development of a unified mobile experience that will strengthen waves product ecosystem.

We acquired wave three years ago, and it has since achieved important financial and operational milestones.

As such <unk> founder and CEO Kirk Simpson believed it was the right time to hand over the reins to a new leader to take wave into its next phase of growth.

I want to thank Kirk for his leadership and many accomplishments.

Importantly, Kirk was instrumental in selecting our new leader does that here code yet.

Zahir was formerly the general manager of North America for after pay where he led the company's rapid market expansion.

<unk> he was the executive Vice President Global merchant solutions and partnerships at Mastercard.

His significant Fintech management and product development experience make him an excellent fit to lead and scale the business and I am excited for this next chapter of wave.

Overall small business continues to execute and I'm pleased with the progress we made in fiscal 'twenty two.

Moving to financial products, we're focused on driving innovation within our mobile banking platform spruce.

We've had four new app releases since the January launch streamline the sign up process and made enhancements to the existing credit score feature to help clients understand how it is calculated and how they can improve it.

As of June 30, we have 160000 sign ups and $83 million in customer deposits.

As a reminder, we introduce clients dispersed only in the DIY channel at launch to learn and gain customer insights.

Now that were outside of tax season, we're continuing to innovate the feature set tests customer acquisition and prepare for the launch in the assisted channel next tax season.

Our block experience imperative, which is all about blending digital tools with human expertise.

<unk> to drive a better experience for our clients for.

For example, our technology investments enable clients to be served fully virtually to fully in person and everything in between.

During the 2022 tax season virtual uptake from clients more than tripled.

Embedded machine learning in the DIY user interface is producing a better experience for customers by streamlining the time to complete their return.

And we are better anticipating when the offer of DIY user help from a tax pro which adds expertise to maximize the outcome.

Our new innovative fulfillment network enables tax pros with capacity to process a return from anywhere in the country, regardless of location, which results that our clients to be more quickly served and better leverages our tax pro availability.

This was one of the reasons, we saw strong tax pro productivity this season.

Our enhanced virtual technologies had the added benefit of providing efficiencies for the business we.

We have begun reducing our existing square footage without closing stores.

As most of our tax pro training is now online and we no longer have the need for large conference rooms, and many offices.

We've also tested drop off only locations this year to better leverage the fulfillment network serve clients quickly and optimize staffing.

Finally, robotic process automation or RPE have streamlined highly manual back office processes, eliminating nearly 40000 human labor hours in fiscal 'twenty two alone.

As you can see we continued to achieve significant milestones in our block Horizons journey and I am very pleased with our trajectory.

Turning now to results we finished the year strong in both the assisted and DIY channels.

Having more clients than typical in the May and June period.

We exceeded our guidance on both revenue and EBITDA and continued our multi year trend of creating value for shareholders.

Since 2019, the last normal year prior to the pandemic our performance speaks for itself.

We have grown total clients.

<unk> grown assisted market share grew.

Grown revenue and EBITDA more than 12%, each and reduced shares outstanding by 21%.

Leading to adjusted EPS growth of nearly 50%.

And we've grown the dividend.

Stepping back over over double that timeframe since 2016, we have grown adjusted EPS by approximately 110%.

We emerged from the pandemic much stronger as a company and are on a path of growth.

In summary, it was another great year for H&R block delivering on our purpose to provide help and inspire confidence in our clients and communities everywhere.

I am excited about the momentum in the business the strength of our capital allocation and where we're headed.

Tony will now share more on our financials and outlook.

Thanks, Jeff and good afternoon, everyone.

Our results continue to be strong and I am happy to be here today to share more detail.

I'll begin with a review of our fiscal year 'twenty two results.

Provide an update on the ongoing strength of our capital allocation practice.

Discuss our outlook for fiscal year 'twenty three.

And our thoughts on how we deliver total shareholder return over time.

As a reminder, the prior year included the end of tax season, 'twenty, which was extended to July 15th of that year.

That causes our results to decline when you compare fiscal year 'twenty two to the prior year.

In fiscal 'twenty, two we delivered $3 $46 billion of revenue, which decreased three 5% or $125 million over the prior year.

When normalizing prior year results for the tax season impacts recognized in July of 2020, and the impacts of Emerald card stimulus total revenue increased by $165 million or 5%.

Total operating expenses were approximately $2 7 billion, an increase of approximately 1% or about $21 million <unk>.

Primarily due to higher marketing and technology costs, partially offset by lower depreciation and amortization and bad debt.

We continued our efforts of identifying savings to fund our investments and our expense management remains strong.

EBITDA was approximately $890 million, a decrease of 15% or about $162 million.

Compared to the normalized prior year, EBITDA increased by 9% or about $75 million.

Interest expense was approximately $88 million, a decrease of about $11 million or 11% driven by lower draws this year on our line of credit.

Harshly offset by the $500 million of notes, we issued last June .

As planned in the fourth quarter, we paid off the 500 million five 5% maturing notes that were originally due in November which will result in material savings given the new notes, we issued at a two 5% interest rate.

Pretax income was $659 million compared to $797 million in the prior year and our effective tax rate was 14, 9% compared to 13, 4% last year.

Compared to the normalized prior year pretax income increased by $99 million or 18%.

Turning to share repurchase we bought a total of 23 million shares for $550 million. This year at an average price of $23 84.

This was 13% of our shares outstanding and today, we announced another share repurchase authorization that I will share more about in a moment.

Earnings per share from continuing operations decreased from $3 67 to $3 26.

While adjusted earnings per share from continuing operations decreased from $3 94.

To $3 51.

Compared to the normalized prior year adjusted earnings per share increased from $2 97.

At $3 51.

Or 18%.

In fiscal 'twenty, two we acquired 125 franchise locations.

We view this as a good use of capital given that we were able to repurchase locations at attractive EBITDA multiples and integrate the businesses into our existing company operations.

We believe we can continue to acquire franchised locations, which as we previously shared can contribute approximately a point of growth annually to our topline.

Regarding sand Canyon to long outstanding litigation matters, which we refer to as the homeward cases, or recently fully resolve and sand canyons favor.

As reported in our Form 10-Q last quarter.

We feel great about this outcome for sand Canyon and do not plan on providing regular updates going forward outside of our disclosures in Form 10-K, and 10-Q and other SEC filings unless there is material news to share.

Switching gears, we have a long track record of generating significant cash flow and returning value to shareholders through dividends and share repurchases, which helped drive earnings per share growth.

As we've shared we believe free cash flow yield defined as free cash flow divided by market capitalization is an important metric for our company.

Despite the increase in our market cap in recent months, our fiscal year 'twenty two free cash flow yield remained strong at approximately 13%, which is more than double that of the S&P 500.

Because of the momentum and strength in our business. We are pleased to further enhance our capital allocation by announcing another increase to the quarterly dividend to <unk> 29 per share or more than 7% growth.

And a new share repurchase authorization of $1 $25 billion, which is effective through fiscal year 2025.

Since 2016, we have increased the dividend by 45% and retired nearly one third of our shares outstanding.

In total we returned over $2 7 billion to shareholders in that timeframe and we will continue to drive on ongoing value with these practices.

Let me now turn to our fiscal year 'twenty three outlook.

Given the rollback of the child tax credit for this upcoming year and an expected increase in our effective tax rate from the mid teens to low twenties, we're pleased to provide an outlook with topline growth.

EBITDA that outpaces revenue growth and EPS that grows even faster.

We expect revenue to be in the range of 3535 to $3 $5 5 billion.

We expect to generate EBITDA of $915 million to $950 million from the from growing the top line and leveraging our fixed cost structure.

As I just shared our effective tax rate is expected to be approximately 22%.

We are also adding EPS guidance, which more holistically captures the value we're creating.

For fiscal year 'twenty, three we expect adjusted earnings per share to be in the range of $3 72.

To $3 95.

On that note, let me share more about how we are driving EPS growth and how we think about total shareholder return.

We believe we can grow revenue, 3% to 6% annually over time.

Driven by the many levers we have in place, including about a point from the steady industry growth a couple of points of modest low single digit price increases.

A point from franchise buybacks and nearly a point from wave.

From there we have additional upside with our block horizons imperatives.

We then have the opportunity to grow EBITDA at a rate of nearly one five times that of revenue due to leveraging our fixed cost structure.

After layering on opportunistic share repurchases, we see a path to double digit earnings per share growth annually through 2025.

On top of the P&L expansion, we continue to grow our quarterly dividend, which we have paid since black became public and $19 62.

As Jeff shared over the last six years, we have grown adjusted EPS of 110% or a CAGR of 13%.

You can see that H&R block has had multiple strong years of performance and I am more excited than ever about what is in front of us with that I'll turn things back over to Jeff for closing remarks.

Thanks, Tony.

Before closing I want to reiterate just how pleased I am with our performance in fiscal 'twenty, two and the path we're on we.

We had another great tax season achieved significant block horizons milestones.

And continue to return value to shareholders through our capital allocation practice.

Our success is made possible by the collaborative efforts of our entire organization.

Thank you to our steadfast tax professionals franchisees and associates, who embody our purpose every day to provide help and inspire confidence in our clients and communities.

As well as the team at wave, who continue to execute and drive innovation.

My sincere thanks go out to the team for another great year.

Forward to all that lies ahead of us as we continue to build on this momentum in fiscal 'twenty three now.

Now operator, we will open the line for questions.

As a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone to ask a question. Please standby, while we compile the Q&A roster.

Our first question comes from the line of Scott Schneeberger of Oppenheimer <unk> company.

Scott Schneeberger your line is open.

Thanks, very much good afternoon, everyone.

Great job and excellent that you added this this long term evergreen guidance very much appreciated.

I think I'll start out.

Tony or Jeff just asking what is implicit in the 2023 guidance Tony I appreciate the breakdown of.

Of kind of the long term revenue growth and then and then taking it down the P&L, but what are fundamentally the areas, where you think youre really going to going to going to grow in this coming year.

Specific to the year. Thanks.

Yes, Scott Thanks for the question I mean, it really starts with strength in the tax business as it is.

Start I mean, we've talked about it's a healthy industry that grows about 1% over over time.

And we expect that going into 'twenty. Three we also expect to continue to take moderate price.

Obviously, we're in a high inflationary environment, but we've talked about we think that we can take low single digit price increases.

Arne that right based on customer feedback over the last several years.

Franchise buybacks that actually will continue to be a driver of revenue. We executed 125 locations. This year, we think we'll be in that ballpark going into next year, obviously wave growth will be additive as well.

We're planning to launch spruce in the assisted side of the business, which will be additive to revenue. So all of those pieces working together continued performance in small business tax, which we've seen over the last several years. So all of those pieces working together, obviously driving the revenue side and then leveraging our fixed cost structure as we've talked about obviously variable costs will go up.

We are offsetting inflation, that's hitting us from a comp perspective from a wage perspective, but overall doing a really good job of managing expenses, which is allowing us to grow EBITDA faster than revenue and then EPS is obviously has the leverages as well as <unk>.

Additional share repurchases. So all of those pieces together are the core components of our outlook.

Great. Thanks, appreciate that and then I'm curious.

Had good visibility back in May the last time hosting a public conference call and providing a financial update but it looks like theres going to be some activity. After the tax season deadline. This year that was pretty elevated.

Imagine we get it in your 10-K when that comes out but could you speak a little bit to what you saw after the tax season deadline with regard to volumes and pricing across the liquid and the DIY channel. Thanks.

Yes, Scott this is Jeff Youre, absolutely right and we know we did what we could to position ourselves given that business that remained.

In the assisted business.

We kept more office is open we add more tax professionals working.

Obviously.

That's a strength to be able to be open obviously to capture that volume and we saw continued strength in our napp trends. We met last time Nap was up about 8% and that continued in that period. Following the tax season closing.

And DIY.

We saw some improved performance in the DIY business we.

We also saw a benefit from late season pricing in Nash I think that moved from about 3% to 6%.

So just really across the board the team continued to execute well given the business that remained in the market and that shows up in the strength of our results.

Great. Thanks, I'll turn it over.

Thank you.

Thank you. Our next question comes from the line of George Tong Goldman.

Goldman Sachs George Tong Your line is open.

Hi, Thanks, good afternoon.

In the 2022 tax season net average charge in assisted as you mentioned increased 8% and two thirds of that was driven by complexity mix can you outline your neck assumptions embedded in next year's guidance and the likelihood that complexity reverses next year given some of the factors that lifted 2022 complexity.

Should paper such as crypto in retail trading.

Yes, George absolutely so.

First of all I would say, we feel very good about our value proposition in the assisted business, we're seeing that in multiple ways as we've spoken about and Youre exactly right. The knack increases was about one third price in two thirds mix from complexity.

Think about that headwind as a couple of points of revenue.

And that's a real the rest of our plans have been built around offsetting that again, we think we can offset some in price again with this low single digit price increases and then the growth in the other parts of the business that Tony just outlined.

But that is that as the headwind, but we feel really good about the momentum in the business and the strength of our plans to be able to offset that.

Got it.

Touched a little bit on this earlier, but can you explain in more detail your assumptions around industry growth for next year in assisted and DIY and how you expect market share to perform and H&R block in both of those categories assisted and DIY.

Yes, obviously, we're coming out of just some really crazy years in terms of industry performance in the ups and downs in all of the things that we've been speaking about.

Sitting here today, we're not aware of any major changes in the tax code, that's going to create some new piece of noise and so when.

When we look at the macro factors, we see the industry kind of going back to its historical CAGR of one to one 5%.

And for Us.

There are two things that we expect one is continued strong performance in the assisted business.

And that means continuing to hold or grow market share again over the since 19, we've grown market share in assisted about 40 basis points and feel really good about that performance.

You may remember DIY.

On our last call was one area, where we Werent pleased.

Despite the fact that we've done a really nice job with pricing meaningful revenue growth, we feel really good about the way, we're driving more DIY clients to human health.

But returning DIY to share growth.

Top priority.

Very helpful. Thank you.

Thanks George.

Thank you again to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone to ask a question.

Next question comes from Kartik Mehta of Northcoast Research Kartik Mehta. Your line is open.

Hey, Jeff and Tony jump.

Maybe just a little bit on wave I know has been growing relatively well and I know you had talked about at some point getting your profitability as you look at FY 'twenty three kind of what's your expectation as far as maybe revenue growth goes in.

And what that could mean from an EBITDA standpoint.

Yes so.

A number of a number of things in there Curt.

So first of all obviously, we feel good about wage growth.

Since we bought the company. It has continued to perform very well every year.

So on the top line as we've said that's contributing about one point of growth to block.

But it is still losing money despite improving its operating losses, which is hurting us on the EBIT margin line. So the transition.

Kirk.

Here. This is at the top of his list is coming into the company really understanding how we can accelerate growth and how we can accelerate our path to profitability we.

We still have not put a target date for him when that has to happen.

Because we want to really continue to push growth and that's what he is coming into the job focus on so we will have more to update as we continue to watch the business, but that's where we stand.

And Jeff I know you commented a little bit on real estate. Please in terms of shrinking some of the footprint.

The square footage in an office, but I'm wondering.

Virtual grows.

Is your outlook for the next two to three years in terms of what could happen too often then if there is an opportunity there.

Yeah, So I would connect three three dots here one is.

The consumer adoption of virtual tools.

The second is the changes to operating model to be able to complete returns from any location.

And the third is the reduction in real estate.

So.

What you've heard of US talk about real estate has been about locations, but because we are now testing operating models, where there are drop off only locations.

Or there are locations serving people outside of that location. The focus on square footage. We think is really important and so the first steps we've started to take or to reduce the square footage, where we know it is just simply not being utilized anymore, especially giving our training model.

For years, we've had large training rooms in offices and now that we are delivering our training virtually that's the low hanging fruit in square footage, which obviously helps us on the rent line.

So those three things really have to work together.

And we're making great progress, but the thing I would remind the team about all the time is this is a once a year purchase frequency so were increasing the adoption of the virtual tools, but we have to continue to make that habit for the consumer while we perfect. The operating model changes and we start tackling the low.

Hanging fruit in real estate, so we do see opportunity, but it will be over many years and Jeff setup, but just the opportunity is really on reducing square footage versus reducing points of presence. We think the points of presence are helpful allows for walk in traffic allows for new client acquisition.

But if we can reduce the number or the size of each of those offices, that's really where the savings will come to play.

Thank you both I really appreciate it.

Thanks, Thanks Kartik.

Thank you at this time I would like to turn the call back over to Michaella gallina for any closing remarks.

Thanks, Latif and thanks, everyone for joining us today, we look forward to speaking with you again next quarter.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Thanks.

Okay.

Yes.

Okay.

Yes.

Okay.

Thanks.

Sure.

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Thanks.

Yes.

Okay.

Yes.

<unk>.

Hum.

Okay.

Thank you.

Sure.

Okay.

Thanks.

Sure.

Okay.

[music].

Okay.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

Thank you.

Okay.

[music].

Yes.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

Sure.

Okay.

Sure.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

[music].

Yes.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

Yes.

Okay.

Sure.

[music].

Okay.

[music].

Sure.

Yes.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Thanks.

Sure.

Okay.

Yes.

Okay.

Sure.

Okay.

Sure.

Okay.

[music].

Okay.

Sure.

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Thank you.

Okay.

Thank you.

Sure.

Great.

Okay.

Sure.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Thank you.

Yes.

Thank you.

Yes.

Okay.

Thanks.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Sure.

Okay.

Sure.

Yes.

Okay.

Yes.

Sure.

[music].

Yes.

Okay.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Thank you.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Great.

Sure.

Okay.

Yes.

Okay.

Great.

Okay.

Yes.

Thanks.

Yes.

Okay.

Yeah.

Yes.

Okay.

Yes.

[music].

Yes.

Okay.

Yes.

Okay.

Thanks.

Yes.

Okay.

[music].

Yes.

Okay.

Sure.

Yes.

Sure.

Okay.

Yes.

Okay.

<unk>.

Okay.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

Thanks.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Sure.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Thank you.

Okay.

Sure.

Okay.

Thanks.

Okay.

Great.

Sure.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Sure.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

<unk>.

Okay.

Yes.

Okay.

Yes.

Sure.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

Okay.

Thank you.

[music].

Okay.

Yeah.

Okay.

Yes.

Okay.

Yes.

Q4 2022 H & R Block Inc Earnings Call

Request a DemoDemo

HRB

H&R Block

Earnings