Good morning. My name is Tanya and I will be your conference operator today. At this time, I would like to welcome everyone to the H&R Block Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. I will now turn the call over to Mr. Colby Brown, Vice President, Finance and Investor Relations. Sir, you may begin.

Thank you, Tanya. Good morning, everyone, and thank you for joining us to discuss our fiscal 2018 second quarter results. On the call today are Jeff Jones, our President and CEO and Tony Bowen, our CFO. We posted today’s press release on the Investor Relations website at hrblock.com. Additionally, a presentation for viewing is available via the webcast and will also be posted to the Investor Relations website after this call. Some of the figures that we’ll discuss today are presented on a non-GAAP basis. We’ve 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 2017 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 into the queue. With that, I’ll now turn the call over to Jeff.

Thanks, Colby. Good morning, everyone, and thank you all for joining us. I’m really delighted to be here with you all this morning. It’s been a busy first few months, and I’ve been immersing myself in the business, which has only reinforced my decision to join this great company. H&R Block is a trusted brand that at its core is about helping people. And while much of what I’ve learned will help inform our long-term strategy my number one priority is delivering a successful tax season 2018. We’re excited and we’re ready for the season to begin. Today, I’d like to provide some insight on what attracted me to H&R Block, my approach to the business and the planning process we are kicking off to take a fresh look at our long-term strategy. Given that our primary focus is delivering a strong tax season, I’ll spend the majority of my time discussing key elements of our seasonal plan. I’ll then provide our perspective on tax legislation and what it means for H&R Block. Tony will then walk you through our second quarter results, as well as our financial outlook for fiscal 2018. So let me begin by talking a little bit about what attracted me to H&R Block. As I mentioned, this is a trusted brand with even greater potential. H&R Block’s existence is based on something that truly matters, helping our clients during one of the most important financial transactions of the year. Our client relationships are grounded in expertise and emphasis something that’s rarely seen in other businesses. I’ve spent the past 60 days immersing myself in the business, including better understanding our capabilities. I’ve visited nearly a dozen offices in the U.S. and Canada. I’ve met with nearly 70 franchisees and I’ve hosted client focus groups in…

Good morning, everyone. Thank you, Jeff. We’re excited to have you here. As a reminder, due to seasonality of our business, second quarter results are not representative of our full-year performance. To put it into perspective, second quarter results typically represent less than 5% of our annual revenues and approximately 15% of our annual expenses. That said, our results were in line with our expectations. With that as a backdrop, I would like to provide additional context on the quarter. Revenues increased $10 million, or 7% to $141 million, primarily due to increased international tax preparation fees, positive fluctuations in foreign exchange rates and favorable preseason results in the U.S. Turning to expenses. Total operating expenses increased $18 million, or 5% to $357 million, due to compensation and occupancy costs. Compensation and cost increased due to the variable labor related to revenue increases in the U.S. and Australia, as well as planned conversion of high cost contract labor to lower cost full-time associates. Additionally, a portion of the increase in both compensation and occupancy cost was driven by prior year acquisitions of franchisees and inflationary increases. It’s important to note that the percentage increase in total operating expenses is influenced by the relatively low base. As I shared, the second quarter typically represents approximately 15% of our annual expenses. I’ll provide thoughts on our fiscal year outlook later, but can say that this year, this quarter’s operating expense increase of 5% does not reflect our expectation for the full-year. Compared to the prior year, we saw interest expense decreased $1 million due to lower draws on our line of credit. The quarter’s effective income tax rate was relatively unchanged from the prior year, as higher discrete tax benefits were offset by a lower base rate, both of which are beneficial…

Thanks, Tony. I want to reiterate how excited I’m to be here and how ready we are for the tax season to begin. We have plans in place to deliver compelling value for our clients, and we’ll continue to be aggressive in the market through new partnerships and products and compelling promotions that resonate with consumers all backed by a strong integrated marketing campaigns. And we will deliver this to operational excellence as the foundation beneath it all. We look forward to sharing more when we report our third quarter results. And with that, we’ll open the line for questions. Tanya?

[Operator Instructions] So our first question comes from the line of Anjeneya Singh with Credit Suisse.

Hi. Good morning. Thanks for taking my questions, and welcome, Jeff, excited about having you at the helm at H&R Block. So a question on Tax Pro Go. I was interested to hear that offering. Is this more reactive on your end and driven by client feedback, or is this more proactive on your end as you’re targeting in unmet need? And if this were to gain scale, any thoughts on how you’re thinking about your store footprint going forward? Thanks.

Anj, great to meet you as well. So let me add a couple of comments and then I’ll let Tony give some more detail prior to my arrival. This was absolutely a product that was in development and I was thrilled to see within development, because it was completely based on consumer need. And I think as we have done more and more to understand discrete consumer segment, this is a really great opportunity for a consumer that really wants a lot of help but for some reason, they can’t or they don’t want to visit a national office. And so getting more and more clear on understanding that segment will happen over time as we launch and iterate on this product, but it was absolutely driven by consumer need in our segmentation.

Yes, just to add to that, Anj, we’re not looking at this is a way to reduce our store footprint, obviously, in the short-term, given this is just the initial launch of the product. We’re a long way from having that discussion. It will be delivered with the tax pros that sit in our retail locations and essentially utilizing excess capacity that we have across our nearly 80,000 tax professionals. But it’s still way too early to talk about any impact on our footprint.

Okay. Okay, got it. And as a second question, one for Tony, I realize you probably don’t want to get too granular on the margin guidance, but I want to take a crack at the question anyway. So it seems like, consensus is modeling your margins compressing 80 bps year-over-year. And I think, as a base case scenario, when you folks have talked about the $15 million of one-time benefits in 2017, it would imply a 50-ish basis point drag year-over-year. So as we look at your guidance, could you talk about, what are the productivity initiatives, if you can elaborate on those that give you confidence on comparable margins year-over-year?

Yes. So there’s obviously a lot that goes into it. We did have the $15 million benefit in 2017, Anj, you mentioned that won’t recur in 2018. We also have some normal inflationary increases that are going to roll in this year. We’ve got the additional locations that we’ve added due to franchise buybacks. I’m not going to comment specifically on some of the various productivity initiatives. To be honest, it’s – there’s no one thing that we’ve done. It’s just continuing to monitor our expenses closely to try to drive that. But also the margin is benefited by the fact that we expect to grow revenue, which I highlighted as well. We do expect modest revenue growth and that obviously provide some margin relief as well. So overall, we feel good about where it’s rolling up, and obviously expecting at the high-end of the range this year.

Okay. Thanks so much.

Thanks, Anj.

Your next question comes from the line of Kartik Mehta with Northcoast Research.

Hey, good morning. Jeff, I wanted to ask you just about client count, you talked about modest core improvement. And does that imply that you can get to a flat number this year, or do you think it will be just improvement from last year and will take a little while to kind of get to flat and then grow?

Again, I will kind of tee up some comments on what I’m seeing and let Tony comment more if he wants to. But I think, our goal in the assisted business is continue to improve on the client trajectory and ultimately, we want to see that turn and grow, but not for this year. I think, the growth in clients we expect to continue to come from the DIY business. When I talked earlier about some of my observations, I think, when I talked about relevance and having a relevant value proposition that work as it relates to our long-term strategy the goal ultimately has to become sustainable growth and we will ultimately expect that to be in clients.

I don’t have a lot more to add. I do think, overall, clients, Kartik, should grow really driven by DIY, but we’re not commenting specifically on where we think assisted will land other than it’s going to be better than the trajectory and the performance we had last year.

And then, Tony, on tax reform from a corporate standpoint, at least, on the proposals that are out there right now, what type of benefit do you – and still would you anticipate for Block?

Yes. So, as you know Kartik, we’re in the mid-30% range today, that includes both federal and state. So really on the federal side, the proposal is reducing it down to 20%. We’re still working through the exact impact. There’s obviously a lot of complexity. And reality is, it’s still being debated. It’s in conference right now between the Senate and the House. So, I’ve got the team hard at work, but we’re still cracking the numbers. And I think, regardless, it’s probably going to change before it comes to final law, if you will. So more to share at the appropriate time, but will definitely get a benefit, given our federal rate is closer to 30% than it is at 20%. But exactly, what the impact is, whether or not you’re going to be able to deduct state taxes against your federal, et cetera, there’s still a lot of open questions that are still to be determined.

Thanks, Tony, I appreciate it.

Thanks, Kartik.

Your next question comes from the line of Thomas Allen with Morgan Stanley.

Hey, good morning, and welcome, Jeff. So first on assisted volumes. if you were to split off assisted volumes between client retention and new additions could you just remind us how last year went? How do you think this is going to go?

Thanks, Thomas. So we did get an increase in retention last year by about 2 points. We also were able to grow the new clients last year as well. This year, we think it’s going to be improvements, probably going to come more on the new client side. I mean, we would love to see an improvement in retention. Again, we got a pretty good increase last year. It’s not going as an expectation. We think it’s possible that it could go up, but it’s not a base expectation. So most of the improvement is going to come from continuing to bring in more new clients in 2018 versus what we had in 2017.

Helpful, thanks. And then just thinking about capital return, obviously, it’s not the most efficient thing to just have cash sit on your balance sheet and you should be generating a lot of cash this year. So like could we may be expect to catch up on the lack of buyback this year and next year, or I mean, how are you thinking about that?

Thomas, this is Jeff. Let me just tee it up real quick and I’ll let Tony jump in. Capital allocation is obviously very important part of our long-term strategy. And with the CEO transition in my arrival, we did not make any share repurchases during the quarter. And honestly, we felt that was prudent just considering we’re about to embark on a fresh long-term look at our strategy. But I like Tony to comment more and more just how we’re thinking about it.

Yes, I mean, Thomas, obviously, we still have the cash. We didn’t do anything else with it. So to your point, there obviously could be a catch up. But I think, to Jeff’s point, we really want to keep our options open. And until we know exactly where we’re going, what required investments we’re going to need to make back into the business we just felt that it was prudent to give us some x amount of flexibility, as we approach this new strategic work.

Great. Thank you.

Thanks, Thomas.

Your next question comes from the line of Jeff Silber with BMO Capital Markets.

Thank you so much. I wanted to talk about some of your marketing plans for this year. I’m just curious in the message that you’re going to be giving out. Are you going to be focusing more on the DIY product than you have in the past?

Good morning. It’s Jeff Jones. Yes, we will be more aggressively marketing DIY product this year than we have in the past.

Okay. Any color on that? I mean, I guess, part of the criticism in the past is that a lot of people were not even aware or maybe less aware of the fact that you had a DIY product. So any color on that would be great?

Yes, and I think you just hit on it. I have the same reaction, as I assessed my options to join the company. When I arrived, I was thrilled to see the team had their own understanding of that as well. And they were well underway of developing mass advertising to make sure people knew it not only we were in the business, but we have a really compelling product and we were proud for people to use it. So you will see us be more present and communicate more about our DIY products in general.

Okay, great. And then I have – I’m sorry.

But Jeff, the only thing I was going to add is, obviously, the Tax Pro Review, we view as DIY offering, where you’ve got obviously the option for help if you need it. So that would be a key part of our marketing plan this year, as well as it’s essentially relaunching that product.

Great. And that’s actually segmented to my follow-up. In terms of Tax Pro Review and a Tax Pro Go product, can you talk a little bit about the pricing strategy for both of those?

Sure. Given that they’re delivered virtually, it gives us a lot of flexibility to try various prices. But in general, the pricing will be specifically between DIY-assisted. But we will be testing various price points as we try to assess consumer demand on a go-forward basis.

Okay, great. Thanks so much.

Thanks, Jeff.

Your next question comes from the line of Scott Schneeberger with Oppenheimer.

Thanks. Good morning. Just following-up on the last side of a question. With regard to marketing, what do you view for year-over-year as far as spend? Is that something that’s going to be relatively flattish or might we see that go up on an absolute basis?

Good morning. It’s Jeff. We’re not going to comment on the exact levels of spending. But as I came in and assessed, both the level of investment and the way that investment was being directed, I feel very good about our plans since we’ve been.

Yes. And Scott, the one thing I would add obviously, the marketing investment has contemplated in the EBITDA margin outlook that I discussed it earlier.

Okay, thanks. And then on – with regard to some of the products, the – did I hear correct, Tony, the Refund Advance loan will go up to $3,000 this year. Could you elaborate on where you think the competition will be, and how you might market around that as a differentiator? Thank you.

Yes, we’ve seen a few different things in the marketplace, Scott. We’ve seen $2,000 loans, $1,500 loans. I think, there was one that was similar to our $3,000 loan tier, and we are adding an additional loans tier. So we’re be essentially 4 tiers, 500, 750, 1,250 and then 3,000. Obviously, we went out pretty big with the message last year. We expect to do that again this year. It was an effective campaign for us. We think, there’s still a lot of gas left in the tank. While we did – do a good job of getting the message out, I think, there’s still a lot of potential clients who don’t know about the offer. So this year having a larger loan amount continuing to pound the drum for a second-year in a row, tax professionals getting more comfortable, clients becoming less skeptical. I think, last year was a little bit of too good to be true. But the fact that we actually did what we said we were going to do and clients were walking out of the office with up to – last year up to $1,250 loaded on their card, in some cases before they got in their car was a really good client experience. So we’re pretty excited about the increase this year and definitely something we think is going to help us drive new clients into our offices.

Thanks. And just one more quick follow-up on something you said on the last question. The – for the new Tax Pro Review, in your press release, you had said between [59.99 and 89.99] [ph] and just how you respond to that prior question. Is that going to be fluid throughout the year? And might we see something outside of that range, or is it going to be in that range? Thank you.

Yes, I think, those prices are essentially viewed as almost I can attach to the DIY product. But I think, we will be testing various price points just to understand is there more demand at different levels within the DIY flow, but that is the base price that we’re going to market with.

Okay. Thanks very much.

Thanks, Scott.

Your next question comes from the line of Hamzah Mazari with Macquarie.

Hi, good morning. This is Mario Cortellacci filling in for Hamzah. Any updates on your thought process around monetizing your store base when you’re not in tax season? I know you had a Block Advisors initiative, so wanted to see if there are any updates there?

Good morning, Mario, it’s Jeff. So, I think, as we take a big step back and trying to figure out our ultimate path to sustainable growth. One of the things that I committed to do, which is a very objective, very methodical approach, taking nothing for granted and looking at any asset we have in the possibility of monetization. We’re obviously just getting started on that. And so, it’s too early to say now what those ideas may be. But I think, I owe to us to look at every possible option and that’s something that we’ll do.

Okay. And just a quick follow-up. Could you also give us a sense of how much room there is for you to buy more franchises in your system? And what are your returns looks like for those so far?

Yes. There’s definitely additional franchise repurchase opportunities. As I said in my opening comments, we expect the volume to continue to decline. We repurchased about three years ago over 300 offices and it’s been on a decline. We expect about 100 offices this year. So we’ll continue to do a level of them, but I would expect that number to continue to moderate a lot of what we repurchased our larger operators who have been in the system for 20, 30-plus years and we’re looking to essentially retire and exit. So that those who have already been repurchased it, but opportunities will continue to come up. But it’s not our goal to repurchase all franchise locations at this point, it’s more just on an opportunistic basis in areas that make sense for us to operate. As far as the return, we’re rough about in the specific ROI. But I will tell you that the level that we’re repurchasing these at are EBITDA multiples, that’s well below what we’re trading at as a public company. So it’s accretive to earning. It’s a positive return, and they’re fairly seamless to integrate, given they’re essentially operating like a normal company store.

Thank you so much, and good luck, Jeff.

Thanks, Mario.

Your next question comes from the line of Michael Millman with Millman Research Associates.

Thank you. Could you talk about how your tax for go pro compares with TurboTax’s live, focusing to be sort of heading to sort of a collision? And secondly, on your RAs, do you expect that to continue to be offered with no additional cost to the taxpayer?

Yes. So the first one, Michael, so we view tax pro go is different than tax pro live as, at least, we understand it, I believe tax pro live is more of a DIY offer that then you can upgrade, if you need assistance, which is more comparable to our Tax Pro Review, which was previously Best of Both that we’ve had in the marketplace for a number of years. Tax pro go is what we view is more of a full-assisted experience. You upload the documents. You get a pricing upfront, tax pro in office has completed and then essentially you communicate virtually back and forth and approve and pay, et cetera. So it’s more of a full-assisted experience versus the DIY upgrade product, that it more Tax Pro Review we have that as well. When the refund advance, I actually didn’t catch the end of that question. Oh, sorry. Yes, no, there definitely is no cost to the taxpayer. We’ll continue to be a free product. Obviously, last year, we didn’t change the pricing on those clients either. So it’s really – we’re viewing it as a marketing tool to drive new clients into our offices.

Thank you. Excellent.

Thanks, Michael.

There are no further questions at this time. Do you have any closing remarks?

Thanks, Tanya. Thanks again everyone for joining us, and this will conclude today’s call.