Good morning. My name is Matthew, 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. [Operator Instructions] Thank you. Colby Brown, Vice President of Finance and Investor Relations, you may begin your conference.

Thank you, Matthew. Good morning, everyone, and thank you for joining us to discuss our fiscal 2019 second quarter results. On the call today are Jeff Jones, our President and CEO; and Tony Bowen, our CFO. We've 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 reconcile the comparable GAAP and non-GAAP figures and schedules attached to our press release. Before we begin our prepared remarks, I would 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 such, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2018 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 thanks for joining us. We appreciate everyone being flexible with the change in call time in honor of the late President Bush. We've been hard at work the past several months focused on executing our plans for the upcoming tax season. I want to thank our associates, tax pros, and franchisees for all they are doing to ensure we're ready to serve our clients as the season gets underway. We're taking the right steps toward long-term growth in clients, revenue, and earnings, and ultimately value for our shareholders. I continue to be excited for this season and for the future of our company. On today's call, I’ll give a brief recap of our key objectives for the year, followed by how we're bringing this strategy to life in tax season ‘19. Tony will then provide details on our second quarter results and additional insight into our fiscal 2019 outlook. As a reminder, we announced our long-term enterprise strategy in June and provided more detail on our Q1 call in August, including our key objectives by channel. To recap, in our Assisted business, we're focused on improving the value we deliver to our clients, developing and delivering on a clear brand promise to differentiate H&R Block, and improving the quality and consistency of our service delivery in the tax office. In our DIY business, we're investing to improve the product and user experience, pricing at a level that is competitive and provides value to our clients and communicating this value to grow awareness and compel DIY consumers to switch to H&R Block. And in virtual, we will continue to innovate, leading the industry as consumer expectations evolve by combining digital technology with the unmatched scale and expertise of our Tax Pro network. We will ensure…

Thanks Jeff. Good morning, everyone. Before I get into the details of our Q2 results, as a reminder, we typically report a loss during the fiscal second quarter due to the seasonality of our business. Therefore, second quarter results are not representative of our full-year performance. Starting with revenues, we saw a year-over-year increase of $8 million or 6% to $149 million. This is primarily the result of increased Assisted tax prep revenues and the timing of revenues related to our Tax Identity Shield product, partially offset by lower international revenues which were negatively impacted by foreign exchange rates. Turning to expense, total operating expenses increased $7 million or 2% to $364 million primarily due to onetime costs of $10 million related to our office footprint optimization, as well as increased compensation expense. These increases were partially offset by lower depreciation and amortization and marketing expense. The increases in revenue and operating expenses combined with an increase in interest income resulting from higher interest rates and higher cash balances drove an improvement in pretax loss from continuing operations of $4 million or 2%. While we saw an improvement in pretax loss, our loss per share increased $0.12 to $0.83. This was due to a lower-tax benefit compared to last year as the lower corporate tax rate negatively impacts quarter with a seasonal loss. Turning to discontinued operations, there were no changes in accrued contingent liabilities related to Sand Canyon during the quarter. For additional information on Sand Canyon, please refer to disclosures in the company's reports on Forms 10-K, 10-Q, and other SEC filings. Turning to capital. Our priorities remain unchanged. We first focus on maintaining adequate liquidity to fund the business. We then look to invest in the business to drive long-term growth. We then fund our dividend, which…

Thanks Tony. I hope the additional information we shared today provides more context regarding our plans for the upcoming tax season as well as the full fiscal year. We are taking bold steps and innovating to improve the value we deliver for our clients, position as well not only for this season but for the long term. We're at the early stages of our journey but are confident in our plans. We look forward to talking with you after the fiscal third quarter. With that, we'll now open the line for questions. Matthew?

[Operator Instructions] Your first question comes from the line of Scott Schneeberger with Oppenheimer. Your line is open

Just interesting on what you just mentioned, Tony, could you quantify on the acquiring franchise locations? You mentioned it was more than anticipated. What type of positive revenue impact will that have on the year? Thanks.

Yes, I don't know if I have the exact numbers, Scott. We were originally thinking more like 80 to 100 locations, so the incremental amount is approximately 25, a typical location doing $200,000 to $300,000 in revenue and obviously the incremental amount to us would be the 70% that we weren't getting before. So, I think that should give you a sense of the incremental revenue that should drive.

And then, Jeff, the transparent pricing, it’s certainly a transformational initiative. I’m curious what will we see with regard to marketing spend and marketing timing this tax season relative to those of the past. Thanks.

So, our overall investment is contemplated in our guidance, so that's all consistent. This will be a core message for the company where we haven't announced yet exactly all the shifts we're making in our marketing messaging, but suffice it to say upfront transparent pricing will be very clear to the market. It will be a major focus of how we go to market for the year.

Your next question comes from the line of George Tong with Goldman Sachs. Your line is open.

Investing in pricing is a key objective for the upcoming tax season. Based on your study of the competitive backdrop so far, what would you say is the approximate pricing premium that H&R Block has over competitors, and is your objective to remain premium-priced based on the value provided or is it to bring pricing more in line with the competition?

This is Tony. Really good question. Our goal isn't to be the low-priced leader, so I think H&R Block will demand some level of premium relative to a lot of the other offerings in the marketplace. Specific to your question on what type of premium were we at, it really depends. I think across at spectrum and different client complexity, our premiums varied, obviously on the simple land or the Free EZ, and we were very competitive last year given we had the Free EZ promotion. I think given how our pricing had evolved over time, we definitely identified certain client segments where we were very much above the market average, if you will. The consumers don’t really feel the average, and it's impossible to shop the average, but we know in certain segments, in certain geographies, there's definitely places that we were well above the market, and we've taken the opportunity as part of this reset to try to fix most of those and bring us much more in line and use pricing as a catalyst to try to return us to client growth. That being said, it's well beyond pricing. Pricing is just one aspect of what we're trying to do, and it's the overall value proposition and all the elements that we're making - the changes we are making that are all eventually going to allow us to be successful.

It's Jeff. I would just reiterate that we were not trying to be the low-price provider and to echo Tony's comments about all the other initiatives that have been put in place to demonstrate value, we also have seen that it's not just the price the consumer was paying, it was the fact they had no idea what it was going to cost. And so, when I think about our approach to pricing, there are really three different components. The first component is really about the fact that they'll know the price before they begin. The second is how easy it will be for them to figure out what their price is, and then the third will be the actual price. And so, we're really thinking about all three of those elements.

And as a follow-up, as the results of your new pricing transparency, you’ve indicated that about one-third of filers will pay 10% less than last year. Can you help unpack that and detail which filing segment we'll see the most change?

Yes, I’d say it's a fairly complicated answer. I mean, as you know, George, the way we priced historically was extremely complex and made up of hundreds of individual billing items. So, what we were able to do in this change is simplify our overall approach which allows us to be transparent and share the price with the clients upfront. When you think about who's going to get the bulk of that decrease, there's individuals like self-employed filers, homeowners, Middle America families that are really going to see the bulk of it, but it really depends on the specific situation and the types of complexities that that client had last year and the types of complexity that they'll come back with this year.

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

Tony, you broke up a little bit at least on my line when you were talking about the outlook. Can you review what you said about Assisted in terms of volume and the pricing, what you're expecting this year.

Yes, starting with price, I mean, just the price obviously, Jeff, will be down this year, lowering price. We're not sharing the exact amount it will be down. Obviously, it's contemplated in our overall revenue guidance. I mean that's one of the changes we tried to make this year. I mean last year, we provided a volume and more of a directional MAC. There's a lot of moving parts this year, which is why we thought it was important just to drive guidance around an overall revenue number given there are so many parts. As far as volume, the only comment I made was we do expect Assisted to be down. I think we are really optimistic about the changes we're making around upfront pricing and the other value proposition, but obviously we have a headwind with the elimination of the free EZ promotion which we expect mostly that will occur during the first part of the tax season.

And talking about your new price transparency strategy, I’m just curious what the competitive response has been so far.

This is Jeff, Jeff. I mean, obviously, we haven’t really entered the season yet. So, it’s difficult to know what the competitive response will be. We know that as we’ve continued to evolve exactly how we will message this and communicate it, the way that we’ve structured how easy it is for a client to figure out their price, we’ve been doing a lot of additional testing on that with consumers, and that has been very positively received, but we don't know yet exactly how competitors will respond. We'll see once we get into the season.

One thing, Jeff, I would add to that, I mean, obviously we expect competitors will respond. I mean as a market leader, they typically react to whatever offer we have in the marketplace. I think the one thing that makes H&R Block a little bit unique is the fact that we're able to go out and market a message on a broad scale which is quite a bit different than most of other competitors in the space and we think that's going to provide us an advantage.

Your next question will come from line of Alex Paris with Barrington Research. Your line is open.

This is Chris Howe sitting in for Alex. I had a question in regard to the millennial market segment. Can you perhaps add some additional color or some granular detail about the engagement and the utilization of H&R Block's product suite that you're seeing within millennials? And what you're doing heading into this tax season to increase retention efforts towards new millennials that were acquired last tax season?

I'll take this off and see if Tony wants to add anything. So, obviously, we're looking closely at who we're attracting in our ability to grow new clients. We mentioned on the last call that in tax season '18, over half of our new clients to H&R Block were millennials. And so, one of the things we continue to see and understand is the power of the brand name, how trusted it is on the topic of taxes. With Tax Pro Go, I think what we saw was that the method of sitting down for an hour in the tax office isn't for everybody. And so I think that's why we're continuing to broaden the ways that millennials and others can access the brand. Again, we think so digitally Tax Pro Go is a great way to do that. They get the full Assisted experience, but they don't have to physically visit an office. It actually turns out for a lot of people as well given our retail footprint that simply dropping off your documents is very convenient for people too. So we'll continue to build out that continuum of all the ways people can access Block and pay close attention as these products grow on their ability to attract new clients to the brand, but also younger demographics to the brand.

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

I believe New York City has had for some time upfront pricing . Can you talk about how that's worked in New York City, and what - how you saw that deferring in terms of clients for places that didn't have upfront pricing and so that as you're now upfront pricing nation-wide, similar to what it is or has been in New York City? I was also interested in, you talked about the first half of the season, Assisted would be down for reasons you gave. Could you talked about what you expect for the second half of the season?

I'm not exactly sure what you're alluding to with respect to New York. We have ran various tests that we're constantly doing on different pricing approaches. Several years ago we used to have a version of a pricing board in our offices and that maybe what you are remembering. It's probably been four or five years ago. I think the main difference between that and what we're rolling out now is, that gave clients an indication of a range, about where they may fall based on their particular life situation, but the challenge with that model was, the ranges were incredibly wide. She might have a range of 99 to 199, which isn't that helpful. And what we're rolling out this year is, every client will know the pricing in its entirety and can place themselves in the appropriate life situation and then whatever particular add-ons they have based on the documents they are bringing into the office to know their exact price. The feedback we got from several years ago is, it's helpful versus nothing, but it still doesn't tell me my price and some clients were worried that they were at the top end of the range and that maybe it is more hopeful than anything. So I think that's specific to what you may be remembering as far as what we would have done in New York. What we are rolling out is nationwide. So it will be in every Company office. Obviously, franchisees have the ability to opt in. We are pleased that we've had incredible opt-in rates. The vast majority of franchisees will be following the model this year on a national level. Franchisees though, as you remember, do set their own individual prices. So their price points may and will be different from the Company offices, but they will be following the model because they believe in it so much, which we were very pleased to see that result coming out of our franchise meaning. I think your other question was specific to volume. I mean, we're not going to get more specific than saying that the first half will be where we expect to see some level of loss given the Free EZ promotion. Our goal is to continue to grow clients in all segments, in all parts of the season, whether it be first half or second half, but we just know that given the Free EZ promotion ran through 2/28 last year, it will be a bit of a headwind.

So will that over comp or will the second-half gains over comp that loss?

Overall, we did mention in the opening comments that we expect Assisted to decline. So we do expect a slight decline in Assisted, which obviously is disappointing for us given that obviously our goal over time is to grow clients, but we felt with all the changes happening with the simplification of the 1040 this year and it just didn't make sense to launch the Free EZ again, so that's going to be a bit of a headwind.

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

Tony, I wanted to go back to your previous answer on the franchisees and participation. I'm wondering just if you could give a ballpark range of the level of participation you're anticipating from the franchisees in the new plan, is it 80% or over, is it less, just good to get a perspective on how the franchisees are thinking about the new program?

So, we rolled this out in October at the Franchisee Convention and did a lot of work to educate in a broad way and then with individual franchisees to sit down with them at scale and help them understand in their business what this would mean to them. And just to put a percentage on it, we saw north of 80% adoption of the model, we would say the vast majority of franchisees. And so we were very, very happy with their adaptiveness, their response. And frankly, their feedback was like what consumers told us. From their business perspective, they knew that our pricing model was causing friction for their clients as well, so they really applauded the change.

And then just on the digital side. I noticed that you lowered prices at the beginning of this season compared to last year, now that there is a decent price difference between you and TurboTax. I'm wondering if you intend on marketing that price difference or how you might go about marketing that to try to gain market share?

And the way I'm thinking about it is, there are three core strategies in the DIY business broadly. One is, we will continue to evolve and improve the product experience, making it more personalized, making it more simple and making it more mobile, so that's the focus of how we want the product to get better year-over-year. We will price competitively versus the marketplace and we will aggressively market the total value proposition to DIY. I have said before, we will act like a challenger brand in DIY and that's definitely our posture going into the year.

Your final question comes from line of Hamzah Mazari with Macquarie. Your line is open.

This is actually Mario Cortellacci filling in for Hamzah. Just could you give us a sense of how long the investment cycle will be? Is 2019 expected to be the bottom in margins or how should we think about this longer term - or just the margin potential longer term after the increase in 2019?

So, we guided 24% to 26% for the year. Obviously, that was a reduction versus where we've been historically. And our guidance isn't changing today. One of the things that we've been talking a lot about is, where we have been historically in the high 20% range, as we assess the business and the places where we need to invest and the way we need to drive growth, we just believe that in the high 20s is represents a margin level that is the Company not investing in itself to grow and to be more relevant for the consumer. So we are definitely not setting a goal to get back to the high 20s. We are focused on margin expansion over time as we grow volume, and that's really the key to how we're thinking about the next several years. We believe we have to grow clients and revenue and earnings over time, but again, the high 20s feels like a level where we are just not investing in our business appropriately.

And just regarding the Free EZ, I mean was there conversion rate year-over-year for those clients? Just trying to see if you're ever using it as an acquisition tool to go from a client that maybe got their stuff done for free and then actually convert it to a paying client in the year or two years from now. I'm just thinking if you are actually missing out on any revenue from there?

I mean definitely over time some of those clients migrated up to more complexity. I mean your tax situation tends to change from one year to the other and to qualify for the Free EZ promotion, you would have essentially had to only have a W2. So if you bought a house the following year, had children or became self-employed or something else, then that would provide a monetization opportunity to move up. When we looked at the data over the last several years, clients are migrating up at the pace that we need to justify the program, which is part of the impetus for eliminating it this year. The other thing that's happened, it's just become an increasingly expensive to even acquire the Free EZ clients. So the number of clients that you're bringing in relative to the dollars you're spending on marketing and the discount you're giving it's became increasingly expensive and that's why we're really pushing free clients to go into our DIY products. We still obviously have those products on the DIY side and focus more on more Middle America clients on the Assisted side.

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

In your response to previous question about increasing digital year-over-year at this early part of the season, I'm aware [indiscernible]. It looks like [indiscernible] to be an offset or Jeff, based on your response I got the sense that over the year we will have a net reduction in pricing in digital. So the big question, if you could confirm that? And bigger question is, what type of pricing reductions will we see in digital versus realistic H&R Block this season, where - which will be the more meaningful and any degree of magnitude you may be able to share? Thank you.

This is Tony. I’ll actually take that. I will actually take that. I mean, we're definitely going to see a bigger reduction on the Assisted side, I mean if you remember, we did a bit of a price reset in our DIY business a few years back, resetting our lineup. So, overall, this year in DIY we expect the net average charge to be maybe slightly down to even flat. And part of that's going to be driven by our attach of Ask a Tax Pro, which is a new offering we announced today, as well as just overall mix. We're going to continue to be aggressive on the price side in DIY, but we've had favorable results last year from the launch of the self-employed skew as you mentioned. So overall, DIY will be essentially flat and that is our base expectation.

We have no further questions at this time. I'll turn the call back over to our presenters for any closing remarks.

Thanks everyone for joining us this morning. This concludes today’s call.