Ladies and gentlemen, thank you for standing by and welcome to the H&R Block First Quarter Fiscal 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference maybe recorded. [Operator Instructions] I would now like to hand the conference over to your host, Vice President, Finance and Investor Relations, Colby Brown. Sir, please go ahead.

Thank you. Good afternoon everyone and thank you for joining us to discuss our first quarter fiscal 2021 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. Also on the website, you will find a link for the webcast containing today's presentation, which will be posted 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'll 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 2020 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.

Thank you, Colby. Good afternoon everyone and thanks for joining us. When we last talked, we were in the middle of what was the most unique tax season in history. The pandemic resulted in the first ever extension of the filing deadline, and changes to nearly every aspect of our operating model. Throughout the season, our teams demonstrated agility and resilience. We adapted to an ever changing environment and we delivered for our clients when they needed us the most. The result was a strong finish growing revenues 300% in the quarter and serving more clients than last tax season. We've also made progress in other areas of our business. Our results at Wave have steadily improved, as they've returned to double-digit percentage revenue growth following the initial disruption caused by the pandemic. After the close of the quarter, we also successfully issued long-term debt and signed an important agreement with MetaBank to be the provider of our suite of financial products. These developments have resulted in a great start to our fiscal year as we continue to build positive momentum in the business. With that backdrop, there's obviously a lot of ground to cover on today's call. First, I'll talk about the recently completed tax season, providing perspectives on both our performance and the overall industry. Then I'll give some thoughts on the progress we're making on our strategic roadmap. Tony will then discuss our Q1 results, and share high level thoughts on the balance of fiscal 2021. He'll also provide an update on our capital structure, including details on our recently completed debt offering and will talk about our agreement with Meta. I'd like to start with the tax season. The majority of the season took place while the country was dealing with the pandemic. We navigated the…

Thanks, Jeff. Good afternoon, everyone. With a strong finish to the tax season, our fiscal year is off to a great start. Today I'll share our results for the quarter, thoughts on the remainder of fiscal 2021, an update on our capital structure, and finally, some color around our recent agreement with MetaBank. Due to our seasonality, we typically report lower revenues and a net loss during our first quarter. This quarter's results, however improved due to the significant tax return volume during the month of May, June and July. Before jumping into the financials, I thought it would be helpful to provide some context on our volume and net average charge performance, which were reported in late July, as well as an update on Wave. In tax, we posted overall volume growth in the U.S. for the third consecutive year with a 3.3% increase in returns, this was led by continued strength in our DIY business with a 10.6% increase in online filings. In Assisted, given that we had approximately half of our total network open, and those offices were operating under a modified model, we expected a decline in return volume and a loss of market share. Our finish to the tax season was strong however, resulting in a decline returns of just 2.8% and a small share loss. Regarding pricing, our net average charge in DIY declined due to mix, as well as our decision to keep our Free state filing promotion through the end of the tax season. In Assisted, we targeted flat net average charge through end of the year, though saw a slight decrease due to mix in our company offices, partially offset by improved pricing in our franchise network. Turning to Wave, during last quarter’s call we talked about the impact of the…

Thanks, Tony. Before concluding, I'd like to thank our associates, franchisees and Tax Pros for the agility and resilience they have demonstrated over the past several months. They truly make H&R Block a special place and why we were able to accomplish so much during such a difficult time. We're now focusing on the future, and I'm looking forward to sharing an update with you in December. With that, we'll open the line for questions. Operator?

[Operator Instructions] Our first question comes from the line of Kartik Mehta of Northcoast Research. Your question please.

Hi, Jeff and Tony. I guess Tony maybe just to start-off with few thoughts on margins as we go forward. I know FY 2020 was odd year. But if you kind of look at FY 2019 as a base year, as we move forward and get to more of a normal tax season, what do you anticipate for EBITDA margin?

Yes, thanks, Kartik. We're not going to provide a long-term outlook today. But obviously, as we grow the business both on the top line and then grow EBITDA basically, we would expect the EBITDA margin to grow with it. And that's really what we're focused on, both starting this year and in the future is investing where we need to invest to continue to grow. And then as we grow the top line that resulting in improvement on the margin as well. We've talked about how, when I have a specific goal of getting EBITDA margin to a specific number over the next several years, it's more and growing that top line, which will eventually grow the bottom line as well.

And, Jeff, I know this question, you could probably take an hour to answer, so I apologize for it, but maybe if you could just give some highlights. As you see more of the business migrate from traditional face-to-face to virtual, what kind of benefits could that have for H&R Block?

Yes, Kartik, thanks. And we could spend a lot of time but I think the first thing, I would say is we're obviously building kind of platform of capabilities that mean a lot of different things, right? It means everything from digital upload of your docs, approve and pay online. Get help as a DIY filer, upload with mobile and let us do all the work for you. So there's really an array of products obviously, the number one benefit is to the customer and continuing to make this experience as easy and personalized as possible. From our perspective, we're building these capabilities really ahead of consumer demand. We're seeing high growth rates, but still a relatively low base, but we’re getting great feedback from clients about the products, we're attracting a new younger client to the brand, those are all positive. On the operating side, when we look into the future, this is not a 2021 thing, but it's in the future, the more that we're able to serve clients virtually in whatever way that means, it means we have an opportunity to look closer at efficiency in both our utilization of our experts, and that the physical footprint. And over the next several years, that has potential to be real benefit to us, while we're also driving value for the customer.

Thank you very much. I appreciate it.

Yes, good to hear from you.

Thank you. Our next question comes from the line of Jeff Goldstein of Morgan Stanley, your question please.

Hey guys, just thinking about the Assisted trajectory going forward, maybe just help us with what type of recovery you're expecting from here. So I mean, you're expecting a return to 2019 volumes, or maybe it's maybe a return to someplace in between 2019 and 2020. And I know you're not providing any specific numbers, but just in broad strokes, how should we think about the pace of recovery from here on the Assisted side given COVID seems to, at least this year seems to have altered the path forward in that business?

Yes, thanks for the question. Obviously, few different pieces there. Let me just start with, no this is the second year of making real changes to our Assisted business on the price value relationship, the quality of execution, digitizing the way we can serve customers and you may remember that in mid-March, when we had our call, we were on track to deliver our year which meant holding share in the category which was a real improvement year-over-year in the Assisted business, obviously that that got derailed a bit but nevertheless we’re very pleased with how we ended the year. What we're doing now is really trying to develop multiple different scenarios, given potential variables in the industry. And starting with a large, large number of filers that were EIP only, when you remove those from the mix, and you start looking at unemployment rates for next year, how long and how rich the state and Fed unemployment benefits remain. What the operating environment looks like in next tax season, that's obviously a variable that could go different ways. When you net all of that, we're expecting the industry to be flat to down slightly next year. Our goal remains to grow the business, to grow Assisted clients, and we think we're on a nice trajectory to do that. There are many variables, obviously that are weighing on next year. And that's how we're thinking about the industry overall and the scenarios that we have to develop. And again, when we're in December, we'll be providing our exact outlook on the year.

Okay, that was all great. And I think this one is for Tony, it just looks like you got a lot of leverage on your field wages line item relative to our overall revenue growth this quarter. So were there any added efficiencies in there that could be more permanent in nature, just what was really driving that leverage?

Yes, I mean obviously, it was a challenging environment to try to think about how we were going to staff offices given really the unprecedented no history to really guide us. But we went into the quarter, expecting a certain efficiency level, we did a lot better than what we even thought, part of that was volume related in the Assisted side where we just had more returns and more clients that we served, which was a good thing. We also saw really nice management of labor by our field staff where it's having the right Tax Pros and the right offices at the right times, all drove that efficiency. But the way that we have our compensation model work during the Q1 period is a little bit different than how it typically works during tax season, just some of the changes we had to implement, to get tax professionals to work during this extended period. So there's some learnings we can take out from that. No kind of immediate changes that we're making, but there's definitely a lot that we learned in that extended period from an efficiency perspective that we can think about going forward.

All right, thanks for the color.

Thank you.

Thank you. Our next question comes from the line of Hamzah Mazari of Jefferies. Your line is open.

Hey, good afternoon. Just a question on digital. Again, I think your digital market share, correct me if I'm wrong, today’s maybe 15% or so percent. And I think it's historically you've talked about getting to 20%. Could you maybe talk about, do you view the timeline to get to 20%? If that's the right number, has accelerated because of COVID and any kind of hurdles that you see in getting to that, is it more brand awareness or is it sort of additional features thing, just any thoughts as to gaining more critical mass in digital and what you need to do there? And obviously, this was a very good year for you.

Yes, thanks. This is Jeff. I'll kick it off. And Tony can chime in if he wants. But I think by digital, you're referring to our DIY business.

Yes.

And we're currently in 14%, 15% market share, to my knowledge, since I've been here, we've not provided any outlook to get to 20% market share. I don't know in the prior years, there could have been something you're remembering. But make no mistake, I mean our strategy in DIY remains three very clear things. Number one is just the continued evolution improvement in our product. I feel great about our product today, and we're getting the kind of third-party accolades as well. Pricing is an area where we're looking very closely at our pricing strategy. What we've been doing meaning in the last couple of years is maintaining a price advantage to the category leader. And being very dynamic in terms of how we think about pricing. The reality is, they’re taking large price increases every year. And so we'll be looking carefully at our pricing strategy as we move forward, more to come there. And third is telling the story. We continue to build awareness, we continue to build retention and customer satisfaction. So we are in this business to compete, and I feel very good about the progress we've been making.

Got it. That's very, very helpful. And just my follow-up question. I'll turn it over is, is there still an opportunity to be buying back franchisees, I know with COVID things may have changed. Obviously, we've talked about liquidity in the balance sheet and Tony touched on that but just any updated view on franchisee buying back strategy? Thank you.

Yes, absolutely. Thanks for the questions. So this year, we did buy back more this year than the prior-year, call it around a couple hundred, which is then right in the zone of our five-year average. And the way I think about franchise buybacks moving forward is there's really two different categories where I believe we'll continue to look, one is those franchisees that for various reasons, decide they want to exit. We can buy them at the right multiple and we're a good acquirer, so that will remain a category. Another category is what I would just call cleaning up the footprint from how we've expanded historically and a good example of this is what we call a spot franchisee, further back in history, there were much more defined geographic boundaries between the company offices and franchise offices. Over many years that line got blurred to the point where we might have a franchisee in an urban area possibly down the street from a company location. And that doesn't make sense to the franchisee. And that's an opportunity where we can clean-up the footprint. And that's a second category, that we'll definitely continue to look at.

Got it. Thank you.

Thank you.

Thank you. Our next question comes from Scott Schneeberger of Oppenheimer. Your line is open.

Thanks very much. Good afternoon. My first question is kind of a follow-up on that. Jeff, you kind of foreshadow potentially some sort of pricing in DIY in the coming year. DIY was down I think 4.5% this year and I think Tony called out predominantly that would have been you keeping Federal Free and State Free on all-year which you didn't do last year. So I guess the question is kind of two-pronged, assuming that was the primary driver was it everything or was there some mix in there, just a little bit more granularity on what occurred this year on pricing. And then the follow-up is Jeff, just to squeeze out a little bit more of your hint there. How should we think about as we work our models, maybe your approach next year, I think can be confident in your volume growth in digital. How should we think about pricing? Thanks.

Yes, you got it. Let me start again, Tony will jump in. But a lot of different pieces there on DIY pricing, you may recall, we got off to a bit of a slow start in the season, we had some impact on ourselves. That impacted in the early part of the season, we made that change and we caught up. And then we made a strategic change to your point on State as a way to compete and grow volume. And so those were things that this year impacted and definitely some mix in there as well. Moving forward, and again, I don't want to get too far ahead of myself. But I believe we're at a place now where our product is very competitive. And so we have to be looking for ways that we continue to grow and pricing could be one of those levers. If we're not getting enough credit from the consumer for the price advantage, then where strategically, can we take price and be very transparent about it. That's something that's super important. Our overall positioning is price transparency. You may know today that if a consumer is in our flow and for any reason, the price changes on them, we call that price preview, we expose it to the client. So we want that to not feel like a bait and switch like it might at others, and be very, very straightforward how we think about price. But more to come on fiscal 2021.

All right, thanks on that. And then I guess, shifting gears a little bit for my follow-up. I guess if one of you could kind of speak for the board here, I'm curious in mid-August, every year for the last few years, you've increased the dividend, this year you chose not to. It is very good dividend, no doubt and Tony mentioned on the call, hey, we're still a dividend growth company. But he also said we don't plan to grow it this year. So that decision is kind of been made. The question is why I'm curious why not the increase this year on still solid cash flow?

Yes, well I obviously can't speak for the board. But just to reiterate, some things that we've talked about. One is this company is committed to a dividend. As we've mentioned, we look at it once a year, the board makes that decision once a year. And I think this year, as we just looked at capital strategy in general, it was a year to be conservative, make sure that we were doing the right things to protect liquidity of the business. We did that, we came out of that successfully in the board, we'll evaluate if we're what kind of increase we take again in June when we review the policy again. But I think, as Tony mentioned, 30% increase in the dividend over the last five years. So it's definitely a company that's oriented toward returning capital to shareholders and creating value through the dividend as well.

Okay, thanks very much.

Thanks, Scott.

Thank you. Our next question comes from Michael Millman of Millman Research. Your line is open.

Thank you. I'd like to follow-up on what we're just talking about DIY pricing and was wondering, I assume it once and just assuming that until it completes its purchase of Credit Karma and guessing that they're going to be pushing price significantly downward in order to get the other business, where does that leave you in Do It Yourself and secondly, on Assisted assuming that you’re able to grow somewhat, but it does look like the industry declined somewhat. It doesn't leave you with absolute growth. So where does Assisted go, going forward? Thank you.

Well, thanks, Michael. There's couple of different questions, first on DIY pricing. It's hard to speculate on what they may do, if that deal closes and what pressure it could put on the industry. The way that we think about it is, first of all, we remain committed to free, we have a very successful Free product today or commercial Free product that for example, college students can file for free at H&R Block, they can't add into it. People with unemployment income could file for free at block not there. So we'll always compete with free, we think it's an important entry point into the category with an opportunity over time for them to buy other services like Live Health as a great example. Absolute product pricing, we've maintained a price advantage for a number of years. And in part that was because of a belief that our product needed to significantly improve. So the customer didn't feel like they were making a downgrade or a bad choice, and we're there. So with a great product, we feel like we can start thinking about price as a lever more than maybe we have in the recent past. On the Assisted question, again a couple pieces to what you're asking, but first of all, just every year, there is another new reason why this is going to be the year that Assisted has a major decline. This year, it was going to be the second year of TCJA. And then obviously, the pandemic on top of that added another new layer. And I think what we continue to see and believe year-over-year is the fundamental truth that people need a system in one help with their taxes. So the business shifted a little bit this year. But in the context…

So you would think in three years Assisted should be -- you should increase your earnings from Assisted? Is that the message we should take?

So I think, so a couple of messages. One is I think the definition of assistance will continue to evolve, that a Tax Pro may sign a return, but it won't always because of client sit for an hour in a physical office with a Tax Pro that we're unlocking capabilities to get human help, that's changing the definition of what the old Assisted model used to look like. And when we do that, we're able to attract people because of the ease and expertise that we're known for. And our goal remains to grow Assisted clients, and that hasn't changed.

Okay, great. Thank you very much.

Thank you.

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

Hi, thanks. Good afternoon. So H&R Block’s net average charge declined 1% in Assisted in the 2020 tax season. Can you talk about how you plan to approach pricing in assisted next year, I think you touched on Digital DIY, perhaps flush out a little bit around your strategy within assisted?

Yes, thanks, George. This is Tony. So as you recall, this is the second year of upfront transparent pricing, where we took a hard look and essentially changed our entire pricing model in Assisted business two years ago. And at that time, lowered price for several million of our customers. Going into this year, we expected our net average charge to essentially be flat. Each year for the last couple of years, we've continued to make tweaks to the model. We hear feedback from customers, we hear feedback from tax professionals. I mean like slight tweaks to that model. At the same time, we obviously serve several new clients, we also there's a few clients that leave us. So the mix shift is always kind of plus or minus a zone of 1%, if you will. So it was basically in that zone, there was no overall trends that were up to note. It was just more of a rounding error on the mix shift. Going forward, now that we've kind of stabilized in where we are from a price perspective, we've had really good feedback from customers on the price or value questions specifically been ask in our survey, we feel really good about the price that we're charging for the value we're delivering. And as we've shared in the past, we do expect to return to modest price increases in the future. We're not saying today necessarily next tax season, but over the next several years, we do believe that we can take modest price increases as inflation continues to come into the P&L and we can offset that.

Got it. That's helpful. And the follow-up on an earlier point that was made, I think you indicated that you expect the industry to be flat to slightly down next year. Just wanted to confirm that this was specifically for assisted and perhaps you can talk about what your expectations are for Digital DIY volume growth in the 2021 tax season?

Yeah, I mean, Jeff talked about this in his remarks and then on a couple of questions. I mean, there's a lot of moving parts going into next year. The assisted category and the overall, let me start with the overall industry will definitely be impacted by how many EIP returns are in the base that will roll-off. That's going to be a pretty significant negative for the overall industry numbers. We believe there's seven million to eight million that were kind of the official EIP. And then there were several returns that were on top of that, that were filed as part of the tax preparation process that weren't necessarily tracked by the IRS. You're also going to have unemployment which we would typically think about one way but given the significant benefits that are being paid out for people that are unemployed, that could actually cause people to maybe file maybe otherwise wouldn't file, so that may actually be in some ways a tailwind, not just a headwind. Obviously, the migration between assisted and DIY or from DIY back to assisted in year two of the pandemic for individuals that maybe have switched, thinking they want to switch back to assisted now that stay at home orders and other things may have lifted, and then the overall overhang of the pandemic still being around, there's a lot a moving parts. And we've ran multiple scenarios and thinking about how this could impact the assisted business and DIY business. And thinking about being prepared for all those scenarios. What Jeff was alluding to is if you set the EIP returns aside to seven million to eight million plus, we think the overall industry is going to be flat to slightly down. And we've got several scenarios showing assisted and DIY kind of been in that zone, depending on what you believe in each of the different variables. So it's hard to predict each of those specifically. There's a lot of moving parts. We'll continue to update you guys as we learn more. And that's probably all we could say at this point.

Got it. Very helpful. Thank you.

Thanks, George.

Thanks, George.

Thank you, our next question comes from Henry Chien of BMO. Your question please.

Hey, good afternoon. Yes, I wanted to ask maybe a little bit higher level, it's somewhat related to some of the other questions, what are -- when you're looking for this next tax season? You understand that there seems to be some blurring between assisted and digital and that seems to be the strategy. I guess what is sort of your high level focus? Is it growing volumes? And how do you expect that to kind of shift between well, I guess how should we think about it just because the lines are blurring and I say that because I kind of see it firsthand as a filer with HRB on the digital side. But yes, just kind of like high level goals and to kind of frame how you're approaching next year? Thanks.

Yes, absolutely. Again, I will tag team a little bit but at the highest level, it remains our focus on growing volume, growing revenue and growing earnings mean that that has not changed in any quarter. I think what is definitely changing is the definitions of what these two historical businesses have been. And when you say digital, it used to mean DIY and we continue to find ways to make getting help easier for people, but Tax Pro’s are still doing the work. So that still makes it an assisted return. It just over time is looking less and less like an hour waiting in a physical office every time. Other we’re obviously still very focused on restoring Wave’s growth back to where they were. We're seeing a nice recovery in the business. We're seeing a nice change and how they're thinking about customer acquisition. Wave Money is off to a really strong start. And that fits nicely into our overall belief that there's opportunity for H&R Block in small business generally which is something we'll talk to you more about in December. So, a number of things that continue to improve and grow the core consumer tax business, well we also think about growing businesses, we're already in like small business, like Wave and like financial products.

Yes, got it, okay. And then just as a follow-up, and so when you think about growth, either in consumer products or in Wave, how much of that or I guess how much of that strategy is dependent on taking share? Or is it -- or is there like a specific segment that where it might be better suited to?

Yes, great question. And obviously, each of those businesses I mentioned has a slightly different dynamic. Obviously, in the consumer tax business, given it's a defined number of filers generally every year maybe becoming one as an exception. That is about taking share, whether that's in pure DIY or assisted. We have obviously a very known set of competitors in DIY, a much broader set of independent competitors and assisted. But there we have to have great quality, the right price value and continue to make it easier. In Wave’s business, for example, they are laser-like focused on that small business zero to nine employees, that is currently not using any product. It's much like the DIY Tax business would have been years ago where those small businesses are using pencil, paper, spreadsheet shoe box, and Wave has a core free accounting product has a low cost of entry to get them off the sidelines. So each business is a little bit different as we think about moving more into small business. Those are other examples where there's more industry tailwind than headwind and we know from the customer that the H&R Block brand building on the two million small business clients we serve today has a great right to win. So more to come in December, but each business has a slightly different dynamic.

Got it, okay. Thanks so much.

Yes, thanks Henry.

Thank you. At this time, I'd like to turn the call back over to Colby Brown for closing remarks. Sir?

Thank you, Latif and thanks everyone for joining. This concludes today’s call.

Thank you. This does conclude the conference call. Thank you for participating. You may now disconnect.