H&R Block Earnings Call INSIGHTS: Emerald Card Regulations, Sears and Wal-Mart

On Wednesday, H&R Block Inc (NYSE:HRB) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Emerald Card Regulations

Thomas Allen – Morgan Stanley: So one of your competitors talked about outsourcing their prepaid debit card business because profitability was worse than expected because of new regulations. Can you just talk about the Emerald Card and how new regulations are impacting your earnings there?

William C. Cobb – President and CEO: How the regulations are affecting our earnings, is that the question?

Thomas Allen – Morgan Stanley: Yeah. On the Emerald card.

William C. Cobb – President and CEO: I think Greg. I’ll just say something and then I’ll let you potentially. We are very committed to the Emerald card. We think it’s a great source of growth for us. We think it’s a great service to our clients. We are one of the largest issuers in the country of general purpose reloadable cards. We issued almost 3 million last year, loaded almost $10 billion in deposits. So, we are very committed to not only continuing to grow Emerald cards, but managing it very appropriately and then I’ll turn it over to you Greg in terms of any earnings impact.

Gregory J. Macfarlane – CFO: Yeah. I mean our view is that –currently we have a very successful program. It’s a top three program in terms of number of cards issued and if you look the amount of money that flowed on to that, it’s quite a substantial program and as we develop our detailed plan here for this upcoming tax year, we are very bullish on the opportunities that program represents for us. Specific to regulations, we’re obviously very aware of the things we need to be in compliance with and we always use that as the starting point, but our goal is to deliver a product to our clients that meets their needs and we always try to do better than that and our current products in terms of the rate structure, the fee structure, disclosures, it’s actually award-winning from many of the consumer groups that we’ve sort of showed it to. So, I guess I’m not specifically aware of the regulatory issues that maybe our competitor facing, but from our perspective, I think it’s a great program and we feel really good about our position.

Thomas Allen – Morgan Stanley: So, you won’t expect any decline in margins in that business next year?

Gregory J. Macfarlane – CFO: No, we’re not really giving forward-looking forecast at this point in time.

William C. Cobb – President and CEO: And nor do we break our margin by line item like that, but I wouldn’t anticipate anything, but like I said we’ll give a fuller review of our entire plans in December.

Thomas Allen – Morgan Stanley: Can you give us losses associated with the Sand Canyon claims review this quarter? I think you used to in the past than this quarter.

William C. Cobb – President and CEO: So in the quarter the validity rate was about 4.5%. We, as you well know, we review each putback on a loan-by-loan basis. We are under our contract or contracts I should say have a prescribe time in which to do that and we’re always diligent about doing that. Then once we sort of reviewed that, the claims which give validity rate, we then figure out the actual payment date how much that is. Is it more than you’re looking for?

Gregory J. Macfarlane – CFO: The 4.5% validity rate is fine. I was incurred a number but that’s fine and then just in terms of – I know you said you’re going to give more color on the capital allocation strategy in December, but can you say have you bought back (indiscernible) and just for modeling reasons should we not expect any buybacks until maybe you renegotiate the January 13 maturity?

William C. Cobb – President and CEO: Year-to-date we bought back $315 million worth of stock. I think its 21.3 million shares specifically. Then with regard to going forward, we are not going to get into when and how much we’re going to purchase. Obviously we have an authorization from our Board and obviously, during my time here, we bought back almost 12% of the shares of the stock, so I’d rather — you judge us by our actions, but we’re not going to commit to any timeframe or say when we are or aren’t going to look at stock buybacks. As you know, we’re continuing to protect the dividend as we have for the last 50 years.

Sears and Wal-Mart

Scott Schneeberger – Oppenheimer: On the tax front, with the Sears reduction, could you guys give us perspective of how many Sears stores you had been in and then also just across retailers remind us where you are with Wal-Mart and who else you may have relationships with? Then finally on this question, just your long-term strategies of being (indiscernible)?

William C. Cobb – President and CEO: Yeah, I’ll take Wal-Mart first. Wal-Mart last year we’re in 250 stores and while we are not ready to disclose the exact number that we’re in discussions with Wal-Mart right now. We will have an increase in the number of locations for fiscal ’13. With regard to Sears, we’re in about 500 Sears’ locations last year. We will be in a 112 Sears stores that are highest volume, highest profitability stores, we will continue to maintain a presence there. We also have the opportunity in under 100 mall locations to also have a presence there. So, they are in some ways additive. We are working on leases and the like. But like I said, with regard to our ability to retain clients, which ultimately, it is about client retention. We’re confident that we’ve done this before and we know how to do that. In effect, we were able to save money by reducing our footprint and yet, the win-win for us. In addition to the partnership with Sears is that we were able to reduce costs in some of our less profitable stores yet keep our best and brightest.

Scott Schneeberger – Oppenheimer: Going to just capital structure as I have rated you guys in the tax capital structure and putback capital structure, in the credit facility versus commercial paper, can you give us I guess what your preference is to use during this off season and compared in contrast this year as to how soon you might tap into working capital borrowing in this off-season?

Gregory J. Macfarlane – CFO: So, I think between the lines and resourcing, congratulations again to CLOC renewed Scott, was that right? I think I heard that

Scott Schneeberger – Oppenheimer: That’s implied, nice job.

Gregory J. Macfarlane – CFO: So, I mean, I do want to spend a minute on that because it was a lot of work. It’s a big number, a lot of the people here at H&R Block worked quite hard to get there and that was really the first step for us and so I don’t want to lose sight of that because the CLOC historically has been our backup liquidity source and (indiscernible) taking care of it I think very favorable rates and there is a lot of details in the disclosure, so you can read through that. It was a big accomplishment and it was also during the time line which we outlined pretty much consistently with you which I think is also worth noting. Specific to utilization in commercial paper that has been the traditional source of primary liquidity during the slow season, the slow season is typically three, four months of the year that’s generally speaking kind of what we look at for the next season in terms of maybe also between the lines going forward that’s all tied up in how we may kind of go forward with our capital structure solution, which as I said before, we’re not really prepared to get into right now. We’ll share more details with you in December on that?

Scott Schneeberger – Oppenheimer: Then just – I want to touch on the validity and on mortgage put backs, that’s a very low number the 4.5%. Could you just give us a feel for how that’s trended over the past few quarters, years and just speak to the most recent tax come in, I know you haven’t looked at it, but any additional color you care to share, that’s an open question?

William C. Cobb – President and CEO: Scott, in terms of the new batch, I mean, if you’re referring to the $142 million that came in the first quarter of new putbacks. We don’t comment on that in quarter. Our validity rate at 4.5% has continued to decline over time. The 4.5% validity rate is pretty consistent with the last few quarters. I don’t have the chart in front of me right now, but that’s in line with what we’ve been seeing over the last three or four quarters, so that would be a more consistent pattern right now.