Derek Drysdale – Investor Relations
Russ Smyth – President & CEO
Robert Turtledove – Senior Vice President & Chief Marketing Officer
Sabrina Wiewel – Chief Tax Network Officer
Phil Mazzini – Senior Vice President Tax Services Support
Becky Shulman – Senior Vice President & CFO
Andrew Fones - UBS
Vance Edelson – Morgan Stanley
[Sam Buddrick] - UBS
John Fox – Fenimore Asset Management
Joe Capone – Credit Suisse
Sloan Bohlen – Goldman Sachs
Michael Millman – Millman Research Associates
Michael Chapman – Private Capital Management
H&R Block, Inc. (HRB) F2Q10 Earnings Call and Investment Community Conference December 8, 2009 8:30 AM ET
Let me cover our safe harbor statement. This presentation and various comments made in connection with it including certain estimates, projections, and other forward looking statements. These statements speak only as of the date on which they are made and are not guarantees of future performance. Actual results may differ materially from those expressed, implied or forecast in the forward looking statements.
H&R Block undertakes no obligation to publicly release any revisions to forward looking statements to reflect events or expectations after the date of today’s presentation. H&R Block provides a detailed discussion of risk factors in its periodic SEC filings and you are encouraged to review those filings.
To start our program today and set the tone for the entire morning we’ll begin with a brief video. Welcome and thank you for your interest in H&R Block.
That video was developed for us by our advertising agency after we had reviewed our long term business plans with them. It was a way they were kind of doing a check to make sure that they captured the spirit of what we’re trying to accomplish with our long term business plans. I think they’ve captured that spirit extremely well in that video.
We’ve shown this a few times already internally and the question that we always get: “So is this your new brand campaign, is this your first commercial?” The answer to that question because I’m sure you’re going to ask me anyways if I don’t tell you what the answer is, not quite.
You will see, I think, when Robert shows you some of our early work later on this morning you’ll see many of the individual components from that video in our new brand campaign. We’ve chosen those elements that we’re confident that we can actually deliver against in our tax offices and with our digital offerings. However, the reality is we’ve got some work to do over the next few years so that we’re going to be able to deliver on all of the promises that we showed in that brand video.
Directionally I think that gives you a good sense of where we’re headed and we are excited about where we’re taking the brand. As we’ve tried to put that into words, the words we chose, where our journey is and our mission is to become the most trusted state of the art tax preparation experience at a great price for everyone.
A lot’s happened since we met here last January both in the marketplace and at H&R Block. I’m pleased to share our progress with you as we head into now our 55th tax season and my officially second tax season. Before we get started this morning I wanted to introduce you to our leadership team. We’ve got several new members on our senior management team this year. I want to take a chance to introduce them to you. For those of you that are here, please stand up when I introduce you.
First, Robert Turtledove who joined us this summer as our Chief Marketing Officer, although he’s new to the role, Robert is already deeply engaged in helping us build our brand consideration trial and really is working hand in hand with our new ad agency DDB to work on the new brand campaign. You’re going to see the early results of those efforts later this morning. In fact, Robert and the team just finished shooting commercials about a week ago and you’re going to see some of the early product that they’re coming out with this morning.
Also joining our leadership team is Kate Fulton who is leading our Government Relations and Public Policy efforts in Washington DC. Brian Worum our new General Council, I think Brian is here. We’ve also added C.E. Andrews to the team. C.E. is the President of RSM McGladrey. C.E. is unable to attend today.
I need to off script here a little bit. I’m reminded that last year at this meeting we didn’t have our President of RSM here at that time. About 10 days later we announced that we were making a change. I don’t want you to assume that because C.E. is not here that that is the reason that he is not here. We are very happy with C.E. but as you can all imagine he has a few issues to work out at RSM McGladrey so that’s the reason he’s not in attendance.
Those are the new folks on the leadership team. In addition, we’ve got some of our existing folks that are in new roles. Sabrina Wiewel, who you met last year when she was leading our Digital team and Phil Mazzini. Phil and Sabrina are deeply tenured leaders who have taken on new roles leading our Tax Network. Sabrina kind of leads the integrated side of our field retail offices and the digital channels and Phil leads the operational support team that makes sure that our tax season runs smoothly.
Other tenured members of our leadership team are Becky Shulman our CFO who you will hear from later this morning. We’ve also got Rich Agar who is our Chief Information Officer, Ken Treat who is responsible for franchise development efforts, I’m sorry Tammy Serati, who is in charge of Human Resources and Joan Cohen who rejoined the H&R Block as our Chief of Staff after she successfully transitioned our financial advisory businesses over to Ameriprise.
With this group of folks I believe we’ve got a very strong leadership team that has a really good balance of deep knowledge and experience within H&R Block as well as some external experience in leadership that really gives us a fresh perspective on our business. Our goal today is to give you of our plan for long term sustainable growth as well as a lot of specific details about what that plan is going to look like for this tax season. In particular we’re going to focus on specific initiatives that we think are critical to renewing our focus on our client and to really improve on our ability to execute.
Each of the presenters today is going to outline the changes that have taken place this last year that we think demonstrate the comprehensive approach we’re taking as an organization to really improve client growth over the next three years.
Before I talk about our plans and preparations for tax season 2010 I know many of you from the cocktail reception last night are very interested in an update on our negotiations with McGladrey & Pullen. The news as you saw if you read the press release this morning are that we have recently received a final and binding ruling from the arbitration panel. For now, the rulings of that panel are subject to a confidentiality agreement. We continue to have very positive and productive conversations with the McGladrey & Pullen Board and we are very optimistic that this is going to be settled within the next few weeks.
I did see there was at least one headline this morning that used the word that this situation was resolved and I want to reinforce we chose the words in our release very carefully. While we’re very optimistic that this will have a good outcome, we are not across the finish line yet. I want to make sure that that is clear to everyone because I don’t want anyone to leave with a misunderstanding of exactly where we’re at in this situation.
These negotiations have been taking up some of my time and all of C.E.’s time and then some. I can tell you that the rest of the H&R Block management team has been squarely focused on this upcoming tax season. I’m very pleased with the progress that we are making over the past several months to deliver a strong foundation for this tax year as well as for a strong foundation for future years. You’re going to hear this morning about our plans to attract, retain, and convert a lot more clients over the next three years.
Before I get into specifics about why I’m so optimistic about our position and about our future, I do want to take a second to show you a quick overview of broader trends within the tax industry. Keep in mind these are things relative to the tax industry itself, not specifically how we think it impacts us at Block which we’ll get into throughout the rest of the morning.
A few key market challenges that we think everybody faces as a result of the current economic climate: First, our assumption going into this tax season is that we expect IRS filings to be down about 2% this year and that’s really a result of the fact that unemployment has now reached double digits. Second, we expect to see a continued shift to the do it yourself category from assisted prep, primarily driven by the growth in the digital online space.
We believe that with continued economic pressures and some additional marketing spend from some of the larger branded companies that we expect that free filing is going to plan an even bigger role in the industry this year then it did last year. New tax law changes add a lot of complexity to the code. We don’t expect that these changes are likely to significantly increase the number of filers but we do expect them to have a significant increase on the net average charge.
At the same time, from an overall market perspective what we’ve been seeing for the last few years is that prices across the board for many retail tax preparers have continued to increase while the perceived value by the clients for that tax prep service has not kept pace. Overall when we look at the marketplace footprint the number of assisted tax preparation offices has increased pretty significantly, in fact by more than 40% since 2005 but that rapid office growth rate has decelerated in the past couple years to where it was just 4% last year. We expect that this trend will continue and that the growth rate will continue to decelerate for the next several years.
We also expect to see some progress probably in the next month regarding the IRS recommendations to regulate tax return preparers and increasing taxpayer compliance. However, we don’t expect that these changes are going to have a significant impact on our tax results this season but more likely have an impact on us in 2011 and then 2012.
Lastly, while consumer demand continues for settlement products they do appear to be more price sensitive then they have been in the past. We’ve been seeing a trend not only at Block but more importantly within the industry of people switching from refund anticipation loans to refund anticipation checks which we think is an indicator that taxpayers are really for the first time more willing to wait a little bit longer for their refunds in order to pay a reduced rate. We think the overall effect of this is that the profitability on financial sentiment products is likely to continue to decline over the next few years.
When we look at the situation that we’re dealing with I think the reality is that economic conditions are shrinking the marketplace to a certain extent. We do believe that this is temporary and the industry will return to its historical low single digit growth rates. We have modified our business plans to leverage our competitive advantages which we think are many, and to take advantage of this opportunity in the marketplace and capture additional market share.
With only 11% of the retail and digital market share space we think we have significant market share opportunities ahead of us as the use of paper and pencil segment continues to decline and digital continues to grow. Now admittedly I think we’ve created some of our own market dynamics internally that have impeded our ability particularly to significantly increase our 11% market share in retail.
However, I do want to point out, as you see on this slide, that from a market share perspective what we saw happen last year in our retail business was not meaningfully different in terms of market share change then what we had seen in previous years. The client count looked different and the client loss in 2009 looked different but that was really more of a result of the positive impact of the economic stimulus act on our results in 2008.
While the Digital segment is growing I will tell you we’re not satisfied with our results because we don’t think we’re growing at a fast enough rate in Digital and we don’t think we’re getting our fair share of the growth in the Digital category. I’m happy to tell you that a lot of work has been underway these last several months to try to reverse these trends and so we’re going to walk you through some of the changes that we’ve made in our approach and our business to position us for growing our market share in growing our profitability.
When I was here with you a year ago I talked about the reasons I was intrigued by the opportunity to lead H&R Block. In addition to the strength of the brand and the strength of our people the market opportunity was really one of the key factors that brought me here. Now that I’ve been here a little bit more than a year I continue to see tremendous opportunity despite some of the short term industry challenges that we face.
At H&R Block we’ve been spending the past year making changes that we really believe are going to differentiate our brand in the marketplace. Beginning this tax season we intend to fully leverage our size and scope and the strength of our brand.
Internally I will tell you we have not pointed to the economy or the unemployment rates as the root cause for our performance last tax season. In fact, in my message to all of our employees at the end of last year I talked about the state of our business. I really said the economy just put a magnifying glass on some of the internal challenges that we’ve had which have frankly been brewing since about 2002. What have we done about it? We’ve spent a lot of time this last year actually listening to what our clients have to say.
Listening to what our clients have actually been telling us for the past several years and in that process of listening we’ve learned a lot about ourselves. We’ve learned a lot about what we need to do better, to better serve our clients. We’ve learned our clients want choices in tax preparation. They want to be served in a variety of different ways. We’ve learned younger taxpayers joining the market have very specific preferences about how they want to interact with the brand and what they’re willing to pay.
We learned that taxpayers aren’t just looking for tax preparation; they’re looking for tax relief, because they have very complicated tax and financial implications that change over time. We’ve got to view this relationship with our clients as more then just tax preparation. We need to build a deeper partnership with our clients that provide the piece of mind that really comes with providing tax relief.
I was also clear when we listened to our clients that we’re missing out on some key opportunities as we interacted with them. In the past, we rapidly expanded our office footprint which stretched the capabilities of our tax professionals and our people and had a negative impact on our training and our cost structure. As we focused on a narrow segment of client service which was really focused on converting clients at the tax desk, rather then capturing opportunities in the broader market space that really focused on full end to end client experience.
As you can see from this chart, historically we focused our efforts and energy on opportunities at the tax desk so even if we performed really, really well the maximum opportunity we probably had for growth was about one million clients because that’s what was defined as the opportunity we were missing at the desk itself.
As we listen to our clients we learned that there were some other missed opportunities and they were bigger then what we were missing at the tax desk. In fact, more than two million people who interacted with the front desk when they walked in but never got to see a tax professional, that’s a huge growth opportunity for us.
Then you look at the bottom end after we’re done serving our clients. For those who did complete their return we didn’t focus on retaining those clients. We lost 4.5 million clients who didn’t come back, many of the reason which were the same as the clients that walked out on us prior to meeting with a tax pro. We’re also learning a lot about why clients leave our brand, why they don’t consider us in the first place or if they do consider us why they decide not to give us a try.
We’ve completely changed the way we look at our growth opportunities and as a result we’re completely changing our business focus and our business priorities. Robert is going to go into more detail on the Blue segment of our opportunity here to show how we’re going to go after those 110 million plus client opportunities that we’re missing out because people won’t even consider using H&R Block.
Sabrina and Phil are going to go into the fundamentals of the tax preparation experience as clients walk in, call in, sit down and get started with the tax professional all up until the time when they file their return, pay for service and leave our tax offices. All those areas basically shown in the green and purple on our client waterfall.
Becky is going to tell you what all of this opportunity is going to mean to our client growth and retention opportunities the next few years and how that relates to bottom line profit growth opportunity as well.
When you look at the full client experience and the gaps in our service our growth opportunity is exponentially higher then it was previously as we shift our focus and resources to where we think there are much, much bigger rewards.
This is a retail client waterfall chart, we have a similar waterfall chart for digital we won’t go into today but we are looking at the digital opportunity in the same way as we’ve just explained from our retail business. That’s critical to helping us make decisions about where we allocate time and resources.
How do these opportunities translate into real change for the business? Let me tell you how we’ve translated some of these insights into actions. First, we made some key organizational changes. We should be doing best which is providing tax relief for our clients. First, we removed unnecessary management layers in our organization. A couple of objective, we wanted better align our field and our field support employees so I think we’re a lot more nimble now, we operate more efficiently and all of us, but particularly the senior leadership team here in the room today can work a lot closer to the client then we have in the past.
We’ve changed our communication process so that all of us are speaking directly to our employees, especially to our tax pros so they know the changes that we are making and even more importantly, they know the reasons why we are making those changes.
As I mentioned at the outset, I think we have in place a very seasoned leadership team that has a good balance of H&R Block knowledge experience as well as a fresh perspective of seasoned executives that we brought in from the outside. We’ve eliminated several projects and activities that didn’t support improving the client experience.
So far to date we’ve stopped programs and activities that we used to spend between $20 and $25 million a year on and we’ve reinvested those dollars and human resources into activities that we think are going to really help us grow our client base. Becky is going to get into more of those specifics with you later this morning.
Those are some of the organizational change we’ve made. We’ve also made some significant changes in terms of changing our mindset and our approach to the business and its really focused on a couple key areas that I think are critical for us to grow our business over the next several years. The first is Digital. To be perfectly honest, historically our retail business has always viewed the Digital space as the enemy rather than viewing it as an opportunity. I know we never talked about it externally that way and I don’t think the management has thought of it that way but within the broader organization, tax pros really view Digital as the competition.
I think we understand now that that is not the case. No one is more well positioned then we are to leverage the trends that we’re seeing in the Digital category. We are the only tax preparation company that can serve clients in the way that they want to be served. You saw in our mission statement, we talked about the evolution towards becoming state of the art, being a state of the art company that can offer a Digital experience in a way that allows clients to interact with us through all the different phases of their lives.
Whether they’ve got a simple return and using a free online service for now is the best choice, or whether they’ve gotten to the point where their situation is more complicated where deductions and tax credits require a lot more sophisticated tax preparation experience. Digital is simply another way for us to serve our clients. I really believe it enables us to engage in a dialogue and a relationship with clients, particularly the younger client, so second generation baby boomers or the millennials as they’re called. We’ll talk more about the millennials in a few minutes.
As we listen to our clients I think we also realized we’re missing a critical opportunity with this younger generation. You’re going to see that we’re actively targeting this new millennial generation which is already very large, they represent 18% of the population and they’re growing very rapidly and many of them are going to start to become taxpayers for the first times over the next few years.
We realize that we’ve lost some relevance with this client segment. Some of it is from a pricing perspective, but we’ve also lost relevance in terms of the look and feel of our offices and frankly historically we haven’t kept pace with technology that will enable us to really serve this very technology savvy client segment. We’ve got to make progress with this generation as they enter the workforce which is why we’ve also shifted the mindset of the organization to embrace Digital as a critical growth opportunity for us long term.
Within Digital we’re actively watching the free market and I will tell you we’re not afraid of the trends we’re seeing. Whatever method our current and future clients prefer we are fostering a relationship early on by delivering a valuable service that they can trust. That’s where we’re at from a Digital standpoint but it is a significant mindset change from where the organization was just a year ago.
The second major change we’re taking a mindset and approach is relative to our office footprint. We know that we can better grow our client base by executing better in our existing offices rather then by further expanding rapidly our office footprint. We’ve got a network optimization strategy. It includes reducing the regular office footprint this year by about 400 locations as well as another 1,200 locations at our Wal-Mart and other alternative channels all of which are generally unprofitable.
By closing these underperforming company owned locations we can better optimize our existing office footprint. We can improve on our execution and we can better utilize and train our highest performing tax pros so that we can provide a greater client experience in our existing offices.
Third area that I think is a significant area of change for us is franchising and its one where I get a lot of questions probably because of my background at McDonald’s. I will tell you we view franchising as a client growth strategy. This is not a financial engineering strategy. As many of you know, we have previously announced plans to re-franchise up to 300 company owned locations for this tax year and we will be very, very close to that number.
Despite the fact that we hadn’t been an active franchiser for many years we have been able to build our pipeline of qualified financial candidates fairly quickly and we’ll continue to acquire the strongest talent available for our retail office network. We view franchising as a real strategic growth opportunity for us, especially given some of our competitions struggles and some of the changes in the marketplace.
The reality is part of the reason that our top retail competitors are around today is because H&R Block never franchised in urban areas. Historically we viewed those areas as company owned territories as that philosophy over the years has forced entrepreneurs within our system to become franchisors with our competitors. I think now that we are once again an active franchisor its going to make it a lot more difficult for our branded competitors to attract and to retain the best franchisees available in the tax preparation industry.
I think franchising is also going to be an effective tool to help us address some of the opportunities for consolidating what is now a very fragmented independent tax preparer marketplace. As the IRS begins to license and regulate tax professionals we believe that franchising with H&R Block is going to become an attractive alternative for many of those independent tax preparers who are likely to see increased pressure and the price value part of their business as well as increases in their operating costs.
Finally, we’ve told you in the past that we’re going to get more efficient and we’re going to get more effective regarding our operating costs. I think the reality is we’ve done a very good job with that over the last two years. We’ve proven we can do this, I think has actually become a core competency for us at Block and I want you to know that this is not just a two year exercise this is the way that we’re going to continue to do business going forward.
I hope you have clear sense of some of the fundamental changes we’ve made in our attitude and in our approach to how we’re doing business. From how we’ve viewing our client growth opportunities and how we view our approach to serving those clients and how we intend to improve on our operational execution.
Robert, Sabrina and Phil and now going to go into each of those critical areas of this client waterfall so that they can demonstrate to you what we’re doing to improve our business results. I will tell you, they’re going to go fairly deep in terms of the specifics of how we’re going to drive great execution. At an investor conference we don’t normally go into this kind of level of granularity but we think its important for us to demonstrate to you that we are doing what we said we were going to do and to give you the specifics so that we instill a great sense of confidence in our ability to execute against these initiatives.
At the end of the day that is where we have failed in the past, in our ability to execute and accomplish what we said we were going to do. You’re going to hear about the fundamentals from Sabrina and Phil, the basic blocking and tackling to get to our goal of being the most trusted state of the art tax preparation experience at a great price for everyone.
First, I’d like to introduce Robert and bring him up to the stage to expand on our brand consideration and trial strategy. I’m really thrilled to have Robert on board. He brings more than 25 years of consumer marketing experience with him. It includes a very unique blend of start up experience with The Ladders.com as well as positioning and re-positioning some of the world’s greatest known brands such as Pepsi, Pizza Hut, Frito-Lay and Unilever.
I think just as important or even more importantly, he brings a real passion and enthusiasm for our business that is absolutely contagious and I know you’re going to see that in him today. His combination of experience and passion is one of the many reasons that I am really confident in our ability to grow our business. Please welcome our Chief Marketing Officer, Robert Turtledove.
Thank you Russ for about 110 million opportunities to see if I can get it right. I’ve worked with a lot brands and companies over the course of a career bigger and small, traditional, established brands, some that were sparkling, some that had lost their way. Its interesting, at the cocktail party last night a few people asked me, “So what’s your perspective coming in of H&R Block?” A few things jumped out of me right away when I was looking at this brand, it’s only been 90 to 120 days.
The first is that H&R Block is truly a pioneer brand. This is a brand that invented a category, the tax preparation category. That says innovator, it says ground breaker and not a lot of brands have that kind of pedigree. There is something inside that that you can’t ignore about a brand like this.
The second observation about this category is it’s a very emotional category. Taxes live at the intersection of people’s lives and people’s money. That’s very rich territory but its also very anxious and very emotional territory. Where you’re playing around with that in marketing and preparation you need to tread carefully and just understand that dynamic.
Another observation I think everybody probably feels, but it just struck me is it’s an incredibly confusing category. No offense, does anyone really understand the stuff. Who here prepares their own taxes? Probably it looks like five or six hands. I’m not sure that anybody in this category speaks in plain English. This confusion is a clear part of the category but the good news is where there is confusion there is also significant opportunity.
There’s another observation and this really goes more to the broad category. This is a good business to be in, it’s a perennial business thanks to our friends of the Government and the IRS, death and taxes, right? There is more to it than that, don’t take my word. Forbes recently wrote an article and they were talking about, the article was titled, “The Most Resilient Brands in America.” H&R Block was on that list and was on that list because of our ability to weather the inevitable economic cycle [inaudible] that plague our 50 hundred year history of economic cycles.
Resiliency is an attribute that I’ll take anytime because it says a lot about our brand. The overall impression I have of the brand is about its rich history and it’s DNA. H&R Block has deep roots and values. It’s been nurtured by 55 years of literally service to a nation of taxpayers. You saw some of that DNA in the video that Russ showed earlier.
Remember, that video is our brand purpose; it’s the place we want to get back to again, to be the most trusted state of the art tax preparation experience at a great price for everyone. We have some work to do to get our brand and our service back to that place. That’s what Phil, Sabrina and I are going to share with you over the next few minutes.
Let’s go the brand and let’s start with the brand consideration opportunities. For me it’s pretty straightforward, you have to define your realities, take your head out of the sand or wherever else your head is and look at what’s going on in the realities you face. If you define the reality you can then figure out what your opportunities are and what buttons and what levers you have to push to change that reality to get those results you seek.
The approach I’ve brought here is pretty straight forward. The first thing is you bring a fresh pair of eyes. Those are through a client lens. I’m not always sure we look at it through a client lens. We look at it through business lens, we look at it through a bottom line lens, a financial lens, and somebody’s got to look at it through the client lens. The best thing, frankly for me, I do not know a lot about taxes yet. I’ve been here about 90 to 120 days so I think I’m looking at it the way most consumers do. Frankly, my category naivety works to my advantage because I think I’m challenging the customer here in some of this approach.
The second approach is much more disciplined and fact based. I look at three voices; the voice of the market, the voice of the customer, and the voice of the brand. It’s an honest and pragmatic and candid assessment, it’s almost quite clinical if you will. I just want to see what’s going on. I call it the brand stethoscope, a physical checkup, if you will of where we’re at and how we’re feeling. Join me for the next few minutes as we go and do a physical checkup of our brand. We’ll start with the brand health survey which polls the whole general taxpayer base.
The first thing that came out is that perceptions about H&R Block have slipped in a number of key areas, particularly when it comes to tax knowledge and proficiency. We understand the tax law changes and our tax pros are knowledgeable and well trained and we help you feel confident about your tax situation and that we provide expert tax planning. The scores range and were actually pretty high on a bunch of those but they have slipped, those are perceptions.
Let me throw two realities out, we do 10 million hours of annual tax training. You know why? Because this is our core business, we don’t do anything else. No offence to CPAs they do a lot of other things. We just do taxes so we are the best trained and the most knowledgeable about taxes. The second piece is our tax pros are the most poached in the industry. H&R Block tax training on your resume is a license to get a job at another tax firm because we train them and people put it on their resumes. The issue is not that we don’t get it; the issue is that we don’t get credit for it. We’ve got to change that.
The other perception that needs to change, you step back, is how we’re perceived overall. The truth is versus CPAs they look at H&R Block and they say you guys get me my money fast; we’re a fast refund company. We’ve done that to ourselves a little bit with an overemphasis of speed of refund and fast money. Don’t get me wrong, this is a critical and valuable segment to those people that need their money when they need it. We have over 100,000 tax pros and I assure you that those tax pros do a whole lot more than just get people their money fast. We need to get better credit for what we do.
I want to move over a little bit to the voice of the marketplace. We did an interesting study, it’s called a problem detection study and what’s interesting, if you ask people what they want or what they think you’ll get some reasonable good stuff back. What’s fascinating is when you ask people to complain the flood gates open and people will tell you a ton of stuff. What we discovered when we did this problem detection study and we asked people to complain this is what they said about taxes in general, about the whole industry and the category.
The biggest, thorniest issues far and away with category confusion and complexity about taxes. These are not just Block issues these are tax issues. The rules change every year, it’s impossible to figure out the tax code. I’m annoyed by the process. Tax jargon goes over my head and so on. As I said earlier, the consumer looks at it and says nobody speaks in plain English.
The other warning sign you see up on these things, there are a few bullets there on pricing and value. There is definitely anxiety and confusion about pricing, there are fees for everything, price was too high, prices go up, and I don’t understand the pricing and so on. The message is clear from this, whoever helps the consumer through this minefield will do much more then just prepare their taxes. What we’ll be doing is we’ll be providing them tax relief. If we do that we’ll become a friend and hopefully a friend for life.
The next voice I wanted to listen to was the voice of the marketplace. We’ve got to look at the digital space in particular and Russ alluded to it. Very simple, we are not getting our fair share in Digital. TaxCut is number two in software sales and TaxCut is number three in online sales. I have to confess that when I got here I had never heard of TaxCut, I’m sorry, I hadn’t. I’m not alone, 46% of the target audience in Digital are not aware that H&R Block has digital products.
Since we acquired this TaxCut around 1994 we’ve shied away from using the H&R Block brand and we’ve been tentative, frankly nervous in our commitment to this space as Russ mentioned earlier. In fact we’ve done pretty well in spite of ourselves and in spite of our low wins. Our presence and our credentials in this channel are a major factor in overall brand consideration and how we’re perceived as being relevant because it goes to the brand choices that consumers want.
If I’m missing out on a part of the category I’m not relevant and I won’t be considered. The good news again is that this is a significant opportunity and it is an achievable opportunity. I won’t use the term low hanging fruit but we can get off of this one.
Finally, we looked at the broader brand perceptions and specifically advertising. Everyone here in this room likes to talk about advertising because we’re all marketing experts. Who here fancies themselves as a marketing and advertising expert? I think a lot of us do. It’s tricky because we are consumers so we have opinions. Objectively we looked at our advertising, we said you know what; our ads have not always been effective.
Its a competitive world out there and I think in an effort to break through the clutter and to make some noise and make a difference we’ve gone off the enjoyment and entertainment value and make the company seem appealing, instead of the more important issues of getting the main ideas across and especially made you want to buy or the proxy for consideration. That’s really the true measure of effective advertising.
Our tone hasn’t always been right either. People take their taxes seriously and our ads should respect that. That doesn’t mean that there isn’t a place for humor but it does need to be done right because this is, remember at the intersection of people’s lives and people’s money and we’ve got to respect that.
The other piece about our advertising is that again at times we’ve blurred what we stand for. There are a lot of messages out there and I wish I could tell you different but most of those are just from last year alone. With good intention we’ve put multiple messages out there about multiple products or features or promises or segments whether it’s a guarantee or fast money or how smart we are or whatever it is.
The net result is confusion and the net result of all of this when you put together the perceptions there’s a 16% consideration. One in six people would consider us to do their taxes for them in the future, of that waterfall, of the 99% aware. That’s about 110 million potential opportunities for us regain consideration and trust.
What’s critical this is a hugely important part of the diagnosis because if we think we now understand the things that are causing that lack of consideration we can then do something about it and we can build an execution plan around it. I think you’re probably looking and saying that’s quite a checkup. We’re not done yet because there are still a few more tests to come.
When the brand stethoscope finishes doing the rest of its work we actually also picked up some incredibly strong vital signs, muscle, the good cholesterol, if you will. These are just some of them. I’ll breeze through them. We’re number one in market, 12,000 locations serving a far flung nation, 100,000 tax specialists, 99% awareness, 55 years of experience, a category and a consumer that’s begging for simplification. We’ve done it over 500 million times and counting. A company that’s in strong financial health and last year we got consumer $43 billion in refunds alone, just last year. Those are some very, very healthy stats. That’s the strong DNA that I talked about.
When you combine all of the tests together, the perceptions, the brand category, the opportunity and our muscle you get a full prognosis and the full prognosis is this. This brand is not sick; this brand is just out of shape. It is a very, very big difference between the two. You can get back into shape again and when you get fit and you get this brand in peak condition, when we address the opportunities we just laid out; consideration, brand perception, and the digital opportunity make no mistake about it the business opportunity is huge.
If we move consideration just one or two points amongst that 110 million potentials who don’t consider H&R Block the math speaks for itself and the number of clients potentially coming through the trial final is massive. Every point of consideration that we can move is about 1.3 million clients willing to try us, willing to send them to our tax offices or to our digital products.
It’s all about getting the brand fit then and executing against this opportunity because hopefully you got excited about the fact that there’s some real opportunity there and I think you know why you want to go after it. We have a simple two point brand plan to go after it. I’m not one of those that puts a 27 point plan together because focus and execution against the right things is how you make progress. We have a lot of other initiatives but I want you to take away these are the main things we’re working on.
Driving consideration and trail and committing to the game in Digital. I’d use the analogy that’s kind of like diet and exercise, very simple, but not so easy to do. Let’s jump in and let’s start talking about how we’re going to move consideration.
The problem is changing minds is not easy; people get set in their ways. How do you change people’s minds? We can’t just preach at them, they’re not listening; the wall is up, they don’t believe us. What do we do? The first piece with our marketing is we really need to send them a signal that we’re listening and that we get it. It’s not about telling them that stuff, somehow they’ve got to feel that we’re listening. We need to make them think and we need to make them think about H&R Block. If you can get people to think they start doing some of the math themselves.
We need to show them what we do and what we know, not just what we’ve got. No offence to our “We’ve got people” campaign, “We’ve got people” campaign did a great job of saying we’ve got all these great people. It’s what these people do for you, its what these people know and how they can help you that matters. There’s a shift from what really is important to what clients are looking for, what we do and what we know.
Clearly we need to show them why we’re different and how we can bring stuff that the competition cannot. Finally, we’ve got to give them their options and let them decide how they want to be served by us. All of that sounds great but we still have to break that wall down. We still need a way in. Are you with me? I’m not going to take one of those naive approaches, fine let’s just go put some marketing out there and we’ll bring the wall down. We think we’ve got a pretty good psychological set of insights that’s going to inform our advertising.
What we know for sure is that people have questions, lots and lots of questions. We also know that people are confused, very, very confused. They just want to get it right. This is so important to them. What we believe is that asking questions and speaking in plain English is our Trojan horse to get behind the wall, a scholar of ancient history, but really you do have to figure out how to get behind the walls. A lot of you know that that wall is up.
We believe when we ask the questions people will think and they say, “I don’t know I know the answer to that question, I hadn’t thought about that.” It suggests that H&R Block does which immediately goes to our expertise. What it really does is it has the consumer come to a little bit of those conclusions themselves. I didn’t tell them, I’m smart and I know all this stuff. I made them vulnerable themselves and they did the math in their head that said you guys probably know that stuff.
The second piece is that when we speak in plain English which I’m amazed that for 50 or 60 years nobody in the category has done. When we speak in plain English they’re going to say finally somebody gets it and somebody gets me. We believe that we are tapping into the right insights, the right psychology that’s going on in their heads that will help us unlock consideration and get them to reconsider this brand. We’ve talked about it in years past but we think there is an informed plan here.
What I’d like to share with you now is, hopefully you think that’s a fairly well thought out psychologically informed plan to go off to consideration. It’s not a promise, here’s what we’re going to do about it. I’m going to share with you some of the work, three of the first six ads that are going on and some of the other forms of media. I want you take away a couple of things before we get into this.
I am not interested in winning awards, we want to win clients and that’s a big difference. I got no Super bowl aspirations, I don’t want to be the darling of the ad industry, I want my advertising to work. I want my advertising to change perception. I want to make consumers think not necessarily laugh. Maybe they’ll enjoy it but its very, very critical is about work that needs to be done.
The first ad we’re going to play you is a spot called “Anthem.” Anthem really goes into real life questions and real life tax situations.
“Is a haircut a job hunting expense?
Last summer my kid made four figures; does he need to file a tax return?
They’re not just any questions.
Did we just make a charitable donation?
They’re the trickiest, thorniest questions of all.
Is this considered a home office?
Bring your tax questions to the company that helped clients get over $43 billion in refunds last year along.
How can I get more money?
Click, Call, or Come Over. H&R Block. Get it right.”
Real questions about real life situations backed up by the fact that we got clients $43 billion in refunds last year alone. We end with a Dad who just wants to look our for his family. He knows why it’s so important to get it right.
Our net spot poses a similar set of questions with a slightly different pail. Here’s “Windows.”
“Is my cable TV tax deductible, even the weird stuff?
Should I be getting receipts from the babysitter?
Can I claim my 30 year old as a dependant?
Whatever your question, however you want to do your taxes.
Kitchen remodeling, is that a write off?
H&R Block gives you the flexibility to work online, on the phone or in person.
Click, Call, or Come Over. H&R Block. Get it right.”
More real questions and situations but this cleverly makes the point that whatever your questions and however you want to do your taxes, H&R Block is the only brand that offers all of these options and this much flexibility.
The next spot is called “Plain English.” It goes to the fact; well I think it speaks for itself.
“W-2’s, Schedule-B, 1040A, recapturing credit carry forward?
Part year resident computation that makes no sense.
Previous withheld gross wage income? What?
You don’t speak tax but fortunately we do. H&R Block. We’ve got over 50 years of experience translating tax speak into plain English.
Click, Call, or Come Over. H&R Block. Get it right.
Intangible personal property.”
I think that really strikes a cord and it doesn’t matter what income bracket you are, people are going to look at that and say that’s right they get it, regardless of your tax bracket. You don’t speak tax but we do.
Notice that in all of these ads we have introduced a universal invitation to click, call, or come over, which reinforces on purpose all the channels and the ways we serve you. The 3D brand icon is not by accident a 3D brand icon. This is a multi-dimensional brand, we are not a single retail channel, and we have many, many ways to serve you.
Still to come are five more ads. One supporting the digital products specifically, one dedicated to settlement products, another one dedicated to more complex tax preparation and to great Latino ads that will take the same approach to questions but will do it in plain Spanish and will help us tap into the Latino opportunity.
As a total body of work we think it begins to reframe the brand to reengage consideration and ultimately get people to think about trying us again. Of course, we think it begins to reassert ourselves as America’s most trust tax solutions provider who you can count on to get it right.
I’ll now briefly walk you through some examples of how the campaign is actually consistently applied to a whole bunch of other medium. For example, I’m going to show you some print ads and this is a print ad that’s actually running this week in Military Money Magazine. I’m here, my home is thousands of miles away so where do I file? Ask H&R Block. No one does more military tax returns each year. We know the ins and outs of where and how to file and what you can deduct. Get it right, H&R Block. What I really about that ad is they’ve got enough things to worry about, let taxes be just one less thing on their minds.
There’s another ad called “Busy Twins.” Born December 31, 2009, at 11:52pm, born January 1, 2010, at 12:11am, can you help me out here?
Another ad is called “Busy Year” In 2009 we had Kaylee, bought our first house, landed a freelance gig, got a hybrid, and dumped some lousy stock. What do you say we do a face to face? The final ad probably feels very familiar on April 14th; its 11pm April 14th is now a good time to talk?
We think we’re tapping into the mindset of how people are thinking and feeling and how they’re living their tax lives. That’s where we’re hopefully making the connection point in the TV and in the print ads.
Here’s an example on Digital that takes the same idea to the web. This one actually taps into the turbulent job market and imagine you’re looking at a computer screen and there’s a display ad on the left or banner screens and ads on the top right and this is the kind of ad you’ll see. I think very relevant right now and obviously several more like that.
In social media here’s just one example of a 30 second online video that would appear on websites like YouTube or Hulu, our own website, the community sites, etc. This one actually picks up one of the themes you saw in the first Anthem ad but it goes a little deeper with a little bit more of a smile.
Finally I want to talk a little bit about local radio because it’s a critical piece of our plan. It may not sound that exciting but radio is a great way to drive traffic market by market. Also, we found a way to use radio and local radio to drive our traffic and our expertise. The fact is the state taxes change just as often if not more often then the Federal taxes.
Nobody better qualified to interpret those taxes then the local H&R Block Tax Pros living in their states and in their own communities. Here’s a real life example of a state tax focus radio ad that sets up 40 seconds worth of why the tax laws are different from state to state and then in the end talks about a real tax law in Kentucky. Let’s take a listen.
“At H&R Block we specialize in tax preparation so we know every state’s tax laws are different.
Here’s a question about state tax laws we got from Indiana: I’m in the military and I spent several months this year overseas. Will my state give me any tax breaks?
Yes sir, Indiana will definitely recognize your service. Stop into your local H&R Block office and we’ll show you how. Hats off from us as well.
This question was from Idaho: My boys go through a lot of food. I heard something about a tax break on groceries.
Idaho has you taken care of ma’am. Stop into your local H&R Block office and we’ll show you how. Wherever you live, whatever your tax questions are, we’re here to solve them.
Just click, call or come over. H&R Block, get it right.
Hi, I’m Angela Tao from the H&R Block office in Benton. Did you know that tax laws vary from state to state? Come over and ask us about how you can benefit from Kentucky’s new motor vehicle trade in allowances and many other laws that could affect you. Give our office a call at 527-9952 with any questions.”
That a real tax pro talking about real tax questions her clients face in her community. Multiply that by all the 50 states and what you’ve got is an ability to connect really, really well at a local level both with knowledge and expertise and of course consideration all in one. Those are just a few of the highlights from the campaign to drive consideration and trial which is one of the first critical legs of the plan.
I’m now going to move onto the second very, very important leg of the plan which is our commitment to the game in Digital. A strong invisible commitment to the game in Digital this is not just about us participating and being an accidental tourist in the space, this is about embracing it and asserting ourselves in it.
One of the smartest things we’ve done is to re-brand our TaxCut product as H&R Block at Home, formerly TaxCut which is a bridge. Without being overly dramatic we are now harnessing the might and power of a brand with almost 100% awareness behind our digital products and the fight for digital share. I’ve got to tell you, we know it’s the right thing to do and it’s about time. I’m not sure why we shied away from it but we’re doing it.
We’ve also made significant upgrades to our digital products and our digital product lineup too. You’re going to hear more about that from Sabrina, because that too is very much about the client experience. Then we’ve made significant upgrades to our website which is essentially our online office, for want of a better word.
Those include upgrades to brand integration, better navigation spoken in plain English, new improved tax calculators. We’ve got a dedicated Latino website, we have community websites for an army of qualified social media savvy tax pros and we have 45 states tax websites. You know what? People want to know what’s going on with taxes in their own local state.
We will aggressively market our Digital offerings with dedicated digital creative that we talked about and we’re going to have a strong presence in the marketplace in TV, search online, social media, and direct mail. We’re not going to shy away from using free in our online marketing in order to attract people in because we know free is a critical ante, a gateway into the digital segment.
Finally, you’ve seen Click, Call, or Come Over, which is our ubiquitous call action to say we are in the space and we are in the game and you cannot look around what’s going on and not know that H&R Block is in the digital business.
The final piece that Russ talked about is reaching out to millennials. These are the next generation of taxpayers. They’re probably not going to do their taxes exactly the same way their parents did. We need to attract them to the H&R Block brand. You know what? I’m not waiting for them to file their first tax return before we reach out to them. About six weeks ago we proudly unveiled a new program called H&R Block Dollars & Cents which is a grass roots school driven program to promote personal financial fitness to high school teenagers.
This USA Today ad goes to the heart of the opportunity but actually the heart of a real problem. Today teens can balance a skateboard but not a checkbook. They know football scores but they have no idea about credit scores. While they study multiple languages, savings is a foreign concept. The punch. Let’s teach our teenagers about money before the real world does. This is a silent crisis going on in schools and young teenagers today.
Our goal was about 1,800 schools in the first year of the program. We’ve had over 2,000 in the first six weeks and the schools are taking the money out of their own pocket to buy the curriculum. We know we’ve hit a cord and a tone here with over 300 stories and 220 million impressions. We believe this is the right course for this brand, targeted at the right audience and we’re really excited about nurturing it not just as a consideration vehicle or as an acquisition vehicle but ultimately about making a brand relevant to an emerging and powerful generation of taxpayers.
Finally, we’re building a truly valuable brand asset in the Tax Institute. The Tax Institute is a national leader in providing unbiased objective research analysis and interpretation of the Federal and State tax laws and we could sure use some of that. It’s more than that because the consumer perspective on this too is they want a trusted and objective source of credible information that can help them through and give them guidance in this confusing tax world.
There you have it. A focus and we believe thoughtful plan to grow grand consideration and trial and to commit to the game in digital. We put a face on consideration and the many levers and influences that drive it. We put a face on the opportunities in digital and how we can go capitalize on them. Then we took you through, as Russ said, deep into the pipeline to see here’s the work, here are the initiatives we are taking to market this tax season to get it done.
This is not a hypothetical plan sitting on a shelf that you’re going to have to wait until next year to see are they going to do something about it. All with the express purpose of moving the needle in the brand consideration part of the client waterfall. We know that when we reengage people to try H&R Block the progress should yield significant results. Remember that waterfall, I wish there was a magic pill but there’s not. There’s no switch that you flip. Changing consideration will take time. It is the right work and it is the right plan for this brand.
We’ll do our consideration and trial work as you’ve seen. From here the story really moves from the consideration phase and bringing people to our doorstep to the client experience phase which is ultimately where the brand lurks. Whether it’s on retail or in digital the client’s experience is the sum of the brand.
Sabrina Wiewel and Phil Mazzini have between them over 20 years of H&R Block leadership in the field, in the support offices, with tax pros and with client and across all of our channels. They know what it takes to lead people and satisfy clients and they know this company and its business. It’s my pleasure to introduce to you Sabrina and Phil, who lead our team in delivering on this great brand’s promise and make it happen.
We’re really excited to share with you our action plans today for the Tax Network. As Robert just discussed with you, he shared with you the way in which we’re going to increase our overall consideration from a brand perspective. We have one of the most recognized brands in the country and still only one in six people say that H&R Block is for them. This is not just a marketing issue. This is actually a client experience issue as well.
People are telling us that they don’t believe that we have a product or a solution for them or even what we have might not be good enough. It’s not enough to just have Robert’s marketing deliver clients to us through our doors through a strong marketing campaign. We have to be able to deliver good service in our retail offices, through our digital products, and through our client service after a client finishes a return.
Today Phil and I are going to share with you our action plan to address our client break points. It’s a waterfall that you guys have seen earlier in Russ’ presentation and it relates to the first and last impression when they come in through our doors. It also relates to the price/value equation and the choices that we’re going to offer our clients in our service offering.
To set up the framework this morning, I want to take a look at what the people have been saying about our brand and the services we provide. The first thing that we’ve heard clients say to us is, “I walked into your office, I left before starting a tax return, I sat down with a tax professional but I didn’t feel welcome.” Also, as you saw on the waterfall, there are about two million of these clients that walked into our office, checked in at the front desk and walked out for service related reasons, before even meeting with a tax professional.
The next one that we heard people say, “I started my return with a tax professional but I didn’t pay, the price just didn’t make sense.” Again in the waterfall as you saw there are one million clients that sat down with a tax professional but left before paying for their return. Sometimes this is price related, sometimes its service related.
Another one that we heard is, “I called an office with an issue of a tax return that you prepared for me but I never got a call back. I don’t feel like a valued client. I don’t know that you care to know me. You make me feel like a number.” Four million clients who completed a return with us last year will likely not come back.
Our plans to address these break points and give our clients the service they deserve is not sexy. Through these fundamental actions that Phil and I are going to be addressing with you we’re confident we can drive more paid clients and get them to return. We think we can turn seven million unsatisfied clients into long term clients for us.
As you can see, we’ve got a lot of opportunity to change the impression of our brand and make ourselves more relevant and satisfy taxpayers. We’ll come back to these quotes as we share how we’re going to solve for these issue through the first impression, the last impression and price/value. It’s a different world today, people want choices, clients want to feel important, they want to feel excited and confident about the service that they just experienced or they’re going to look elsewhere.
We need to offer the clients what they want, whether it’s in our office, through our digital products so that they’re going to feel good about the experience they receive from H&R Block and they’re going to refer us to their friends. We know we can do this because we’re doing it around the country today. We just need to do it better and more consistently throughout our network.
I’d like to bring Phil Mazzini in and share with you the actions that we’re going to take to improve the impression of our brand within our offices and our service centers. Then I’m going to come back and talk to you a little bit about improving the impression of our brand through our digital products and really just kind of tell you what we accomplished since last time that we spoke here last year. Then I’ll also share with you our price/value equation and finally Phil will return with the last piece of the waterfall and talk to you about what we’re doing to keep clients happy after they finish their return.
With that I’d like to turn it over to Phil Mazzini.
As I start here let me just reiterate that tax preparation is a very serious event. In fact, for most of our clients it’s the largest financial transaction they have all year. It’s with this context that we approach client service in 2010 and really beyond. As Sabrina mentioned, our plan is a block and tackle approach to serving clients, one that will create and support an optimal environment for our tax professionals to serve clients and for our digital clients to serve themselves. We know that a positive client experience more times then not leads to return visits.
First year clients, we only retain them at 50%. If they come back a second year we retain them at 65%. If they come back a fifth year we retain them at 85%. The key is a positive client experience for every new and returning client. There are four primary touch points or opportunities in the client experience that we’ll address to close gaps in our service. Our goal is to ensure that when clients walk in they stay, they finish and pay, and they come back to us year after year.
These four opportunities are the look and feel of the office and the digital products, the welcome, the interview, and the service we provide after the client finishes their return. As Sabrina said, I’ll share the touch points from a retail perspective and she’ll share it from a digital perspective.
First, the look of our offices, this is basic. A lot of people asked me about this last night. Like all of us, clients expect professional, clean, comfortable, and secure offices. We’re going to give it to them. Clients tell us we need to improve here. We’ve got a clear plan to get our offices in better shape and we’re holding our field leaders accountable to make sure our office is promoting and welcoming environment that’ll make clients want to say. We have guidelines in place and we’ll enforce them in a disciplined way. Specifically, we’ll measure what matters. Client satisfaction and how this initiative contributes to it in our offices.
We’re also looking ahead, we’re looking to the future, and we’re testing a new more sophisticated look and feel for our offices. This is really to attract more clients; it’s really Starbuck’s for the tax office. We’re introducing an upgraded look in 300 offices this season. These offices move us in the direction of state of the art. They offer amenities all clients are looking for.
Features like client privacy, TVs in the waiting room, music, and new work stations, and speaking of coffee, we’ll have that too and we’ll have that in all of our offices. It’s a natural conversation starter, the aroma helps create a warm environment, and helps put clients at ease. Coffee may sound like a small step but I really believe that when it disappeared more then 10 years ago we sent a clear signal to our organization. Anything that gets in the way of the efficiency machine has to go, despite what it means for client service.
That’s changed, in 2010 and beyond our clients come first. We’ll learn from the various elements of this new office rollout and implement the winning ones as we move forward.
Last, we’re also introducing a flagship office right here, right off Times Square. It’s a living billboard designed to change the perception of our brand. It showcases state of the art look and technology in one of the busiest locations in the country. In fact, over one million people walk by this location every single week. They’ll see the future of H&R Block. They’ll think differently of Block when they see this office. As this concept takes root we’ll gauge client reactions and we’ll considering opening more billboard offices in the future.
Now let’s move to the second opportunity to reduce walk outs and improve retention. Let’s remember this quote, “I walked into the office and left before starting with a tax professional because I didn’t feel welcome.” Tax preparation can make people nervous. Clients want to be welcomed and greeted in a warm way when they walk into our offices and they want to be put at ease. In many cases this happens but until this year it didn’t happen enough across our network.
From a retail view again we can win a piece of the over two million clients each year who check in at the front desk but leave before even starting a tax return. We know from our data that when clients are greeted warmly their satisfaction rises significantly. In fact, if they rate us positively at the front desk they’re two times more likely to rate us positively overall. Its common sense.
Think about walking into your doctor’s office or a restaurant for that matter and no one greets you. How long would you stand there and wait to be acknowledged or helped. Not very long. Would you return? Probably not. We haven’t implemented consistently, its common sense but we really haven’t implemented it consistently and that means for us opportunity. What are we going to do about it?
We’re adding 40% more offices dedicated hours to the front desk in our company owned offices so there’ll be someone there to greet clients. We’re also training our tax professionals to warmly greet clients when they walk into a smaller office where we do not need dedicated front desk support. This will give every client who walks into our offices a proper welcome from a trained professional.
Again, it’s basic, but if they walk out before even getting started we’ve lost them for good. We have high confidence that this improved coverage will improve satisfaction because we’re seeing it today in many franchise offices where they’ve made the investment in the front desk. These offices retain clients at a three to four point higher rate. This is driven by a group of factors but certainly front desk coverage is a big piece of it.
It’s not just adding hours that’s going to make a difference its adding better people and “better” is the emphasis there. This year we’ll take clear steps to hire the right people for the job. We’re already putting a much stronger emphasis on recruiting the right people up front through career fairs, social networking sites and traditional job boards. We’re also using a new online assessment tool to help us find the right people, people with the skills and personality to succeed.
Currently 70% of the candidates are passing the assessment tool, stopping those not up for the job from slipping through. What is really comes down to is the tried and true personal interview. The reality is, for these positions we should be able to figure out in 30 seconds if the candidate is a people person. If they are a people person, if its yes they go to the next step. If no, they go elsewhere, maybe they go to the competition.
Secondly, once we’ve hired the right people that go through 14 hours of training so they’ll be even more effective in greeting clients. In the past, our front desk associates were fortunate they received an hour of computer training. Things are different. Folks these are big changes. In the past, admittedly we weren’t too particular on who we hired for these positions, largely as a result of our former real estate strategy and yes in part just due to our lack of attention and support of this activity. We focused on buts and seats, quantity not quality. This practice ended last year, and again from here on out we’re putting clients first.
This now leads to our third opportunity and probably our most critical opportunity, to improve the client experience. Remember this quote, “I don’t feel like a valued client or that you know me. You make me feel like a number.” Let’s talk about the tax desk experience. The bottom line there’s nothing on the retail side of our business that defines the H&R Block experience better then what takes place between the client and the tax professional desk. What happens there determines whether the client finishes, whether they pay, and whether they come back next year and whether they refer a friend.
Clients want a tax professional that is confident and puts them at ease. We’re going to give it to them. We’re making a significant investment this year in improving the tax desk experience for our clients through the following actions. First, we’ll move clients to our top performing tax professionals. That might sound like a small thing but it’s a big thing. We’ve never done this before. In fact, we’ve never even worked tax professional performance into our operating model. Of course we see much stronger satisfaction scores when client sit with our top tax professionals, its just common sense.
We also know that many of these tax pros have the capacity or are willing to work more hours. It just makes good business and client sense to give these tax pros more clients. That’s what we’ll do this year. First, we’ve identified who they are. Generally a top performing tax professional is someone that’s highly certified and trained and retains clients year after year. Then we simply schedule more hours for them. Obviously this initiative will have significant impact outside of peak but we’ll get benefit from it during our peaks as well. With this strategy we’ll move one million clients to these tax professionals.
More clients will stay and pay as a result of this improved client experience at the desk. With our higher performing tax professionals having 8% higher retention rate, more of these clients will return and refer their friends. Again, it’s a big change. This is the first time in our history that we’ve evaluated our tax professional’s performance to this extent and held them accountable. While we expect to see a lift this year from a higher referral rate and some other factors as a result of this action, the bigger benefit comes in the out years with retention. It will compound year after year.
The second action we’ll hire fewer newer tax professionals and better train those that we do hire. In support of moving more clients to our top performers, this year we’ll hire 50% less new tax professionals. Our retail footprint reduction efforts have dovetailed nicely with this effort and act as an accelerator for it because it takes pressure off our hiring needs.
In support of the first year tax pros that we are hiring, we’re implementing a new mentor apprentice approach that puts the emphasis on learning the job. We’ve adjusted their pay structure to create a learning mindset and eliminated the commission based pressure on the first year tax professional. We want our best people to develop and return to us and we’re highly confident that this system will encourage that.
We’re putting our money where our mouth is; in fact we’re investing $30 million this year in these initiatives. This $30 million the delta is very big on retention, we think this $30 million is worth every cent and will be paid back in long growth and retention of the brand.
Now I’d like to turn the stage back to Sabrina to discuss our digital business, the price/value equation and the choice we’re giving to clients for our service in 2010 then I’ll see you again to close out the presentation.
One of our strongest expressions of personalization is choice and I talked to you about that a little bit earlier. We want to give clients choice. Choice is what our digital and integrated offerings are all about. As Russ mentioned, the industry is seeing a greater shift to do it yourself and do it yourself products, primarily in the free space and we’ve been seeing that happen for a while. We’re not afraid of this trend.
In fact, we’re better positioned this year then anyone to serve the clients the way that they want to be served on whatever phase of the lifecycle that they’re in by giving them choices. If they start with us in a free channel or with a free digital product with a simple return, will remain relevant to them as their tax situation become more complex and requires a tax professional.
This time last year I reviewed with you our digital product landscape. I also closed by reviewing what we were planning to do in 2010 and beyond to push us to be a more competitive and a customer choice in the marketplace. I want to update you on what we’ve done so far from what I told you last year. The first thing that I had told you in the close was that we were going to focus on share, retention and profit.
As the digital industry continues to grow year over year we’re focused on capitalizing on this growth and on building on last year’s success by making our offerings more appealing in all channels; online which also includes free and FFA, and software. We believe that we’re going to see a lift in 2011 based on some significant changes we made to the product this season but I’ll touch on that in just a minute.
We’ll continue to price our products competitively for the gain in profit. Then in terms of closing the product gaps that we talked about last year we did close the product gap between us and our competitor and we’re really excited about a smart import feature which allows us now to do W-2 and 1099 importing.
The product is friendlier and easier to navigate an it refers to what Robert talked about, it talks to the client in just plain English. We also wanted to simplify the customer’s experience so a new simplified product line is going to be available that’s going to take the guess work out of the decision for the product of what the client thinks is best for them. I encourage you guys to take a look at it. We set up the product out in the hallway and you’re free to take a copy as you exit. Please feel free to take a look at this.
We also included a new personal tax guide which will help steer the user through the return with some occupational face advice. Then as Robert told you, we were going to leverage the H&R Block brand and we did that. You heard Robert say we’ve dropped the TaxCut brand although we’ll use that in the transitional year but we’re leveraging the H&R Block brand as H&R Block at Home. We believe this will heighten the awareness of our digital products, especially given that we have 99% awareness of H&R Block brand and as Robert talked about we only had 46% awareness of TaxCut.
Let me now talk about the integration between tax professionals and the digital products, I know many of you asked me about that last night at the cocktail party so let me talk a little bit more about it. There are lots of opportunities for our clients to connect with a tax professional digitally. As I said before, this is our competitive advantage, giving our clients the ability to interact with an army of tax professionals who are certified and they can be virtually anywhere we need them to be and trained to answer tax related questions. This is where choices come in.
A client may not want to wait in an office while the tax professional prepares their return and gets it all ready, they will have a choice now to go home and approve this completed return online. Or, a client may want to prepare the return themselves and they can now send a question and connect with a tax professional online. We’re also piloting a new product called Best of Both across about 15% of our nation this year. We had a similar product in the past we called it Signature, I think you heard me refer to it last year. It wasn’t very well supported or marketed for that matter.
Last year this client product grew even with just an okay product. We’ve gutted it and we rebuilt it based on customer feedback. Best of Both represents a product in the marketplace that integrates digital and retail. This product will allow clients to prepare their return online and then have a tax professional review, edit, and sign it. That’s great news because it’s also scalable. We can very quickly expand it if we need to. In fact, we have plans in place already to do just that.
Best of Both has one more distinct advantage; it allows us to bridge the profitability gap between digital and retail segments. We now have a better trade up mechanism for clients that allows us to stay connected with them in a more profitable manner. As you can see, the digital plan also fits into our strategic focus. We will give clients a good first impression by bringing more awareness to our digit products and by leveraging the H&R Block Brand. The product features and the integration capabilities will give us a state of the art impression that supports the vision of the brand that Russ shared with you in the beginning.
We will personalize the experience for all of our clients by giving them a way that we can serve them the way they want to be served through product choices and options to connect with a tax professional.
Now that I’ve completed the digital conversation I’d like to actually shift this conversation to price/value. Digital pricing has always been straight forward and transparent industry wide. We can’t say the same thing about retail. Solving the price/value equation in our retail locations is a very large opportunity for us. As Russ mentioned earlier, prices across the board for branded retail tax preparers has increased while perceived value for their services have not kept up with pace. We’re guilty of the same thing.
We’ve received consistent feedback from our clients saying that they’re confused by our pricing and I think you hear Robert say this is also nationwide. Our tax pros are telling us that they’re also confused about how to explain it.
The second thing that we hear is that our prices go up every year. The deeper issue is that we’re facing this time in our economy as well. The third thing we hear is our services aren’t as good as they used to be for the price. Now we know this is true for the entire category not just us. If we’re to be viewed as good value for the money we’ve got to clear this up by taking the confusion out.
Let me start by saying we intend to hold the line overall on our Forms based pricing this year. We’ll rely less on couponing and instead reduce price where we have the opportunity to reverse share with the clients. Nevertheless we still expect our net average charge to increase. Not at the same pace as in previous years. Before you start typing on your Blackberry’s about price let me explain how we’re going to set this up.
We will rely on new client growth and anticipated complexity and less on price increases for revenue growth. As you heard Russ say, the constant and complicated changes in tax law is a benefit for our business and complexity is on our side. We’re expecting that increased complexity to come largely from the tax law changes like make work pay credit, expanding qualifications for the earned income tax credit, the child tax credit, and the home buyer’s credit.
This is a big change for us and we believe that this overall moderation in pricing is necessary for our long term sustainable share growth. As we move down this waterfall that you’ve been seeing all morning pricing directly affects the service area client experience. You know what; we could make an argument that pricing actually impacts the entire waterfall.
How are we going to solve the price/value issue as it relates to trial and service? I want to share with you more deeply what we’re going to do about it. Let’s start with price confusion, the first think I talked to you about. It begins with the fact that we can’t even quote our own pricing. Many times the first question a client asks is what’s this going to cost me and we can’t answer this basic question either on the phone or in person. How do we expect them to trust us enough to prepare their returns?
We know that this can be a barrier to get them to come in, pay and return next year. This year our tax professionals will have a simple tool that will allow them to estimate prices for the clients. Clients will also be able to use this tool themselves to approximate their charge in a waiting room. This will help set the expectations right up front and avoid potential sticker shock and help build trust. Having the ability to quote a price up front will also better help us explain our value at the end of the experience.
How many of you have ever sat down with a CPA or an accountant and they were able to explain what they did for you, what it costs, why there’ve been changes from year over year, they can’t. We’ll be able to. We’ve added a screen within our software that will serve as a tool for our tax professionals to clearly explain the value that they provide. It’s including IRS estimations for how long it would have taken to do their return had they done it themselves and how much a client’s refund has been increased by utilizing certain forms.
We’ve solved for being able to give our clients and estimate of our pricing and we’ve created a tool that allows our tax professionals to explain the value, to take the confusion out and put the transparency back in. We know there’s still an issue about how much we charge.
We know that we have lost some of our value proposition for low income and young filers that file a 1040EZ Form. You can see from these charts that we experience both new and shared declines in these particular segments. Its worth noting that these clients are particularly susceptible to migrating to digital channels where we have weaker market share.
For these straight forward price sensitive clients we will now charge $39 for the Federal Return and $29 for the State and this is nationwide where a state return is required. This pricing represents a 25% price reduction for these clients. Our data and research tells us that we are confident that if we maintain and rebuild share in these key segments which represents about 17% of our client base that they will come back.
Finally, for all the other clients that I mentioned earlier we will hold the line overall on Forms pricing this year. So, same return, same price. Complexity is on our side and so we do expect some natural average charge increases as a result of the complexity and based on the market dynamics we believe brand competitors will feel pressure to raise their price to any added complexity they may see. This puts us in an even better position to take share. That is our price strategy for tax season 2010. We believe these changes will bring more transparency, a great understanding and an increase in value perception among our consumers.
Now I’d like to turn it back over to Phil so that he can close by talking about how we’re going to retain clients through our call resolution.
Improving issue resolution when clients call our contact centers is really a huge piece of the client experience. I don’t think we’ve ever talked about our call centers specifically here but it’s an important piece. We can either turn these callers into brand advocates or into brand attractors depending on how we treat them and how we fix the issues.
Our call centers field approximately 90 million contacts annually with nine million of these contacts being fielded by live agents. The seasonality of our business, the complexity of the tax code and the filing process and the Emerald suite of products create a challenging call center environment. Again, also lots of opportunity to impact the client experience.
This year we’re investing in key service levers that we know will improve our capability to handle calls and achieve more consistent satisfaction, areas that have been problems for us in the past. These actions include expanding our automated response capacity to improve stability. What’s that mean? Last year we dropped more then a million calls meaning they just didn’t get through because of capacity and this obviously hurts any ability to retain these clients. With this investment we plan to eliminate the issue.
Second, higher levels of staffing. Last year we targeted an 80% service level. This is not the client service ballpark we want to play in. This year we’ll target and staff to 95% service levels and this level is consistent with a strong service brand. Better functionality, access and connectivity will allow appointment setting and other important services at the call center. In the past, we asked clients to hang up and call an office to make an appointment.
I’m not sure the odds are really high that this can be successful. This improvement that we’re making will eliminate this client inconvenience and the slippage that we know we experienced as a result. Its already working, we’ve already set 10,000 appointments for Emerald Advance Product already this season.
Number four, training and processing system improvements help us solve client issues the first time they call. After all, none of us really want to call back to try and resolve an issue. Finally, we’ll implement 32 initiatives to reduce the need for client calls in the first place.
One example of this is after every debit card transaction we’ll now have the ability to text account balances to our Emerald Card Accountholders, it’s a simple service that clients told us they want. It’s truly a win-win. Clients win with improved timely information and we win as our call center agents spend less time providing bank balances to a very small group of clients who call us a whole lot of times.
With these actions we’ll improve client satisfaction and with that, client retention. Again, no different than anywhere in our client service chain we can turn these callers into advocates. If we turn them into advocates we’ll spread the word and help Robert increase consideration and trial. If we let them down and they become trappers they’ll pollute the waters and make Robert’s job a lot harder. It’s very clear where we’re heading, clients first from here on out and we expect to help the marketing team improve the number of consumers in the H&R Block camp.
In closing, reduced walk outs, improved retention, increased conversion, and convenient choices to allow clients to access our services when and how they choose are all outcomes of a better client experience. We’ve made significant progress in the last several months to align our organization with a client service mindset.
Again, these actions aren’t sexy; the work isn’t easy and won’t be accomplished in one year. I can say with confidence that we have strong alignment; we’re fully committed to executing this plan at all levels of the organization. In fact, with more than 4,500 offices already open to serve clients with our Emerald Advance product our plan is taking life and beginning to deliver.
We’re receiving feedback of noticeable change from not only our tax professionals but from clients themselves. Clients are already noticing the difference and one very recent example a client in one of our Florida offices in West Palm Beach asked is there a new manager here? The answer is yes and the manager is the client. They’re driving our decisions.
On behalf of Sabrina and I, I’d like to say thank you. We’re going to take a 15 minute break. When we return Sabrina and I will turn the stage over to our friend, our financial partner and CFO and someone I think you all know fairly well, Becky Shulman. On behalf of Sabrina and I again thank you for your attention and we’ll see you in 15 minutes.
I’m going to wrap up the day by discussing the opportunity we see from the changes we’re making in the business. The financial potential is significant if we are successful in moving the needle on consideration, client experience and retention. I’ll cover our plans for further optimization of our cost structure and our plans for reinvestment. We have some meaningful competitive advantages this season that I will highlight from our settlement products and H&R Bank. I’ll close with a discussion of continued improvement in our financial position, our financial flexibility and capital allocation.
This organization has formerly looked at regular price increases times a small incremental client growth rate as a formula for reaching a short term target. You all know what I’m talking about. This year, every year at this time we put up there the formula (X% in price increase, X% in client growth). This business is not formulaic. There are several paths to great results the right way. As you’ve heard our team discuss here today there are a number of key business levers to get to the bottom line and we believe they are all interactive. You cannot pull one without impacting the other. It’s the balance of these levers, along with effectively managing our costs that will enable us to grow in a sustainable way.
The key tactics in delivering a successful tax season this year are higher brand consideration to adjust the top of the waterfall, enhanced first and last impression to address the middle of the waterfall, increased focus and commitment to digital and greater personalization to impact the lower end of the waterfall, and changing the price/value equation. Each of these tactics will require great execution. Great execution will deliver great results to our clients and to our shareholders.
Russ and Robert talked about increasing brand consideration from the current level of 16%. The increase in the number of taxpayers willing to consider the H&R Block brand is an option to preparing their tax returns will in turn increase new client acquisition. Moving the needle on consideration can be very impactful.
Let me give you a sense of the magnitude of an increase and the consideration percentage. One percent of 132 million IRS filers is 1.3 million. Assume we convert about a third of those or 500,000 of those 1.3 million at a margin of $80 to $120 per return will drop between $40 to $60 million pre-tax to the bottom line by increasing consideration by only 1%.
While increasing consideration will drive new clients it is far cheaper to retain the existing clients we already have. A general rule of thumb is that it’s five times cheaper in keeping our clients. Improving the first and last impression and ensuring a personalization of the tax preparation experience are efforts we expect will lead to the improved retention and increased referrals which will obviously drive increased earnings.
Being successful in moving the retention percentage will compound every year we move the needle as the following year starts from a higher base. Our history has shown us that retention is a very hard metric to move as we’ve had retail retention around 70% for the last several years. Why do we think that we can increase retention when it hasn’t changed considerably over the years? We have hundreds of offices and thousands of tax professionals with retention rates greater than 80%. We know it can be done because it is being done already in pockets of our network.
Our objective is to get the rest of the network to replicate those same retention levels. We believe that our client service initiative, new tools, and daily measurements will get us closer to those goals. Again, to give you an idea of what retention increase means to our bottom line, on our 15 million client base a one percentage point increase would be 150,000 retained clients. Again, the margin per return at $80 to $120 the increase to pre-tax earnings would be $12 to $18 million for that one percentage point increase. That is only the one year effect. We will begin to see a multiplier effect as retention builds over the next few years.
Sabrina and Robert discussed our plans for our renewed focus and commitment to the digital business. We view the digital channel and its integration with retail as a key source of client growth and profitability. We have seen success in not only monetizing clients coming to us through free Federal and FFA channels but we’re also recognizing the benefit of their migration into our retail channel. H&R Block is uniquely positioned to lever the integration of the retail and digital channels.
Solving the price/value equation helps us to both attract and retain clients. As we talked this though let me reiterate up front our revenue guidance is for low single digits which reflects expected growth for a combination of client growth and net average charge growth.
Phil talked about our pricing initiates to increase value, a critical component of the price/value equation. Sabrina also spent some time review our retail pricing, plans for the upcoming season including our new 1040EZ pricing which we believe will be one of the most aggressive in the industry. We’re able to offer this competitive price point as we have the advantage of being able to leverage our cost reduction efforts.
We also believe it’s the right time given the current economic environment to offer this value to a targeted client segment in need of a more affordable solution. The 1040EZ price point also compares very favorable to digital alternatives ranging from Free to about $100. As we improve our value our price point are no longer a barrier to consumers using H&R Block.
Bottom line we are very confident in our lower price points at our retail and our free Federal and FFA offerings in the digital channel as it reflects our lifetime view of clients. We believe that over time these clients will graduate to more complicated solutions and move across the channel using H&R Block as their provider of choice.
The tactics we’ve been talking about don’t come without investments. Now let’s talk about the investments and how we’re funding these initiatives in TS10. You’ve heard me talk about the development of a cross conscious culture. We have greatly moved the needle in this area and I believe that this is quickly becoming a core competency for this management team. As we reduce costs in non-client facing activities we have been able to reinvest in the client focus tactics that Phil and Sabrina spoke to which will improve the customer experience.
First let’s hit the cost savings that will be achieved this fiscal year. As Russ mentioned, we asked the organization to stop doing certain projects and activities that aren’t adding value to the client. This created savings of $20 to $25 million. We’ve been able to take advantage of the weak real estate market conditions and renegotiate over 2,000 of our existing leases. These rate reductions were generated generally with two to three year lease extensions. Estimated savings for FY10 are $6 to $9 million with a total cash savings of $36 million over three years. We’re currently over 75% of the way to our FY10 goals.
We have also taken a hard look at the network to examine where we can optimize the existing footprint. We identified and closed 260 offices with leases expiring in April 2009. An additional 305 underperforming offices largely in alternative channels like Sears and grocery stores were also closed. The leases within the 305 offices had not expired and therefore we’re accrued accelerated rent on these offices. We won’t get the full financial benefit on those until next year. These offices represent 5% of our locations but only 1% of our clients before any retention efforts.
In FY10 these 560 plus office closures will save approximately $15 to $16 million in rent, occupancy real estate tax and depreciation expenses. Net of the client impact these closures are $6 to $8 million benefit to the company. Not only do we see financial benefits from our network optimization efforts but more importantly we also benefit with better execution in the existing tax offices and improved client service as we consolidate and leverage our highest performing tax professionals.
We will continue to optimize the network and we’re considering closing approximately 200 additional offices with leases expiring in April 2010. The company owned office footprint will decline about 1,500 locations reflecting the loss of the Wal-Mart locations, office closures and our re-franchising efforts. The bulk of the decline is coming from the Wal-Mart change. While we were disappointed about the loss of these locations it only impacts about 2% of our client base. The franchise owned office count will be relatively unchanged as the Wal-Mart closures will be offset by the re-franchising and new office openings.
It’s important to note that when we close an office we’ve been able to retain between 60% and 65% of those clients and this year we have planned retention programs for our clients served in those closed locations. We’re also continuing to create savings in other areas including headcount, office supplies and telecoms, and better expense management is driving savings this year across a wide variety of other areas including training and local advertising. The results will be an additional savings of $10 to $12 million.
Another area of the company where we’ve been able to generate meaningful cost reductions is in the area of sourcing. We plan to capture an additional $7 to $10 million in savings this year. The FY10 cost savings were in turn repurposed to improve our client experience. You heard Phil talk about the investment we’re making in the front desk. We will increase the staffing hours by 40%. In addition, we will put more clients in front of our more experienced and best tax pros. These two efforts will improve the client experience and the reinvestment will be about $30 million.
Another large investment, over $10 million, is being made in specific markets where we are under penetrated. Those investment dollars will be mainly spent on marketing, acquisition, and enhanced staffing efforts. We’re excited about the investments that we’re making in our call center operations, about $10 million. We’re upgrading and migrating our digital and retail platforms to improve our client response times and our ability to resolve problems and our live agent productivity.
The cost reductions and investments I have just discussed have all been factored into our existing margin and earnings guidance for the year. I want to assure you that our cost management is not a one time effort. We are looking at our future state operating model to determine how we can improve service to our clients in the most efficient way. Make no mistake, our focus is on growing our clients and doing it profitably. Again, great results the right way.
Our commitment to expense control is strong and we intend to fund investment in new initiatives through reallocation of resources rather than just increasing costs as we’ve done in the past. As you can see, we expect our expenses prior to loan loss reserves and the impact of the Southwest acquisition to be relatively flat year over year.
Now I’d like to take a minute to talk about some of our competitive advantages this season. First, I’m really excited about our settlement product positioning. We believe we have a meaningful advantage as a result of the changes going on in the settlement product market. Several refund lending banks have announced a significant reduction to their financing fees and as a result a need to restructure their financial arrangements with their retail tax preparation partners. H&R Block as you can see on the chart is not making any changes to its pricing, including not raising the price on tax preparation.
We understand that many retail competitors plan to increase their fees to offset this loss of revenue. This is a fluid situation at the moment but based on our currently available information this is our view of our competitive advantage in settlement products. For competitors we think the account fee is likely to increase slightly, that additional fees are likely to show up on client statements as technology or other fees and could add $20 to $60 and that they will increase tax preparation pricing before complexity changes 2% to 4%.
Net net our competitor’s clients are likely to see incremental fees which may be in excess of the bank financing fee reductions. Even worse, at least for non-Block clients, they will see a very large increase in their rack fees since there is not offsetting financing fee adjustment. Therefore, H&R Block should have a significant price advantage in the rack market this year. In addition, so that lending banks can maintain a certain level of profitability with a decline in revenues they may decrease their approval rates to lower their bad debt risk.
While its hard to predict how much benefit will accrue to H&R Block in terms of incremental client growth in FY10 we think it is positive not only for this year but for next year as well and we intend to maximize our competitive advantage in acquiring clients in need of settlement products.
Next I’d like to shift focus to another competitive advantage, our H&R Block Bank. The H&R Block Bank is a real strategic asset. The bank creates several competitive advantages that no one else in the tax prep industry can match. First is our Emerald Suite of products. This includes our pre-season loan offering and our pre-paid Debit card as a disbursement option. With the bank we control the product design which enhances our flexibility and speed to market and we control the product economics.
Our clients receive the best product in the industry at one of the lowest price points. This competitive advantage leads to stronger client growth through increased client acquisition and retention. In fact, we see a retention lift of approximately 1% to 3% from our Emerald Suite of products. The bank also increases our financial flexibility with its access to traditional banking funding vehicles including over $1 billion of consumer deposits that we leverage each tax season and lines into the Federal Reserve and Federal Home Loan Bank.
We have excess liquidity available for our Emerald offering this season. We loaned approximately $720 million last year in our Emerald Advance Program and our expectations are similar for this season. So far we have been pleased with the demand but even more so pleased with our execution. Our bank brings another competitive advantage including our ability to bring certain settlement products such as our digital simple pay product or Digital Rack in house.
For example, we can do this with our retail rack product in the future and we’re doing a pilot program this year to make sure that we are operationally ready. By manufacturing these types of products ourselves we again can control product enhancements, pricing, and costs, which we don’t have the ability to control, using a third party financial institution. In addition, the bank gives us an incredibly robust platform for future product and services innovation.
Now let’s talk about financial flexibility. This part of the discussion is really rewarding for me given where we’ve been and where we are today. The company continues to have financial strength and flexibility it needs for working capital, bank products and share repurchase plans. Since the second quarter of last year our cash balances increased $738 million, our equity has increased $238 million, and our total debt has decreased by $698 million.
We have financial flexibility through our $2 billion committed line of credit which matures in August 2010. In addition, the funding for our RAL product is still expected to be provided by HSBC. HSBC is obligated to use best efforts to fund our purchase of participation interest and that contract goes through 2011 with two one year extension Block options.
We feel confident about our internal financial situation and there are also signs of improving economic conditions. The banking industry appears to be improving, cost of funds remains relatively low and access to liquidity is improving. However, uncertainties remain. Unemployment remains high and consumer confidence remains low. These continued uncertainties could constrain client growth. These uncertainties are causing us to be cautious and opportunistic about our investments.
We believe we can provide shareholder value through preserving a strong balance sheet, maintaining a strong liquidity position and having sufficient access to credit markets. In fact, we were able to reenter the commercial paper market this week after nearly a two year absence. Being cautious and opportunistic allows us greater freedom to invest in our business and make strategic acquisitions to drive growth, increase dividends and/or allocate capital to share repurchases. The strong capital position and access to capital is a strength not shared by our competitors.
We intend to maintain a targeted capital structure and access to sufficient liquidity which includes complying with the covenants of our committed line of credit which is currently $650 million, and also maintaining an investment grade credit rating. We believe strong capital structure is critical to our shareholders interest and taking too much risk in this area is not a bet that management is willing to make in the current economic environment.
Maintaining our targeted capital structure and having access to sufficient liquidity will allow us flexibility to reinvest in activities that support organic growth such as client experience and client acquisition, client facing technology, retail office upgrades, product offerings, and franchising. In other words, the reinvestment required to keep our businesses healthy.
Next we will continue to look for opportunities to acquire businesses that are aligned with our strategy and allow us to achieve a competitive advantage. Rest assured we have learned from our past and any acquisitions will be tightly aligned with our tax focus. As an example, we are looking at consolidation of some of the over 100 EROs in the industry towards direct acquisition, conversion of competitors to franchisees as well as funding our franchisees to acquire their competitors. These are typically small dollar amounts and they aggregate to $20 million or so in any given year.
Finally, we plan to return any excess capital to shareholders either through increased dividends or share repurchases depending on the value of our stock. We will continue to be thoughtful and opportunistic in the allocation of capital. We plan to allocate capital to those activities which we believe will yield the best results for our company and our shareholders.
H&R Block does have a long track record of returning excess value to shareholders, $4.1 billion over the last decade. Total dividends paid have steadily increased over the last 10 years totaling $1.5 billion. Currently our dividend yield is over 3% which is better then the average of the S&P. We also returned a significant amount of cash to shareholders through share repurchases $2.6 billion over the last 10 years.
We currently have a $2 billion share repurchase authorization. This amount was granted prior to the market disruption so the execution has been delayed a bit. We strongly believe in this environment that that was the right thing to do. Given our recurring cash flow characteristics the opportunities that we see before us today and our current financial strength I want to reiterate our target or our goal of $2 billion in share repurchase. However, it may take us a little longer then the four years we originally anticipated may be an additional year or so to complete that.
Let’s go back to our client waterfall for a minute and overlay an example of the opportunities. Historically we have been focused as Russ aid on the bottom section of that waterfall. We’re now concentrating on the entire continuum of opportunity. It will be a journey. How much we will accomplish in year one remains to be seen. Recall that in a single year a one point improvement in consideration could be worth $40 to $60 million and that a one point improvement in retention could be worth $12 to $18 million. The compounding effect of this can be quite dramatic.
Our goal is to improve consideration and retention five to ten percentage points over the next five years. One way to achieve this goal would be to average one to two point improvement in each of the five years in both measures. Not that I’m promising that we will achieve this result in a linear fashion or in the first year but rather we want to illustrate the range of outcomes over this five years.
In the first year of that improvement the company would realize $50 to $100 million more in incremental earnings which would compound to $300 to $600 million over five years. Achieving these annual improvements over this timeframe would likely result in significantly higher client growth ranging from 3% to 7%, incremental cash flows for increased share repurchase activity and my favorite, potentially a PE multiple expansion.
You can see that making small progress against big levers creates big results. Therefore, we will stay focused on improving the perception of H&R Block with its consumers, on improving our client experience and on improving our client retention on all phases of the waterfall. This is the new focus at H&R Block. We are looking forward to our first year along this journey.
With that I hope you’ve taken away today many of the key changes that we’re making. This management team is great execution this tax season. We’re going to leverage our strengths, a highly recognized brand, deep tax preparation expertise, large scale, superior products, and a strong financial position. We are addressing our historical weaknesses with increased client focus, increased brand consideration and improved price value. By doing so, the enhanced client experience we deliver should translate into increased market share and increased share price. In other words, great results the right way.
Finally, I wanted to leave you with a confirmation of our guidance. We project low single digit revenue growth. We expect margin improvement in tax services of 100 basis points over the next two fiscal years and we continue to expect EPS from continuing operations in the range of $1.60 to $1.80.
With that I’d like to ask the management team to come back up on stage for Q&A.
Please raise your hand if you have a question. We want to make sure that we get a microphone to you because the Q&A is also being broadcast over the web so it’s important that the folks in the internet audience can hear your questions as well.
Can you talk a little about what your tax preparers are doing in the other eight months of the year that they’re not preparing taxes? The basis of the question is you went through the fact that every year you lose four million customers. If were a tax preparer and every year I only retained 70% of my clients the majority of my clients came from within a 10 mile radius of my office and I had eight months off I probably would spend some of those months calling those people, emailing them, and making sure that I had better retention the next year so I could actually make more money.
Your client base doesn’t change much every year, it’s the same people between 25 and 102 in this country to pay taxes and you know exactly who they are. Over the last five years if you’re losing four million a year that’s 20 million you actually touched and somehow you haven’t gotten them back. Can explain to me what these people are doing in the other eight months that they’re actually not ambitious enough to go back and get the clients that they probably touched in the prior years, given you know who the client is and they have to buy the service?
I’ll turn it over to Sabrina in a second to talk about what in the non-busy season period. One of the things I will tell you before I spin it over to Sabrina is until this year most of our tax pros didn’t know what their retention levels were. In fact, one of the interesting things for me as I traveled to the tax offices last season I would ask our tax pros what is your retention level. They invariably always said I retain all my clients unless they die. I said your retention is actually on your computer screen so let’s go take a look at it. We go and take a look it would say 64% and they would say that can’t be right. We walk them through it and show that it actually was right.
Part of what we’ve changed and Phil and Sabrina addressed it in their piece of what we’re changing from an operational perspective is just this is the first time we’ve actually told our tax professionals what the retention levels and what their service levels were. I think that’s a critical part of us improving operations because our tax pros want to do better. They want better client retention, they want to go on and build their business but we haven’t given them the information or the tools necessarily to make their off season time as productive as it otherwise ought to be.
I think that’s a critical change that I want to make sure all of you understand that I don’t want to make it sound like our tax pros are lazy we just haven’t given them the right information to let them know what their performance really has been.
First of all I was making sure everybody is also aware it’s a seasonal workforce. We have a percentage of the tax professionals that work all year round; we have in every city or every district there is an office that’s opened, which is one issue. I think the question is a good one in that in the off season, when you talk about the other eight months we actually have associates that are not employed with us, they are off.
The question that we’ve been wrestling with is the year round access to email so we had email and then interactions with the clients, we know they’re interacting with the clients via their own email and then providing the tools to actually do outbound calling which we’re doing centrally right now. I think your question is more tax pro based so we’re working on trying to get that. Phil you know in terms of pushing our clients to the tax professionals the things we’re working on there.
You bring up an opportunity, that’s just another opportunity we have I think as a company to enable our tax pros to reach out during those times. I think it’s another lever that we have going forward. There is some wage and hour labor laws that we have to deal with but I think as we move forward working on that challenge and I think we have a lot of potential in that area.
You said that point that tax preparer is seasonal so I guess why not put more of the burden on corporate in the three months beforehand to actually distill the people who’ve been there in the last four years, get their email addresses, hire some temp workers, there’s a high unemployment rate, call every single one of these people and direct them to your offices.
Why not actually be proactive in Kansas City and drive those people right to the offices so when I show up January 1st I already have my entire list of people that are actually going to come in and you’ve already called that list for me because you know who they are because you ran the numbers through a database because you have the last 10 years worth of tax returns of people who touched you. It doesn’t seem that extraordinarily difficult.
You’ve nailed it. There’s two pieces to this. What are the tax pros doing during the off season? There’s a huge marketing opportunity for us with a robust CRM client relationship management system for us to communicate on a regular basis. By the way, it doesn’t just happen three months before tax season. One of the things we know and we’ve got pieces in place, tax events happen year round. You have a baby or change a job or move state or get married it doesn’t matter whether that happens in January or June, stuff doesn’t uniquely fit between January 1 and April 14th.
We’re developing, part of its infrastructural and making sure we’ve got robust and sophisticated knowledge management and data management systems that allow us to communicate real time, real live events with our tax base so they’re not hearing from us just once a year. They’re hearing from us potentially once a quarter, we’re checking in with them, did any one of these events happen to you, make sure we put it in the folder and the file.
When the Government changes tax laws and tax changes we’re giving them heads up on what is the make work credit pay mean to you. I think there’s an opportunity for the communication part of that retention too in addition to what’s going on in our field tax offices.
There are some privacy law issues that do restrict what we’re able to do right now and its going to cause us to change the way we collect the data round our clients to enable us to do exactly what you’re talking about. We agree with you, that is the opportunity but right now we’re not set up to take advantage of it the way we’d like to be.
There is communication that happens in the off season. I think there’s an opportunity to improve it. Not as much as we’d like.
Andrew Fones - UBS
It seemed like the area you had a problem in last year was that the lower AGI levels, the younger client. You’ve explained that you’re going to cut the price of your product on the 1040EZ. Could you detail what else you’re doing to address that issue potentially for this year? The second question relates to guidance. In terms of keeping pricing flat but expecting low single digit revenue growth can you explain what the assumptions are in terms of market share relative to digital growth, rack, and other things that could help also drive some revenue growth?
On the pricing piece for the lower AGI last year that was as you said that was where we lost most of our clients. In fact, I think the client loss in the 20,000 less AGI segment was about 60% of our total loss. That’s really a critical area for us to have an impact on this and to reverse the trends that we’ve seen not only last year but in the prior years. In doing our research in our fact base we think that pricing a big part of the mechanism to get that group coming back to us. Robert also talked about the dollars and cents campaign which is really targeted a little bit probably at the younger side of those millennials the 17 and 18 year olds to catch them a little bit early.
In addition to that there’s a lot of other things that are happening at a local level that are not national that are targeted at college students in particular. Many of our geographic areas are doing specific college programs to go after college based students. Those are the other couple things that I think are specifically going after that audience.
A lot of our other service initiatives and a lot of our branding is also intended to make ourselves more relevant to that client base as well.
Remember my slide on the business is not formulaic. We’re really trying to get away from the whole exactly what is the price increase, exactly what is the client growth. I think we’ve said that our intent is to overall not increase the prices on our base form or to hold that relatively constant, that we will see complexity flow through but there’s a lot of levers with respect to this and I think we want to get out of the habit of putting in exactly what that formula and our expectation for client growth.
Vance Edelson – Morgan Stanley
Could you comment more on free file, I think some in the industry have indicated it could lose steam due to growing complexity of the tax code. You seem to think it will be a force going forward. How do you plan to monetize that and take advantage?
There are two components to free file. There’s the component that’s FFA which I know we’re working with Kate Fulton and the government relations team to maintain our presence in the free file alliance, we believe that that’s an important place to be and to serve that client base. Within the free file base we do see a migration of folks that come from the free file into the online space especially as they get more complex and need more forms because it’s a pretty simple approach.
We believe that free file is the entree so when we talk about free file online as well its the entree, a lot like the $39, $29, 1040EZ those clients migrate and we’ve seen that happen over time, they migrate to a 1040A just like they do online. As they migrate in the family then they upgrade into other products and we’ve been able to see that actually last year was the first year we were aggressive there and we saw that movement occur in that migration. We feel good about that space.
The government piece of free file alliance its a sight sponsored by the IRS but really all the work is done by companies like us and some of our other competitors. That space has not grown overall over the last couple of years. The reason for that is because we are also providing an entree in the free tax filing directly with our companies. That’s where a lot of the growth has been. The growth in the digital category and we think the battleground for the future is really in the online space.
Retail software has been shrinking, people have different prognosis about how long they think that category will last. Its still there but it’s certainly not a growth category. The real growth we think in the digital space is online. When you look at everything online, free is a pretty compelling marketing message. In reality, free is not free. Most folks enter in the free channel and then actually end up paying and upgrading for goods and services.
We did that for the first time last year with a lot of great success, we got a lot of good learning’s about how to do that even better for this year. We really believe, as Sabrina talked in her part of the presentation, because we have 100,000 plus capable tax pros we have a lot of other ways to get people options that they can upgrade to even if they enter in the free online space. We think from a competitive advantage standpoint we’ve got a lot of other levers to pull in terms of monetizing clients that enter in free that others in the category do not have.
Could you reflect on your Wal-Mart experience and possibly talk about how it has affected your business strategy going forward?
When you say our Wal-Mart experience obviously its clear that Jackson Hewitt will be the exclusive provider in Wal-Mart next year. I think when we think about that channel I’ll say a couple things. Number one, we don’t expect, when this initially happened we expected Jackson Hewitt to have many more locations then we actually think they’ll have at this point. We lost about 1,000 locations there; they will not be replacing us in all those locations. That’s upside for us in terms of our internal strategy.
In terms of retaining those clients we have a very well defined and I think well performing protocol for when an office closes and we have been very successful transferring clients to different offices and often with the same tax professional which is extremely important in this equation, transferring those clients to the same professional. Last year we retained clients we expected maybe 60 and we were up around 65% range which we think is pretty powerful.
Becky referred to the 2% just to give you a little context on that. Of the 2% of the client base we believe 65% of them will be retained. The effect is maybe about a half a percent.
The other thing we said publicly before that we’ll reiterate is that channel, the Wal-Mart channel was our least profitable business channel, in fact our profitability on those 2% of our clients was marginal at best and that was under the old contract. Had we been tethered to Jackson Hewitt’s terms that profitability would even have been less or negative.
We do want to grow clients and we want to grow market share but I’m really not interested in chasing client growth that isn’t also shareholder and profitability growth based. We just decided that that wasn’t the right avenue for us to pursue and we think to Phil’s point by retaining a good portion of those clients we can actually be more profitable with fewer clients then we’ve previously done in the Wal-Mart channel.
[Sam Buddrick] - UBS
How have you changed or modified the compensation of your seasoned tax professionals perhaps better align it with perhaps some of retention objectives you’ve stated? You mentioned I think taking some of the newer preparers off the commission model for their first year but are there changes that you’ve made or need to make with respect to the larger piece of your compensation expense?
My second question on a separate line is your retention statistics if I’m reading them correctly appear to be retail retention statistics I was looking at some of the incremental contributions you were talking about those were retail contributions not digital contributions. Is retail retention, certainly an important measure, but is there a broader system retention objective that you should be considering as well as people perhaps move back and forth or the lines blur between retail and digital?
On the tax pro compensation piece for the experienced tax pro we really think that with the changes we’ve made in getting more clients to our better performing tax pros that they are going to have the opportunity to make a lot more money. We haven’t focused on the compensation side of the package that says what they make per return because in the overall aggregate they’re going to make a lot more money because they’re going to get a lot more clients then they have in the past.
One of the things that all of us learned and as we were talking to our best tax pros last tax season is that over the past few years they’ve gradually started reducing their hours of availability because they felt that they were sitting in the office, they had too much open time on their schedule and every time they saw a client come in they saw someone in the office directing that client to one of the newer tax pros.
Their perception I don’t think is a reality but their perception was they’re putting it to a newer person because they cost less per return then I do. As a result, they started to then reduce their hours of availability. I think by changing and communicating to them what we are doing in terms of getting more clients to them we are quickly seeing them increasing their hours of availability and they way they’ll make more money is by serving more clients. That’s the way we think they get an immediate benefit out of the program changes that Phil and Sabrina outlines earlier today.
I would say also that we have historically been increasing the weight of compensation that’s tied to retention. As we go forward as that becomes more and more important we’ve obviously talking about that and thinking hard about that.
I believe that that is probably one of the biggest changes we’ve done for the organization has actually been combining digital and retail together in terms of how we are looking at the business and how we are compensating short term incentives, other things in the organization to think about it as one growth, one brand, and one retention. We do have a blending that is occurring at the associate level just so you know from an incentive standpoint to look at it one way.
The retention rate between the two, retention on digital versus retail they’re very different. Our retention in the digital channel is much less. We did move it four points last year and increased the retention four points so we think we’re moving the right direction but there’s still a pretty large gap between us and our retail channel and us and the other competitors in the landscape actually on retention. We’re putting a pretty great emphasis on retention from a digital perspective as well.
The biggest reason we had the lower retention on the digital product side were some of the product flaws that Sabrina addressed earlier, lack of ability to do auto import of W-2 or 1099s not enough connections to some of the different financial institutions. The work that’s been done in the last 12 to 15 months really helped close the gaps on some of those product discrepancies of what was TaxCut to some of the other digital competitors. We think that will help us even more so bump up our retention levels on the digital side. Clearly even more work to do on the digital front then we have on the retail front.
John Fox – Fenimore Asset Management
My question is on Becky’s slide about your advantage on RAL and Rack versus the competitors. My perception would be that people will go into a competitor’s office expecting a refund. I would assume, I would like you to answer this, they have no idea what the costs or fees are going to be, they could probably do the whole return and then get hit with, Becky alluded to special fee at the end, and not even know that you guys have an advantage.
My question is, is my perception of what happens in the office and when the fees and prices are disclosed to the customer, is that correct? Number two, how are you communicating to people that you are much more cost effective option for payment products?
Historically your point about how people thought about fees on financial sentiment products was accurate. In fact many years ago when Block lead the industry in reducing the APR rates on RAL financing and even marketed it I believe in that year there wasn’t a substantial increase in RAL product movement at Block because a lot of folks viewed it as I don’t even know what I get charged for just get me my money as quickly as you can.
What we’ve seen in the last couple years I think is a trend from RALs moving to racks and we think a great part of that is driven by people are becoming a little bit more price sensitive or price aware on the cost of some of these financial settlement products. I won’t say that explains all of it but I think certainly people are more price sensitive to it today then they have been in the past. I think your perception was accurate a couple years ago but we think its changed to some degree, not entirely but some degree.
How do we address that? It’s got to happen I think from a local marketing perspective and a local marketing standpoint. We know from prior experience when we get on national TV or national radio and talk about RALs and fast money we get a lot of negative perceptions that go along with that. Its works for a small percentage of our client base but it turns off a big part of the population that we’re trying to build and grow our business with. We’ve got to be very local and very targeted in terms of how we message that.
I think our messaging is going to be this year to try to take advantage; it’s about the price differential. I also think it’s about the availability of funding that we know we have that clearly the competitors there are many question marks about particularly with our next largest branded competitor who had an early season product that instead of lasting four weeks only lasted about three and a half days.
We don’t know what their funding availability is actually going to be and I think Becky mentioned in her piece about likely they will have lower approval rates on RALs then they have historically had. We’re going to go aggressively on a local basis to really get that message out and try to get it to the clients before they ever get into one of our competitors offices.
Joe Capone – Credit Suisse
You addressed substantially your top performing tax professionals and how they’re rewarded with greater client contacts and greater compensation per hour and what not. Can you address the bottom tier, it would seem if retail retention is in the low 70’s and we know there are substantial professionals in the low 80’s in retention there’s probably a substantial number of professionals in the 60’s or even below who could be tarnishing your company on a going forward basis. Have you increased remediation efforts there to help them become better performers or raise the bar if the professionals are below such they’re cycled out of the company?
Yes, we’ve raised the bar. I mentioned that we’re holding our field leadership accountable in looking at our tax professionals and evaluating our tax professionals. I just want to address one thing, tax professional retention because I know many of them are listening, it does vary across geographies and types of neighborhoods and things like that so we account for those types of things. People that are in, after accounting for those things, people that are in the lower tier are getting training and coaching and just like how we evaluate many of our employees if we’re not hitting where we need to his we’re going to have a conversation and this may not be the right business for them.
I think your point is a really important one because from my experience last tax season one bad egg has a significantly negative impact on the whole atmosphere of the office. As part of our training and educating tax pros on their performance levels we are having those open and honest discussions with the folks and telling them where they’ve got to get better and where they need to improve if they want to stay with Block.
For those that are doing a terrific job, making sure that we’re differentiating them and rewarding them accordingly. I think in the past, because we didn’t have a performance measurement system everybody kind of blended to the middle so the poor performers thought they were better and we probably didn’t recognize and reward our best performing tax pros as well as we ought to have.
The goods news is that we’re retaining our higher performing tax professionals, what we call higher service level of tax professionals in the 90’s right now. The people that are in the lower tier we’re retaining them at much lower rates on purpose.
We just have not had those kinds of conversations with our tax professionals. We’ve actually gotten in front of 70,000 tax professionals already to date and had these conversations where we’ve ranked them a 3 2 1 and then given them this retention number that Russ referred to. By giving them both of those pieces of information the tax professionals are surprised, they’re having some pretty deep dialogue. By ranking them we have now this ability to have targeted training and targeted conversations with that lower percentage so its either up or out basically for that lower percentage which is a conversation we haven’t had before.
Sloan Bohlen – Goldman Sachs
On the share repurchase plan, first can you remind us what the original target for the completion of the plan was? Second to that you’d mentioned the weak economy is being part of the delay. What specific sign post are you guys looking for either economically or operationally that makes you feel better or give you some comfort in completing that plan?
I thought it was important to put it in the context of the $2 billion number that we have out there. When we talked a year ago at this time we talked about the fact that while thankfully we were through all of our financial issues, the market was in a pretty severe state of disruption. Since that time though and as we’ve gone into this year we’ve had the M&P issue and other issues that are outstanding and so as we think about when the right time is for us to go into the market we’re looking at the market as a whole, we’re looking at things we have within our own organization, inside information that we know that can prevent us trading over a window.
I can tell you though that as a company we are very committed to the share repurchase plans that we’ve put out there. We have every intention of going after the goal that we’ve put out. I think there have been a lot of circumstances that have impacted the timing of that.
Michael Millman – Millman Research Associates
Can you talk about what some of your pilot things have shown you both the good and the bad in the last year that you’re using or not using or changing this year? Secondly, regarding your client growth or lack of growth I think you outlined about 5% but you have a certain retention on that. Is your low single digit revenue based upon retaining 60% of that 5%? Thirdly, can you talk about what you might see for revenue per client in 2011 on the assumption that there’s no added complexity?
We talked in the presentation about a couple of the things that we’re testing this year, one of which we talked about the office remodels of which we’ve got 300 and we want to see the impact that we think that can have from a positive perspective on the perception of our brand and the quality of our tax pro expertise in the office. That is one thing that we are piloting this year.
You heard Sabrina talk about the best of both product which is really one way to go after a seamless integration of digital clients and leveraging our 100,000 plus well trained tax professionals. We’re testing that in two major geographies I think Sabrina said about 15% of our country. We are very encouraged by this from a longer term perspective but we don’t want to over sell it because we need to prove and see that it’s a real consumer proposition.
I think we have the unique capabilities to provide this but we’ve got to show it’s a compelling consumer proposition as well. We are doing it in two large geographic areas this year and doing it with some marketing support and the right operational support behind it. That is another major pilot initiative that we have going on.
Sabrina talked in the pricing piece about what we’re doing with the 1040EZ pricing and also showed you a price quote tool that we have. We have pockets in other areas of the country where we are testing even more levels of what we’ll call price transparency. We really believe that long term we need to get more clarity around pricing for clients in this business.
The 1040EZ pricing is one attempt at that for a very specific targeted segment but we’re testing other places where we’re doing more transparent pricing, its not price discounting in those other areas but just more clearer ways to communicate a price up front so we have some different pockets where we are testing that as well.
From a franchising perspective I talked a little bit in my opening remarks about franchising, particularly in the urban areas. As part of the 300 or so offices that we’ve re-franchised a significant portion of that is focused on franchising in urban areas which is new to us, particularly in ethnic communities. We think that’s an important growth opportunity for us and so that’s another test or pilot program that we’re going to get a lot more information on throughout the course of this year.
Can you guys think of any major things that we think if they work well we would accelerate? In house racks a the bank that Becky talked about in her piece there’s a pretty good size pilot with that and we’re very comfortable and confident that operationally as that works out well that is something we could scale to a national basis, potentially as quickly as 2011. Those would be the five major initiatives that I would say are in pilot phase this year that if they work out and we see the kind of results that we think we may have you would see an acceleration of those initiatives into 2012.
Michael Millman – Millman Research Associates
Part two was Becky’s numbers to it would seem to be about 5% client loss but the low single digit revenue growth does that assume that you get 60% or 65% of them back? I’m trying to understand.
You’re talking about if you look at the “headwinds” those numbers were prior to us retaining the 60% or 65% of the clients in the closed offices whether they were the Wal-Mart or whether they were in our traditional offices. Those numbers were prior to the retention so if you do it net it comes down to about net of a 3% headwind. That’s before any of our growth initiatives so that’s before about taking into account how much we can move consideration trial this year.
It’s before we take into account how much we’re able to reduce the almost two million people that checked into our tax offices last year and then walked about before ever seeing a tax professional. And it’s before the expected client growth that we would get out of our pricing work both in terms of the pricing quote tool as well as the $39, $29 pricing on the Federal EZ and the state return. Those are the three major initiatives that we think should help us grow our client base and help offset whatever headwinds we face.
Michael Millman – Millman Research Associates
So the specific bottom line of that is what’s embedded in the low single digit revenue? Is it 3% plus some of these initiatives?
Plus the net impact of the initiatives. Some of the initiatives obviously like the reduction on the pricing of the 1040EZ has a negative impact on your net average charge. We expect it to have a significant impact on our positive client growth. As Becky mentioned, we’re not going to get into the nits and nats and say how much exactly do we think net average is going to go by and how much is client growth because if this 1040EZ pricing really has a big impact its going to drive clients a lot more but it will have more of a negative impact on the net average charge. Net, net with think its going to be a positive.
In year one, then the migration.
Michael Millman – Millman Research Associates
The third actually goes to the next year in terms of assuming that there’s no increase in complexity what would you assume would happen to your average revenue per client in 2011?
We’ve said that we think complexity this year is probably worth about 2% to 4%. Frankly we don’t see any reason to believe in the near term that there will be anything but additional complexity going forward. The current administration and all the things that have either passed or talking about passing invariably include other elements of tax complexity. In fact, in the initial drafts of the healthcare bill in the Congress there’s lot of elements around that that will be driven off of the tax code and the tax system.
In fact, I believe that that’s going to continue for a lifetime. People will talk about it but I think its just going to get more and more complex because the reality is in America the tax code is the one way that the Government has to redistribute wealth and we know the current administration is committed to redistributing wealth which leads me to believe that they’re going to use the tax code more and more and more. I don’t see an end in the near term to complexity and Kate you’ve been in contact with the Government folks she’s been nodding her head while I was talking. I’ll take that to mean you haven’t heard anything else that you haven’t shared with me and that would indicate otherwise.
Michael Millman – Millman Research Associates
Is it fair to say that the company is trying to operate as though you were good franchisee? Is it fair to think that overall what the company is trying to do is to act like what any good franchisee does in terms of service, in terms of promotions, in terms of contact with customers off seasons, etc.?
Yes, I think that’s a good way to think about it.
Michael Chapman – Private Capital Management
Becky, on the buyback you’d said that it’s now four to five years. Is that from start date so the implication was $500 million a year?
We’re already a year and a half.
Michael Chapman – Private Capital Management
We should expect even though there has been pick ups around about $500 million a year given the right price would be the right number to use going forward?
That would be how the math works.
Michael Chapman – Private Capital Management
Russ, you mentioned that on the RSM deal that it was confidential for now. Will we get clarification once the negotiations are done as to everything that’s gone on prior to that?
Michael Chapman – Private Capital Management
In the retention you guys said that 1% to 3% retention lift just from the Emerald products that you’ve had that would imply given the retention’s been flat the last couple of years that there’s been actually net loss from everything else. Is there a difference between the company owned and the franchised owned retention rates that you guys have seen?
Yes, 4% to 5% of franchisees outperform on client retention, better than the company, 4% to 5% higher retention rates.
Michael Chapman – Private Capital Management
That would then lead me to believe that down the road the split between the franchised and the company owned will be different then it is now? Five years down the road could you give us an idea of what you think the percentage of your store base that would be franchise versus?
We said publicly that we’re moving towards a 50/50 mix from where we’ve been and we’ve already taken quite a few steps to do that. Part of it is through the office closings and consolidation of our company footprint. Part of it is through the 300 plus company offices that we have re-franchised for this year and we’ll continue to have some regular amount of normal re-franchising of selling company offices to franchisees.
Then I really think the biggest part of this shift in mix going forward is more of our growth I believe is likely to come out of franchise locations. I talked earlier about franchising as a strategic growth opportunity. I think we can use that as a mechanism to consolidate some of this fragmented market out there with the independent tax preparers and so I think we can bring a lot of those folks into the H&R Block system, particularly as the IRS gets more specific about what they’re going to do from a certification and licensing perspective which I think is going to put a lot of financial and just operating constraints or challenges on some of these independent mom & pop tax preparation businesses.
Moving towards 50/50 and I think based on the results of what we see happening with re-franchising and our ability to help consolidate the rest of the industry that will dictate how quickly we get there or whether we even go beyond that.
Michael Chapman – Private Capital Management
The argument would be that it should be more than that in the franchise given they’re performance advantage over you guys right?
There have always been theories this is why we’re doing the re-franchising program and getting franchisees in urban markets. Historically the way the company is franchised is in the outlying geographies they leave that for the franchisees but the medium and larger sized cities are all company operated. The argument I’ve gotten internally is you can’t compare our performance to theirs because they don’t have any competitors and it’s in a different geography.
I flip that around and say maybe they don’t have any competitors because they’ve done a better job of servicing their clients, of retaining their clients, of not raising prices by as much and so they’ve kept the competition out. We really need to test that proposition and see do franchisees outperform the same way, competing in the same locations as they do when they do in different geographies. My bias is that the answer to that will be yes. We want to see what that difference really looks like.
Andrew Fones - UBS
In terms of the spend this quarter from the static loan pool could you give us that number perhaps and help us think about when you may be adequately reserved such that that expense will roll off?
We are still reserving against the mortgage loan portfolio, although at a declining rate year over year. One thing I’ve learned over the last couple years is not to stand up here and predict the mortgage market and where I think the individual components of it are going to go. What I can tell you is that we still are attracting in line with our modeled rates on the delinquency component. We are seeing severity creep up a little bit again. Those things are factored into the numbers that we reported.
We expect to file our 10-Q today and there’s a lot more in depth information into the mortgage portfolio, again it will be available to you this afternoon. To reiterate though it is a static portfolio, we are not adding to it, it continues to decline and we have those balances in the book. I guess I’m hesitant to say when I think we will be done. I think we all know that there’s box around it at this point and the box continues to get smaller, it’s within a very manageable number for us. We look 12 months out and at this point I’m not ready to put a definitive stake in it as to when we’ll be done.
Andrew Fones - UBS
Russ, you mentioned at the outset that hopefully you’re just a few weeks away from a completion of the negotiations with M&P. Is there anything philosophically that would stop you from reinitiating the buy back at that point?
Andrew Fones - UBS
You mentioned the impact of the new regulations that we’re expecting for tax preparers and the impact that could have on the growth of the franchise fees and in terms of attracting new franchisees but perhaps you could talk about the other impacts on your business of that regulatory change.
Its hard to say what it is until we actually know what the regulations are going to be. In our many meetings with the IRS one of the things that we think is really important with whatever they come out with is its critical that there be real enforcement mechanisms in place because otherwise this become paper legislation much like their view that there shouldn’t be any pay stub filing. Enforcement, we believe needs to be a critical part of whatever they come out with.
I think over time what will happen is they are embarking on this initiative because they believe that there’s lot of people fraudulently preparing tax returns in the marketplace. Lack of certification and licensing is resulting in the IRS not collecting their fair share of revenue because of the fraudulent returns being prepared. Their incentive is clearly to get rid of the fraudulent taxpayers.
What impact will that have, I think it will, as it takes effect, get rid of a lot of competitors in the marketplace and think those generally are folks that are cutting corners on things. They cut corners on their own tax training, they cut corners on the prices that they charge people because they don’t have the same brand risk that we have so they don’t devote 10 million hours of training a year for their tax professionals.
It will affect number one will be is clean out some of the bottom of the tax preparer industry. On the people that still remain and choose to stay I think it will impact their operating costs. Until we see what the real licensing and certification requirements are its tough to tell. We feel pretty confident that we are going to far and away exceed any requirements that they might come out with so we don’t expect it will have any meaningful incremental cost to us. I think it will add operating cost infrastructure to many other of the independent mom & pops in the category which I think again put more pressure on them from a price value equation.
I think there’s a psychology of having to deal with licensing and certification that becomes another headache that an independent preparer won’t want to have to deal with. Those would be the headlines of where I think the impact is.
Tying back the M&P question is something Michael I think you were inherently asking about is will we give more specifics. If we thought that the ultimate outcome of this was going to have a material affect on our business we would have changed our earnings guidance. I think the fact that we’ve reiterated guidance should give you some comfort that regardless of the outcome we feel comfortable that we can work within our current guidance range.
I’m the only thing standing between you and lunch. I want to take a couple minutes to reinforce just a few key points that I want to make sure you leave here with because we have covered a lot of ground today in outlining how we’re preparing for this tax season which I think is only talked to. I got a phone call from our receptionist at the H&R Block office; he informed me we are 27 days away from tax season. If you’ve been to our office the security guard at our front desk knows everybody’s name and always tells us here are how many days till tax season. I wish we had 11,300 of him to be able to put in our receptions position in our tax offices.
There’s a couple key things that I think are kind of a connecting thread here of what we discussed today. First, I hope you clearly take away that this management team is really focused on our client number one. Number two; we are really focused on improving execution. I know many of you have been around for a long time covering this business, say boy we’re hearing about the same areas for opportunities. I understand that because it is the tax business after all. It wasn’t any different in the hamburger business, the food needs to taste better, the service needs to be friendlier, and the drive thru needs to be quicker, the price needs to be more affordable.
It isn’t that much different in the tax business and you can hear some of these same things when you listen to some of our other competitors talk about what their business plans are. The difference for us is going to be that we’ve got the ability and we are going to be driven to really execute significantly better then we ever have in the past.
Third, we talked to you about how we’re changing our approach to the business and a lot of it is around how we’re really embracing digital as a growth opportunity and really committing to it. How we’re looking at our retail office footprint in a very different way and how we’re looking at franchising in a very different way then we have in the past.
We’ve talked about those three fundamental changes in our business. What we haven’t talked about is how we’re going to measure our progress. I think that’s something I wanted to leave you with because I think that is a critical part of improving our execution. We have internally changed the way we really track and measure our performance.
As a management team and throughout the support structure in the organization we have a consistent and effective set of goals that we are aligned against. Its about growing the number of paid clients and growing pre-tax earnings and that at a tax pro level you’ve heard us talk about putting actual metrics and measures in place for the first time because they’re going to help us evaluate tax pro performance, reward those who really perform well and for those that don’t perform well make sure we take the appropriate action steps.
We’ve aligned all of our incentive programs, all of our compensation programs around these same metrics to make sure that we are driving against the right business initiatives. Each of us are measured on those key metrics and that’s what our focus is. There’s no doubt I think we have some challenges ahead in the tax industry, particularly this tax season. While we’re closely monitoring these trends, I really believe that what some of us or some of you refer to as headwinds are really providing us at H&R Block a unique opportunity to grow our market share.
I think we’ve got the right brand, I think we have the right people and I think we’ve got the right business plan in place to offset those challenges and to really capture the market opportunities that exist out there for us. I’m optimistic that we’ve made a lot of progress in the last several months that are not only going to drive improved client and profit growth in 2010 but equally as important really build a strong foundation for future growth in fiscal years 2011 and 2012.
We talked about some of our success in our last couple earnings calls over the last year, maintaining our financial discipline and strength as Becky mentioned earlier. Leadership marketing I think you’re seeing a difference with the work that Robert and the new ad agency are doing for us, then driving operational excellence. Those are the things we’ve talked about in the last couple calls and all the strategic initiatives that we discussed with you today are really directly aligned under those three areas.
We’re going to leverage our competitive advantages, we’re going to go after the market opportunity by really serving clients they way they want to be served. By improving consideration and trail and then really working on solving better the price/value equation while we continue to maintain our strong financial discipline and strong financial position.
We know that last piece is critical. The cost savings, Becky mentioned, it’s become a core competency for us. We realize that we cannot cost cut our way to prosperity, we’ve got to use that strong cash flow, access to liquidity to those cost reductions so we can return value to our shareholders while we still wisely reinvest back into our core business to make sure we’re doing the things to grow it again.
We are becoming a client focused company again, we are going to deliver great results the right way and I hope after you’ve heard us talk in more detail today I hope you’ll agree that we’ve got a thoughtful plan that’s designed to attract, retain and convert clients both in the coming tax season and for several years to follow.
As Becky illustrated in her math session at the end, even if we just make some incremental progress against some of our key initiatives its going to have a compounding affect year over year that really starts to add up exponentially to impact our bottom line and that’s really why I’m so optimistic about our position and our future here at H&R Block.
Thanks for coming today and attending live. For those of you who joined on the webcast thank you for joining us.
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