H&r Block, Inc. · NYSE:HRB
H&r Block — Q1 FY2008 Earnings Presentation
34 slides from H&r Block's earnings presentation, Aug 30, 2007
Slide 1: Fiscal First Quarter 2008 Earnings Conference Call
Fiscal First Quarter 2008 Earnings Conference Call August 30, 2007
Slide 2: Conference Call Participants
Conference Call Participants Bill Trubeck Executive Vice President, Chief Financial Officer Mark Ernst Chairman, President, and Chief Executive Officer
Slide 3: Forward-Looking Statements
Forward-Looking Statements This presentation and various comments made in connection with it include certain estimates, projections and other forward-looking statements. The words "will," "plan," "estimate," "approximate," "project," "intend," "remain," "expect," "believe," and variations thereof an
Slide 4: Mark Ernst, Chairman, President, and CEO
Mark Ernst Chairman, President, and CEO
Slide 5: Mortgage Operating Update
Mortgage Operating Update In discussions with Cerberus to modify sales agreement May and June improvements overshadowed by impact of July and August rating agency changes Narrowed origination collateral Re-priced loans substantially higher Secondary market has little or no appetite Ceased originatio
Slide 6: Mortgage Sale Update
Mortgage Sale Update Some current modification discussions are: Minimum $2B funding 60-days prior to close and $8B minimum warehouse line conditions either modified or waived HRB responsible for divesting or winding down origination business - we would pursue immediately Cerberus would purchase OOMC
Slide 7: Early Payment Defaults Trends
Early Payment Defaults Trends 3.80% 3.60% 3.40% 3.20% 3.00% 2.80% 2.60% 2.40% 2.20% 2.00% Q206 Q306 Q406 Q107 Q207 Q307 Q407 Q108 0.025 0.0264 0.028 0.0332 0.0368 0.0356 0.0313 0.0309
Slide 8: Current Loan Production
Current Loan Production No longer offer 2/28 or 3/27 products Shifted to 5/25 products Moved to full doc Only owner occupied properties CLTV 90% or less
Slide 9: Loan Exposure
Loan Exposure Balance sheet @ 7/31 with key assumptions: Currently Valued @ Warehouse Loans $2.1 B 0.92 Scratch and Dent Loans Held for Sale $0.2 B 0.51 Residual Interests $0.1 B Cumulative Loss Assumption 5.13% Discount Rate 47% Prepayment 3.5 years Repurchase Reserve Liability $0.1 B $0.3 B @ 0.64
Slide 10: Assumption Changes Drive Loss
Assumption Changes Drive Loss Mortgage segment pretax loss - $331 mm Residual Impairment $50 mm Increase Discount Rate From 28% to 47% Write-down of Beneficial Interests In Trusts $73 mm Currently Valued at $0.92 Increase in Repurchase Reserves $136 mm Change in Severity From 26% to 38%, Increased K
Slide 11: Mortgage Financial Overview
Mortgage Financial Overview Q1 pretax loss - $331 mm Lack of a secondary market Negative 586 bps net gain on sale gross margin $3.1 billion in executions: 44% securitizations 56% whole loan sales Reduced carrying value of residuals $157 mm added to reserves: Higher severity Increased due diligence k
Slide 12: Origination Statistics
Origination Statistics Q1 originations: $3.3 billion 1Q08 4Q07 Cost of Origination 262 bps 245 bps Average Loan Balance $251,000 $234,000 WAC 8.64% 8.47% 2-Year Swap 5.08% 5.02% Current WAC - about 10.45% Additional restructuring underway - OOMC staff levels about 2,140 associates, down from 2,650 a
Slide 13: Mortgage Balance Sheet
Mortgage Balance Sheet July 31, 2007 Current Assets Held for Sale $1.1 Non-current Assets Held for Sale $0.8 Total Assets $1.9 Liabilities Held for Sale $0.8 GAAP Book Value $1.1 Tangible Net Asset Value* $1.1 (billions) *as defined in sale agreement with Cerberus
Slide 14: First Quarter 2008 Results
First Quarter 2008 Results 1Q08 1Q07 Revenue Continuing Ops $381 $343 Net Income/(Loss) Continuing Ops ($110) ($118) Net Income/(Loss) Discontinued Ops ($193) ($14) Net Income/(Loss) ($303) ($131) Earnings/(Loss) per Share Continuing Ops ($0.34) ($0.36) Earnings/(Loss) per Share Discontinued Ops ($0
Slide 15: Operational Highlights
Operational Highlights Tax Services - results in-line with expected off- season losses Consumer Financial Services - improved earnings from Bank and Financial Advisors Business Services - solid top-line and bottom- line results
Slide 16: Tax Services Summary
Tax Services Summary In-line pretax loss - $172 mm Focused on leveraging unique products for TS08 enabled by H&R Block Bank Expanding availability of 36% APR RAL through: H&R Block tax offices (debit card or check) TaxWorks and 1040Works (software for professional preparers) Introduced line of credi
Slide 17: Consumer Financial Services
Consumer Financial Services Revenue* - $114 mm; up 45% Pretax earnings* - $6 mm; up $9 mm Financial Advisors third straight quarter of profitability * From Continuing Operations
Slide 18: H&R Block Bank
H&R Block Bank 1Q08 OTS Plan Return on Average Assets 1.34% 1.00% Efficiency Ratio 37% 36% NIM 2.08% 2.50% $1.3 B mortgage loans held for investment: Average loan size - $219,000 Average FICO - 717 Average CLTV - 78% HRBFA deposits - $734 mm Tax client deposits - $129 mm
Slide 19: H&R Block Financial Advisors
H&R Block Financial Advisors Profitable for third straight quarter: Includes $9 mm intangible amortization Amortization will decline to $3 mm in 3Q then cease Advisor productivity - up 30% $32.5 B assets under administration - up 6%
Slide 20: Business Services Overview
Business Services Overview Revenue* - $193 mm; down 1% Narrowed focus in capital markets - phasing out business valuation services Tax business - 9% revenue growth Pretax loss* - $2 mm; improved from $7 mm loss in Q107 * From Continuing Operations
Slide 21: Bill Trubeck, EVP and Chief Financial Officer
Bill Trubeck EVP and Chief Financial Officer
Slide 22: Corporate Operations
Corporate Operations Pretax loss - $16 mm vs. $31 mm y/y Lower interest and legal costs
Slide 23: Discontinued Operations
Discontinued Operations Consists of OOMC, and two smaller lines of business previously in Business Services Loss from discontinued operations primarily due to mortgage losses
Slide 24: Balance Sheet
Balance Sheet Jul. 31, '07 Apr. 30, '07 Cash $0.4 $0.9 Short-Term Borrowings $1.7 $1.6 Net Receivables $0.4 $0.6 (billions) Drew $850 mm on committed working capital lines: $2B in total capacity Unstable commercial paper market for A2/P2 borrowers Substitute funding for working capital needs
Slide 25: Balance Sheet, continued
Balance Sheet, continued $181 mm change to other working capital Continued to fund OOMC operating needs Issued 2 mm shares from treasury shares 325 mm shares outstanding at year-end
Slide 26: Other Financial Items
Other Financial Items Effective tax rate: Continuing ops - 40.2% Discontinued ops - 42.5%
Slide 27: Capital Structure
Capital Structure HRB below OTS tangible equity requirement Due to losses - no share repurchase until FY09
Slide 28: Performance Outlook
Performance Outlook Focus on core tax and related financial services Aggressively manage through volatile and fluid market conditions Reaffirm guidance - narrowed FY08 continuing ops EPS $1.30 - $1.45 Discontinued ops losses will impact Q208 Tax Services - building on margin expansion Consumer Finan
Slide 29: Annual Shareholder's Meeting
Annual Shareholder's Meeting
Slide 30: Annual Shareholder's Meeting
Annual Shareholder's Meeting Breeden Partners' campaign disruptive to H&R Block's strategic initiatives: Has advanced no new ideas Actions may deprive shareholders of significant potential of H&R Block Bank Vote your WHITE proxy to support your board
Slide 31: Fiscal First Quarter 2008 Earnings Conference Call
Fiscal First Quarter 2008 Earnings Conference Call August 30, 2007
Slide 32: H&R Block Appendix
H&R BLOCK’ Appendix
Slide 33: Reconciliation of Non-GAAP Financial Information
Reconciliation of Non-GAAP Financial Information Financial Information Financial Information
Slide 34: Fiscal First Quarter 2008 Earnings Conference Call
Fiscal First Quarter 2008 Earnings Conference Call August 30, 2007