H & R Block Inc (HRB) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the H & R BLOCK second quarters earnings release conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, you'll be invited to participate in the question and answer session. At that time, if you have a question, please press the "1" followed by the "4" on your telephone. This conference is being recorded Wednesday the 28th, 2001. I would now like to turn the conference over to Mark Ernst, President and Chief Executive Officer of H & R BLOCK. Please, go ahead sir.

Thank you, good afternoon and welcome.

Thank you for joining us to discuss our Fiscal 2002 second quarter results. With me is Frank Cotroneo, our Senior Vice President and Chief Financial Officer; Jeff Yabuki, Executive Vice President; David Byers, Senior Vice President and Chief Marketing Officer; Becky [Schulman], Vice President and Treasurer; and Mark Barnett, our Director of Investor Relations. Before I begin my formal remarks, I need to remind you that various comments we may make about future expectations, plans, and prospects for the company constitute forward-looking statements within the meaning of the Federal Securities Law and are based on current information and expectations. These statements speak only as of today. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the second quarter press release and in H & R BLOCK filings on Form 10K and Form 10Q, which are on file with the SEC. I'd also like to take this opportunity to invite to you our annual investor conference, which we will host on January 8th in New York. This year, we'll provide a comprehensive look at our gross strategy and how we're progressing with our plans to invigorate the H & R BLOCK brand and business. This'll include an overview of our marketing plans and outlook for the upcoming tax filing season. We're planning to conduct two optional sessions in the afternoon. First, we'll provide a detailed look at the strategies for RSM McGladrey our business services segment, and then an in-depth review of the option run mortgage business. Details concerning the conference will be posted on First Call or feel free to call Mark Barnett. We hope you'll be able to join us. I'd like to highlight some additions to our senior management team that occurred this quarter. We've been building a top-notch senior management team who is committed to our strategy and make H & R BLOCK a great investment for shareholders. Joining us recently are Jeff [Branmeyer] as Senior Vice President and Chief Information Officer and Brian Nygaard who joins us as president of our financial advisers business.

Jeff comes to us from First Union, now Wacovia, where he held senior-level positions in their technologies organization and most recently as CIO of the company [INAUDIBLE] of the Money Store. Brian Nygaard joins us from ING, where he was running their North American brokerage business. That business with over 10,000 representatives prepared Brian for the significant challenge of building our distribution capabilities in a client-focused way. I'm delighted to have these two talented individuals join us. I'm also pleased to annoyance that Tom Decker Sipe has been named to the H & R BLOCK Board of Directors. Tom is currently President and CEO of Westaff, a temporary staffing and employment services firm, has a long and distinguished career in the Schwab organization and will bring valuable counsel to us as we build our capabilities to serve our clients' investment needs. Bob Davis has elected to retire after several years of service on the H & R BLOCK Board. I want to personally acknowledge and thank Bob for his many important contributions to the Company over those many years. Turning to the financial review, we've achieved solid results in the second quarter despite the slowing economy and the impact of the September 11th tragedies. Our consolidated quarterly net loss was $28 million or $.15 per share compared to $49.7 million or $.27 per share last year. Of the $.12 per share improvement over last year, $.06 is the result of improvement in operating performance; primarily driven by exceptionally strong results in our mortgage business, which more than offset expected weakness in the investment services and some earlier-than-normal expenses in U.S. tax services. The remaining $.06 improvement is the result of the reduction in goodwill amortization. Our proven results for the quarter was somewhat restrained by our share repurchase program this quarter. The reduction in shares outstanding and loss of income from cash deployed slightly increased the loss per share.

Clearly we believe that this will be good for our full-year results and is consistent with our capital allocation strategy. For those who regularly follow us, you know that our tax business, as well as business services, are seasonal and we typically report a loss in the second quarter each year. With the exception of investment services, we saw revenue growth across all of our major domestic lines of business resulting in a 12% increase in second-quarter revenues to $378.7 million compared to $337.5 million a year ago. Our cash flow in the second quarter also improved significantly. Our cash loss is as measured by gap net loss and adding back the remaining after-tax amortization expense of acquired intangible assets improved $10.1 million or 35% to a loss of $18.5 million or $.10 per share. This compares to a loss of $28.6 million or 16% -- excuse me, $.16 per share in last year's second quarter. Cash flow is measured by earnings before interest, taxes, depreciation, and amortization improved nearly $20 million to $5.9 million for the second quarter compared to a negative $14.1 million last year. Before discussing our segment results, let me comment on some highlights from the quarter. Our initiative to sell mortgages to our tax customers again achieved very strong results in the second quarter. Demonstrating our strategy of deepening relationships with the H & R BLOCK tax client base is working and is beginning to provide a sustainable source of revenues and earnings growth. H & R BLOCK Mortgage, our retail channel, contributed 11% of the mortgage segment's $72.8 million year-over-year improvement. Of all mortgage loans originated during the quarter, 10% of all loans and 62% of all retail loans came from the H & R BLOCK tax client base.

Moreover, lower acquisition costs associated with H & R BLOCK tax clients helped to drive significantly higher margins from cross-sold loans. Our cost per loan for an H & R BLOCK tax client is running about $830, substantially less than the cost per loan for $1,300 for a non-H & R BLOCK client. Results from the wholesale mortgages servicing operations were outstanding this quarter as well. I'll talk more about that when I review that segment. Also in terms of creating greater depth in the relationships we have with traditional tax clients, 1/3 of all new accounts opened in our financial advisers business in this calender year have now come from H & R BLOCK tax clients. And this does not include the approximately 25,000 IRA accounts that we opened last tax season. Before getting into segment specifics, let me have Jeff Yabuki, our Executive Vice President, comment on preparations for the upcoming tax filing season.

Thank you, Mark.

In U.S. tax operations, we're understandably focused on preparation for the upcoming tax season. Supported by strong retention of our existing tax professional staff and a 15% increase in our tax school enrollment this year, we've had a solid recruiting effort for tax professionals. Our real estate commissions are in place and our marketing campaign is ready to launch in January. We'll discuss our overall pricing strategy at our investor conference. Our research isn't yet complete on what consumer impact we can expect from the tax law changes passed by Congress earlier this year. While we recognize that the changes with the most impact won't go into effect until 2003, we believe that concerns over the tax changes this season will present a strong opportunity for us. We expect to have specific insight into consumer attitudes in the next few weeks. That information will better guide us in both setting expectations for the year and in finalizing prices. This information will be shared at our investor conference in January. We've developed a revamped marketing campaign that capitalizes both on the current environment and learning the surrounding message effectiveness over the last two years. The research on the marketing campaign suggests that we have a strong consumer message for this year. This, coupled with the expansion of the successful marketing programs, position us to capture growth opportunities in the market. We're also introducing new products to bring additional value to our client base. One of our strategies is to develop a broader portfolio of settlement products in anticipation of the potential changes in traditional refund anticipation loans or route products. We continue to believe it will be three to five years before the IRS speeds up refund processing to the point that traditional refund loan products are impacted. Nevertheless, we're taking steps now to innovate and prepare ourselves for reduced demand for the traditional route products. For example, we'll offer an instant route this year that will allow clients who qualify, based credit scores, to obtain loan approval immediately and receive a check upon the completion of their tax return.

Qualified clients will no longer need to return to the office a second time to pick up their check. Our research suggests that instant access to a client's refund will be attractive not only to our existing route clients but also to higher income clients who don't typically purchase bank products. We also believe that an instant route product will create sustained value even as the IRS ultimately achieves its goal of processing refunds in two to three days. This year, we're also introducing our first value add product for clients who owe taxes. Through our relations with Household Bank, we will offer qualifying clients an instant line of credit that can be used to pay the balance due to the IRS. Along with the credit line, our clients will have same as cash terms for 90 days. We believe this product is consistent with our stated desire, strengthening our value proposition to higher income client segments. As we're in the learning stages of this new product, we've elected not to materially participate in the lending aspect of this product during the upcoming tax season. In our E-solutions business, we've made significant enhancements to our software and on-line products. In order to deliver targeted value to the digital tax marketplace, we've been focusing our efforts on two distinct market segments. Digital self-preparation and on-line professional assistance, we think software will be the likely be the dominant option in the digital self-preparation market this year, and for sometime. Our software pricing strategy for this year is designed to continue building unit share while delivering meaningful profitability. Along with continuing to make the H & R BLOCK brand, more prominent for tax software consumers, we have several new features that allow users to experience H & R BLOCK in a very personal way. For example, we're providing both software and on-line users an opportunity to have an H & R BLOCK tax professional review their return and provide the client feedback prior to filing. This is an expansion of our successful on-line review service introduced last year. We'll also provide each of our retail

clients an opportunity to receive a free financial plan through our financial advisers business unit. We're continuing to differentiate on-line through the delivery of integrated advice and breadth of services. We'll again offer our professional tax service which allows people to have their taxes prepared online using existing capacity in our retail network. While this program is still in the early stages of development, the clients that we acquired last year had very attractive demographics. Helping to broaden the appeal of the H & R BLOCK brand. We're encouraged by the strong distribution potential related to both our AOL-Time Warner alliance and our continuing strong relationship with Microsoft and the MSN network. Now, let me turn the call back to Mark.

Thank you, Jeff.

Now, I'll review the second quarter financial results from our different business segments. In U.S. tax operations, which includes our U.S.-based tax services, interests and refinance loans and the E-solutions business, we reported quarterly revenues of $28 million, a $1.6 million or 6% increase over last year's second quarter. The pretax loss in the second quarter was $104.2 million compared to $85.7 million last year. The increased loss was driven by a number of factors. Payroll taxes of $7.2 million, associated with heavy seasonal associate stock option exercises, earlier technology development and marketing costs, and higher rents and field support wages resulting from increased tax school enrollment. In preparing for what we believe will be a solid tax season, our operational readiness is ahead of where we historically have been at this time this resulted in increased second quarter spending of approximately $10 million primarily related to the implementation of technology and marketing initiatives. This early preparation should result in reduced levels of spending during the 3rd and 4th quarters. At this point, we expect that the full-year contribution margins for U.S. tax operations will be greater than what was originally planned. I'll comment on this further when we talk about guidance. With respect to cash flow, the U.S. tax operations segment declined by $21.3 million to a negative $92.3 million compared to last year's negative $71 million. Our international cash operations, which include Canada, Australia, and the United Kingdom, generated revenue of $13.7 million, a decline of $1.2 million over last year. The decline in revenues is largely attributable to an unfavorable Australian exchange rate. Pretax losses of $991,000 were slightly higher than last year due primarily to somewhat weaker than expected tax season results in Australia offseting improved performance in Canada.

Our mortgage operations which include Option 1 and H & R BLOCK mortgage, our retail mortgage operation, as mentioned earlier delivered exceptionally strong results this quarter. Revenues rose 114% to $180.8 million compared to the same quarter last year and we're up 22% over the first quarter. Pretax earnings rose to $93.2 million compared to $20.4 million in the year-ago period. $3.4 million dollars of the increase is a result of the elimination of goodwill amortization. On a sequential basis, pretax earnings grew at 40%. We continually [INAUDIBLE] to minimize the impact on our balance sheet. Fiscal year-to-date, 82% of our pretax earnings have been cash earnings. [INAUDIBLE] strong cash flows coming from this business. Looked at it another way, $12 million of the second quarter's $93 million of earnings is represented by residuals that we have added to our balance sheet. The remainder was realized in cash. EBITDA increased $70.7 million or 207% to $96.9 million compared to $26.2 million last year and $69.9 million in the first quarter. The exceptionally strong operating performance of our mortgage segment was driven by higher loan origination and service volume, increased pricing from loan sales and increased contributions from our retail mortgage business. Compared to the second quarter of last year, approximately $17 million of the increased performance was due to increased spreads as a result of the lower interest rate environment. Loan origination volume was $2.6 billion dollars or an increase of 76% over last year. Larger sales force, higher volume of applications, and an improved closing ratio drove this strong growth and originations during the quarter.

Compared to the prior quarter, loan origination volume was essentially flat due to a temporary slowdown in originations in the weeks following September 11th. In October, applications -- application rates per day returned to pre-September 11th levels. For nonprime production, the percentage of loan refinancings to total loan originations hasn't changed significantly as a result of the decline in the interest rates. We also achieved a 14% decline in the net cost of origination contributing to a 193 basis-point year-over-year improvement in operating profit margin. While we're clearly benefiting from the declining rate environment, the work we've done to reduce the cost of origination is allowing us to continue improving our position in the industry. The operating profit margin for the second quarter was 3.52%, 352 basis points compared to 159 basis points last year. The operating profit margin is defined as pretax earnings before goodwill amortization, provided by mortgage funding. Typical [INAUDIBLE] in the second quarter grew 26% over last year. As of October 31st, Option One's servicing portfolio totaled $20.9 billion, an increase of $6.1 billion over last year's second quarter. I'm also pleased to be able to say that Fitch recently affirmed its top rating for Option One's primary servicing and upgraded [INAUDIBLE] in to it's top rating. In so doing, they cited the solid experience and tenure of the management team, strong internal controls and effective loan administration process, and noted Option One's early and frequent borrower contact collection strategy and experienced loss mitigation, all of which provided the company with a solid foundation for loan management and for loan performance. Related, we continue to monitor the valuation of the residuals on our balance sheet as they can be sensitive to changes and prepayments as the rates decrease Our servicing capabilities provide us with the opportunity to maintain a detailed view into the performance of the underlying loans.

I can tell you that based on loan performance relative to the valuation assumptions, our residuals are fairly valued. Both current prepayments and defaults are well below our modeled levels. We monitor those values very carefully, and based upon their current strong cash flow characteristics, future writeups are possible. Frank Cotroneo will provide you with more details concerning these valuations in his balance sheet discussion. H & R BLOCK financial advisers, our investment services operations, continues to be adversely impacted by weak market conditions which were exacerbated this quarter by the tragic events of September 11th. Revenues of $64.8 million declined 61% from the year-ago quarter and 6% from the first quarter. The subsequent revenues resulted in a pretax loss of $9.1 million compared to pretax earnings of $11.8 million in the second quarter of last year. or pretax loss of $6.1 million in the first quarter of this year. The elimination of goodwill amortization positively impacted this segment's year-over-year comparison by $4.1 million. In line with the rest of the industry, we continue to see weakness in the two main drivers of revenues, trading volumes and margin lending. Second quarter trading volume declined 40% compared to last year. Commission and fee income declined $24 million or 37%. Although we've increased our commission rates over the last year, the average commission per trade declined to $63.17 compared to $70.52 last year as a result of smaller trade sizes due to lower market levels. Interest income on margin accounts decreased $42.3 million or 71% from last year due to a 67% decline in consumer margin balances and a 225 basis point decline in margin interest rates over the quarter.

Prior to September 11th, indications were that margin balances had stabilized. However, in the weeks following, margin balances dropped significantly as have those have throughout the industry. At the end of October, margin balances totaled $888 million compared with $1.2 billion at the end of the first quarter and $2.6 billion a year ago. Over the past month, however, we're again seeing indications that margin balances have stabilized. Even though the segment decreased $24.9 million to $3.6 million compared to $28.4 million last year. This quarter included a one-time pretax charge of $1.7 million associated with further staff reductions that has were made after September 11th. We continue to focus on controlling expenses and rationalizing resources to match revenues balanced against our strategic investments into this business. As bad as the market environment is, I nevertheless feel very good about the progress we've made since we've acquired this business. We've taken significant steps to reposition H & R BLOCK financial advisers for growth. These include developing capabilities to serve our clients in the manner they want to be served such as introducing on-line services, right-sizing the business with an appropriate cost structure and effective expense controls, bringing our product line to competitive parity through the introduction of c-based products such as cash management accounts and expanding mutual fund products that will decrease our dependence on transactions fees. And these collectively -- we will be able to recruit and retain financial advisers. Where we're now beginning to focus. [INAUDIBLE] services. Revenues rose 17% to $91.8 million compared to $78.3 million dollars last year. Approximately, $7 million

of this increase resulted from acquisitions, netted the loss of revenue to the sale of KSM Business Services last January, with the remainder attributable to growth in tax consulting and wealth management services. In mid-September, we saw a slowdown in consulting revenues. This has been followed by a very strong rebound in October. For the segment, pretax earnings of $2.6 million compared with the pretax loss of $1 million last year. Increased revenues were offset by off-season losses from newly-acquired firms as well as normal operating cost increases. The elimination of goodwill amortization positively impacted the year-over-year comparison by $4.6 million. [INAUDIBLE] in this segment decreased $1.4 million to $7.3 million compared to $8.7 million last year. A recent announcement of an agreement to acquire Equikor Resources, a business valuation and investment banking firm that specializes in corporate finance services for middle-market companies, represents an expansion of our service capabilities within the RSM McGladrey channel. A core strategy for our business services channel is to extend complementary nontraditional services to the RSM McGladrey client base. The Equikor acquisition is a prime example of this. With the combination of RSM and Equikor Services operate as the client base creates what we believe to be significant opportunities. These are the first of what we expect to be several acquisitions of this nature. Although we do not anticipate any large acquisitions, each will be a step assisting our goal to present RSM as the leading [INAUDIBLE] business consulting firm serving small to midsized companies by reallocating our capital to strategic high return business opportunities. Now, let me turn the call over to Frank Cotroneo, who will review the balance sheet and other corporate items.

Thank you, Mark.

Good afternoon. In connection with our earlier adoption of the new goodwill standards, SFAS 141 and 142, we're required to complete step one of the Goodwill impairment test base reporting [INAUDIBLE] by October 31st. This task is an indicator of potential impairment under the new standards. We have completed a test in accordance with the standards and found no indications of impairment in goodwill. At this time, based on current information, we don't foresee business or economic conditions to result in a goodwill impairment charge this fiscal year. During the quarter, we've experienced heavy seasonal compulsive stock option exercises. With the large portion occurring in the first few days in September. Through October 31st, seasonal tax professionals exercised options for 5.1 million shares of common stock compared to virtually none last year Which resulted in stock option proceeds of $104 million. These unplanned proceeds were allocated to the share repurchase program. The option exercises also resulted in additional payroll tax expense of $7.2 million in our U.S. tax operations. As seasonal tax professional stock options are only exercisable from September through November of each year, we expect there'll be some, but not significant, stock option exercises in the third quarter. The tax shield benefit of these option exercises contributed $29.9 million in additional equity this quarter and expected to contribute $41 million in the full year. During the second quarter, the company repurchased approximately 7.6 million shares as a cost of $284 million. Year-to-date, we've repurchased 9.7 million shares as a cost of $352 million, or an average price of $36.32 per share. The adjusted weighted average shares outstanding for the quarter fell only slightly as compared with the prior year as the bulk of the repurchases occurred in the second half of the quarter. We continue to be on track to achieve our targeted capital structure of 35% debt to total capitalization by fiscal year end 2003.

Turning now to the balance sheet, there are several notable balance sheet changes. The value and retained interest and [securitizations] at the end of the second quarter was $285 million down from $368 million at July 31st. The decline was primarily attributable to the sale of $134 million of residual interests in the second quarter [INAUDIBLE] security. For balance sheet purposes, this was partially offset by a market to market increase for residual interests were loans are cash flowing stronger than are originally modeled. This market to market adjustment of $34 million went to equity and wasn't part of the current quarters earnings. Cash flows from the residual interests continued to be higher than expected due three factors. First, excess retained interest spread has significantly increased due reduced funding costs which is typically tied to one month [INAUDIBLE]. Secondly, loan losses to date are less than projected when these interests were initially valued. And third, loan prepayments to date are less than those originally projected as well. This higher than expected cash flow from residuals is causing net interest margins [securitizations] or "NIMS" to -- [INAUDIBLE] to retire 12 to 15 months early, compared to the originally estimated maturity of 24 to 30 months. Our expectation is to monetize this increased valuation through cash collections and a new "NIMS" offering sometime in calendar 2002 as we continue to implementing our policy of minimizing the amount of residual interest we hold. We also down carefully monitor the valuation of nonprime mortgage service rights or MSRs on our balance sheet. Compared to the first quarter, MSR assets increased $8.9 million to $77.8 million. Out of a total servicing portfolio of $24.9 billion, MSRs are only booked against our own services portfolio of approximately $16 billion.

The remaining $6 billion of services portfolio is subservice loans for which we receive a fee. As you know, MSR valuations are most sensitive to prepayment speeds. Our nonprime MSR assets tend to be more stable than comparable prime MSR assets as prepayment penalties cause prepayment speeds to be more stable and predictable. As of October 31st, 74% of our own servicing portfolio contained prepayment penalties with an average remaining duration of 20 months. Through the period of January through October of this year, monthly prepayment rates averaged 2.2% compared to 1.7% for the calender year 2000. This increase in prepayment rate is within our valuation assumptions and is dramatically less than the increase in the prepayment fees experienced in the prime market. For specific data regarding loss performance, including losses and prepayment rates, I would refer out to investor relations page of Option One's web site at WWW.OONC.COM. Use the name "investor" and password: option#1 will provide you immediate access. The cost of common stock and treasury increased from $674.7 to $858.5 million compared to the second last year. The increase is attributable to share repurchases, less shares [INAUDIBLE] from option exercises. since October, 2000. Finally, notes payable increase from $372 million at the beginning of the quarter to $882 million at the end of the quarter. The increase in balance is related margin to $260 million increase in cash balances to increase on hand liquidity in the wake of September 11th. Now, I'll turn the call back to Mark Ernst who will discuss our earnings outlook.

It has been our practice.

We try to update the outlook for full-year performance as new information becomes available to us each quarter. We can now see that our revenue and earnings for the current fiscal year will likely exceed what we've previously expected. Though many of the factors benefiting our mortgage business performance are expected to continue through the balance of the fiscal year, we don't expect the declining rate environment to benefit us going forward. While there are other environmental factors hindering our investment services business, we're encouraged by what we've begun to see in this business recently. Also, as Jeff described, the tax season is shaping up well. We said in June that for fiscal 2002, planning purposes within our U.S. tax operations, we were using a 10% revenue growth assumption in setting our spending levels and targeting at 50 basis point margin improvement. While I'm optimistic that it is shaping up to be a good tax season, it is a bit too early to provide fully updated revenue guidance for this segment when we finalize our pricing, we'll have a complete view. It is our intention to provide with you a more detailed outlook and guidance for the tax season at our January conference. We do know that spending has been well controlled and that revenue growth will likely exceed 10% through a combination of marketing programs that will drive unit growth and revenues from nontax preparation sources. Along with those slightly higher revenue expectations, we anticipate the margin in the tax business will actually increase by 100 basis points at our currently forecasted revenue growth rate. The combination of these various factors means we now expect revenue growth will be well within our long-term guidance range and earnings per share for the full fiscal year will be between $2.15 and $2.25 per share. For the third quarter, we're comfortable with the current street estimates, however as we experienced last year, material shifts in the filing patterns of consumers can have a pretty significant impact in

the results for the third quarter. In conclusion, we're obviously pleased with the strong results we're reporting today through the hard work of our associates. We continue to deliver outstanding and solid financial results and our preparations for the upcoming tax season are well ahead of where we've historically been at this time. During the next several weeks, we'll make the financial decisions with respect to pricing as well as other strategic initiatives for the upcoming tax season. I look forward to updating you with our outlook for the tax season at our investor conference in January. With that, operator, we'd be happy to open the line for questions.

Thank you, ladies and gentlemen. If you have a question for this question and answer session, press the "1" followed by the "4" on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question was answered and you wish to withdrawal your poll request, press the "1" followed by the "3." If you are on a speaker-phone, please pick up the handset before entering your request. One moment please for the first question. Michael Hodes of goldman Sachs, please, go ahead with your question.

Hi, good afternoon, guys. A couple questions. First disregarding the guidance, is the upward move in guidance mostly a reflection of more conviction on the tax business given your comments on perhaps the somewhat better margin? Or is it more just capturing just stronger mortgage trends? Secondly, in the mortgage business, maybe you can talk more philosophically about how large are you willing to let that get? In my calculations, It's approaching the third of the earning stream if you'll look to cap it. Then just a point of clarification in investment services, could you just give me the average commission portrayed. I know what it is in the press release. I wasn't sure if you said $53 per trade or $63 per trade.

It was $63.

Okay.

On the guidance. I'll tell you, most of the increase, although there's a slight amount of the increase in guidance is driven by tax, most of the increase is from an expectation both currently as well as perspectively for the mortgage business. That range does not include -- it includes a little bit, a couple cents of additional upside that we see, we can clearly see now in the tax business, but most of the guidance increase is coming out of mortgage. In terms of mortgage, you know, philosophically, couple things about that business, one is we have been focused on ensuring that as we -- as the results come out of that business, that we're doing two things. One, that the bulk of the earnings that we're reporting are coming in the form of cash and with that continuing to be our policy, as Frank talked about, we've been doing a number of things that minimize the balance sheet impact and minimize the amount that we put or we maintain on the balance sheet and any risk we maintain. That'll continue to be our policy. In terms of a cap on how large we would let the business get, I suppose the real answer to that is, if at some point in the future we could not maintain the level of cash earnings that come out of that business, we would take a hard look at what size we want it to be. In the current environment, we're able to have much of the earnings, the vast bulk of the earnings, in fact, be in the form of cash. And so, from our perspective, there's no philosophic reason to limit that. That may at some point hurt our year-over-year comparisons, obviously from this line of business if at some point in the future we don't have the kind of cash earnings environment you get out of the mortgage business today. But as long as this type of environment is out there, we see this as a great source of additional cash earnings.

Got you. Following up on the mortgage, it seems like you're trying to give us more disclosure here. I take it that there's going to be, you know, a full array of analytics in the queue that we could track some of the assumptions and the balance sheet items? There's a lot of what Frank talked about, you know, doesn't really jump out of the balance sheet as stated.

Michael, there already is sensitivity analysis in the queue. But, again most of the information that I think you'd want to see will be on the web site at Option One talking about prepayment speeds, delinquencies, residual valuations, et cetera --

I've looked at it. But you're saying there'll be a way we can cross check it against the assumptions on the securitizations

Yes.

Okay.

The other thing I was telling you Michael, and I mentioned at the outset. In the January conference, we'll announce split and have an optional afternoon, if you will, where we'll going to go in-depth on McGladrey, the business service business, for those of you who don't have a deep understanding of what our strategy is there and what kind of dynamics we expect there. We're also going to do a deep dive on Option One in the mortgage business. So there we'll give you a lot more this kind of -- of analytics on how the business performs and what the balance sheet implications are.

Thank you, guys.

Thank you.

Our next question comes from Chris Gutek of Morgan Stanley. Please proceed with your question.

Thank you, good afternoon, everybody. Mark and Frank, I don't want to beat a dead horse here but certainly the mortgage residuals is a hot topic. A timely topic as well. I recognize the data is available at the web site. For some of us who aren't mortgage experts, can you walk through in a little bit more detail what resource you're using for prepayment rates, seeing currently, what you're the assumptions are that are embedded in the valuations and do the same for the default rates as well. Having done that, Mark, can you follow up on the comment you may have to write up the value of the residuals. By how much would that likely be? When will that likely happen if at all?

Sure, you know, it's a little bit difficult to give you, you know, a quick thumb nail on the key drivers.

The two key drivers obviously are prepays and default rate assumptions. I can tell you our typical default rate assumptions are between 4 1/2% and 5 1/2%. If when we put a valuation around these things, those are the typical rates. It depends on the vintage and the types of loans and a number of different things like that. What we know is that that's the cumulative default rate we expect over the life of a pool of loans. Our oldest and worst-performance vintage is a 1995 vintage that is currently running at about 375, 375 basis points of default. That's a very mature rate level. And that's our oldest and worst performing pool. We're well underneath the typical assumptions that we'd make on those. On prepays, Frank mentioned this, on a nonprime mortgage loan portfolio, typically you get prepayment penalties attached to the loan. While they're somewhat controversial, that's part of what creates the stability and the valuation. I think the number was 74% of our current loan servicing portfolio has prepayment penalties attached to it. That has the impact of making the prepayments very, very predictable, because there's an expected and, you know, really happens spike that occurs once prepayment penalties run off, but that's something we're able to plan for. So far, again, against the pools we have, we monitor this very carefully, I don't think that I can recall a single pool that's running above its prepayment expectations. They're all typically at or below the cumulative prepayment assumption that we use in the making these -- putting these things on the books. That's what led to the writeup comment.

At some point as these loans pay down, we as the residual NIM holder have the rights to the remaining cash flows. And we've been fairly conservative, we think, prudently conservative in the our assumptions with these items put on the balance sheet. And they're stemming the cash flow. There's cash flowing earlier and in bigger amounts than what we had originally modeled and our policy and our practice is to, as we can take these things off the balance sheet, and find a buyer for them, we'll take them off the balance sheet. We think that we have a number of them that are approaching a point where the cash flows will allow us to resell them and we would intend do that. We expect that could happen in -- some time in calender 2002. We really haven't determined when that would occur. But in all likelihood that would entail a writeup at the time of a sale.

Okay. And maybe one follow up on that point if I could on the default rates, the starting comment was looking the different pools since 1995, the default rates have been below what you've assumed, but the economy isn't doing well recently, why should the historical default rates being below the estimates give us confidence that the default rates won't rise in the next 12 months in the context of a weak economy?

Well, certainly that's an outstanding risk. And that's part of what we look at that on a regular basis. I can tell you the 375 is the worst we've seen in terms of performance. It's far from the best. What we've seen over the course of the weakening, I think, over the last six months or so is that the apparent run rate is up 50 basis points in terms of expected defaults. That's our current estimate with the weakness we've seen in the economy most recently. But again, we believe this gives us a lot of cushion to the level of expectation and also, you know, part of the benefit of this is our servicing platform that we commented on the Fitch ratings that's been attached to our servicing business, but our ability to see into these loans and these loan pools to intervene early when we think there's a risk of a borrower getting behind and to take action on that, has proven historically to bring us in at lower loss rates than the industry. And I think this is a kind of environment, a kind of economy where an outstanding service portfolio like ours or service operation like ours is all the more important.

Okay. Makes sense. And if I could, one quick question about the tax business. I understand you don't want to get into the detailed policy until early January. But the marketing strategy last year was clearly designed to appeal towards the middle income customer and not as much to the low-income customer. My understanding of the marketing strategy for the upcoming season is not to go with that message necessarily, but instead to focus on the tax law changes which are likely to leave people pretty confused and try to take advantage of that confusion. If that that is, in fact, the correct marketing strategy your company will be using, could that not potentially imply a negative mix shift in the customer base back towards lower-income people and therefore lower growth in revenue for return and how do you plan to prevent that from happening?

First, I would tell you, I don't think our marketing strategy is designed to move away from our past strategy of moving more upscale. You know, how we'll craft a tax law change message and how the supporting things that go with that are all being designed to continue our push to bring in a more -- a higher income demographic. There's nothing about this year's campaign that I would say is designed to shift that acquisition focus. The one thing that's different this year that Jeff commented on was some new products we have in the settlement product portfolio. For example the instant RAL and the balance due product will target slightly higher income demographics. The instant RAL, basically, the way that works is -- You come in and we'll, while you're in the office, we'll credit score you. And, if you qualify, you'll be able to walk out with a check and never have to come back as well as the balance due where you'll get 90 days after April 15th with no interest charge and we'll front the amount of money for the balance due to the IRS, are both products that we think will have more appeal to a higher income group and that continues to be our strategy. We also know that the tax law changes themselves have a direct correlation between, you know, those changes and their impact on higher income consumers. So just to focus on tax complexity and tax law change is likely to help us more strongly with higher income consumers.

That's great, thank you, Mark.

What I would tell you also is we'll try to give visibility to that entire mix issue at the January conference. 'Cause we're looking at it in very great depth.

Thank you, Mark.

Our next question comes from Michael Millman of Salomon Smith Barney. Please proceed with your question.

Thank you, I guess a few questions and starting with the latest. There wasn't sheer market. If you said on the balance due that you were going to front the interest or the balance through April 30th? And if so, are you looking for the tax returns or will household be giving you some fee to get the loan? In addition on the tax, could you give us some idea of on an atlas to average pro forma basis excluding, or adjusting for, the 142, what you're looking for for an increase in costs this year? And also on the tax, you indicated you expect more like 100 basis points increase rather than 50 is that on an adjusted basis as well? If so, adjusted what would have last year's have been? And then on the mortgage, I was a little surprised. I'd thought that prepayment was running about 83% of the portfolio, at least of the recent portfolio. So I'm not sure if the 74 takes into account historic numbers and in the same vain, the penalty duration, I thought, was running over the last several years closer to 30 months rather than 20 months and then, again, if the 20 months, really reflects historic numbers which are probably less important today than they had been. And then, maybe you could talk a little bit about whether on the balance sheet if you've repaid some of those extra borrowings?

Sure. I think I've got all of those. Let me -- I'll take them in order. On the balance due product, let me describe how that will work. Um, basically for a client who comes to H & R BLOCK and has a balance due and it doesn't matter when they come to us, if they come to us in January, February, March or up through April 15th, if they have a balance due to the IRS, will pay the IRS on April 15th. We -- not we, Household will through a loan that has no interest and no payments for 90 days. And then at the end of 90 days, so by July 15th, if people repay the loan in totality, there'll be no interest charged at all to the consumer. Basically, they get to -- somebody who comes to H & R BLOCK, has until July 15th to effectively pay their tax bill. This'll cost you nothing because Household is --

That's right. This'll cost us nothing.

Will Household pay you a fee for this business?

No, what we've agreed to for the first year is that we'll provide the product and that they will -- we'll provide the product to our clients and the economics of the underlying loan product will stay with them.

It's a traditional 90 days same as cash where there's breakage on the 90 days. That's how the economics work for them. Ultimately, what the pricing will be for this, if there'll be a charge, processing fee, or something like that remains to be seen. And the balance will only be available up to $5,000. There's a few tweaks that are still in development. But we think that this thing has some appeal or will have some appeal to, you know, to a higher income demographic. In terms of the percentage of growth in expenses, I don't quite have the number the way you're asking the question. What I can tell you is that the 100 basis point margin improvement is on an apples-to-apples basis. So after we adjust for the way in which we're now allocating costs, it's still a 100 basis point increase in the margin year-over-year. That's at our current estimate run rate for revenues which is slightly above 10%. So net/net, there's a bit of an increase that we can clearly see. That's primarily being driven by less spending than we've had to make this year than what we've had anticipated we might have to do get ready for tax season. On the mortgage business, the issue about the 30 month versus 20 months and the 83% prepayment versus 74. The 74% of the current loan portfolio has prepayment penalties is a -- is an aggregate number. The 83% is in our more recent loans that are being put on the books. 83% of those have prepayment penalties attached. We've made a concentrated effort to make this a part of the product design we have. And increasingly, we're seeing those products that are being

sold include the prepayment penalties. So if anything, the risk of prepayments is only getting better, if you will, because more and more the loans we're now putting on the books have that kind of provision. The same is true of the 30 month versus the 20 month. The 20 month is the remaining amount or the remaining average months for prepayment penalties. The 30 months is a typical amount that we include in the up front when we put a loan on the books.

So the bottom line is that your mortgages have gotten much more conservative more recently than historically.

All of that is mixed even with the pricing, but I'd say we've looked to take less risk in these loans. They are less risky. Finally on the balance sheet and whether we've prepaid -- essentially what you'll see on the balance sheet this quarter, we've increased the amount of CP we have that is on a committed basis. We've extended that out. We've extended that out the week following September 11th and basically locked in higher levels of CP and therefore are carrying higher levels of cash in the event that, you know, we weren't sure what was going to happen. We weren't sure about the liquidity in the markets out there and we didn't want to take any chances. So we locked in more liquidity than we maybe ultimately would have had to.

And that remains on the books? Also, you've said that you expect the mortgage strength to continue, although not at the necessarily second quarter level, it was up 100 -- the spread was up or the margin was up about 100 basis points -- For purposes of forecasting, would you suggest we use the lesser amount going forward or do you think it gets even below that?

Well, you know, that is sort of the -- you know -- What we know are a couple of things. We estimate that during this quarter, the decline in interest rates that occurred during the quarter gave us $17 million of additional income because of holding loans that ultimately came more valuable when rates declined. We don't think that will occur again this quarter. Now, you know, Alan Greenspan could delight us all again with a drop in interest rates, but for planning purposes in our forecast, we're not using further declines in rates in setting our own internal expectations of what pricing will be. Aside from that $17 million, I'd say, you know, our originations are running pretty consistent so far this quarter with where they've been in the last two quarters, so I don't know we would expect a change there. And the backend market appears to be as strong as it's ever been. Aside from the value gained from declining rates, you know, we're look at the third quarter being much like the second quarters and first quarters.

So somewhere in between the two, then?

I think that's probably right.

Okay, thank you, mark.

Thank you.

Our next question comes from Chris Gutek of Morgan Stanley. Please proceed with your follow-up question.

Yes, couple questions if I could. If we could switch to the financial advisory business for a minute. I want to double check. I think in the last call you guys talked about tripling the number of tax preparation financial advisers to 400 last season to 1200 in the current season. Are you on schedule to hit that target?

I think the answer to that is, "Yes." The latest round was we had a number of people in training. We'd been shifting between different training classes in different parts of the country. The key is whether or not we have them trained before we go into tax season or whether we are still training into the tax season. Our target was to get to that many before tax season. You know, currently, I'd say we're probably, you know, from what I know, I think the training classes have been a bit slower and delayed from what we'd expected. And as a result, we may be closer to 900 to 1,000 when we go into the tax season. Another thing we've been doing is we've been offering some of our tax professionals an alternative track to the financial advisers track, which is to be a loan finder, if you will, for our mortgage business. We've been training a number of people who have switched to that career path or that training path where we're training them on how to source mortgage loans into a central processing center. There, we're actually expecting to have somewhere in the order of 2000 to 2,500 people trained for that kind of a service or that kind of a role going into the tax season.

Interesting. I think in the last season, you had quite a few express IRAs set up, my impression those were essentially loss-leaders where you weren't making money because the account sizes were pretty small and the product certainly wasn't very profitable to begin with. Is the thinking with the express IRA in the upcoming season to try to leverage that loss-leading product into additional sales in the current tax season? Does that make any sense or?

I can tell you precisely what our strategy and our thinking is around the express ira. Last year, we did about 24,000 or 25,000 of those accounts, on a pilot basis in certain regions of the country. We're rolling that product out nationally, including to a number of our franchise offices, although not all of them will take the product this year. A couple things, A, we think that the way we've structured it that the first-year economics are about to break even. And we think that as the account sizes build over a number of years, it'll be a nice -- it'll never be dramatically large -- but a nice, little profit center. The more important attribute of the express IRA that we think we can leverage overtime is the retention impact it has on tax clients. We believe to be the case and we'll get our first indication of that in real life with clients this year from the 25,000 who took that product last year on a pilot basis. What we believe to be the case is that clients who leave some of their money behind with us at H & R BLOCK, are far more likely to come back to H & R BLOCK year after year and therefore we could overtime improve the retention rate we have on the core client base. If we can do that without losing money on the account in year one, we think that's a big win for the organization over time.

Makes sense. Okay. One more follow-up on the tax business if I could, Mark. You mentioned the shifting of technology costs and marketing costs into the fiscal second quarter. Could you elaborate on exactly what technology and what you're doing from the marketing perspective in the second quarter?

Sure, as Jeff Yabuki talked about some of those, you know, the technology most notably is the big driver of this. And in there, what we've been doing is implementing a field communications system and a new payroll system that is designed to capture savings in a number of the -- in our payroll costs that occur during tax season. Jeff can give you a lot more detail.

Okay.

Chris, what we've done is we've got, as Mark indicated, we've got a system for a new system for our payroll. We've got several additional systems we're rolling out this year to help monitor tax season as we've started to talk about last year that will -- that have gotten out a bit earlier than we had expected. From a marketing perspective, we had some expenses that we had moved forward. Most notably, some TTS advertising we planned for in a later quarter and we extended in the second quarter and some more limited marketing program expenses that we've brought foreword. Because we had a very good TTS year, as I mentioned, we also is have field-based labor costs that were -- we end up paying now that will end up converting basically to reduce our overall costs. It's a draw, an advance draw against future salaries. So those will come back as well.

Okay. Great, thanks.

Our next question comes from Michael Millman of Salomon Smith Barney. Please proceed with your follow-up question.

Thank you, I guess a few clarifications. One, let's start with what TTS is. But also, maybe, could you just go back over the retail mortgage business. I at least kind of missed some of those numbers. And then maybe you could give us an idea in the second quarter what the gain of securitization mortgage was. And finally, maybe talk a little bit -- or you did touch upon it, I think -- some of the strategy behind raising the TaxCut prices.

Sure.

TTS stands for varyingly, depending on who you talk to and how long they've been with the company, is tuition tax schools, or tax training schools, or tax training service, or a number of different things. But it's known very affectionately around here as TTS. The retail mortgage business is obviously doing very well for us. We've had good performance. I mentioned 60 some odd percent of our mortgage loans originated this quarter came from H & R BLOCK clients. That's purely consistent with our strategy of using our H & R BLOCK client base as a pool of prospects to offer this service into. Within that business, we are offering a full range of products. We're a little bit unique in the industry in that we're not a specialist in conforming we're not a specialist in subprime. We're not a specialist in government. We offer a full range of products. As a result, we're able to position ourselves both with BLOCK clients as well as nonclients so if you're in the market for a mortgage, we have a product for you and we'll find you the best product that's available. We think that's a very defensible position in the market and it plays very well with H & R BLOCK clients where we don't have to turn somebody down for lack of a product that fits their needs. This business has -- is up pretty substantially from where we were a year ago in terms of originations. The pipeline continues to grow. And we are rolling out the number of co-located retail offices where we have H & R BLOCK mortgage retail professionals in our offices that share space with our advisers and with our tax professionals. So, all in all, we think the business goes along well and we think it is a nice sustained growth for our business. I think if any place in our mortgage business that we're benefiting from the refinance boom that's going on, it is probably in that line of business right now.

We don't see as much refinance activity going on inside of our Option One business. The proportion is about the same there. But, all in all, that business is moving along well it continues to be an area focus for us. In terms of the margins that we've seen overall -- This quarter, we saw an overall net 328 basis point margin in the overall mortgage business. That's up from, I guess, last year for the full fiscal year of '01, we had a 226 basis point overall margin. That was made up of a gain on sale of 471 basis points. We earned warehouse interest. That was last year, full year, 57 basis points. Then we had an all-end cost of origination last year of 303 basis points. This quarter, by comparison, our gain on sale was 511 basis points. So we're up 40 basis points over last year. Our warehouse interest was up somewhat. It was at 90 basis points versus 57 last year. Our overall cost of origination was down. It was down to 272 basis points. That's how we get to the net margin of 328 basis points. You know, what that reflects are a number of things: The warehouse interest income is a reflection of financing costs being dramatically lower as interest rates have dropped. The gain on sale is benefiting a bit from that. Although the quality of the product we originate is really very much determined -- causes us to get a very solid gain on sales. We've been focused all year on how do you make sure that our cost of origination is an industry leading level, so that -- industry-leading level so we have the opportunity either to price aggressively when we need to or in appropriate times like this price to yield us a good

return. So overall, you know, again, our business there is performing, you know, very, very well.

Mark, were those numbers you just cited second quarter or first half?

Those are second quarter. We can give you first half if you'd like. The first quarter was very much like the second quarter.

I guess the question was, I thought that the margin was 352 basis points. I'm not sure why that differs from the 328.

This is the operating profit margin. It doesn't include some of the other things like service income that goes through the overall margin for the business.

I see, so this is the production side?

This is the production side only. Yes.

Okay.

In terms of our strategy related to our pricing for TaxCut this year, again, I think I'll let Jeff talk a bit of what we're thinking there and & what we're looking for.

Michael, did you have a specific question about the pricing?

It seems like the pricing is up about $5 across the board on the TaxCut?

Correct. We -- as you may recall from last year, in that business, we took our prices materially down in the prior year and shifted our model from a basically a full front-end model to a model that more closely mirrored the market. And that is, some of the revenues coming in at retail are at point of sale. A fair amount of revenues coming in on the back end. We started charging for states for the first time, and we were very pleased with the unit share that we picked up. We do know maintaining a delta is important for us. And we believe with the software pricing that had occurred in the prior year that we had the ability to raise prices at the $5 level and not impact our share and continue to build profitability in that business line.

I think it's worth pointing out is that there's clearly a demarcation of this occurring in the market. You know, if you look at Intuit's pricing for their basic product, they're moving their basic product up dramatically in substantial ways, I think they're trying to push their brand to be the premium brand, which has been for some time in that market, and to take it to positions less for the low end of the customer at the basic level.

Right.

And while we'll maintain a pretty aggressive price at the basic level, that's given us the opportunity to take a little bit more pricing latitude with that segment. Where we've historically gained much of our share is with the new entrance in the markets. Those new entrants are typically buying the basis products. It's all tactical as this whole industry kind of settled down now. We're all looking to make some good money in it.

Thank you.

Thank you.Steve Farley with [INAUDIBLE] Capital, please go ahead with your question.

Frank, can we please go back to, I believe I heard you say that something having to do with the sale of new bonds led to you receiving an extra $44 million more than you thought from residuals and that it went straight to equity and not to the income statement? Did I understand that right? Could you explain that to us? Maybe we should all get our taxes done by you, guys because you can hide $44 million in income? [General laughter ]

That's not the purpose and it wasn't only cash. If you go to the balance sheet as of July 31st, residuals were $368 million. At the end of this quarter, they were $285 million. The reason for the big shift downward were two activities taking place. One was we didn't complete the NIM, the net interest margin transactions on the first quarter transactions in the first quarter. That got completed about three weeks after the first quarter, shortly in the middle of August. Because -- and that's the reason why the residuals were so large at the end of the first quarter. When the NIM got placed, the residuals went down by the value of that transaction of $134 million. What we then did because the cash flows on our residuals are coming in stronger than we'd anticipated, we did take a small mark to market of $44 million, which is in line with gap.

But basically, Steve, the gap rules on this is we have to fairly value those residuals. When we do that, we take a mark to market adjustments that runs through other comprehensive income, doesn't go through our earnings, and we can only take that back into the gap earnings when we sell -- when we receive cash. Um, we think that will happen. But it hasn't happened yet. And that's why we tend to take the mark to market adjustment, and we took that into equity, but we won't take it through gap until we realize cash. We think that's the transaction that could occur sometime in 2002 based on the current pattern of cash flows coming out of those NIMs.

Okay, thank you.

Thanks. We'll be happy to do your taxes also.

Thank you.

Our next question is from Bruce Babcock of [Saber] Capital. Please proceed with your question?

Thank you. I was a little confused on your shares outstanding. If I understand correctly, you issued about 5 million shares or options or something to employees but you bought back 7 million, and yet the shares you show on the balance sheet look like they didn't change at all. Can you give me an estimate by maybe by the end of the year what your shares outstanding will be?

Sure, year-to-date we've purchased approximately 9.7 million shares. Options exercised are 7.2. Expected shares, fully diluted shares by the end of the year are expected to be an approximate 183 million range.

183, 184. Right now, I think this quarter end was 183-something. That's basic. That's not fully diluted. Fully diluted, add 2 million to that number.

Potentially.

So it'll probably be on a full-year basis, you know, in the 184-185 million range.

And what was it last year? Do you have that?

Yeah, I do. That was 94. 188.

188, something like that.

Not big of an influence.

Thank you very much.

It'll be down but it won't be down -- you know, it'll be down 3 or 4 million shares.

Okay. Thank you.

Our next question comes from John Neff of William Blair. Please proceed with your question.

Yeah, this is [John Romano] from William Blair. Could you provide some additional color on your comments on your -- the basis for your comment that the expectation for the tax season is shaping up well. Is that simply from the changes in tax law or is that from the experiences you're seeing in your offices to date?

It's from a couple things. Part of it is how well prepared are we as an organization? And that is -- the key determiner to that is how well have we done in recruiting tax professionals. We have had an outstanding year plus getting very high quality people. Plus retaining many of our people that we've had in the organization before. And seeing very, very quality people in our [Crash] Tax Training program. So that's part of it. Part of it is encouragement that we've seen in the way our marketing programs are coming together. We're fairly encouraged by both how we're -- I'm encouraged by how we've been able to capitalize on the learning that we've gained over the last couple of years and convert that into a very quality campaign that we think will have a lot of consumer appeal. Certainly, my opinion doesn't count. What counts is what consumers do with it. But our research on this campaign is very, very good. Um, so we look forward to be able to share that campaign with you. You know, and clearly the historic view we have of tax law changes and how that ultimately plays out in consumer demand for professional tax services, we think it is going our way. Now, we know we know that and so we're doing some research to get at what consumer attitudes are about tax law changes this year. Because this quirky situation is where there's a lot of talk about tax law changes but the fact of the matter is much of the change starts kicking in next year, not this year. We think we'll benefit from consumer belief that there's been a lot of change, but we want to validate that before we get ahead of ourselves with too great of expectations. I hope that wasn't, you know, didn't leave you stunned.

No. Thank you.

Ladies and gentlemen, as a reminder to register for a question, please press the "1" followed by the "4" on your telephone. We have no further questions at this time, please proceed with your presentation or any closing remarks.

I appreciate everybody joining us today. Let me, again, remind you, we'll hold our annual investor conference in New York on January 8th. Let me just point out that we'll hold our traditional tax season preview in the morning and then conduct two focus sessions in the afternoon, one focused on business services strategy and then another following that focused on the business of Option One. We hope you'll join us for all or part of that day. Thanks again for joining us today.