H & R Block Inc (HRB) 2003 Q2 法說會逐字稿

Please stand by for realtime captioning.

Good afternoon, ladies and gentlemen, my name is Paul, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the second quarter earnings release conference call.

All lines have been placed on mute to prevent background noise.

After the speakers' remarks, there will be a question-and-answer period.

If you would like to ask a question during this time, simply press star and the number one on your telephone key pad.

If you would like to withdraw your question, press the pound key.

Thank you.

I would now like to turn the conference over to Mr. Mark Ernst, Chairman and CEO of H&R Block.

Thanks, good afternoon and welcome.

I appreciate everyone joining us to discuss our fiscal 2003 second quarter results, um with me today are Jeff Yabuki, our Executive Vice President and Chief Operating Officer, Frank Cotroneo, our Chief Financial Officer, Becky Shulman, our Treasurer, and Mark Barnett, our Director of Investment Relations.

Before I begin my formal remarks, I'd like to remind you various comments we may make about the future expectations, targets, plans and prospects for the company, constitute forward-looking statements within the meeting of the federal securities laws 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 included those discussed in our first quarter press release and our second quarter press release, and in H&R Block's filings, form 10-K, form 10-Q, and form A--K which are on file with the SCC.

Also I'd like to take this opportunity to invite you to our annual [INAUDIBLE] conference which we will host on January 7th in New York.

We would provide a comprehensive look on gross strategy and how we're going on with our plans to invigorate the H&R Block brand and our business.

This conference will include an overview of our marketing plans and an outlook for the upcoming tax filing season.

The afternoon breakout sessions will provide a detailed look at the strategies of our [INAUDIBLE] business services segment, H&R Block financial advisers, our investment services segment, and will provide an in-depth review of the option 1 mortgage business.

Details concerning the conference will be posted on first call or else feel free to call Mark Barnett, and we hope you will be able to join us in person.

And if you can't, we'll also be webcasting the conference.

Turning to the results for the quarter, um, I'm pleased to report today we achieved solid operating performance in the second quarter achieving a 10 cent per share improvement over last year.

A reported gap results for the second quarter include the Texas litigation settlement, pretax expense of $41.7 million, or 14 cents per share.

Also included is a noncash charge of $6 million or two cents per share related to the completion of the goodwill impairment review of our investment services segment.

The $6 million goodwill charge is in addition to the $18 million that was recorded in the first quarter.

Overall, reported gap results for the quarter were a loss of $37.3 million or 21 cents per share.

Excluding nonrecurring charges, our consolidated loss from operations was $8.7 million or 5 cents per share compared to a loss of $28 million or 15 cents in the second quarter of last year.

Our improved operating results were driven by continued strong results in our mortgage businesses.

Revenues in the quarter increased 26% to $471.4 million, compared to $373.9 million in the year-ago quarter.

The strong growth in revenues is primarily attributable to mortgage operations with solid growth in U.S. tax services, international tax and business services.

Excluding the nonrecurring charges, our cash flow in the second quarter also continued the trend of strong year-over-year growth.

Cash earnings that we measure by gap, net loss, and adding back the after-tax amortization expense of acquired intangible assets in the goodwill charge improved 22.1 million to $32.6 million or 2 cents per share compared to a loss of $18.5 million or 10 cents per share in last year's second quarter.

Now, I'm going to ask Jeff Yabuki our Chief Operating Officer to review the financial results from several of our business segments.

Thanks, Mark.

U.S. tax operations report an increase in revenues for the quarter of $5.9 million, or 21% to $33.4 million compared to the year-ago quarter.

The increase was driven primarily by an increase in offseason tax returns related preparation piece, and recognition of revenues related to our piece-of-mind service.

We're wrapping up what has been a strong tax-school season this.

Resulted in a 9% increase in revenues on the strength of a 9% increase in enrollment over last year.

The increase enrollment is providing a solid base for seasonal recruiting efforts.

The reported pretax loss for the segment increased $48.1 million to $152.3 million versus $104.2 million last year.

The increase loss this quarter is primarily attributable to the Texas litigation settlement charge of $41.7 million.

The net increases in operating expenses for the quarter totaled $12.3 million and were driven primarily to increases by labor and related expenses, occupancy costs and legal expenses.

Additionally, $2 million of expenses were accelerated from the second half of the fiscal year while our expenses for the quarter were higher than last year, we were within our planned levels and as typically the case in the second quarter, represent preparations for the upcoming tax season.

At this point, we feel confident saying we expect to meet our targeted 60 basis point improvement in operating margin for the full year, excluding the impact of the previously announced litigation.

We have a number of strategic initiatives underway for the upcoming tax season.

For competitive reasons, I won't yet be specific about this year's programs.

We will provide you with an in-depth look of our plans and expectations for the upcoming tax season at our January 7th investment community meeting.

However, let me briefly comment on a couple of programs we're introducing for the upcoming tax season, all are designed to enhance long-term tax unit growth.

As we previously discussed, we see a significant opportunity to create sustained increases in client growth by improving client retention.

One of the important steps that we're taking this year is to better align our compensation systems with client service and retention for the tax organization.

This year for the first time, we will reward our tax professionals for achieving improved levels of client retention.

Tax associates who deliver a high-quality client experience has measured by actual client retention will be rewarded commensurately higher than their peers who may not.

We've also included client retention as a key component of our incentive balance for tax field managers.

By adding retention is a key component of our compensation programs.

We will begin emphasizing the behaviors that are needed to drive growth in the future.

At the same time, we maintain the variable compensation aspect of our tax professional pay plan, which is a favorable fact on managing our margins.

We also introduced a new tax client [calling] program in the second quarter that is designed to increase retention through both additional client contacts and the delivery of relevant advice by a tax professional.

Based on predictive modeling, this program targets those clients we believe are most likely to atrite and seeks to positively influence their decision to stay with us prior to the start of the tax season.

While the early indications from the program are encouraging, we don't have any history to compare the results; however, we're optimistic the program will positively influence the decision to continue using H&R Block for tax services in the upcoming tax season and beyond.

Part of our compensation cost in the second quarter is due to the program.

While we believe these and other client experience and retention focus programs will provide a lift to unigrowth over the long-term, we can't say the programs will impact 2003 results.

While we will provide more information on our future retention initiatives and their related opportunity at the January investor conference, since we have never had these programs before, we likely won't rely on them for forecasting results until we have at least a first year of experience.

Also, in surveying the opportunities for growth in the retailed tax business, we have decided to expand the overall size of our office network.

In contrast, the actions of the past several years.

We will talk about this important long-term growth initiative in more detail in January, we expect the number of company-owned locations to expand by just over 200 offices this year, an increase of about 4%.

Our expansion criteria included factors such as market penetration, population growth, targeting the right segments of new clients, existing capacity, and the local competitive landscape.

We expect that these new offices will perform at a break-even basis during the 2003 fiscal year with the slight negative impact on the operating margin for the year.

In the tax software business, we expect that the changes recently announced to our product, limiting ability to file returns from more than one computer without purchasing additional licenses of copies of the software will drive unigrowth and revenue in the software category.

We elected not to incorporate these lockout features in our offering and expect some incremental lift in the units flowing from the sizable count of the cated gory.

In addition, we're introducing a new upper-end platinum product this year that leverages pricing power from innovations and our advice and on-line professional services that we have developed over the last few years.

With respect to refinance anticipation loans, or RAL there is nothing directly as a result of any of the litigation that will change the way we operate the RAL program this year, and I will remind you the allegations in these lawsuits are related to business practices that occurred during the early and mid 1990s.

We believe we have operated and will continue to operate our RAL program in a forthright manner.

We will continue to do what we can to ensure the consumers select the best settlement option available for them.

Along those lines, we'll continue to look for innovative way its to build a full set of settlement products that meet the needs of all of our tax clients.

Products such as express IRAs and balance-due loans add additional value to the tax experience, which we expect will increase client retention in future years.

Our international tax operations, which include Canada, Australia, and the United Kingdom generated revenues of $15.3 million during the second quarter, an increase of $1.7 million or 12% compared to last year.

The pretax loss of $250,000 represents an improvement of $741,000 over last year's second quarter.

The improved performance is primarily due to a successful tax season in Australia where we achieved a 5.4% increase in tax returns prepared combined with excellent expense management.

The second quarter operating results for H&R Block advisers saw a challenge over the last few years.

Steep declines in equity valuations reflected by the fact that in October, the dow closed at its lowest points since October 1997, coupled with volatility and a weak economic outlook continued to negatively impact our business results.

Revenues for the second quarter were down $8.6 million to $50 million, compared to $58.7 million in the first quarter of 2002, and $64.8 million in the second quarter of last year.

Excluding the goodwill charges recorded in the first and second quarters, investment services had a pretax loss of $21.9 million compared to a pretax loss of $14.8 million and in the prior quarter and a loss of $9.1 million in the second quarter last year.

These quarterly loss figures include aproximately $7 million of continued intangible amortization.

As in the previous several quarters, we will continue to see weakness in two main drivers of revenues.

Trading volume and margin lending.

Second quarter trading volume is down by 22%, compared to both the prior and previous quarter.

Equity transaction-based revenues declined $5.7 million, or 22% from last year, and $5.2 million or 20% from the previous quarter.

Total revenues excluding margin interest were down $7.2 million or 15% over the previous quarter, and $6 million or 13% over the prior year.

While equity-based transaction revenues saw declines, total revenues related to fee-based accounts introduced in October 2001, remain stable over the previous quarter at $1.6 million.

Indicative of our shift in product mix from transactional revenues to fee-based and packaged products, 65% of retail, noninterest revenues for the quarter came from sources other than the sale of direct equity investments.

These revenues are concentrated in fee-based accounts, mutual funds, and a rapidly-rising base of following the accidented and variable annuity sales.

The transaction from -- I'm sorry, the transition from a transaction-based organization to that of consultative and adviseriented sales continues to progress, and the related revenues are quickly becoming a driver of revenue growth.

As the quarter ended, investment services made its initial launch into the life insurance arena with the introduction of a term life product, and we plan to expand the available product line throughout the next year.

As we mentioned in our first quarter call, one of the key initiatives this year, is to build removes through experienced producing financial advisors to the organization.

During the second quarter, we added 53 experienced advisers for a total of 121 for the first half of the fiscal year.

It's our expectation we'll continue hiring advisers at a similiar pace, throughout the remainder of the fiscal year.

The challenging financial services environment combined with existing capacity in our field infrastructure and the unique financial services opportunity inherent in our tax client base create an excellent opportunity for us to build producer scale and the revenues necessary to deliver future results.

At the same time, we're experiencing little attrition over our veteran financial advisers.

Recently, we have seen a slightly more positive trend in our asset-flow statistics, which might be an early indication the recruiting initiatives are having a positive impact on the business.

As Mark mentioned earlier, we plan to have a more detailed discussion on our financial advisers business at our January 7th investors conference.

Let me turn the call back to Mark for a review of our mortgage and business operations.

Thanks, Jeff.

Our mortgage operations which primarily include option 1 of H&R Block Mortgage, the retail mortgage operation, delivered exceptionally strong results again this quarter.

We continue to benefit from three well-performing platforms and a solid reputation for client service that allows the product pricing generating strong margins.

Pretax earnings rose to $153.5 million compared to $93.2 million in the year-ago period and $147.1 million in the previous quarter.

Option 1s servicing portfolio was $26.7 million, an increase of $5.8 billion over last year's level.

The second quarter alone production totaled $3.9 billion, an increase of 47% over last year.

Revenues for the first quarter rose 52% to $274.6 million, compared to the same period last year, and were up 10% over the previous quarter.

Compared to last year, revenue growth was driven by an increase in both conforming and nonconforming origininations resulting in an additional gain on sale revenues of $33.2 million.

We saw a slight decrease in our gain on sale percentage consistent with steps we took in lowering rates charged to our customers.

We had increased interest income residual accretion.

Our services business saw a $7.8 million increase in income, growth from our retail mortgage operation represents more than half of our quarter-over-quarter origination growth, demonstrating the momentum that we're building in our effort to cross service to H&R Block clients.

Our net gain on sale was 4.78%, compared to 4.1% in the previous quarter and 5.08% last year.

The decline in net gain was driven by lower average interest rates charged to borrowers, which has the effective reducing the premium that we receive in the capital markets.

The weighted average interest rate charged to borrowers during the quarter was 8.24%, compared to 8.85% in the previous quarter, and 9.93% a year ago.

The decline in the rate charged to borrowers is a result of sustained low interest rates, although the decline has the effective narrowing our spreads, pretax profit margins on loans originated are still above historical averages and is well within our planned expectations.

We continue to manage our mortgage business to optimize cash earnings from originations.

Cash proceeds from the sale of second quarter loan production were 84% of the total gain on sale, compared to 94% in the first quarter and 90% during fiscal 2002.

The fact that such a high percentage of our gain on sale is cash is significant because it means only a small portion of our gain on sale revenue is dependent on future loan performance and our related prepayment and loss assumptions, which I will discuss in detail in just a second.

In the second quarter, the percentage of our loan sales done through securitization, devcreased due to strong cash execution in the [whole] loan market decreased.

Of loan sales for the quarter, 25% are were securitized and the remaining 75% were sold in whole loan sale.

This compares to securitizations of 58% in the first quarter and securitizations of 81% in the second quarter of last year.

The mix between whole-loan sales versus securitizations is dependent upon a number of factors but is highly dependent on the assessment of how to best optimize the level of cash that we received for our production in any given quarter balanced against the value that we will receive.

The operating profit margin within our mortgage operations was 2.99% compared to 3.52% last year, and 3.68% in the previous quarter.

The decreased operating profit margin is primarily attributable to the lower spreads.

Credit quality remains strong.

On a fico score basis, our average fico scores for non prime originations, continues to improve and averaged 598.9 for the current quarter of origininations, compared to 571.7 for the year-ago quarter.

Average loan to value remains steady at 78.9%.

It should be noted that out -- that our loan-to-value has remained at the 78 to 79% level for several years.

The average estimated life of our loans remains approximately 2 1/2 years.

As you know, last week we announced the completion of the sale of mortgage residual assets.

In this transaction, we monetized part of the value of the write-ups that we have been taking in our residual assets over the last year.

In other words, we sold residual cash flows from 12 previous net-interest margin transactions that paid off sooner than expected because they generated cash flows higher than originally anticipated.

We believe the 142.5 million dollars in cash that we received from this renim is very solid evidence that the assumptions we used in our valuing our residual assets reflect real market value.

As a result of this transaction, we realized a $122.4 million pretax gain or approximately 31 cents per share in the third quarter.

Net of accretion that would have otherwise been recorded.

On a full-year basis, this transaction will contribute about 23 cents per share of incremental income.

The reason the full-year incremental contribution is lower than the third quarter contribution is because this transaction had the effective eliminating about $22 million of accretion or 7 cents that would have otherwise been recognized in the fourth quarter.

In a moment, Frank Cotroneo will discuss the balance fact of this transaction.

We're highly confident of our mortgage operations.

Originations remain very strong across all of our origination channels.

Loan performance continues to exceed modeled expectations as both our whole-loan sales and securitizations are not recourse transactions, it's important to note that our risk as it relates to loan performance is essentially limited to the valuation of residual assets and mortgage servicing rights on our balance sheet.

We model our residual interests based on a very cautious outlooked based on historical prepayment experience, cumulative losses, and forward live or interest rates.

We then discount the expected cash flows.

Had the value of these residual assets is based on future performance, we continuously monitor the reasonableness of our assumptions relative to actual loan performance.

Over the past 15 months, we have had to write up our evaluations based on actual performance rather than write them down.

Actual nonprime loan performance relative to our valuation assumptions remains well to modeled assumptions.

We're currently using a weighed average 4.85% cumulative loss assumption.

Our worse performing vintage year is 1995, and now with 96% of the pool paid off, cumulative losses are at 3.88%.

Cumulative losses for all other vintage years are less than 3%. [Our forward libel assumption] is that one month libel will rise, the level of the current valuation date which was 1.81% to 5 1/2% over the next 12 months.

Our weighed average discount rate is 16.7%.

With respect to loan prepayments related to our production, prepayment rates are predictable as about 80% of our loans including prepayment penalty during the first two years.

Accordingly, we see relatively low prepayments while the penalty is in effect and very high prepayments once the penalty expires.

Even in this sustained low-interest rate environment, we're not experiencing any significant rampup of prepayment rates and we remain well within our modeled expectations.

Delinquency trends continue to be positive.

Using a 12 month seasoned data, delinquency rates have been trending down since January of this year.

At the end of October, 31 days plus delinquency rates were 13.7% compared to 14.8% in January of 2002.

We're using a 12-month season data to factor out the positive effect increase origination volumes would have had -- otherwise have on the overall delinquency rate.

Additional information regarding loan performance, including losses, delinquencies and prepayments is available on our option 1 website at www.oomc.com.

But let me just conclude by saying that despite what has been written about the mortgage business by people with a vested interest in painting it negatively, we continue to manage the business to optimize cash, our originations remain very healthy.

We're seeing the benifits of building a business servicing the H&R Block tax client base and the small amount of risk that we have retained on our balance sheet is appropriately, yet conservatively valued.

Turning to business services, um, in this segment, revenues rose 11.9% over last year to 97.9 million dollars.

Primarily as a result of the increase in revenues associated with our entry into the valuation, corporate finance and payroll processing businesses.

Accounting and tax services also improved during the quarter.

This growth was partially offset by declining revenues and consulting services due to selective downsizing of unprofitable service lines.

The continued recession in manufacturing and the cautious business environment are the primary contributors to the slowdown and consulting services.

The pretax loss was $3.8 million compared to pretax earnings of $2.6 million last year.

However, $4.2 million of the decline in operating performance was due to planned startup losses related to building the payroll and valuation businesses.

We saw an increase in tax and accounting earnings, the increase in tax and accounting earnings is attributable to operating efficiencies that we're realizing through improved productivity and decreasing our operating costs.

As I previously mentioned, we're not planning any significant acquisition activity within our business services segment fiscal 2003.

Though we may complete smaller acquisitions that meet a specific business need.

Our focus for the near-to midterm will be on execution of our growth strategy to ensure that we are appropriately integrating products and services, such as wealth management, payroll, and valuation services into our overall business model.

Although we expect the valuation and capital markets businesses to reach break even by fiscal year end, losses related to the payroll business are expected to continue through the remainder of this fiscal year and into fiscal 2004.

We have also launched a new brand identity system for RSM in the second quarter along with regional brand-building campaigns designed to build awareness for this business in a time when there is significant turmoil in accounting relationships for many of the clients that we're targeting.

Now, let me turn the call over to Frank Cotroneo who is going to review the balance sheet and other corporate items.

Thank you, Mark, and good afternoon.

As compared to July 31, 2002, several notable events occurred that impact the balance sheet.

As of October 31, resual interest on our balance sheet totaled $387 million.

Representing a decrease of $11 million over the first quarter.

This decrease reflected a note of write downs of $13.1 million, an additional write-up taken in the second quarter of $38.4 million, and cash receipts of $62.6 million.

However, as Mark discussed earlier, the reason we sold a portion of our residual interests, the transaction reduced the company's residual interest by a net $157.7 million.

Taking into account the impact of the renim and the additional write-up that we took as a result of continued strong performance of past securitizations, residuals are currently valued at $229.1 million on our balance sheet.

The renim transaction had the effective accelerating accretion revenue and cash flows that would have been realized during the remainder of fiscal year 2003 and fiscal year 2004.

As a result of this exceleration, fiscal year 2003 third quarter revenues and pretax earnings will increase by $92.9 million or about 31 per diluted share.

While 4th quarter revenues and pretax earnings will decline about $22 million or 7 cents per diluted share.

Therefore the full year effect on fiscal 2003 of the [IUNADIBLE] transaction will be $71 million or 23 cents per diluted share.

Margin loans recorded as receivables from customers, brokers, dealers and [INAUDIBLE] organizations decreased by $137 million to $543 million during the quarter due to a continued conservatism of investors.

Free credit balances recorded as accounts payable to customers, brokers and dealers were $847 million.

Notes payable increase from $156 million at the beginning of the quarter to $482 million at the quarter end.

The increase in borrowings is related to funding share repurchases and working capital requirements during the quarter.

During the quarter, we repurchased 5.7 million shares at a total cost of $276 million, or an average cost of $48.28 per share. 3 million shares were issued for option exercises, employee stock perchases and restricted shares of which 2.2 million were related to seasonal tax operation exercises compared to 5.1 million last year.

Proceeds [INAUDIBLE] related to these option exercises totaled $94.7 million.

These proceeds were allocated to the share repurchase program.

The seasonal tax stock programs were through December through November of each year, we expect to be some but not optional in the third quarter.

The tax shield benefit of the option exercises contributed 23.5 million in additional equity this quarter.

Finally, as a result of the nondeductible goodwill impairment charges taken in the first and second quarters, the effective tax rate for the full year has been raised 100 basis points, this will result in a 1 cent in the third quarter and 4 cents in the fourth quarter and the full year.

I will turn the call back to Mark Ernst who will discuss our earnings outlook.

Thanks, Frank.

Let me just briefly comment before I do that regarding the RAL litigation.

As I'm sure you know, it's our overwiting objective to do what is in our opinion is in the best interest of shareholders are respect to any of this litigation.

I ask you also understand it's not in the best interest of our shareholders for us to discuss our litigation strategies in these matters and we're notably to offer speculation and to the outcomes of the effects of our strategies.

As announced last week, we have reached a settlement in the Texas litigation, and that settlement is subject to court approval.

A hearing seeking court approval is expected within the next week or two.

It's difficult in any litigation to decide to settle when you truly believe you have done no wrong and caused no one any harm.

What is most difficult is the lingering image that is left, the company must have done something wrong or else they wouldn't have settled.

I firmly don't believe this to be the case, but we believe we ultimately would have prevailed in the Texas litigation under all the circumstances involved.

We believe the settlement is in the best interest of our shareholders and is preferable to prolonged risks and uncertainty in what would undoubtedly have been a lengthy and costly trial and appeals process.

With respect to this the Zowoski case, which is a national nationwide class action case in Chicago, the hearing and the fairness of the settlement in that case concluded on November 15.

The judge took the case under advisement and gave the parties until December 20 to submit briefs.

A decision is expected sometime after that.

While we can't speculate as to the judge's decision in Chicago or the effect of the Texas settlement, if any, on her decision, we believe, as we have since the Chicago settlement was first reached, that it's fair to the nationwide class.

We know that both the plaintiffs and the defendants, including Block have submitted extensive evidence and legal authority that fully supports the fairness of the settlement, and we firmly believe that the Texas situation and settlement should not adversely effect the settlement in the Chicago case.

In the other case of interest, the Green case in Maryland, the case is currently scheduled for trial in early January.

Unlike Texas, the judge in Maryland has indicated that she will send the issues involved in that case to the jury and not rule on them as a matter of law in advance of the trial.

While we believe a decision of approving a settlement in Chicago would resolve this case, we recognize that the trial in Maryland might be concluded prior to a decision in Chicago and we're proceeding with our litigation strategy in that case.

We strongly believe that the law, and the facts, supports our positions and that our customers have not been harmed in any way related to the very popular RAL product.

As indicated, it wouldn't be appropriate for us to go into any detail of the litigation strategy in the Maryland case or any other litigation matter.

Despite all the negative news coverage, RAL's remains a highly popular product with clients.

As a company, we're in the difficult decision of defending something that consumers like in a consumer group's dislike.

I believe the ultimate solution is for the IRS to continue its efforts to shorten the time it takes to issue tax refunds.

We worked for the IRS to encourage the technology investments that will allow this to happen.

In the meantime, RAL's our product the consumers want.

We can't choose not to the offer the product.

Too many consumers will go elsewhere solely for this aspect of the tax service.

At the same time, we're working hard to ensure that clients know completely what their refund and loan options are in the costs that they're incurring with every alternative.

This year, we will encourage clients who selected a RAL to plan ahead next year so that next year they have greater flexibility with respect to product selection.

As we move forward to become our client's tax and financial partner, RAL's presents a complicated balancing act of helping clients with what they want while knowing what their alternatives are, what these alternatives cost, and how to best improve their financial situation regardless of whether they want a RAL or not.

Looking forward, we believe the outlook for fiscal 2003 continues to be positive for the company.

As we said in our last call, historically H&R Block has benefitted from significant tax law changes.

Since the recently passed tax legislation uses a [phase in] approach, we believe the changes will continue to positively impact our tax business.

For planning purposes, however, we use cautious assumptions for setting spending levels in our tax business knowing that when tax season arrives, there is little chance to reduce costs if revenue growth is not what we expected.

Overall within our U.S. tax business, we continue to use a 9% revenue growth rate in setting our spending levels, and we're confident we'll achieve our targeted 60 basis points profit margin improvement.

This performance would allow us to again see double-digit earnings and cash flow growth from this business.

We'll provide much more detail on this outlook for our business in January.

Within our mortgage business, we expect strong performance throughout the -- through the remainder of our fiscal year.

On our last call, we indicated full-year pretax earnings growth for our mortgage segment to be in a range of 35 to 50% based on the planning assumption that rates would move significantly higher later in the our fiscal year, moderating our profit growth as the year progressd.

We can now see that interest rates are not likely to rise as fast as our planning assumptions anticipated, and we now believe pretax earnings growth will more likely be in a range of 50 to 75%.

We remain highly cautious in our outlook for the financial advisers business.

Market conditions deteriorated in the second quarter and while we're taking what we feel to be prudent actions on cost and revenue generations side of the business to address our weak financial performance, we're not planning for this business to show a meaningful improvement until our next fiscal year.

Excluding the goodwill impairment charges on an operating basis, we're expecting losses commensurate with last year as we continue to build this business for the long-term.

As I mentioned earlier, we're investing in a number of startup businesses within our business services segment that will moderate our reported results; however, we believe these to be very attractive and very well aligned businesses that will create value for shareholders in the long-term.

Combined with the recession in manufacturing and the cautious business environment, I'm expecting flat to slightly higher earnings growth win the business services segment.

On a consolidated basis, we expect fiscal 2003 revenue growth to be within our target range of 10 to 15%.

Our current expectation is fiscal year 2003 gap earnings per share in the range of $2.90 to $3.10 per share.

This includes the incremental 23 cents from the renim, less the 14% charge from the Texas litigation settlement and the 13 cents in goodwill impairment charges.

You might note it's nondeductible for tax purposes and therefore, we're raising our overall reported tax rate.

Excluding the impact to the renim, Texas litigation and goodwill impairement charges, we would expect cash earnings from operations to be in a range of $3.16 to $3.36 per share, which reflects the additional 22 cents of intangible amortization that we incur.

With that, let me add one more thing, which is a thanks to the many H&R Block associates who regularly listen in to these calls and are responsible for helping us drive the performance that we have from all of our businesses.

I appreciate all of your focus on your various businesses and serving our clients well, and for those of you in the tax organization, I'm looking forward to a very strong tax season, and I would like to thank all investors for joining us today.

Let me remind you again we'll be holding our annual investor conference in New York on January 7 and hope you will join us for all or part of the day.

With that, operator, we'll be happy to open the line for questions.

At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad.

Again, that is star and the number one on your telephone keypad.

Your first question is from Mr. Michael [Hose] with Goldman Sachs.

Hi good afternoon, guys.

Very much appreciate the added detail on the mortgage business in particular.

I have a couple of mortgage-related questions.

First off, I wanted to make sure that the -- the guidance Mark that you gave for mortgage, the growth of potentially 50 to 75% that that included the, um, the gain on the renim?

I say--that certainly at the high end, that includes the gain on the renim.

Okay.

Secondly, I was hoping that you could amplify your comments on the decline in the quarter in the gain-on sale margin.

I was a little bit surprised, um, by the compression there.

I recognized there's been some slippage in the quarter there.

I was hoping you would elaborate.

Is that mostly a function of higher portion of the wholee-loan sales?

You commented on yields coming down a little bit.

Maybe you could elaborate more.

Sure, there are a couple of things at work there.

One is that we have through the course of the quarter, been lowering rates to consumers, so we're seeing compression because of that.

Um, also the mix of how we sold those loans, um, we sold the whole loans as we noted, um, and in general, those are slightly lower in terms of their reported gains but obviously, we like that because it's all cash, um, and the third thing that is related to the margins is, we're continuing within the business to make, you know events that will make the business stronger and our quality of service, that we're able to deliver better, um, and those investments are running through our current operating numbers and effect our reported margin.

I also mentioned, Michael, that related to, um, the increased mortgage detail that we just provided, we're similarly developing a range of additional detail we'll include in our qs going forward on this business.

Great, I had a couple more questions, if you don't mind.

Um, regarding the, um, the go-forward accretion, um, do you have a sense, sounds premature, but in fiscal '04, I assumed some of the, um, assets that were renimed, there would have been accretion in '04.

Do you have a sensitive magnitude there or -- .

Yeah, we do.

Let me have Frank Cotroneo give you the specifics

Hello, Michael.

The amount of accretion that would have been realized in 2004 that was accelerated because of the renim was $46 million.

That would brake down quarterly, approximately $15 million in the first quarter, $13 million in the second quarter, $8 million, $8 to $9 million in the third, and about $8 million in the fourth.

So -- okay, so the earnings in '04 would be that much less because you have accelerated.

That's correct.

Last, I think, mortgage-related question, the write-up of residuals in the quarter was presented on a net basis in the release and in prior releases, presented on a gross basis.

I was wondering if you could break it out and give us what portion of prior write-ups were recognized in the current period earnings.

Yeah, we can.

Give me just a second.

We'll get the specifics, um, we had -- we had, um, write-ups during the quarter.

With about $38 million, 38.4.

Total accretion in the quarter was 54.

Of that amount, 37 was realized out of OCI.

Okay, so put it on an apples-to-apples basis in the prior quarter, we would have to add the $37 million to the 38.4?

That's right.

Okay, why don't I leave it at that.

I'll open the floor to other folks.

Thank you.

Thank you.

Your next question is from Mr. Michael Millman with Solomon Smith Barney.

Good evening, I guess, um, maybe a couple of questions on a tax business.

First, just to reconcile the new guidance.

It looks like there is a difference on a same-store sales basis, about 8 cents.

If that's correct or incorrect, maybe you can comment and let us know.

Also, you talked about the 200 new stores having a negative effect.

Could -- could you -- on the margin, could you quantify the margin?

You still expect to get a 60 basis point, how much might you have gotten without that or how much is the effect.

Could you also talk about how many shares you repurchased November.

You talked about paying an average of $48, slightly lower price, I think, and part of November might have been a good opportunity to buy.

You mentioned that you're, for planning purposes, I think you said you're looking at one month live or at 5.5%.

Could you give us some idea of what the sensitivity to earnings might be if that should be somewhat lower for, what, a hundred basis points, how a hundred basis points would impact that.

Sure, let me, um, sort of take on a couple of those.

In terms of the tax question, if I understand the question correctly, basically, you know, what impact would the -- number one, the additional of additional offices, which will be at a break-even for the year on the bottom line, but obviously because we have revenues that come with that and expenses that offset it, um, that has the effective shrinking margin.

Um, we'll lay out the specific impact that we think is going to get to the conference in January, but our 60 basis points improvement in margin is secure, regardless of that expansion.

Do you think that those new offices will cannibalize other offices?

Yeah, you know, again, we'll lay out all the sort of economics of new office openings, both are experienced as well as what our model is for these.

In general, they have some cannibalization.

We end up bleeding off some clients who moved from previous offices to new offices, and we have typically seen a three year build, takes about three to four years for an office to get sort of fully utilized, um, so, so, there will be some of that but, you know, the net of it all is that we believe we will see incremental clients and incremental revenues as a result of that as we expand the convenience factor and that that is what allows us to operate these things as first-year break even.

So, it also creates, you know, the economics are effected in a lot of different ways, most notably, creating capacity and existing offices for additional clients.

At times when we would otherwise be capacity constrained and as we will try to do this year or are doing this year, we're focusing our expansion efforts into these geographies where we can best describe the client.

We're trying to build for the long term.

As far as the repurchase question is concerned, um, we did not repurchase any shares now during November, and don't expect that we'll repurchase more shares going forward that sort of begs the question if you're buying at 48, why would you be buying at 38 or something else.

Fundamentally, I'll tell you.

We -- we allocate a certain amount of our capital every year at the beginning of the year for share repurchase, and in he understand sight, I wish we could have anticipated what was going to happen to our share price, and we would have waited.

My philosophy has been, um, not to try to time the market but rather where we believe that the share, that the stock is trading below our intrinsic value for us to return the additional capital to our shareholders for share repurchase.

One of the things that implies is that we at 48 saw the value of the stock well below intrinsic value and we're willing to return capital to shareholders through share repurchase, would be doing the same today but to the fact that we have targeted particular capital structure by the end of our fiscal year, and we're working toward that, so, no we have not continued to make more repurchases.

Um, if you would have asked the question the right way, I could have given the answer.

When you asked if that's a hundred basis points lower, I don't know that specifically.

What I do know is that the underlying assumption we make is that the underlying assumptions behind our valuations, um, is that libor, the interest rates will rise from 1, 1.8 roughly now, to 5.5 12 months out, and, you know, if that does not occur.

We would see write-ups, continued write-ups similar to the level of write-up we in this quarter.

Now, if they start to rise more slowly than, that um, you would see continued write-ups, but not as -- as large as the write-up we just took.

I think that's the best way to explain it.

Um, to --

You're suggesting the rise will be similar if the race stayed at 1.8, or you would still have the write-ups even if the rates started to creep up?

We would see write-ups similar to the level we had this quarter, 38 million if rates stayed at the level they're at today.

I see.

And it's hard to creep up, the write-ups would start to be shrunk.

Getting back to Mike, was the 38 million an after-tax number or was that the total write-up?

That's the total write-up.

Okay.

And impossible to show up as additional residuals on the balance sheet.

The tax, offsite -- offsetting tax, um, for tax items shows up as, you know, on the other side of the balance sheet.

It increases deferred taxes.

Right.

So 1/3 of that will go into deferred tax, and 2/3 of that will go into equitiy?

Well, all -- that's correct.

That's correct.

And you mentioned that there was a total of 54 million, was that the total -- the accretion in the second quarter?

The 54 million was -- yes.

That's the accretion during the second quarter.

And so on a --

Before the cash received.

Cash received was about $62 million in the quarter.

So -- in the third quarter, the accretion would be then somewhere in the -- the accretion would be in the order of $32 million?

Yes.

I you know, we have to get an exact number but, you know, this -- the quarter -- the third quarter of accretion is going to be lower obviously because of the renim, but I'll see if we can get an exact number.

Okay, thank you.

Thank you.

You also was -- 8 cents reasonable for the apples-to-apples change in your guidance?

Oh, I'm sorry.

Yes, um.

It's about --I think the apples-to-apples champ change in guidance, my estimate is about 5 cents.

Thank you.

Your next question is from Mr. Chris Gutek with Morgan Stanley.

Good afternoon. [ INAUDIBLE ]

Sorry, operator, we can't hear this caller.

Mr. Gutek, if you would like to withdraw your line, and maybe dial back in and press star 1, maybe we can get a better connection for you.

Your next question is from Mr. Joe Limana with William Blair.

Two questions, first, just to make sure, I didn't hear Frank at the end of your comments, you made comments about the tax rate can going up, you can quickly repeat that?

The effective tax rate for the full year will increase approximately 100 basis points as a result; um, goodwill impairment charges that were taking in financial advisers.

Okay.

The 24 million nondeductible charge that will flow through the PNL on a full-year basis approximately 100 bases.

Okay, relative to your fiscal 2002.

2003.

2003 being 100 basis points higher than 2002.

Okay, and -- the next question.

No, no.

Not quite. 2003 was going to be below 2002.

We're going to be -- it will be approximately 39.2% is what the original full year number was in our plan.

That number should be raised about a point 1/2 from, um, from that level.

It's a point higher than what we had in the first quarter.

So for our planning purposes, we're using 40.7%

Okay.

That's helpful.

Clarifies that.

Um, unrelated question, um, I believe in the household settlement, um, a couple, a month or so ago, they had to lower their prepayment period on their loans, their mortgage loans to two years.

Did that settlement effect you or change your behavior in terms of your prepayment on your new loan originations or mortgage business?

Yeah, we're very familiar with the, you know, what they settled for.

The answer is no.

It doesn't have any effect on what we're doing.

In fact--most of -- I think 80, 89, 90, almost 90% of our prepayments are already two years or shorter.

We were already sort of operating the best practice relative to what household has agreed to do.

So, we -- we don't see anything in the, um, in that settlement that would effect, um, the way in which we operate our business.

Okay, thank you.

Your next question is from Mr. Chris Gutek with Morgan Stanley.

[INAUDIBLE ]

That question has been withdrawn.

Your next question is from Mr. Lee Schafer with [Arley] Capital.

Hi every one, I had a question regarding the tax compensation, the new plan.

I was wondering if you could go into more specifics on how, um, tax preparers will be insented to retain clients.

Is it a percentage increase in, um, say their compensation of the total tax [INAUDIBLE] how many -- or per percentage of clients are retained.

Without going into all the specifics.

Because we'll cover some more of this in January.

What we basically have done is created a system that allows people to get -- we basically pay on a percentage of the tax fee today.

And for the people who are delivering kind of at or above expectationing of retention, so basically kind of our historical retention levels, we'll begin to pay those people at higher rates, and for the people who are below, that um, they will actually get compensated or they could be compensated at a lesser, at a lesser level.

And also for people who stay in the system longer, so as people stay with us longer, we believe that because clients are looking for the longer term relationships that people will have additional incentive, um, the seasonal tax associates will have additional insensitive to stay with us.

The only other thing I would add to that is we have designed a system so that it's not about whether the client returns to the same tax professional, although we clearly like that and want to build that kind of a relationship, but we know there are circumstances where people move, where people's lifestyles change, so we're also building this system so that tax professionals have an insensitive to have clients stay with us, even if it means going to another H&R office, or even if it means having a client go and use our services on line.

Okay, thank you.

Your next question is from Mr. Steve Farley from Farley Capital.

You mentioned the new offices are targeted to the client segments.

What segmenting are those?

Well, you know, we have, um, sort of a fairly complex segmentation approach that we're now using that looks like the findability of clients, client demographics, client [psycographics]and lifestyle aspects to the client.

All driven by both what we know to make their -- [ INAUDIBLE] clients attractive, their expected long-term retention with us to be be attractive and in the long-term, their value to us as a financial adviser-type of client.

I'm not sure a short answer to that, they look more middle to upper middle income to what we have historically served, they look like clients with slightly more tax preparation than our average tax client today is, things like that, which means we will receive higher pricing because of the way we bill for services and what we have experienced over time that these are clients who are more likely to return to us than what we have historically seen.

Thank you.

Your next question is from Mr. Jeff Shriner with MS Capital.

Good afternoon, gentlemen.

I was just wondering, um, what loan origination number in terms of the total between wholesale and retail of the company was using for the projection for fiscal year '03 guidance?

I was about 27.3 this quarter, 27,000.

You mean the number of loans?

Yes, sir.

Um, I don't know the number of the answer of loans.

My sense is that it's similar levels of loans per quarter.

As what we saw in Q2?

Yes.

Okay.

Um, one other question I had regarding the business services was what projected revenue, um, I'm guessing -- I'm considering the business service segment as it seems you are a transitional period in fiscal year '03.

So when we get our arms around it, what projected revenue growth would the company be using, maybe in fiscal year '04 when it's fully developed and going forward?

Well, you know, I would like to, you know, number one, personally I think it's optimistic to say it's fully developed by the time we get to fiscal '04.

Just to be practical, that's not true.

What we're working toward is a sustainable business that has growth characteristics, um, top-line growth characteristics similar to what we currently believe we have in our U.S.

Tax business, um, we think that it can certainly have that kind of potential, either in terms of pricing power, but there much of our folk system on adding additional services into the client relationships, so, you know, while we don't have specific numbers on that, I would tell that you my thinking on it is we're looking at a business that can drive revenue, top line revenue growth internally, not through acquisition.

But internally, when we're getting this thing to really click, um, at the 9-13% range.

Okay.

And just one last balance-sheet issue here.

Maybe I missed something within the conference call here, but I know we had a $6 million hit to, um, goodwill in terms of impairment.

Yet goodwill went up quarter over quarter.

Was there an acquisition possibly in the quarter that was not announced?

We had $63 million increase in business services, and that was offset by a $24 million write-off.

That's it.

The 41 million net.

Typically, I can tell what you those things are contingent payments.

Those are not, more than a $60 million acquisition in the quarter.

I think we had a small acquisition that meet have closed during the quarter.

Furndamentally, we had limited contingencies out there where firms that are performing well within the structure of their transactions can receive incentive payment we end up booking as goodwill.

So that would have to be what it is.

Okay, thank you very much, gentlemen.

Your next question is from Mr. Kurt Moehler from Dresdner RSM.

I just want to clarify a few things on the Texas settlement, there is a their 42 million pretax charge in the second quarter, is that right?

Yes, 41.7.

And how does that split up in terms of the various things.

There are some mailings fees and plaintiffs lawyers and other things with that.

You know, on that -- at the moment, we're, you know, this is a joint settlement between us and some other parties to this, so we have not, um, disclosed or presented that information, um, and, you know, until we submit it to the court, I think we will end up leaving it.

So, I mean, what would H&R Block's share of the cost for this -- share of the cost for this be?

$41.7 million.

Percentage share.

I'm sorry, percentage share?

Yeah.

I don't know off the top of my head.

I don't know how the other parties would have been accounting for their share of this.

Sure?

What I can tell you is roughly this is not -- I wouldn't say purely indicative, but it's directionally indicative.

We of the Texas offices, we represent about half of them.

Okay.

A company-owned operation.

I read somewhere that the plaintiffs' lawyer's fee was $49 million.

How accurate was that, what I read?

Well, again, I would offer that we should -- until we submit this information to the court.

Um, what -- also, as the coupons are redeemed, um, for instance, let's suppose I'm a customer using a coupon for, you know any of the items in the future, will be that running through the PNL, as an actual reduction in revenues then?

Is that right?

It depends on which of the three types, um, first, um, for two of the elements, there is basically three elements that are available to class members, um, one is for access to our software.

That we have booked as part of the up-front cost.

The cost of that providing that, um, another is for a tax-planning guide which we also have booked the up-front cost expectation for that element.

The third is discount coupon, $20 discount coupon available to class members, which is especially a rebate yesterday they use our services in one of their offices.

That we have not booked an up-front cost to because, um, the accounting on that is to -- because it is a relatively small part of the revenue that the client would potentially provide to us, the appropriate accounting is to match that to when that revenue is generated.

Our internal estimates are that the value of that will be diminimus, simply because we will make money from the clients and, in fact, we believe that some of the people who will receive these rebate coupons might be clients where we would have lost them.

The net is we think it's diminimus cost going forward.

Right.

Also, I was just curious.

I'm not sure.

There might be other lawsuits that had been outstanding in Texas with different lawyers, would this settlement cover those?

Yeah, there were two other cases in Texas with the same group of attorneys and this covers all three.

Okay, thank you very much.

You have a follow-up response from Mr. Chris Gutek with Morgan Stanley.

Hello, Mark?

Yes.

Okay, yeah, I guess the question is on the mortgage business.

You have been talking for at least two or three years now about the mortgage business being an encore business for you.

Clearly, you're not getting much value in the market within your stock for the mortgage business.

I guess the simple question is: What is holding on you or your company back from spinning this business off sooner rather than later?

Well, um, when I -- when I tell you is that we clearly -- our finding -- I do believe that we should, you know, we will do what we can do to, you know, create as much value for shareholders as we can out of this business, um, you know, that said, you know, you have -- the conclusions to do that, the best way to spin it off, we have looked at that as an alternative, we have continued to study different alternatives, and you know, I'm not sure I can tell you more than what the whth appropriate time is that we can create more value by doing something different.

We would do that.

Okay.

Similar question for the investment servicing business.

You made it clear in your prepared remarks you're investing in the long-term for the business.

In the context, from my perspective, doesn't seem as if the company has proven it's taken hold yet, and clearly the operating metrics performance for the investment services business remains poor given a week make macro environment.

I'm curious why you're hiring financial advisers at an aggressive rate instead of spreading them over a number of offices.

A couple of reasons for that.

One is, you know, I would tell you we -- I feel like we're making reasonable-enough progress.

I don't want to get ahead of myself.

Reasonable progress on getting this business integrated with the opportunity that we have in the H&R Block tax client base.

It's never as big or as fast, I guess, as certainly I want, but I think, you know, we're making progress here, and I think we're leveraging the fundamental capabilities that exist there in things like, um, our offering of iras in other services important to our ability to sort of develop the longer-term strategy, so it's in essence, we're doing okay there.

To the specific question about why would we continue to grow the number of, um, of people in our system, we have a lot of excess capacity in this system, and we believe we can leverage a lot of the infrastructure through two things.

One is increasing the productivity of the existing financial advisers, and we're working on ways to do that, bolstering new products through enhancing their, um, um, processes that they use, um, with clients through the approach we use through H&R Block tax clients, to to make them or have them become tax -- financial advisers clients, a variety of things related to that.

We also know that we have far more clients in the H&R Block tax system who would benefit from this and have indicated they have an interest working with us than what our current distribution system can attract.

It's a physical capacity limit, even though, you know, you say why is the underlying business growing more rapidly, you know, a lot of that has to do with the sort of background and the ways that we have in the overall environment.

Um, but we have far more clients that we believe would benefit from and would be interested in working with a financial adviser from H&R Block than our current capacity can serve.

So a combination of that infrastructure that is in place, existing capacity in that infrastructure and existing clients who are attracted to us, gives us the belief that if we can track the right kinds of financial advisers to our business, um, that that's a very appropriate and productive thing for us to do.

Now, that takes time because as you bring in now producers, they don't immediately start, you know, generating significant bottom-line profits.

Over time, we think they can and will, and that's why we're doing it.

Okay, thanks for the thorough answer.

Maybe one more quick follow-up answer for Jeff, if I could, I think client retention in the tax business.

To make sure I understand the metrics correctly, I think the attrition for first year tax customers is 50%, and overall aggregate tax business of 30%, 50%, 30%, I guess, Jeff, maybe you don't want to speculate to too specifically right now, but I'm curious, one or two years from now where you think the metrics could be if you give us a wide range of estimates.

Well, you know, Chris, certainly we don't want to speculate that far, um, but I would say that I mean the two statistics that you mention, the 50%, the roughly 50% attrition of first year clients and 30% overall is really what we see as the big gap.

The fact that we are -- we are, um, we're really looking for how can we, how can we shore up the experience with first year, um, first-year tax clients.

That's really the key for us.

To the extent that we can raise that number up, by the time we get to a third-year client and a fourth year client, you're in the 80 plus range, and so for us, the real issue getting those first-year people the right experience for them, and um, I think over the next several years, you will continue to see improvements.

I frankly think that this year, while we expect to see some improvement, the actions that we're taking this year are really going to begin to show up in '04.

The things that we do in '03 will show up in '05.

The things we do in the following year will show up, and you will kind of see an aggregated effect in retension.

Because it's going to take clients multiple years to get a good experience to really, really get the acceleration we're looking for.

Okay, great.

Thank you.

Your next question is from Andrew Bond with Millennium Partner.

Hi could you explain the [INAUDIBLE] from benefital tax masters and whether that would help at all with either the Texas settlement or any of the other litigations, and if it doesn't apply, if you could explain why there is no reimbursements there.

Yeah, you know, I think in deference to, um, to household on this topic, I'm going to sort of avoid or not answer that, you know, clearly we will continue to pursue all the remedies we have available to us to reduce the cost of the overall settlements in all of these cases, but to comment on household specifically, I think wouldn't be appropriate.

Okay, I understand that but I mean it's your indemnification.

Aren't you entitled to explain it from your side?

I think we probably are and, again, from my perspective, you know, I think again, in deference to our overall, um, litigation strategies and managements of our relationship with household, um, it's probably not appropriate for me to publicly discuss indemnification until we have resolved how that's going to be resolved.

Okay, thank you very much.

Your next question from Mr. Ryan [Peblo] with [INAUDIBLE] Brothers.

Um, given the level of whole loan sales in the quarter, why was it cash portion of gain on sales fell?

The primary reason for that is we -- the one thing we aggregate in with the gain on sale number is as we are taking writedowns in our residual balances, those that have previously come through income which we, again, as we're check the valuations and -- and monitoring the valuations on a regular basis, we take, you know, write-ups that go through oce and writedowns that go through earnings and those writedowns, historically been occurring or have occurred in the past, um, we have -- those would come out of the noncash [INAUDIBLE].

This quarter, we had very little in the way of writedowns.

As a result, the effect was that the noncash, um, gain number looked smaller.

Okay, if you look at the residual sale or the renim transaction, being at a premium or discount where they were booked on the balance sheet.

It was at the value that we had on the value shot.

Okay, thanks.

Your next question is from Mr. Dan Kerr with DK Equity.

Good evening.

I wonder if you could explain something on the correlation between significant tax law changes you see over the next five years and the increased tendency of generally lower income taxpayers with less tax concerns with greater numbers from H&R Block.

How much more volume do you expect thanks to substantial tax law changes or will the anticipated bottom line improvement be higher ASP, higher feed base and volume improvement base?

Well, clearly, I'll tell you.

Our focus is how you drive unigrowth.

So, not since, you know, it's not -- it's not as we look out over the next few years, our planning and our expectations are not that, um, we will drive dramatic or significant revenue growth through fee increases, but rather that we're focused on what can we do to drive, um, units.

Clearly, this is a, um, pricing -- pricing, you have to understand, pricing and most of our shareholders use it like you do for the benefit of those that don't, you know, pricing is based on both, um, absolute price increases but also mix shift as we're focusing on our efforts of acquiring and retaining clients.

We're very much focused on those that are the most attractive to us, and those end up being the clients with the higher fees.

And as we're successful, hopefully as we do this, we will see increased in prices but that will increasingly reflect the mixed shift as to absolute pricing increases.

Okay, and, but specifically, in terms of the increasing tax complexity, that is a given over the next five years, given what congress has done.

Does that fact in and of itself lend to improve business prospects for you?

You know, certainly our past experience would say it does.

Two things that come to the top of my mind that we know won't be effecting the -- a broad, um, share of the market in terms of the complexity of the tax situation.

One thing that is a growing, um, issue the alternative minimum tax.

AMT will, you know, effect more and more people unless congress does something about it, one of the most complicated aspects of the tax laws, not due to the tax law changes, its due more to the lack of a change relative to the element of the tax code.

We think that will continue to effect more and more of our clients and more and more people out there, um who, will, um, discover that the time has come when they need professional help, and we're a good first stop or if not a very good stop on the path toward, um, you know, professional help.

Another aspect that we will see showing up this year is that we will effect a very proud share of the U.S. population is going to be the saver's credit.

Saver's credit is a new provision that was -- it was included in the tax law, um, the past last year, this the -- this is the first year it's effected for most people but provides a matching credit for contributions to 401ks and iras for people up to $50,000 of income.

Our current estimate is that that will effect about half of our client base today, and admit nearly half of the U.S. population.

That's a very attractive feature, has a lot of money available to people, but also will have its own complexity.

Combinations of all of those things will help drive the business, I think, as we look out for the future.

Thanks.

That's very helpful and one last or other thing, please, on the refund anticipation loans, you mentioned that you expect that business to pretty much proceed as with with historical trends.

What kind of fee trends and volume trends do you see in that business?

We don't look out on that business, you know, too, many years out.

We believe over time as the IRS gets more and more successful, shortening the cycle time on refunds, that will have the effective making the product less in demand than what it is today, um, so -- so in general, I would say that's the case.

One thing I would say, um, that we're doing is we're working -- we're working to hold the fees, um, and not -- not seeing increases in those, and holding them flat and as we have said, I think as we know in some forms, to make sure that everyone heard it, we're going to be experimenting with the variety of different price points for the product for the upcoming year, looking at what the value is and how we can use price as a way to enhance the overall value that people perceive for us when they're getting refund loans as well as tax services from us.

But an aggregate at a consolidated bottom-line level, you continue to expect RAL to remain a profitable contributor in the range of 10 to 15 total?

Would that be a fair statement?

That sounds high to me.

I think in the aggregate, the refund loan, um, profits if you will, represent -- we would expect them to represent less than 10% of our, you know, pretax number this year.

Okay, excellent.

And -- and your fees on refund anticipation loans tend to be not the high watermark, but I believe you're on average lower than your main competitors.

We have clearly, household who is the banking partner on this with us, or has been and still is, um, is sort of the leading provider in the market because of the scale that we bring, and we have a, um, you know, provision that says we have to have the best product, best product in the market.

The best price product they make available to anybody.

So, um, we, you know, while these things, um, you know, are at times in, you know, under scrutiny, um, we believe that, you know, at H&R Block, at a minimum, they're the best value available.

Thank you very much, gentlemen.

Thank you.

There are no further questions at this time.

Do you have further comments?

All I would like to do is again say thank you for those of you who stuck with us to the bitter end here, um, we appreciate it and, um, if there are questions or follow-ups, please feel free to get a hold of us.

Thank you very much.

Thank you, ladies and gentlemen for participating in today's second quarter earnings release conference call this.

This concludes today's call.

You may disconnect.