H & R Block Inc (HRB) 2004 Q4 法說會逐字稿

Good afternoon.

My name is Wes, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the H&R Block year-end earnings conference call. (OPERATOR INSTRUCTIONS).

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

Please go ahead, sir.

Thank you.

Good afternoon and welcome.

Thanks for joining us to discuss our fiscal fourth quarter of 2004 and our year-end results.

With me today are Jeff Yabuki, our Executive Vice President and Chief Operating Officer;

Becky Shulman, Vice President and Treasurer;

Melanie Coleman, our Vice President and Controller, 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, guidance, targets, estimates, assumptions, plans and prospects for the Company constitute forward-looking statements within the meaning 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 discussed in our press releases and in H&R Block's reports on Form 10-K, Form 10-Q, Form 8-K, which are all on file with the SEC.

In conjunction with today's call, there is supplemental and financial information that we posted to the Investor Relations section of our Web site at www.hrblock.com to facilitate your analysis.

In addition, a copy of our prepared remarks will be posted to our Web site shortly after the conclusion of this call.

During today's call, we will discuss our year-end results, and then I will provide an outlook for fiscal year 2005.

Overall I am pleased to report that we achieved record financial results for fiscal 2004.

By traditional measures of company performance, this was a very good year for H&R Block.

Double-digit revenue growth across all reporting segments drove revenue growth of 12 percent.

Before the change in accounting principle, net income increased 21 percent and diluted earnings per share grew 24 percent.

In addition to record revenues and earnings per share, we managed our capital levels prudently, allowing us to post a return on equity of 44 percent.

Our results were achieved through improved results in tax, business and Investment Services and another outstanding year of operating performance in the Mortgage business.

These results were achieved despite the inclusion of $26 million in stock-based compensation expense that was new for this year.

We believe our results this year, as well as financial results over the last several years, demonstrate the strength of our mix of businesses and our ability to generate solid results even in a year that was impacted by a soft but transitioning economy and a changing interest rate environment.

As we mentioned on previous calls, we adopted a new accounting standard -- EITF 0021, revenue arrangements with multiple derivatives -- that was related to the recognition of revenues for our piece of mind service in premium tax offices.

This change in accounting principle reduced our after-tax earnings by $6 million or 4 cents per share.

For those of you who are interested, pro forma results of this new accounting principle had been applied for fiscal years 2003 and 2002 are included in the appendix to the slides that we posted on the Web site.

Our continued focus on managing our businesses in a manner that permits the optimal creation of free cash flow led to a $236 million or 34 percent increase in cash flows from operating activities to $927 million.

We deployed the majority of our cash toward share repurchase, acquiring 10.6 million shares for $520 million during the fiscal year.

Reflecting our strong financial position and our continued commitment to returning excess cash to shareholders, the Board of Directors has authorized an increase in our share repurchase authority by an additional 15 million shares.

This is in addition to 11 million shares remaining under our previous authorization as of April 30th.

The Board also increased the quarterly cash dividend 10 percent to 22 cents per share effective with the dividend that we will pay on October 1st, 2004.

Before discussing the specific financial results of our business segments, let me briefly comment on a couple of points.

First, I would like to take a moment to personally thank our thousands of associates; our tax and accounting professionals, including the many professionals within our franchise network who served our clients with distinction; financial advisors who are strengthening our business model; mortgage professionals who are setting the standard for how to serve client mortgage needs, and professionals across what is becoming the premier business services firm in America, as well as the many people who support and enable these individuals to do their jobs well everyday.

I need to personally thank all of you for your hard work and efforts that enable us to improve the quality of our clients' lives and lead to our continuing strong financial performance.

Most of our associates know that I am notoriously hard to please.

With that said, I am reasonably pleased with our overall financial performance in fiscal year 2004.

There were clearly some disappointments, which I will address in a moment.

I recognize that the primary interest of many of our shareholders today is to hear our conclusions from our analysis of the tax season.

Although we experienced many significant accomplishments across our other lines of business this year, in the interest of time, our primary focus today will be on the tax business.

First, a brief comment on the positive points of progress that we made this year.

Our financial performance was again very good.

We generally executed well against our strategic priorities of strengthening our multichannel tax offerings and market position and improving our tax and financial advice offerings, while achieving further progress in cross-serving clients across business segments.

We saw significant improvement in key drivers of our Financial Advisors business and improved performance in Business Services.

And our Mortgage business again delivered very strong financial performance through solid execution and attention to building our business in ways that can sustain that performance.

We experienced mixed results in the tax segment this year.

Our accomplishments included achieving double-digit revenue growth, successfully transitioning the major franchise territories, and delivering solid revenues and earnings growth in our digital tax business.

These positive results were partially offset by a weaker than anticipated year for our retail tax client growth.

While we are disappointed, our analysis of tax season '04 clearly indicates that our tax business remains strong.

Our business model and strategy are fundamentally sound, and the H&R Block brand and market position remained very healthy.

That said, there are some issues that we are addressing, many of which we discussed in January.

In fact ,expensive in-season research did not uncover anything particularly surprising or unexpected from what we knew going into the tax season.

Our conclusions about the season are not materially different from what we have shared earlier and are based on extensive analysis that we supplemented by market research, some of which involves multiple years of studies.

Accordingly, we have a high degree of confidence in our conclusions and are confident in our ability to address these issues in a manner that will build our retail tax market position over the long-term.

Clients served in our retail office system declined 3 percent compared to last year.

This was the result of three primary factors, all occurring at the margin within our overall dominant position in the tax marketplace.

First, the less promotional nature of our early season marketing campaign, which did not drive as many early season clients as it has in the past.

Second, underpenetration of our office network, what we have called lack of density and we will talk more about.

And last, continued weakness in the overall tax market of which our client base over index is against that weakness.

While I have some reluctance in discussing the effect of unemployment on the business again this year -- to me it sounds just a little bit too much like an excuse -- nevertheless you need to know that it was a factor placing downward pressure on clients served in our business this year.

The latest IRS data indicates that this was a weaker than expected year for overall tax filings.

Our client base traditionally over index is against the most economically sensitive segment for the population.

As we have discussed, there is a direct connection between unemployment severity, the size of the overall tax filing market, and the impact that this has on our client base.

Our nonreturning client study for tax season '04 indicates that approximately 13 percent of nonreturning clients did not return because they did not need to file a tax return.

We estimate that this had from a 1.5 to 2.5 percent impact on the number of retail clients that we served in 2004.

Turning to the early season marketing campaign.

As we discussed in our last call, we changed our marketing strategy this year to be less promotional regarding Refund Anticipation Loans.

This change in advertising is consistent with the brand repositioning and advice messaging in our media campaign.

In addition, we have continued to evolve our settlement product practices to ensure that clients clearly understand all the filing options available and the cost of each of those.

We want our clients to make informed choices and choose the settlement product that is best for them.

We believe that our marketing campaign was not compelling to those early season clients motivated primarily by access to fast refunds.

We remain committed to serving and growing this portion of our client base, and we will leverage the learnings that we have from this year to aggressively compete for the early season client base next year.

As we discussed in depth in our January investor conference, we undertook an extensive study of performance across our office network to better understand network sizing and optimal performance levels.

We concluded that we had optimal penetration in only 39 percent of the MSAs in the United States and are underpenetrated or lack sufficient office density in the remaining 51 percent of the nation.

As we shared with you in January, a significant office expansion will be required to increase our level of office penetration.

While we knew going into tax season '04 that growing network density represented a significant opportunity to grow client growth or to drive client growth, we concluded that significant office expansion could not be given until tax season '05.

This was primarily due to several factors, including organizational limitations in light of our commencing operations in former major franchise territories, our expansion into over 500 Wal-Mart locations, and the timing for making decisions in order to execute effectively.

So how does this density of our system impact client acquisition?

The simple answer is that due to capacity and location constraints within our current office network, competitors are able to offer what is perceived by some consumers at the margin as more convenient service compared to ours.

Let me explain.

Over the last five years, we have seen a dramatic increase, almost 150 percent, of the number of tax preparation providers authorized by the IRS as Electronic Return Originators or EROs.

This rapid increase in EROs has resulted in more competitors that are able to offer similar services to ours.

Most significant is the quick access to refund through direct deposit or other settlement product.

Until a few years ago, these services were unique to H&R Block and a relative few other providers.

Our market intelligence indicates that because of the increase in comparable tax and speed of refund services over the last few years, certain consumer segments perceive a decline in the convenience aspect of the value proposition that has historically been associated with the H&R Block brand.

The convenience issue comes into play in two forms -- wait time and locations.

What we are seeing inside of our system is that unlike in the past some relatively small margin of convenience-oriented potential clients are not willing to wait as long for service in one of our offices or to drive as far to one of our offices.

These consumers will seek a tax provider that is close or if faced with a wait time in one of our tax offices, they may seek a competitive service that has little or no wait time.

And it is in those markets with higher than typical degrees of competitive density that we see weaker levels of net client growth.

The bottom line is that due to the current limitations and the size of our office network we have not been able to acquire new clients at historic levels.

And although we do not see this problem as the primary driver of attrition, clients who are focused on speed of refund and a convenience value proposition tend to be less brand loyal and are tried at higher levels than other segments within our client base.

It is also worth noting that all indications are that pricing is not negatively impacting client growth to any degree below what we would have predicted in our pricing models.

Our research indicates again this year that we continue to have pricing power which is reflected in the increase in client price value satisfaction cores that we saw this year.

In addition, to address the office density issue, we plan to begin an aggressive office expansion program in this fiscal year.

In a moment, Jeff is going to outline our plans in more detail.

In addition to increasing the size of our office network, we have to continue to differentiate our brand and services to increase brand loyalty and enhance client acquisition.

As most of you know, our strategy is to consistently deliver high-quality tax and financial services to middle America differentiated on the basis of relevant and actionable advice that is accessible to consumers into channels of their choice.

Everything we see this year has convinced us that this is the right strategy.

Our unique ability to provide clients with actionable advice and multichannel access to our services through our digital offerings creates a significant competitive advantage over the longer-term.

Our confidence in this strategy is based in part on the improving client satisfaction scores we have seen over the last two tax seasons, including price value satisfaction which we believe is linked to the actionable advice we are now providing clients.

We are also seeing significantly higher retention rates among tax clients that have multiple relationships within the brand, and through our digital offerings, we are establishing a brand relationship with the do-it-yourself client community that in many cases would not have occurred.

We offer clients the flexibility to choose their preferred maximum of tax preparation each and every year while staying within the H&R Block brand.

Going forward, our ability to capture clients early through digital offerings will provide an important advantage over our competitors, as well as increase in contributions to our earnings.

I firmly believe the tougher environment that we have faced over the last few years will ultimately be seen as a catalyst for change that will make our tax business stronger than ever.

My personal belief is that the few refinements -- that with a few refinements to the business model, some of which I discussed, our tax business will not only return to its historic levels of client growth, but in the process will strengthen our market position considerably, enabling us to deliver outstanding results for shareholders over the long-term.

Now let me turn to Jeff who is going to discuss more about those results.

Thanks, Mark.

Our U.S. tax operations, which include U.S.-based tax services, payments related to refund anticipation loans and digital tax solutions increased revenues 13 percent over last year.

Of the U.S. tax operations segments total increase over the prior year, revenues from retail operations contributed $142 million, digital tax solutions contributed $25 million, and refund anticipation loans participations contributed $65 million.

Pretax income for the segment increased 15 percent for the year.

The incremental segment impact from operations in the former major franchise territories was 115 million to revenues and $30 million to pretax earnings.

For the tax operations segment, operating margins improved 60 basis points over the prior year to 30 percent.

The increase was driven by improved margins in our digital tax businesses and was partially offset by a slight decline in the retail tax operating margin.

The decline in the retail tax operating margin was primarily due to the shortfall in clients served, the impact of operating the former major franchise territories this year, inclusion of intangible amortization from the acquisition of assets, increased occupancy and equipment costs, stock-based compensation expense, and increased marketing costs as a result of brand repositioning efforts to raise consumer awareness of our advice and multichannel offerings.

Gross volume from tax preparation and related fees and company-owned and franchise offices was up 5 percent over the prior year.

The increase was due to an 8 percent increase in the average fee per client, partially offset by a 3 percent decrease in clients served in our retail office system.

Pricing was higher than originally anticipated due primarily to increased client-based complexity that exceeded our expectations.

Total clients served, including digital clients, decreased .8 of 1 percent versus the prior year.

In our bank product line, RAL participation revenues were $168 million, and less direct costs, our participation interest contributed $93 million to segment results compared to last year's waiver fees of $104 million.

RAL products declined by 7.5 percent versus tax season '03 levels due to shortfall in client acquisition and we believe are a less aggressive promotion of this product line.

However, we saw a higher than expected increase in refund anticipation check products this year.

We attribute this change to our efforts to better educate clients on the full spectrum of settlement option available to them each year.

While the performance in this former major franchise territories was below plan levels, it was generally consistent with overall tax market performance and the expected pressure on client retention, given the price increases levied by the former major franchise owners in the prior year.

We were pleased with the results of our Wal-Mart distribution partnership this year.

In the aggregate, the expansion effort performed within our expectations, driving new incremental clients to the brand.

We believe that alternative distribution partnerships like Wal-Mart, along with our long-standing and successful Sears relationship, represent efficient client growth opportunities in the future.

Retail retention improved to 70.4 percent for company-owned operations, despite a higher than normal level of nonfiling clients.

We will continue to focus on developing programs designed to enhance client retention over the long-term.

Turning to the density issue, Mark has explained the why behind the importance of improving our levels of office density, so let me share some additional insights on the continuing role of our office network in achieving growth in the retail tax business.

Part of our confidence in building office network density to drive growth is based on the performance of our newer officers over the last couple of years.

As you may recall, in fiscal 2003 we opened more than 230 new locations across the country.

In reviewing our results by office tenure, we see that those offices opened in tax season 2003 have experienced client growth at an average rate of 29 percent over the comparable period last year.

These results have been achieved without deep discounting or other unsustainable economic actions used by competitors that can distort short-term performance.

In addition to providing important insight into our growth potential, looking at client growth based on office tenure also provides insight into the growth dynamics of other branded competitors given the overall tax market's lack of growth in tax season '03 and weakness this year.

The extensive research compiled over the last couple of years, combined with the performance of our newer officers, gives us a solid foundation on which to build our real estate expansion strategy.

As Mark indicated, we will begin aggressive office expansion this year and expect to add between 500 and 600 regular offices to our network.

In this initial year of expansion, a number of these new offices will be located in areas that lack competitive density today.

We believe this level of expansion in the coming year is appropriate based on organizational capacity and competitive issues balanced against the additional infrastructure costs necessary to support this level of expansion.

We estimate this initiative to negatively impact the tax business's fiscal '05 pretax earnings by $17 million to $21 million.

In addition, we are looking at ways to improve the efficiency of our existing office network and, where appropriate, to increase the existing capacity of our offices.

We also plan to test some alternative business models next tax seasons that are designed to appeal to targeted clients segments that are not well-suited to the current retail tax value proposition.

While it is too soon to provide guidance on client growth expectations for tax season '05, we are confident that increasing our office density in this range will positively impact our ability to grow our client base over both the short and the long-term.

As we have previously indicated, we are eliminating office moves whenever possible, which will free up some previously earmarked capital for office expansion.

Accordingly, we expect incremental capital expenditures for the expansion initiatives this year to be in a range of $20 million to $25 million.

For the overall tax segment, our fiscal '05 planning assumption assumes revenue growth in the high single digits driven by moderate price increases and modest client growth.

We expect margins to remain flat in fiscal '04 as a result of the additional infrastructure costs necessary to support expansion efforts.

Let me now turn to our digital tax solution businesses, which include our TaxCut software and online tax products.

Full-year revenues increased 28 percent for these businesses.

Given the digital business's significant operating leverage, combined with an increasing focus on expense management, the revenue growth translated into substantial bottom-line improvement.

For the first time, both our online and software businesses were profitable this year, generating a 62 percent incremental margin and pretax income of $24 million compared with $9 million last year.

As we have seen for the last couple of years industrywide, as well as within H&R Block, the majority of digital do-it-yourself category growth is coming from the online tax market.

In the software business, total software units sold increased 11 percent to 3.8 million units and software revenues rose 11 percent.

Although growth was solid, our software marketshare likely remained flat to slightly down as compared to the prior year.

Online tax preparation revenues increased 71 percent as a result of a 31 percent increase in clients served to 1.2 million, resulting in what we believe was a significant marketshare gain again this year.

Revenues per paid online client increased 30 percent over the prior year.

In addition, the number of clients of purchasing our online services that link online convenience with tax professional services increased 85 percent.

While this is on a relatively small base, we continue to believe that providing customized tax advice to people regardless of the channel is an important point of differentiation for the company.

As we expected, our ability to provide clients with multichannel access is emerging as an important differentiator and competitive advantage for the brand.

Historically, the significant portion of new tax filers started as do-it-yourselfers using pencil and paper and then progressing to paid professional assistance.

Today we are seeing an increasing number of first-time filers use online services.

Through our multichannel offering, we are establishing a brand relationship with new filers much earlier in their tax filing lifecycle than we have been able to historically.

As the only provider with an owned multichannel capability, we believe this competitive advantage will be increasingly important for client acquisition as well as brand retention.

This year we retained over 490,000 clients who switched their tax preparation method from the prior year and stayed within the enterprise.

This represents a 28 percent increase over tax season 2003.

Additionally, the majority of the incremental capture in the 2004 tax season went from a digital solution to a retail office.

Our international tax operations, which include Canada, Australia and the United Kingdom, increased revenues 15 percent and pretax income 6 percent over the prior year.

The improvement was due primarily to favorable exchange rates, higher volume in Australia and improved cost control in Canada.

We also had a good tax season in Canada.

For the first time in a number of years, we saw growth in tax clients served and also gained marketshare.

Tax returns prepared in company-owned offices were up 1.8 percent for the year, due primarily to new marketing programs designed to attract younger filers and students, and also the addition of an instant product within our cashback program.

Turning now to Investment Services.

We continue to see improvement in the key drivers of the business during the quarter.

Fourth-quarter revenues were up 41 percent compared to last year's fourth quarter and increased 7 percent sequentially.

For the full year, revenues improved 14 percent.

The pretax loss was $23 million in the fourth quarter compared to a pretax loss of $36 million in last year's fourth quarter and a pretax loss of $13 million in the previous quarter.

The quarterly loss figure also includes $7 million in intangible amortization.

The increased loss over the prior quarter is primarily the result of write-downs related to disposition of real estate and onetime staff realignment expenses.

For the full year, the pretax loss was $64 million, which includes $29 million of intangible amortization.

Total production revenue increased by 50 percent over the fourth quarter last year and 5 percent from the prior quarter.

The production revenue increase over the prior year was driven primarily by increased revenue in such products as managed accounts, mutual funds and annuity sales, as well as higher trading volume.

Fourth-quarter trading volume was up 60 percent from last year, but down 5 percent compared to the previous quarter. 42 percent of production revenue came from mutual funds annuities and fee-based accounts compared with 37 percent in the fourth quarter last year and 36 percent in the prior quarter, which is consistent with our strategy.

Ending margin balances increased 25 percent compared to last year and 2 percent compared to the previous quarter.

In terms of growing our revenue base, we continue to recruit experienced financial advisors as a way to leverage existing capacity and better serve our tax clients.

We are particularly pleased to see significant increases in advisor productivity versus the prior year.

Advisors from our fiscal year '03 and fiscal year '04 recruiting efforts accounted for 68 percent of the increase in our production revenues this year.

We also continue to make progress towards deepening the relationships with our tax clients.

For tax season '04 we added more than 11,000 new tax client accounts exclusive of IRAs.

Our brand strategy includes aligning small teams of licensed tax professionals with a financial advisor in local markets to meet clients financial services needs.

This year 460 tax professionals participated in the program.

We continue to believe in the brand differentiation that financial services can bring to the tax business and the Company as a whole.

We will continue to prudently build our capabilities in this business line and expect to deliver improved results in fiscal year '05 and beyond.

Let me now turn the call back to Mark for a review of Mortgage and Business Services.

Thanks, Jeff.

Our Mortgage operations, which primarily include Option One and H&R Block Mortgage Corporation, which is our retail operation, again delivered solid results this quarter.

Pretax income during the fourth quarter increased 34 percent over the year ago period and 14 percent over the previous quarter.

This growth was driven by increased nonprime origination volume, partially offset by tighter margins for loans that we sold.

Full-year pretax income declined 2 percent; however, last year's results included a $131 million gain from the sale of residual assets compared to only $41 million in similar transactions during fiscal 2004.

Excluding these transactions, pretax income increased 13 percent over last year.

Fourth-quarter loan production increased 30 percent over the year ago quarter and 17 percent from the previous quarter.

Revenues for the fourth quarter were up 28 percent over last year and 10 percent over the previous quarter.

Fourth-quarter revenues included a cash gain from the sale of residual assets of $24 million.

Full-year revenues increased 10 percent.

Within our retail Mortgage operations, we have shifted our focus toward higher margin nonprime production due to the slowdown in prime refinance activity.

Fourth-quarter retail nonprime origination volume grew 71 percent over last year and 13 percent over the previous quarter.

Consistent with our expectations, retail prime origination volume decline 38 percent over last year's comparable quarter, but on a sequential basis, volume nearly doubled.

The sequential increase was driven by increased tax referrals during tax season coupled with a favorable interest rate environment that spurred refinance activity.

Of the total number of retail loans originated, more profitable nonprime volume represented 63 percent of the total.

Overall our net gain on sale of originated loans was 396 basis points compared to 437 basis points last year and 408 basis points in the previous quarter.

This anticipated decline in our net gain on sale is within our plan levels and is a result of lower loan sale pricing.

The weighted average interest rate charged to nonprime borrowers on new originations during the quarter was 7.06 percent, down from 7.77 percent a year ago and 7.47 percent last quarter.

At quarter-end, Option One's servicing portfolio was $45 billion, an increase of $14 billion over last year.

In the quarter, the majority of our nonprime loan sales settled through the home loan sale market versus securitizations due to comparatively superior execution in the home loan market.

Of nonprime loan sales that we completed during the quarter, 81 percent were sold to the home loan market, with the remaining 19 percent securitized.

For the year 76, percent were sold in the home loan market with the remaining 24 percent securitized.

The mix between home loan and securitizations is dependent upon a number of factors, but it is highly dependent on how to best optimize the level of cash that we receive for the production in any given quarter bounced against overall value that we receive.

The percentage of cash proceeds we receive from our nonprime capital markets transaction actually was 111 percent for the current quarter compared to 96 percent last year and 74 percent in the previous quarter.

Cash from fourth-quarter transactions exceeded 100 percent due to our decision, as you will recall from our last call, to delay of the NIM sale from our third-quarter securitization activity that was closed in the fourth quarter.

Credit quality remains strong in our nonprime originations.

Our average FICO stores for nonprime originations averaged 607, the same as last quarter and compared to 605 for the quarter a year ago.

Average loan value remained steady at 78 percent.

Nonprime delinquency trends continue to be positive.

Using data reflecting only loans that are 12-month seasoned and beyond, delinquency rates have been decreasing steadily since January of 2002, which represents the period of highest delinquency rates in the current economic cycle.

At the end of April, 31 day plus delinquency rates were 11.2 percent compared to 14.8 percent in January of 2002.

At both our home loan sales and securitizations or nonrecourse transactions, it is important to note that our risk as it relates to loan performance is primarily limited to the value of residual assets and mortgage servicing rights on our balance sheet.

As the value of these residual assets is based on future performance, we are continuously monitoring for reasonableness our valuations assumptions relative to the actual loan performance and performance in the market.

Our residual interests continue to perform better than expected, due primarily this quarter to lower than modeled losses.

Accordingly, during the quarter, we realized a net write-up in residual balances of $67 million, which was recorded in other comprehensive income on the balance sheet net of deferred taxes.

Turning to Business Services.

Fiscal 2004 revenue increased 15 percent, and pretax income increased $33 million to $19 million compared to last year's loss of 14 million.

The year-over-year improvement was due primarily to increased earnings from two lines of business, Capital Markets and our tax and accounting services.

These are offset by plan losses in our payroll and benefits processing businesses.

Fiscal year 2003 results also included a $12 million goodwill impairment charge.

Turning to fiscal '04, we made good progress against most of our key initiatives.

We achieved growth and margin improvement in our core tax and accounting services and improved productivity of our consulting business.

Our Capital Markets business achieved solid profitability, and we strengthened the leadership and business model in our payroll business.

Let me now review some of the key balance sheet items that we have.

We are going to do this compared to January 31st of 2004, and the notable balance sheet changes include the following.

Cash and cash equivalents increased from $671 million to $1.1 billion.

Net increase was generated primarily through cash flows from operations.

Personal paper borrowings to fund RAL participation and early tax season working capital was fully repaid during the quarter.

Receivables decreased $745 million to 348 million.

The decrease is primarily related to seasonal fluctuations typical to tax season, with the majority of the decrease related to participation interest in refund anticipation loans.

Prepaid expenses and other current assets declined $240 million to 371 million, primarily due to the reclassification of our beneficial interest in mortgage-related trusts -- for those of you in the Mortgage business, the I/O Strip -- to a noncurrent asset.

Increases in other noncurrent assets and other non-current liabilities are related to changes in deferred taxes and related balances pertaining to our Mortgage businesses.

Mortgage residual interests and securitizations decreased $23 million during the quarter to $211 million.

Decreasing the balance were cash receipts of $102 million and impairments of 5 million.

Increasing the balance was an increase in net unrealized holding gains of 29 million, which consists of $69 million of write-up, net of $38 million in realize gains, accretion of 47 million and additional residuals from NIM transactions of $8 million.

We continue to focus on cash and minimizing the balance sheet risk, and in that regard, it is noteworthy that our current residual balance of $211 million is 20 percent lower than the residual balance that we had a year ago.

During the fourth quarter, we reacquired 2.8 million shares at a total cost of $149 million for an average cost of $52.77 per share.

For the fiscal year, we reacquired 10.6 million shares at a total cost of $520 million or at an average cost of $48.89 per share.

As of April 30th, there were 173 million shares outstanding, a decrease of 6.5 million shares from the end of the last fiscal year.

Let me now turn to performance expectations for fiscal year 2005.

Within our tax segment, as we have already discussed, we will be investing in our office network expansion, which we believe will strengthen our market position and overall growth potential.

We will also explore alternative business models that are complementary to our existing value proposition that we believe could lead to future growth opportunities in the tax business.

While these initiatives will not require substantial incremental capital, network expansion will impact the operating margin and profitability in the early years.

For fiscal '05 planning purposes, we are assuming high single digit revenue growth and margins that are flat with fiscal '04 in absorbing the growth in offices into our current -- in effect absorbing the growth in our offices into our current operating margins.

Within our Mortgage businesses, we believe that fiscal '05 will again be a strong year relative to the mortgage industry as a whole.

As we have said for some time, we believe revenue and earnings from our Mortgage segment are not as cyclical compared to the prime Mortgage business.

Also, as we have consistently stated, we believe we can continue to grow origination volume even in a rising rate environment.

While the interest rate environment does not appear to have a dramatic effect on our levels of originations, it does affect our profit margin and the performance of all our residual interests.

In order to do well in a changing interest rate environment, which fiscal '05 is likely to be, we must successfully navigate the transitional period until rates stabilize, and the most critical management factor in this dynamic environment will be how effectively we price loans.

Our current planning assumption is that short-term rates will rise 190 basis points over the course of our fiscal year.

Based on this assumption, we expect pretax earnings in our Mortgage segment to be flat to slightly down for fiscal '04, excluding the $41 million gain from the sale of residual assets.

In our Business Services segment, we expect moderate growth in our core accounting and tax services and another strong year in our Capital Markets business.

Our investment in a number of startup businesses will moderate our reported results again this year, but we believe overall performance for the segment will improve and be very solid.

In our Financial Advisors business, we have made substantial progress over the last year.

We believe that this business has been restructured in a way that allows us to compete effectively as the investment climate improves, and we benefit from refinements in our business model.

While we expect continued improvement in financial performance in fiscal '05, we will still operate at a loss for the year.

However, excluding amortization of intangibles, I expect pretax earnings to be close to breakeven.

Our balance sheet is very strong, and we have reached our target levels of equity.

As such, virtually all of our free cash should be available for redeployment, and we expect to devote the substantial majority of the free cash flow to share repurchase.

While actual share repurchases are dependent on a number of factors, we are anticipating a 4 to 6 percent reduction in shares outstanding over the course of fiscal '05.

On a consolidated basis, we expect fiscal '05 earnings to be in the range of $4.00 to $4.25 a share and revenue growth in the high single digits.

While the EPS growth is below the 29 percent compound growth we have achieved over the last five years, primarily due to the likely flattening out of mortgage gains and, therefore, earnings in fiscal '05, we expect EPS growth from our other sources, including share repurchase, to be in the mid to high teens.

And it is important to note that over the longer-term we continue to expect and target earnings per share growth of 13 to 18 percent.

As we have consistently stated with respect to our long-term guidance, in any given year, we may exceed that range as we have over the last several years.

In some years, such as what is likely to be the case for fiscal '05, growth may fall below that target range.

Although we do not generally provide quarterly guidance, given the impact of rising interest rates on the Mortgage business, along with comparability issues in the tax business due to the former major franchises, it is necessary to provide some insight into our first quarter given the current street estimates for fiscal '05.

Specifically we are anticipating lower Mortgage segment earnings in the first half of the fiscal year as compared to the prior year, which we expect will be offset by higher earnings in the later part of the year.

Our planning assumes that higher volatility in interest rates will compress margins during the first and second quarters, but margins will normalize during the second half of the year as cap costs moderate.

As I said earlier, overall we expect the full fiscal year earnings to be flat to slightly down.

Early in the year, mortgage growth initiatives designed to enhance our market position and drive origination growth will result in higher operating costs relative to last year.

In tax, the addition of the major franchises will add approximately $5 to $7 million in additional off-season losses in the first quarter compared to last year.

And in our Business Services segment, earnings are likely to ramp up slower due to some planned investment in infrastructure and the timing of deferred revenues in our Capital Markets business relative to the first quarter of last year.

In conclusion, we believe our results this year, as well as our financial results over the last several years, demonstrate the strength of our mix of businesses and our ability to generate solid results even in challenging environments.

And as we look forward, our growth prospects remain very strong.

While fiscal '05 is shaping up as a key year for several of our businesses, we again expect to deliver solid earnings growth, and I am confidant that over the longer-term we have the ability to deliver superior results for our shareholders.

With that, operator, I would be happy to open the lines for questions.

(OPERATOR INSTRUCTIONS).

Michael Millman, Millman Research Associates.

Thank you.

I would like to just ask two questions.

One is, could you break down the retention change between the first half for the early filers and then the second half filers?

And also, could you give us the retention for preparers as well?

And then in terms of in the tax acquisitions, new acquisitions, new clients acquired, could you tell us over the last couple of years what the actual number of clients that had not used Block in the previous year were, and how many of them had been Block clients before then at some time, and what was the source of the remainder?

Thank you.

Okay.

That is a mouthful.

Let me tell you what I think we know, and Jeff will supplement.

As it relates to retention rate, retention rates between first half or early season and later season, you know we are still doing some analysis on that aspect of our business, so we don't really know what precisely -- it is not as easy as saying last year versus this year because clients move within the season as well.

So defining that problem is a little bit -- I think is a little bit of an art.

But in general we do not see that there was a material difference in retention rates between the timing with which clients traditionally file.

So we're not seeing anything unusual in that retention dynamic this year.

Preparer retention was stable.

It was similar to what we have seen in the past, about 70 percent, and that is consistent with where we have been historically.

And then on the issue about whether the client acquisition was the win-back numbers or what we call win-back, which are clients who were formally Block clients who skipped a year and then come back, whether that number has moved or not -- Jeff, do you know the answer to that?

It was slightly better this year in absolute numbers.

The percentages were flattish.

So we did not see any dramatic change in win-back year-to-year in any of the groups.

Typically what is the percent or what is the number of win-backs?

I think we should follow up on that.

I do not have that number handy.

We would just be estimating.

Just to put it into context, we have about 4.5 million new clients.

The win-back portion of that is going to be less than 10 percent as I recall, so.

But we can get that specific number, and Mark Burnett will be able follow up on that.

So then the other 90 percent are clients that are brand-new to Block?

Typically --

It depends -- at some point, Mike, when we think about this, it depends on how many years it has been since they were a client.

So we have some of our own definitions that we use internally.

Some of the people may not have been a client for two or three years, and we view them a little bit differently than someone who has never been a client.

But I think that is some follow-up that we should do.

The only other piece of color that I would add is, as I recall and we will follow up on this, and, as Mark said, it is very hard to know, because on the retention by time, and that is because we have to gauge it off of when people came in the last year.

But, as I recall, February was actually the lowest month in terms of monthly retention.

Okay.

Thank you.

Michael Hodes, Goldman Sachs.

Two questions.

First, in the Mortgage business, given that you tend to sell forward usually two to three months, I was hoping you could give us a sense of what kind of margins, gain on sale margins you're looking at, and maybe give us a feel for the compression that has taken place over the past two or three months or whatever time period you have handy?

And then secondly on the tax business, I think your vision this year is to open 500 to 600 offices.

And I know, Mark, in recent public comments you have talked about as much as a 50 percent increase over the intermediate term in office count.

Maybe you could give us a feel for how you are picking the tempo on office expansion, and then on a related note, maybe you could give us some of the math behind the $17 to $21 million negative associated with the office expansion plan for this coming year?

Sure.

Let me go back to the mortgage question first.

You are right.

We are virtually always forward hedged on the production that we are writing or the loans that we are writing today or that typically has been the case.

We are -- in a rising rate environment, we are endeavoring to make sure that is the case because we use forward sale pricing as a strong indication of where we need to price our loans in the market as we are out originating.

So we have fairly good forward visibility to that.

We have seen, and I say where we are at right now, we are seeing about a 40 basis point compression in margins.

That is essentially all driven by higher cap costs.

Cap costs on basically on forward sale, embedded in a forward sale, whether that is buying at cap or whether that is selling it forward to somebody else who has bought a cap for it, have gone up about 120 basis points.

The offset to that is that we have seen loan pricing or loan -- the interest rate on loans in the market go up enough to offset about 80 basis points of that, but we are seeing about 40 basis points of compression.

Clearly what happens beyond now, where we are at right now, is highly dependent upon what happens with cap costs going forward, and, therefore, (inaudible) the forward costs or the rates at which we can sell loans, and how quickly we can appropriately price given that forward sale position, both how fast we can react to make sure that we are properly pricing our loans, but also what the market will do and what our competitors are doing.

So that is where we sit right now.

As it relates to the tax question, I will say at least a few things about the pacing with which we are looking at expansion, and then I am going to let Jeff kind of chime in on some of that, too.

I think that is right.

Our analysis is that there is a 4000 to 5000 office opportunity out there for us.

The key constraint that we have is that we will not suppress or go out and aggressively open offices anymore quickly than what we think our organization can effectively execute on.

The worst thing in the world for our brand would be to put up our brand name on something and then not deliver good high-quality service in that office.

So that is our top priority.

It is based on that, plus an intent that we are going to somewhat expand our relationship with Wal-Mart as well this year, that we believe now the appropriate level of expansion is 500 to 600 offices.

But I would say that more has to do with our ability to effectively manage it.

I would say that the 500 to 600 offices is company-owned offices only.

We are also beginning to examine where are the franchise opportunities, which are embedded in the 50 percent number that you're thinking about, Mark.

In addition, we are looking at opening at Wal-Marts again this year or in Wal-Marts again this year, as well as exploring some other alternate distribution points.

So net net the 50 percent growth includes both regular office distribution and alternate distribution.

We will have more insights into that a little bit later on in the year, along with the franchise operation.

The other constraint that I would just point out is, is it just as challenging to recruit tax pros when you are opening this many locations as it is to find the locations themselves when you want to find the right people.

So we are really working diligently to pace finding the right people and interest in versing them into our network, as well as finding the right locations to keep our costs down.

On the cost question itself, on the 17 to -- or the 15 to 20 or 17 to $20 million, the main cost there is we obviously have the real estate and infrastructure, the local operating costs, and then we are building a field-based infrastructure.

With an expansion of this size, we cannot just add it to existing field management capacity.

So we are actually building a fair amount of field management oversight to go along with these 600 offices.

The majority of these offices will not be additive -- one here and one there.

So we are doing a little bit larger expansion, which will take the oversight, and that oversight will then be leveraged a little bit in future years, although I would say we will continue to add infrastructure over the next several years so that we can have assurances that we will deliver services appropriately to clients.

And just one related follow-up.

The expected breakeven timeline on these incremental offices is roughly three years?

It would be three to four years depending on the level of field management infrastructure we have to add.

And that is thinking about it, Michael, in terms of incremental clients, not thinking about moving clients within the system.

So the office itself may look profitable, but we track it on an incremental basis so the clients moved within our system, that does not get added to the economics.

Now you can argue potentially I guess that had we not opened offices, we ran a greater risk of losing some clients who find a new office more convenient, but we don't give ourselves that latitude.

John Neff, William Blair.

A few quick questions here.

Can you give an update on the CFO search?

Sure.

Thanks for asking.

We are in discussions with a handful of people now, and my expectation is that over the course of the next -- to be pragmatic about this -- I am going to say the next six to eight weeks we should be in a strong position with that role.

Great.

And also a question, given the favorable development in terms of the RAL litigation, has that removed the gloves in terms of the next season's marketing?

Well, I would tell you our marketing was not informed this year by the litigation.

It is informed by our brand positioning.

So number one, anything we did that looked and felt different it is because of where we wanted to take the brand for the long-term.

It is not because of anything related to litigation.

Just to reiterate, we don't think in the litigation that we were wrong at all.

So that would not change it.

But we do think that there is a very responsible way that we would like to present this product and to make sure that clients fully understand what their choices are, and we think we have made a lot of good solid progress that we wish the rest of the industry would follow related to how we present this product to consumers.

Having said that, one thing that we do know is that we took a much less promotional approach to refund loans early in the season, believing that we could do that and it would not affect our business.

And we think we concluded that in hindsight it did have an effect at the margin, and we are not satisfied with that.

So I think we will be -- we are looking at how can we advance the goals we have for the brand, but at the same time, be more aggressive about our early season promotion to stop any inroads at the margin by competitors.

Great.

Can you give us an update on your involvement with and attitude towards the government free filing program?

Sure.

I will tell you what I think as far as our attitude, and Jeff will tell you more about the specifics of what we are doing next.

The free file alliance, as you know, had a three-year window.

We just finished the second year.

So we continue to be committed to participate in that program for the remaining term.

You know in general I think that we think that this is a good thing that bringing more people into the following system is okay.

But you know, clearly we do not think that the government is appropriate for the government to be entering into an area that the private sector is already providing service in, and I don't think anything about our participation in the free file alliance alters that view.

Okay.

John Mihaljevic, Thomas Weisel Partners.

Good afternoon.

Just a couple of follow-ups on the office expansion you guys have planned.

First of all, I am just curious what makes the newer offices perform so much better in terms of client growth then some of your older ones?

You know, this is the same phenomenon that I think people confuse some of our competitors' numbers over.

It's the beauty of a small base.

If you're starting an office with no clients, everything looks like growth.

And for us, we clearly understand that because we have some what looks like office cannibalization out of our system because people move among offices, we only look at the incremental clients.

But even within that, there are people who at the margin are selecting offices based on convenience.

So having an office more conveniently located near our population centers has some more people using that service.

And if you're starting that office up in its first, second, third and fourth years, you are seeing compound growth or you are seeing incremental growth off of a relatively small base, which allows you to put up positive numbers.

So that is the essence of it.

Okay.

And then a lot of your tax performance this year was due to the 8 percent growth in the average fee per client.

Given your expansion plans and the fact that Jackson Hewitt and Liberty are also aggressively expanding their office networks, what do you -- how do you see your ability to continue to drive that average fee per client higher going forward?

From our prospective, and I can't speak to others in the industry, we do know that as it relates to Jackson Hewitt, for example, their public information would say that their average price was actually up.

Their average fees were actually up substantially higher than ours.

And from our prospective, we look at pricing power and elasticity on a regular basis, and we are comfortable that the level of price that we have been moving is very reasonable given the elasticity that we would actually have available to us.

And more importantly, our price -- when we say our price was up this year, I think 7.6 percent or so, about 5 percent of that was for regular normal price increases.

The remainder of that was due to changes in people's individual situation, mix changes in our client base, people having more complexity.

So our prices are not being raised at that level.

People's individual situations, the complexity that they have in their situation is actually leading to a higher price.

So it's a little bit more complex.

It is a little bit like going to the store and buying a couple or more widgets.

You are going to find that you are going to pay a little bit more than you might have at the prior time, and so we have those two elements working in our pricing structure.

The other thing I would say about price, there is not a lot of evidence in the market that in any given year price sensitivity drives consumer behavior because this is a hard category to shop price, except for certain very straightforward client tax situations.

But one of the things that we do know is that price value is really where the game is at and, therefore, the effect it has on retention.

That is why you hear us talk so much about price value and how that effects retention.

And we are also working very hard on our value proposition to include or enhance the level of service that we deliver to our clients now to include financial advice and to give people insight on how to improve their financial lives because we know that that is a key part of how we can differentiate the H&R Block brand and also enhance client satisfaction with the overall service they get.

We believe that is a more effective way to maintain pricing power in this industry than just simply capturing as much price as you might be able to take in any given year and then dealing with the next year and next year.

Okay.

And then lastly, as you look at the market as a whole, and let's just assume that your absolute number of retail office clients goes up next year and the same for Jackson and Liberty, where do you think that could come from?

Is it from the CPA side, or is it from the paper and pencil do-it-yourselfers?

Are there any shifts in terms of the larger marketshares of the types of tax preparation that you see out there?

We are not seeing any major shift ins tax preparation methods.

There has been steady growth or larger than market growth on the paid preparation side of the ledger for several years running, and this year it looks like that will be the same thing again.

So you are seeing continuing growth in people who want to have assistance with their tax return.

With the changes in e-filing behavior, that could be a little bit convoluted.

But the research that we do continues to tell us that people want assistance in getting their return done.

What we're not seeing, though, is big moves from -- see people going from CPAs to retail tax or retail tax to CPAs.

People are locking themselves into a method.

Most importantly is something that I think you mentioned earlier, and that is, were are the clients coming from?

Traditionally, we have seen a lot of clients coming to us from pencil and paper, people doing their own returns manually.

With computers and technology and the Internet and online services, we think that that lifecycle is going to look different, and that over time, the majority of our new clients who get first introduced into paid tax preparation will come in from the online or another technology method.

But within the category itself, the paid category, there really are not major shifts within -- if you bucket people by CPAs versus retail operators, the primary thing that we are seeing shifting away from is mom-and-pops.

So the unbranded or the local people that will spring up during tax season and then go away, that don't carry a brand, we probably are seeing more shifting away from that portion of the market overall.

But that is not a huge part of the market, but it is probably the place you see some of that shifting.

Chris Gutek, Morgan Stanley.

I noticed in the press release that the companywide marketing expense was up 35 percent year-over-year in the fourth quarter and up 24 percent year-over-year for the full-year of fiscal '04.

When you guys give guidance of flat margins in the tax business for fiscal '05, you talked about the incremental cost to open new offices, how much are you budgeting within the flat margin assumption for increased marketing spending?

Current -- we're not -- we're still working on those plans.

It is our belief right now that we won't need significant marketing expense to support the real estate expansion.

In fact, one of our hypotheses is that our marketing spending is actually being underutilized because we don't have enough system capacity available, and by adding system capacity, we will get better leverage off of our media.

Now I will to you that is how I feel today on June the 9th, and Mark may have a different point of view on that.

But, as we sit here today, we don't see that to be an important part of our expansion plan.

In fact, one might argue that real estate office expansion (technical difficulty)--.

We are sitting in June.

We are still evaluating what our overall sort of market strategy will be for next year as we go to market and how we will use media as a part of the marketing.

So it is just a little bit early to answer that.

May be it is premature to ask this question as well, but I will try.

The last four or five years the Company has had a mixed shift in the client base toward higher income people, and in theory, that should alleviate some of the capacity constraints early in the season.

We did not really see that, at least in terms of the public data in terms of higher growth late in the season in fiscal '04.

Did you, in fact, have a mixed shift toward higher income clients in the season, and if so, why did we see higher volume growth late in the season, and do you intend to continue to market toward higher income clients going forward?

We did see a continuing bias to doing better in the higher income segments year-over-year.

Again, I would remind you, Chris, that unfortunately those higher income segment folks are a fairly small percentage of our base, and that makes it a little bit more challenging.

Even when you're seeing growth in those segments, it does not offset when you have a weaker than anticipated early part of the season net net.

We don't think that we seem to be running to the same general capacity issues with the higher income segments late in the season than we do in the first half, although there is some of that, frankly, that we are trying to (multiple speakers) --

But virtually all of that gets overwhelmed or can be overwhelmed, and we think some of it -- what is happening this year when you see slight shifts in when consumers decide to pursue tax return processing, you can see -- we can see within our system capacity bottlenecks that crop up that are far independent of any kind of consumer types that we may be picking up throughout the course of the season.

So, you know, I think to draw what I think was the conclusion, my guess is you were going down, which is that higher income client marketing should in theory come later in the season.

While that is probably directionally correct, you see a lot of shifting around, and even a couple of days shift within the season can have a very big impact within our business.

Right.

That is helpful.

And then one question on the Mortgage business if I could.

The Company has benefited from pretty high accretion income, benefiting from past write-ups and nonresidual interests.

Certainly as the Company has been shifting away from securitization toward home loan sales and partially offset by the recent write-ups of residuals, but net net you should be to seeing a decline in accretion income going forward.

Can you talk about how you expect that to play out over fiscal '05 and how that will impact your expectation of a flat to a moderate decline in mortgage earnings?

I have to officially say because this is the official answer, we think that the residuals that we have on the books today are fairly valued, and part of that means that we would not expect them to be written up or written down in the future because we think they are fairly valued now.

So it has been unusual circumstances outside of our expectations that have created that both write-up and the accretion that came along with that.

We would not expect -- clearly at $211 million, that is down from where we were a year ago, and the amount of accretion that will come into earnings off of that base will be smaller this year than it was last year.

The other thing that we had this past year was a small amount of residual sales that is partially driven -- that is very much in large measure driven by our desire to continually minimizing the amount of exposure that we have on the balance sheet to that asset category or that asset class.

So, as we look into '05, we would expect that you are going to see less capital markets gains, if you will, being defined as accretion income, as well as sales residuals.

Great.

And one more final one.

Investment Services is still losing money.

When do you expect it to hit breakeven, and what are your longer-term plans for profitability?

This year I would say we have about $29, $30 million of intangible amortization.

My expectation is that we will be close to -- close to -- plus or minus -- cash flow breakeven or non-amortization breakeven this year.

We are looking at GAAP earnings or GAAP breakeven next year.

(OPERATOR INSTRUCTIONS).

Thomas Stevens (ph), SAC Capital.

Good afternoon.

Thanks for taking my call.

Just quickly, you started talking about the first quarter, just gave some broad generalities.

But I did not really quite get what the gist of it was.

Are you basically saying that the first quarter in terms what people are expecting out there in the consensus is probably a little high?

Is that the message we're supposed to be hearing?

Yes, that is it.

Basically, if I do this just right, we only have visibility obviously to what the sell-side guys are publishing.

But I would tell you that they are overly optimistic about the first quarter.

Ariel Warzowski (ph), Elmridge Capital (ph).

Thanks for taking the question.

A couple of sort of quick cleanups I guess.

The cash expenditure per office for 2005, what should we think about that being?

Well, our CapEx expectation, the sort of the unnormal or non-normal CapEx is about $20 to $25 million.

Now some of that will be amortized or depreciated in the first year, and that is in that $17 to $20 million of negative earnings impact from opening up new offices.

But CapEx is about 20 to 25 for the expansion.

So -- (multiple speakers).

I thought you had said there was offset to that.

You are going to spend less on something?

That is a net net number.

That is net of one of the things that we will do much less of, is office moves.

Historically we had made a number of office moves that required more CapEx just simply to replace an existing office.

We think that for a variety of reasons that is not a very wise thing for us to be doing, and we can see that in the performance data that we have on moves.

So we will stop that.

Could you just break down the two for me then?

How much spent on new stores and how much saved from not doing office moves?

I don't know.

I don't have that off the top of my head.

Do you have a rough estimate of how much a new store is in terms of cash CapEx?

You know cause you are going to do 5000 right, and I know it is a bit apples and oranges, but I would like to have an idea.

Right.

I understand your point.

Just roughly you know.

Is it a million?

Is it 2 million?

Is it 500,000?

It is probably 50,000 in office.

That is pretty low.

Yes. (multiple speakers)

Our CapEx is quite small in these locations.

Okay.

And the next question, on this residual gain on sale, you gave guidance on Mortgage without the 40 million.

Right?

Well, yes.

You can look at it either way.

My general sense is that off the reported number, if you eliminate the 40 million of gains that are in the reported number, now we think that we are probably flat, maybe a little bit down off that going into this year.

Okay.

And then what is that you think about the 40 million becoming?

We do not think the 40 million repeats.

So there is no -- just take out 40 million, and then let the rest take it down?

Sitting here today, we do not expect that there are asset sales, gains on asset sales to be had in the upcoming year.

That is about 13 cents of earnings, right?

That is right.

And that is baked into your 4 to 4.25 already?

That is right.

Okay, so I take out the 40 million, I take the rest down, and so basically the share repurchase is one of the things that offsets all of that?

It does.

It has a big impact for us, yes.

And okay and then last question, how much are you thinking about your competitors adding offices?

So you are going to do 500 to 600 and then possibly 5000.

Can you just give us an guesstimate of what are you thinking about they are going to do?

Frankly, I will tell you, we have looked at what information is available on some of the competitors, the notable competitors, that probably you pay attention to.

We have a whole series of different competitors around the country that we look at.

But you know, the thing that we know is that as we are expanding, we think we understand where we are not fully addressing the market opportunity and, therefore, where there is less competitive density today than what there prospectively could be.

And our focus is really ongoing to those areas that we know have the greatest opportunity to be addressed competitively and get there first.

One of the things we clearly know is if you give consumers choice between two comparable services -- one branded H&R Block and another one branded anything else -- consumers will choose H&R Block.

So we think that the key for us is to give consumers that choice before they have some relationship with one of our competitors.

I guess the thing that confuses me a bit since all of your competitors used to work for you, I am assuming they are thinking just like you.

And why --

I hope not.

But why wouldn't they be?

They sort of --?

Part of the answer is, if you go back and look at our data, from 2000 to 2002, we actually had a decline in the size of our system.

In that period, the competitors, the larger competitors -- those people who work for us -- that is the largest expansion that I can see over the last few years occurred in that period.

And, frankly, from our prospective, we are going to go out and not be passive and we are going to look to expand in places that could have the impact of limiting some of the expansion in the future.

If the market does not have a lot of growth potential, then people may not be as excited or as interested in expanding in those areas.

I am sorry to belabor this point, guys, but other industries are littered with companies that just decide to expand.

Right?

And the other guys in the industry also all decide to expand, and it is a race to get there first.

The result is not a game of chicken where one guys swerves, it is a destruction of the business, and you have a pretty nice business.

So how can you give me comfort that I should not just run away from this business because I hear everybody talking about expansion getting there first?

I think the one key thing that you should at least have an appreciation for is our analysis of this, and I think the study of how many offices and where and precisely which markets do we go to first, and how many offices would we open in a given trade area, we have a pretty extensive understanding of this.

That is driven by real data on the performance and the returns we think we can generate for the capital and the margins that we are looking to target within this operation from the expansion.

That is in contrast to what I think you would note from a number of our competitors who are simply in the market of selling franchises.

Where it is somebody else's capital, it is somebody else's money at risk, and if it does not work out, you know, that is okay.

We go onto the next franchisee who will pay a franchise fee and try it again.

We are operating this expansion in a pretty disciplined way around where we think we can effectively get the returns that we have described that we are trying to get for our shareholders.

Does your model assume they are going to put franchises in there, two or three at a time?

Certainly we're looking at a variety of different competitive responses, and that is helping us decide where do we go to expand our network first.

Well, thank you very much, guys.

Sorry about all the questions.

That is fine.

That is good.

Sloane Swindle (ph), Cove Asset Management (ph).

It is also somewhat a question kind of following up on the gentlemen before me.

One kind of a back of an envelope thing that I look at when you announce the tax data, is I look at the number of clients served per retail outlet, and I find that that has been declining, which I know unless I'm doing something wrong, I would assume you would find that the case as well.

I am wondering how if the number of clients served per outlet is declining, then how does the argument that you need to expand the number of outlets, how does that make sense?

Over the last couple of years, we have added a lot of new locations, and these locations are nowhere near maximum capacity.

Before we started offices and in the three years where we were declining the size of our network through 2002, we were running at what I would call is a natural level of maximum capacity.

Therefore, by adding new offices, we are effectively retrenching for a moment, adding capacity to serve, and now these offices begin to regrow back to our normal level of capacity.

We are fortunate that our levels, our offices in terms of size, have a substantially higher level of maximum capacity than our competitors.

We end up getting significant leverage on these locations in the future.

The other thing, what you have got to make sure you sort of look at, is this year, in particular, we added hundreds of Wal-Mart locations, which are substantially smaller units and, therefore, would never have the kind of capacity.

So a number of clients per unit of operation -- I am not sure is a particularly good measure.

Probably a more pragmatic measure would be, overall real estate cost per client or some measure like that, rather than how many physical locations do you have.

You know the fact of the matter is you can set up a table in a mall and call that an office and you've got a new location.

I don't know that that is really a location.

By the way, we think about serving clients and building our brand.

But that happens.

So you have got to be careful in exactly how you think about what a unit is as well.

Okay.

To the mortgage issue, why did you reclassify the I/O Strip from a current asset to a long-term asset?

That was a consequence of, frankly, our change in auditors.

The new audit firm that came in took a deep look at all of our contractual relationships and the way our various things are structured.

While that asset typically -- not typically -- virtually always has turned within a 12-month cycle, because we don't contractually control that sale of those assets and, therefore, the realization of that value, we concluded that it is more conservative in effect to treat that as a non-current asset, even though our experience has been it always turns.

In terms of April versus March and February, did you see a big difference in production in April relative to March and February mortgage origination production?

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

Also, I know that when you will file your 10-Q -- well, actually a 10-K this time -- you do a very nice discussion of the components of gain on sale, and one of the items is net change in receivable from the trust.

By chance, do you have that available, or do I need to call in or wait for the K?

You mean in terms of what is in the warehouse right now?

Yes, what is in the warehouse?

Or our receivable?

Because the receivable is the I/O Strip.

And that I/O Strip at the end of the year was -- we now call that beneficial interest and trust-trading.

That number is $137 million at the end of April.

So the net change in the receivable from the trust is the I/O Strip?

Yes.

The net change -- I am sorry.

That is the gross amount.

The net change?

I don't have the January 31st balance sheet in front of me, but the difference between that item in January and this number would be the net change.

What about the amount in the warehouse at the end of April?

At the end of April, what was the balance in the warehouse?

Yes.

Yes, I want to say we were in the $4 billion range.

Okay.

And that was about where you were in January?

It was similar to where we were in January, maybe up a little bit because we have seen growing production.

What kind of gain on trail did you recognize on that amount still in the warehouse?

Off the top of my head, I cannot tell you, but it is consistent with what our forward sales commitments are (inaudible).

So it's basically the locked-in value that we have in our forward sale commitments.

And we will report that.

I just do not know what it is off the top of my head.

Okay.

Well, that does it for me.

Thank you, gentlemen.

Jerry Bensen (ph), Ladell Global (ph).

I am actually following up -- I am not sure if you are going to have this answer.

I just want to what was the gain on sale margin for the quarter then for Mortgage?

Yes.

And you did say that you are seeing margin compression of 40 basis points?

During the quarter, our gain on sale was 396 basis points.

That is down -- that was a quarter net.

That was down from 408 from our third quarter, so (multiple speakers)

What was your peak?

Our peak was 5 something.

And when was that?

That was maybe 18 months ago.

Okay.

Are you expecting further compression in Q2 then?

Yes.

Okay.

And then you're projecting strengthening in the latter half of the year then?

That is our current expectation.

Now the key driver of that is how quickly does the direction of interest rates become clear and, therefore, cap costs settle down.

That is clearly the big issue because to hedge a forward sale like this, you really need to be looking at cap pricing, and that is the part of the overall gain numbers that is being most widely affected today.

And we think that, at least our internal planning assumption is that there is volatility in the markets for the next six months, five months now, and then things will start to settle down in terms of direction of rates.

Okay.

Thank you.

Dan Curt (ph), DK Equity.

Good evening.

Could you (inaudible) and talk about what, if any, impact on the tax segment you expect from tax changes that will be felt in '05 versus the effect that last year had?

Well, as it turns out, I am not sure any of us benefited from any significant volume, client volume changes from last year.

There was some incremental complexity based on some of the changes that we experienced in our pricing model or our pricing results, but nothing from a client volume perspective, and we are not anticipating anything this year.

Of course, post-November maybe we will have some better indication, but we are not counting on anything from that standpoint.

The kinds of things that typically will drive client behavior is if there is some broadbased change in something that causes many many consumers or families to be affected by it.

A couple of years ago you saw the rate reduction credit.

That was a good for business kind of change that lasted for a year.

You saw a little bit of tweaking this year in the child credit, but it did not have a real big impact.

The other kinds of things that would affect volume is client behavior.

It has a lot to do with refundable credit, and there is nothing on the drawing board related to that.

The reason I ask is because this last year I think if you slice the 8 percent to roughly increase in the average price for preparing the retail tax returns, you mentioned that complexity roughly accounted for 3 percent of that 8 percent.

Correct me if I am wrong.

That is right.

And if we look into this tax year coming up, I guess you are in essence saying that you again expect about 8 percent pricing power.

Broadly stated, would the breakdown be a similar 5 to 3?

You know the real driver of that other portion is mix (ph).

So, as we attract a slightly different demographic of client, a slightly higher income or more complex client, we price based upon the complexity of their tax situation, and that is what gives rise to that incremental complexity portion.

That is really a brand driven thing where we have been moving our overall marketing mix and our overall messaging to attract a slightly higher income demographic.

There is nothing in our strategy that would have us change that so we would think that that portion of the overall price increase is just not going to decrease.

On the other hand, just to be clear, for planning purposes and for guidance purposes, we are looking at high single digit revenue growth overall in the business this year, and obviously if we think that is inappropriate or that changes, we will update our guidance.

But that is where we are at today.

Perhaps in a related sense, I believe you, Mark or Jeff, said earlier later on that the actual size of your higher income tax base relative to the entire amount of clients you serve was relatively de minimus.

Would you be able to attach a number to that?

Yes.

Let me clarify something about when we talk about client complexity and mix, let me just give you a quick example.

If you take two identical households, both making $40,000 and both having two children and having everything else identical, except that one rents and one owns a home.

In our system, the one that owns a home probably because of complexities in their tax situation has about a 30 to 40 percent higher fee for their tax return.

That is what at the margin greater complexity can do for us, and that is why it is not enough to say, well, listen, is it $200,000 a year household income?

That is just kind of not in the realm of reality.

We're really talking about things that happen at the margin.

And partially, for example, over the last several years, at the margin we benefited from the increase in homeownership in the United States.

We have benefited from a variety of different things, as well as our move toward a different position with our brand.

Okay, wonderful.

Can I ask one last thing?

It concerns the RAL income contribution for last fiscal year '04?

Did you say in the low 90s versus the 105 or something like that last?

I am sorry.

I did not get that.

Yes, that is correct.

The contribution of that, just that one element, was in the low 90s versus 104 I think last year.

Okay.

And that is obviously for the whole year.

Next year or this year rather, with a more aggressive marketing posture and with the dynamics of the change in total filers that you have that you can bring online and in your retail operation, do you see a bigger base of potential tax filers that you can more aggressively offer RAL too, or will to be more of a getting marketshare back kind of situation?

You know I don't want to be hesitant to sort of encourage you to think that we are going to be more aggressive to offer and promote that product.

We think there is a promotion of clients early in the season who are motivated by the speed of getting their refund.

Having said that, one of the things that we are very dedicated to is to ensure that clients fully understand the alternative they have, and we think that partially making sure clients know what they are paying for and what the choices are, will at the margin cause peak clients to choose those things that are clearly best for them.

But at times, that is probably not the Refund Anticipation Loan.

So I think it is a little early for us to judge what the take rate in effect would be on that product.

But what I do know is that we will be much more aggressive about promoting early season filers to come to H&R Block.

And obviously that would be complemented by a bigger footprint of stores with less long lines?

Yes.

Thank you very much.

Thanks.

At this time, I am showing no further questions.

Gentleman, are there any closing remarks?

No.

Just for those of you who have stuck with us all this way, thanks for hanging on, and again, if there is additional detail or more information you would like, we are pleased to talk with our shareholders anytime.

Thank you.

That concludes the H&R Block year-end earnings conference call.

You may now disconnect.