H & R Block Inc (HRB) 2006 Q4 法說會逐字稿

Good afternoon.

My name is Ian and I'll be your conference operator.

At this time I would like to welcome everyone to the H&R Block fiscal fourth quarter earnings conference call.

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

After the speakers' remarks there will be a question-and-answer session. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Dudley, you may begin your conference.

Good afternoon and thank you for joining us for our fourth quarter and fiscal year-end results conference call.

On the call today are Mark Ernst, Chairman and CEO, and Bill Trubeck, Executive Vice President and CFO.

They will each have some comments on our fiscal 2006 results and our outlook for fiscal 2007.

We will then open up the call for questions.

Tim Gokey, President of H&R Block Retail Tax Services and Bob Dubrish, President of Option One Mortgage are with us today and will be available during the question-and-answer session.

To start let me provide our Safe Harbor statement.

Various comments we make including certain estimates, projections and other forward-looking statements may contain -- let me start that again.

Various comments we make include certain estimates, projections and other forward-looking statements.

The words will, plan, estimate, approximate, project, intend, remain, expect, believe and variations thereof and similar expressions are intended to identify forward-looking statements.

These statements speak only as of the date on which they are made and are not guarantees of future performance.

Actual results may differ materially from those expressed, implied or forecast in the forward-looking statements.

Some factors that could cause actual results to differ include the uncertainty that the Company will achieve its revenue, earnings and earning per share expectations for fiscal year 2007 or any quarter thereof, and that actual results for fiscal year 2007 or any quarter thereof will fall within the guidance provided by the Company.

The uncertainty of the impact and effect of changes in interest rates, political, regulatory or competitive environments and the effects of such changes, the inability of H&R Block subsidiaries to successfully expand their businesses, litigation involving H&R Block and its subsidiaries, the uncertainty of the Company's ability to purchase shares of its common stock pursuant to its Board of Directors repurchase authorization, and other risks described from time to time in H&R Block's press releases and Forms 10-K, 10-Q, 8-K and other filings with the Securities and Exchange Commission.

H&R Block undertakes no obligation to publicly release any revisions to forward-looking statements to reflect events or expectations after the date of these remarks.

H&R Block provides a detailed discussion of risk factors in periodic SEC filings and you're encouraged to review these filings.

You should note that in conjunction with today's call there is a Company slide presentation which is posted to the Investor Relations section of our Web site at hrblock.com.

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

I will now turn the call over to Mark Ernst.

Thanks, Scott.

At the outset I want to take a moment to first thank the associates throughout our organization.

In particular those of you in Tax Services deserve a special thanks.

This tax season got all to a really difficult start.

Without your dedication and the commitment of thousands of individuals we would not have been able to achieve performance in line with our expectations for the remainder of the tax season.

Your focus on serving our clients is greatly appreciated.

I want to begin with an overview of our results including the performance of each of the segments.

Bill Trubeck is going to follow that with some comments on year-end financial position and then I'll conclude with our outlook.

For the fiscal year net income was $490 million, or $1.47 per diluted share.

The results include after-tax charges totaling $49 million, or $0.15 per diluted share for the previously announced settlement of refund anticipation loan litigation and associated legal costs and a restructuring charge within our Mortgage business.

Our recently updated guidance was for earnings to be slightly below $1.65 per share which excluded the litigation and restructuring charges.

Our guidance change in early May was triggered by the weaker than expected performance we were seeing in Mortgage Services.

The weakness was due to softer volumes and an increase in loan reserves related to higher first payment default rates.

These factors contributed to a net origination margin in the fourth quarter of 65 basis points, excluding the fourth quarter restructuring charge which was below what we had previously expected.

In addition, we carried over approximately $408 million in loans for transfer to H&R Block Bank.

We would have reported gains of approximately $8 million had we sold those loans, or about 10 basis points of additional margin.

Our Tax Services results were in line with our expectation after giving effect to the tough start we experienced in January.

Total clients served this year increased 2.1% driven by strength in our digital business.

Total retail clients served was down 1.9%.

With the changes that are occurring in the industry, we increasingly believe that our overall clients served number, not just retail, is becoming a key measure for our business.

We achieved top line growth during the year of 4% through pricing increases in line with the 5 to 7% range we were targeting.

Business Services performed very well during the year and in line with our expectations for revenue and earnings growth.

The core tax, accounting and consulting business of RSM McGladrey did well gaining the expected benefits from the addition of the American Express Tax and Business Services business.

Beyond tax and accounting our emerging businesses had mixed performance and overall didn't achieve the full measure of progress that we had hoped for.

H&R Block Financial Advisors surpassed the profitability goals we established but focusing on advisor productivity, a further shift toward annuitized revenue sources and effective cost control.

Before discussing the results of the individual segments in more detail, let me comment on three other items.

First, I'm pleased to note that we opened the H&R Block Bank on May 1st.

We began building the asset base transferring the mortgage loans from Option One we held on our balance sheet in anticipation of the Bank opening.

By May 31st we had purchased approximately $360 million in loans and plan to purchase between 90 and $120 million per month as our asset cap allows.

Second, in a separate release tomorrow we will announce the expanding of our RSM McGladrey Tax, Accounting and Business Services capability into eight countries including Germany, Russia, Mainland China, the U.K. and four Eastern European countries through the creation of RSM McGladrey U. K. Limited and its new reformed relationship with RSM Hemmelrath Gruppe.

While this transaction will have minimal capital requirements for first year earnings impact, or a first year earnings impact, it expands our capabilities particularly in international tax to better serve the growing global advisory needs of our middle-market clients.

This is a reflection of our intent to extend the leading position we've created as the alternative to the Big 4 for our target clients.

And third, the Board of Directors has approved an 8% increase in the quarterly dividend.

This marks the ninth consecutive year in which we've increased the value we return to shareholders via dividends.

The new quarterly rate of $0.135 per share will become effective with the payment in October.

I'll now discuss the results for each of our segments in more detail starting with Tax Services.

Our Tax Services segment, which includes U.S. retail, international and digital tax services along with settlement products, posted the year that was a bit of a disappointment relative to the expectations we had going into the season.

Revenue for the segment grew by 4% to near tool $2.5 billion, reflecting improvement in both our retail and digital operations.

Excluding the $70 million pretax charge for the previously announced RAL litigation settlements and related legal fees, earnings were down slightly due to the expansion into additional new offices this year and the effect of fewer clients during January.

Margins within the Tax segment declined 120 basis points excluding RAL litigation compared to the prior year.

The decline was driven primarily by our office expansion, 70 basis points, and new investment into our digital business which was 50 basis points.

With our combined retail and digital client growth of 2.1% we expanded the reach of the H&R Block brand to about 400,000 more clients.

The combined impact of the early season technology difficulties that we created for ourselves and the competitor pace of lending products was a loss of about 250,000 clients.

We finished the year having served over 15.7 million retail clients, down 1.9%.

However, our paid digital clients grew by over 23% to more than 3.7 million.

The industry data that we've seen suggest that the paid preparation segment regain the market share that it appeared to have lost last year increasing to just over 61% of all returns filed.

This makes our overall retail results a bit more disappointing.

At the same time, we believe that our more aggressive approach to the digital business, while reducing our profitability in the current year, allowed to us gain market share against TurboTax and within the Free File Alliance.

Let me cover some of our key initiatives and then I'll return to an overall outlook for the Tax business.

The expansion over the last two tax seasons in our point to presence has improved our network capacity and enhanced client convenience.

Our 2006 offices that opened on time generally produced the results we expected.

While offices typically take five years to reach their peak client contribution levels, a process commonly referred to as tenuring, the 2005 and 2006 office expansion combined have contributed to client results that would have been diminished without the [inaudible] inconvenience.

The results for both vintages of expansion, when factoring in cannibalization and the negative impact of early start-up problems this season, delivered results in excess of our investment hurdle rates.

Having said that, we clearly experienced stress on our system from the aggressive expansion pace and other changes that we've taken on over the past two years.

We expect to moderate the pace at which we open new offices in the coming year to between 300 to 400 new offices, to continue to enhance our competitive position while ensuring that we effectively execute on our business.

We will evaluate the expansion each year.

We continue to see benefits from the service improvements we've made in the past two years.

We're seeing significant incremental client growth in those offices we targeted for wait time reductions and we've seen improvement in client satisfaction with wait times, ability to make an appointment and our expertise.

These improvements, combined with our strength in the late season this year, lead us to believe we can successfully grow among clients who are more expertise oriented.

This tax season net average tax preparation and related fees per client rose 5.8% for both company-owned and franchise operations which was in line with our expectation.

Client satisfaction data continue to confirm that clients find the service we provide valuable and a good value for what they paid.

We've maintained the higher client price value satisfaction ratings we achieved in recent years despite lower tax refund sizes as a result of our strict implementation of the Uniform Definition of a Child rules.

Clients clearly report that they're receiving reliable services that are appropriately priced.

Perhaps the most significant new development in the Retail Tax Services market this year was the introduction of what is commonly been called "pay stub loans."

This is an apt name because the economics of the products that were introduced have more in common to pay date lending than refund lending.

We find the introduction of this so-called - this and so-called holiday loans to be a disconcerting development in the tax preparation industry.

While there's no question that there is a need for unsecured credit, the association of the high cost pay stub loans with tax preparation generally is not good for consumers and clearly takes the professional tax services industry into a direction that we should all wish to avoid.

That's why I'm calling on our key competitors, Jackson Hewittt and John Hewitt at Liberty Tax, to end the process of offering these products and ensure the reputation and professionalism that are key to our industry.

At H&R Block we believe that how we choose to serve clients is an important part of our brands reputation.

We do not believe that the pay stub loans that Hewitt has offered meet a standard that we would associate with our brand.

We will not, however, sit by and let competitors capture clients because of the standard they're willing to set for this product.

We will, if necessary, aggressively responds in a manner consistent with our values, professionalism and concern for our clients financial needs.

But first, we would ask Hewitt to consider their embrace of this industry development.

While some industry change has been driven by appealing to a desire for quicker access to tax refunds, change is also occurring because of the increased use of technology to meet tax filing needs.

In this part of the market, we set out to become much more aggressive in competing in this emerging space.

With respect to our digital results this year, we're pleased to report client growth of over 23% which exceeded the growth of Intuit's Turbo clients.

We consciously invested in product development and marketing to enhance our competitive position.

These incremental costs reduced pretax earnings by $10 million for the fiscal year.

However, we're pleased with the enhanced position that we have with our Tax Cut brand and believe that we have built a stronger base from which to compete.

The digital business creates an opportunity to introduce clients with currently less complex tax situations to the H&R Block brands via our Tax Cut products.

As life events occur, or these clients financial situations mature, we have seen them migrate to paid professional preparation.

The multichannel approach that only H&R Block offers through both our retail locations and Tax Cut offerings is a distinct long-term advantage over our branded competitors.

Finally, I would note that Intuit has been discussing efforts to integrate do-it-yourself digital capabilities with access to tax professionals as a growth market.

We concur and have been developing the protocols and client service models to scale the type of offering for the past four years.

This year we served nearly 46,000 clients through the service model and believe that we are well positioned to capitalize in the event that this becomes a more dominant form of client access to professional services.

Our international tax operations posted a very good performance this year.

Revenue for the year was $122 million, an 18% increase over last year and pretax earnings nearly doubled to $17 million.

Improved results were primarily driven by our Canadian operations focus on expanded retail distribution, enhancing the client experience and increasing penetration of new client segments coupled with Canadian tax code changes.

I would finally note that this performance came in the market like the United States where we compete with a very focused competitor, in this case Liberty Tax.

Our performance demonstrates the success we can achieve when we align the distinct capabilities of H&R Block to aggressively compete.

Turning to Mortgage operations, results were lower in the fourth quarter compared to the prior year but up subsequently as we had anticipated.

Our fourth quarter net margins improved over the third quarter, however, the improvement was less than we had initially expected as a result of larger industry declines in production.

Mortgage revenues for the fourth quarter were $304 million, down 20% over last year but up about 3% from the third quarter.

Pretax earnings decreased 55% from the prior year to $73 million, reflecting lower year-over-year gain on sale offset somewhat by increased contribution from loan servicing.

Fourth quarter loan production volumes declined by 10% year-over-year to $8.3 billion which was toward the lower end of our expected range.

Based on reports from competitors it's clear that industry volumes have been declining from the peak levels we saw two quarters ago reflecting higher interest rates and a slowing housing market.

We believe origination volumes are settling at levels that are more sustainable as we begin fiscal 2007.

The average loan balance for the quarter was $192,000, down slightly from the third quarter but still at a relatively strong level.

To put this in context our average loan balances today are 22% higher than they were a year ago.

FICO scores for our non-prime production originations averaged 613 compared to 621 in the third quarter while loan to value was sustained at about 81%.

Reflecting consumer demand, interest only loans as a percent of originations declined to 10% while 40-year loans increased to 35% of overall production.

Our fourth quarter gain on sale was down year-over-year but up sequentially.

Although volumes were down, loan sale premiums did strengthen further in the fourth quarter.

As mentioned earlier, we held more than $400 million of loans on our balance sheet at year-end for investment purposes.

The majority of these loans became assets of H&R Block Bank in May.

Had we sold those loans rather than holding them for investment we would have reported additional gains of about $8 million, or 10 basis points in our net margin.

We increased our funded [WAP] by 24 basis points to 8.51% between the third and fourth quarters.

Meanwhile, the two-year swap rate, which is a reasonable proxy for funding costs, moved up 38 basis points to 531 at the end of the fourth quarter.

So there was some narrowing in the spread reflecting the continued competitive pricing environment that's out there.

We continue to actively manage our rates in this volatile environment and have recently increased our rate to address the secondary market rate moves.

Our net gain on sale gross margin improved to 210 basis points compared with 186 basis points in the third quarter.

This includes hedge gains of $49 million, or 59 basis points during the quarter reflecting the secondary market rate changes and our policy of hedging our production pipeline.

During the quarter we sold about three-quarters of our non-prime loans in the whole loan market with the remainder being securitized.

The residual from the securitizations was sold before quarter end effectively allowing to us retain no credit risk from any of the fourth quarter loan dispositions.

The form of execution in the secondary market depends on which method produces the most value while recognizing our continuing bias for cash.

During the quarter we added approximately $12 million to our loan loss reserves above our normal loss accrual related to repurchase activity for loans sold.

The industry has seen an increase in early payment default over the past few months and we have taken a number of steps to mitigate our loss exposure.

Backed by the strength of our servicing organizations execution of our delinquency management plan, we expect to maintain delinquencies at a level consistent with or slightly better than the non-prime market.

However, the increase in loss reserve is consistent with our policy on reserving for repurchase loans.

The value retained mortgage servicing rights on loans originated and sold during the quarter was 65 basis points, down slightly from the third quarter, mainly due to the affect of loans held on balance sheet for ultimate transfer to the Bank.

We continue to focus on aggressively controlling origination costs in the midst of lower origination volumes in a competitive pricing environment.

Our emphasis is on using technology, automation and where effective, outsourcing to streamline our processes.

Our staffing levels in Mortgage have been reduced significantly.

Including the reduction in force we announced last quarter and normal attrition, we reduced our staffing by 1200 people, or about 22% in the last six to eight months.

These actions are important in achieving better profitability in the current volume environment.

Others in the industry have taken or likely will take similar steps.

Combined with our closing of a number of offices, the staff reduction resulted in a pretax charge of $13 million.

We expect that staffing levels will continue to trend downward with normal attrition.

For the fourth quarter, our cost origination was 196 basis points, down from 212 basis points in the third quarter.

Given the lower volume in Q4, we saw a larger dollar decrease than would appear from a basis point perspective.

Our net origination margin was 65 basis points excluding the restructuring charge which was up from the third quarter but below our target of 90 to 100 basis points.

The 55 basis point result excludes about 10 basis points on loans held for transfer to H&R Block Bank.

Option One servicing portfolio at quarter end was $73 billion, an increase of $5 billion over last year's fourth quarter but down about 3 billion from the previous quarter due to lower volumes in our sub-servicing business.

Servicing revenue increased 29% to $102 million for the fourth quarter year-over-year but was down slightly compared to the third quarter of '06.

Servicing expenses also increased reflecting higher amortization of mortgage servicing writes related to the increase in the originated loan servicing portfolio.

Overall servicing pretax income improved 18% over prior year to $13 million in the fourth quarter.

Long-term loan performance trends remain positive with 12 months seasoned and [inaudible] beyond delinquency rates being maintained at about 12%.

Given the recent trends in early payment default, we'll continue to watch this carefully.

We realized a $4 million net write-down of residuals in the fourth quarter which was recorded in other comprehensive income net of deferred taxes.

We recorded $5 million of impairments to residual interest which was reflected in the income statement and we continually monitor the reasonableness of our valuation assumptions relative to actual loan performance and performance in the market.

In April we completed the sale of residual interests for $32 million in cash, recognizing $3 million of gain from that transaction.

Let me now turn to Business Services.

Including the American Express TBS business, the segment generated revenue of $877 million.

Pretax earnings accelerated to $53 million for the year in line with expectations.

Business Services delivered a strong performance for the year with record revenues excluding the American Express business acquisition of $626 million, compared to 573 million during the previous fiscal year.

Excluding the Amex TBS acquisition segment earnings were up 24%.

We're encouraged by the fourth quarter busy season revenue stream and resulting earnings from the Amex acquisition.

There is still opportunity to improve on the efficiency of this transaction.

We're working to transition to full integration which will allow a greater amount of the revenue default to the bottom line earnings.

As we discussed during our third quarter earnings call, RSM McGladrey has a number of emerging business that generally dilute bottom line earnings in the near-term but we believe they have a good long-term potential.

Theses businesses are in some of the most attractive markets for organic and long-term growth.

Two of the emerging businesses are financial process outsourcing which is a leading provider of back office accounting for auto parts, chains, restaurants, and grocery stores. [Inaudible] evaluation and middle market investment banking firm that provides business valuation services.

Although earnings results were mixed, we're pleased with the overall revenue generation of the emerging businesses during the fiscal year and for the most part individually they delivered string double-digit revenue growth.

We continue to carefully track their progress.

The Investment Services continued its solid improvement and delivered results that were somewhat better than expected.

Full-year revenues improved 20% to $288 million.

Pretax loss in the segment was $33 million, or about $6 million better than we planned, and a 56% improvement compared to the prior year.

You'll note that this loss includes approximately $37 million of intangible amortization.

This improved performance was primarily driven by two factors: The success of our reorganization during fiscal 2005 which yielded better cost containment and our initiative to improve advisor productivity for recruitment retention and implementation of minimum production standards.

An increase in the annuitized business and improved net interest revenue from a positive rate environment also contributed to the improved performance.

Increased average production levels were more than offset a slight decline of a number of advisors.

We ended the year with just under 1,000 advisors.

Although recruiting in the marketplace is very competitive, we continue to have success in hiring quality advisors who are attracted to the excellence base of referrals provided by our tax business and our overall business model.

For the year we opened over 17,000 new accounts from tax clients with assets in excess of $764 million and production revenue of $13 million.

In total our cross-selling efforts yielded $31 million in production revenue during the fiscal year and accounted for 16% of our total production revenue.

Total assets under administration at the end of the year were $32 billion, up 14% over last fiscal year.

The opening of the H&R Block Bank presented exciting opportunity for us and our client base as we extend the benefits of banking to select clients.

H&R Block Bank now offers a full range of consumer savings products all paying competitive rates.

Consuming lending products include principally residential mortgage loans.

The Bank also enables us to attract some untapped value from the Investment Services segment.

By adding our affiliated bank to the list of third party banks in the cash sweep program, a portion of customer balances may be maintained at H&R Block Bank.

H&R Block Bank now in the customer cash sweep program we plan to accumulate high quality assets to capture spread income that we would otherwise not have been able to realize.

Considering these opportunities we're now executing on the plan that we submitted to the OTS that called for the Bank to accumulate deposits of $1.4 billion with the potential to earn $27 million in pretax earnings in our first year.

Before turning to the outlook, I'm going to now ask Bill Trubeck to cover our year-end financial position and other financial highlights.

Thank you, Mark.

I'll start with a few comments about our year-end balance sheet.

Given that H&R Block generates about half of its total revenue for the year during tax season there are large shifts in cash and short-term debt between the third and fourth quarters.

Our cash position at April 30th was 694 million, down from 1.5 billion at the end of the third quarter.

The build-up in cash as well as short-term debt at the end of the third quarter was for the purchase of participation interest in RALs.

As is typical, short-term debt was back to zero by year-end.

The cash position year-over-year was down primarily the result of retaining 408 million of loans intended for transfer to H&R Block Bank.

On its opening on May 1st, the Bank began to purchase Option One originated loans with customer deposits and as capital.

Receivables declined to 503 million compared to 1.5 billion last quarter reflecting the normal pattern of collections related to our participation in refund anticipation loans.

This number is up from 342 million at April 30, 2005, due largely to the acquisition of Amex TBS.

Mortgage loans held for sale of 236 million consists mainly [inaudible] warranty repurchases that are typically resold in a relatively short time frame.

The volume of repurchases has increased recently, largely due to higher first payment defaults as previously discussed.

And as ours were up 106 million compared with the prior year, due to increased origination volume, higher average loan balances and higher interest rates.

Property, plant and equipment has increased year-over-year from 330 million to 444 million reflecting primarily the construction of our new office facility.

Changes in goodwill and intangible balances reflect the acquisition of Amex TBS and normal amortization.

500 million of our senior notes are now in the current portion of long-term debt that matures in April 2007, and it is our expectation that this debt will be rolled in the coming year.

Significant changes in year-over-year cash flow uses include the holding of loans in Option One for ultimate transfer to H&R Block Bank of 408 million, increased net MSRs of 53 million and increased net acquisition activity of 175 million.

These changes are offset somewhat by a $222 million [inaudible] change in other working capital, primarily due to reduced income tax payments.

Our cash flow generation remains robust and is higher than our reported earnings.

It should be noted that fiscal year 2006 earnings include 57 million in stock-based compensation expense, 128 million of depreciation and 64 million of amortization of intangibles.

We attained our desired equity level at fiscal year-end and believe that the Company is appropriately capitalized given its retained risk.

Our equity allocation methodology has not changed from prior years.

We look at the level of equity generated, retain equity as needed to support the growth and profitability of our business needs and return the rest to shareholders in the combined form of reinvestment, dividends and share repurchase.

In FY '06 equity generation was down 200 million versus FY '05 due primarily to reduced earnings.

Acquisition activity for the year included the purchase of Amex TBS.

And dividends were higher by 17 million.

And finally, we repurchased 9 million shares for 254 million completing the allocation waterfall.

During fiscal year '06 we issued 6.5 million shares from our treasury shares for option exercises, the employee stock purchase plan and restricted shares.

At April 30, the remaining board authorization was 10.5 million shares and today we announced board authorization for an additional 20 million shares.

Finally, you should note that we plan to file our 10-K for fiscal 2006 on or about June 30th, well within the 75-day requirement for the SEC.

Mark will now share with you our performance outlook for the coming fiscal year.

Thanks, Bill.

Our performance in fiscal '06 clearly did not meet our expectations and we are intent on aggressively managing our operations for better performance in the coming fiscal year.

Given our view into our various business and spending plans, we expect our earnings for fiscal year '07 will be in the range of $1.80 to $2.05 per share.

However, as fiscal year '06 demonstrated, our results are highly dependent on the changing market conditions in the mortgage market and successful execution in Tax Services.

In our Tax segment we're using mid single-digit revenue growth for internal planning purposes.

We continue to manage our spending carefully and are targeting a 50 basis point improvement in segment margins.

In addition, our current guidance assumes that the bulk of the incremental economics and flexibility from our new settlement product contract will be reinvested into our business to improve our competitive position.

The incremental contribution from this new arrangement will be near the low end of the range that we shared in January.

A combination of these mean we expect operating earnings growth in the high single-digits.

In Mortgage Services we expect to sustain our market share and achieve origination volumes at about the level they were in the fourth quarter, averaging 8 to $9 billion per quarter over the course of the year.

This would suggest a year-over-year decline of about 12% in originations.

As the industry continues its transition over the next 12 to 18 months from a focus on volume to an emphasis on cost-effective origination, we will further re-engineer our processes to reduce our cost of origination.

With these volumes and cost assumptions our expectation is that we can earn net margins of 70 to 90 basis points over the course of the year, so clearly, this would have proven optimistic a year ago.

Our downside case assumes about a 60 basis point margin over the course of the year.

We look for continued strong performance in RSM McGladrey's core tax, accounting and consulting business while beginning to invest in efforts to build brand recognition.

For the full-year of the off-season cost of the Amex TBS acquisition, we're looking for earnings growth overall in the low double-digits this year.

Investor Services has become part of a new segment in fiscal year '07, Consumer Financial Services, which brings it together with the H&R Block Bank and H&R Block retail mortgage operations.

We expect financial advisors to move meaningfully closer to profitability through maintaining its cost discipline and focus on advisor productivity.

Overall, our primary focus remains on prudent management of all our businesses as well as efficient capital allocation to create long-term value for our shareholders.

We recognize that this year is a critical year to demonstrate to investors that is our Company is prepared to effectively address the industry dynamics that we pay [from] the tax and mortgage industries.

We're optimistic that our key strategies will support the growth and improvement in our businesses and deliver strong overall performance in fiscal year '07.

With that, I think we will turn to your questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Scott Schneeberger.

Good afternoon.

Had a few questions kind of all over the board.

I'd like to start off with your declaration that it looks like you're going to moderate the pace of new store openings to about 300 to 400 next year.

If you could just elaborate a little bit more on the decision behind that and also, obviously and you've already touched on it a little bit, it will have an impact on your cost and your capital spending but if you could take us a little deeper there I'd appreciate it.

Sure, let me start and I'll ask Tim to join us on this.

Generally speaking I'll tell you, we've been looking at the performance of the offices that we've opened over the course of the last two years and remember we've opened a mixture of traditional offices as well as kiosk-type offices in Wal-Mart so the number that we've opened is, the absolute number looks inflated relative to that.

But this probable is pragmatically about a 40% reduction in the traditional size of our office opening over the last couple of years.

And I would tell you a couple of different things.

The offices that we have opened the last couple of years are performing consistent with what we would have expected so there's nothing that we can see in the performance of those offices that would suggest to us that office openings is not an effective way for us to expand our reach and to in effect compete more aggressively for business in this industry.

Having said that, January was clearly a disappointment for us.

And while we wouldn't say that the early season technology problems that we experienced were directly related to the pace at which we've been opening up offices, we have clearly, through those and other changes that we've made in the organization, put real stress on the system and real stress on our organization to be able to achieve in terms of targets and the change agenda that we have.

I think it's only prudent, therefore, for us to take a more moderate pace in terms of the number of offices that we open to insure that we've got the kind of foundation for the business that allows us to ensure that we don't have the executional hiccups that we experienced this year.

Tim, you want to add to that?

I think Mark has summed it up pretty well.

We feel very good about the offices that we've opened to date.

We think it is a strategy that continues to make sense and meets very attractive investment hurdle rates.

But given everything on the plate we feel the most prudent thing to do is to really ensure the success of the offices that we've opened so far and of all the other initiatives that we're going to have on the plate for next year.

Okay.

I just want to confirm that you do anticipate a little bit of margin expansion, I imagine this is part of it but just wanted to confirm that for the guidance for the coming year.

Yeah, we would expect that we would see about 50 basis points of margin expansion in the segment.

All right.

Great.

Thanks.

Staying within Tax, or actually on that topic, the vintage years of each of your offices, you touched a little bit on this, Mark, but could you give us an idea of one, all the new offices that you've opened in the last two, two and a half years, how they're comping versus prior year, and then overall any insight you can give to the vintages through five or six years.

First of all, we've only sort of aggressively been expanding the number of point spreads into the last two years so anything that we have prior to that is sort of a random set of office openings and I'm not sure, I haven't looked at it in a long time so I'm not sure that they would necessary be indicative of how these would likely a vintage although we could look at that.

Frankly, what we have been hearing from our competitors is that they are seeing slippage in the tenuring of their offices, they call them stores, we think of them as offices.

They are seeing slippage in the overall kind of tenuring of those new locations.

We have not seen that.

We have a little bit of noise in our numbers because of the problem we experienced in January and opening some of our new locations later than we would have otherwise opened them.

But when you strip out that effect for the most part we have not seen slippage in the kind of tenuring that we would have expected out of our offices.

Tim, anything?

I would just say for those offices that we opened this year on time, our performance was exactly in line with the performance the year ago.

For those offices that didn't open on time our performance was significantly worse, and for our second year offices we are very pleased to see that their second year performance was very much in line with, the second year office traditionally, even though this is obviously a much, much bigger class of offices that we've had for many, many years, so we feel pretty good about the way at least the first two years of data we're seeing things tenure out.

Any guidance on tax client growth or are we going to have to wait for that?

For planning purposes what we said is that we are looking for kind of middle single-digit revenue growth.

We are still assessing all that we took out of this year, both on the pricing side as well as on the client growth side and as we put our plans together we'll have a better sense of that.

I think the other thing is, we're looking at various different ways that you could trade-off the two and until we really settle in on what our ultimate execution strategy is, it's just a little early to answer that.

Okay.

Fair enough.

And still on the tax subject, some interesting remarks on and interesting pay stub loan event this year.

Your call to Hewitt Jackson may or may not be answered.

If they continue to offer in, for instance, Liberty Tax offers next year, just kind of curious what Plan B is there for you?

First of all, I would, again, reiterate I would ask the Hewitt's to take their responsibility for the long-term health of the industry very seriously.

I'm not quite sure how they will view that but I would hope they would take it very seriously.

I would tell you, though, we will not stand by and lose ground to competitors because of their decision to kind of go down this path.

We think that there is a way that we could respond or there are ways we can respond that are consistent with our values, with our brand professionalism and what we think we want to stand for our clients that can be a very aggressive response and we would fully intend to pursue that if we need to.

Okay.

I'm taking a bunch of time.

One more if I could sneak in there.

Very positive the 20 million share repurchase program, Bill, the last two years you've done all repurchases in the first half of the year and very little to none in the second half.

I'm just curious, how much of the repurchase you expected to do in the coming 12 months and will there be seasonality to those purchases?

That was a long-winded question -- and if so why that is?

Thanks.

The truth is, we do have, obviously, a plan afoot with respect to when and how we'll access the market and do the purchase.

What I think you probably are aware of is the fact that we have kind of self-imposed blackout periods during which we are not in the market and that's why there is kind of a different pattern to the way that you would otherwise expect us to be going in and repurchasing those shares.

Your next question comes from the line of Kartik Mehta.

Hey, guys.

This is John calling in for Kartik.

The first question, kind of a bigger picture question.

You guys indicated that it looks like the paid preparer market had grew to about 61% of market share this year.

Just wanted to get your thoughts where you think that number could go over the next couple of years, or if you think the paid prepared market is kind of going to be in that high 50s, low 60% range or if you think as an industry you guys can come up with a bigger percentage of the overall tax returns?

I would tell you my own sense is that last year was an anomaly that because of the free-for-all in the Free File Alliance you had sort of a disproportionate kind of shift.

Now you may have seen, we may be seeing a little bit of a disproportionate shift into the paid category this year because of the demise of Telefile, so I wouldn't read all of this year's shift back and more to a trend either.

There's a little bit of noise in the data.

But having said that, in the tracking we do of consumer views of this business and this task that they have to go through, there is nothing that we can see that would suggest that people increasingly want to do it themselves.

So we would expect that there is sort of a continued creeping share gain to the paid category or the assisted category that should benefit people in this part of the market.

Great.

And staying on the tax side, I was hoping to get a little bit more color on the new HSBC contract.

Hoping to find out maybe beyond just a little bit of monetary benefit created by the new contract, does this allow you guys to do anything different with some of the other financial products that you guys are offering?

Does this give you more flexibility as the way you take those to market?

Yeah, I'll tell you, we've said that the contract provides greater flexibility and probably that flexibility, to my way of seeing it, there's a couple of things that are really notable for us.

One is around product pricing and our ability to work with HSBC on how we chose to price products in the market.

That is something that we historically didn't have the contractual ability to modify product design at our expense.

It was really their product and our distribution system.

So that's a key element of flexibility that we are sort of debating how to exercise.

The other one is there is some degree to which we have product exclusivity on some product innovations.

We're working on some ideas that we think could be interesting in that January time frame but it's just too early to the talk about that.

Okay.

And then just two last housekeeping questions.

I may have missed the first one.

Did you guys give any thoughts with respect in 2007 for free cash flow?

And then just on the 300 to 400-office expansion, is it safe to say that doesn't include any shared outlets at retail locations?

We've not kind of put something out exactly on free cash flow but when you think about Cap Ex this year, Bill, we continue to look at ways that we can tighten up the balance sheet particularly around the Mortgage business in various different ways.

We're working on some ideas that we think could enhance our cash flow generation out of the Mortgage business so we are continuing to push on that but we're not quite ready to talk about what those might look like.

And clearly, there's a little bit of less Cap Ex because of the reduction in number of offices.

At the present time we are not -- we do not have a particular number around shared locations.

We'll talk to our potential partners but I wouldn't expect a big number there.

Okay.

Great.

Thanks so much, guys.

Your next question comes from the line of Mark Sproule.

Thanks.

Just, I guess to keep the tax thing going here, if you had the 250,000 clients that you assume you lost because of some early season difficulties and the pay stub loan to your total retail base, you're still seeing declining sort of retail performance as far as total customers on a year-to-year basis.

Is there, I guess I'm just curious, is there a thought internally as to what's going on as far as the added convenience as to what impact that's having or are you just seeing, do you think that you can continue to need to build off of locations to sort of get you to a capacity level that will turn the pie the other direction or, conversely, are we really just seeing, are you seeing a shift to people using digital and maybe that hurts you at the retail locations as well?

Mark, this is Tim Gokey.

We think that without the early season issues we would have had positive growth.

As you know, we gained share in the assisted markets this year and so given the pretty strong growth in the assisted market to regain share last year so we're pretty disappointed not to gain it this year.

We think that on top of the 250,000 clients we lost from a lack of readiness and pay stub in January that our growth was impacted first of all just by the opportunity cost of not having the opportunity to actually grow in that same time period.

Also, we came out of the early season with pretty significant negative momentum and so we felt pretty good about the way we turned that momentum around to grow faster than the overall market in both March and in April and we're continuing to evaluate the area that we did see growth and we'll adjust our plans accordingly.

I don't think it is sort of lack of offices and I think it's really strengthening our value proposition and we think we see a lot of opportunity in the later season clients over time but we'll be evaluating that and have a lot more data by January.

Got you.

I guess to follow-up a little bit you said earlier that sort of your early first, second year-old vintage stores were performing in line with sort of past performance to a degree.

Would that sort of indicate the sort of run off from your existing, your older store basis sort of accelerated or how are your sort of more mature offices doing these days as far as retention, et cetera?

There is a, our older offices clearly have not performed as well.

Part of that is to make our new offices successful we have transferred some of our best tax professionals into our new offices.

So you, we do really look at it as the combination of the total not at each one separately because given the way we transfer tax professionals it's very hard to look at the performance of existing offices in isolation.

So we are not seeing any particular deterioration in the clients associated with either of those offices and we feel pretty good about the underlying client dynamics there.

And just to add to that, when we say though, and we look at our new locations and how they're performing, that is purely on an incremental basis.

So we're looking at sort of performance of those offices net of cannibalization.

So if we move a tax professional and they bring a client base with them, we do not count the movement of that client base as a net add to the new location.

So it really is a pure look at the economics of expansion.

And then o the pricing side, and the last tax thing I'll hit you with, pricing was up whatever, 6% this year, a little bit lighter than some of us might have expected.

Is there any indication that you might either reaccelerate pricing increasing or sort of in light of some of your competitors it seems to pushed pricing a little bit higher than you did this year.

Would you slow off of that to try to attract some people back to the stores or is it still sort of the elastic demand that you've sort of noted in the past?

There's no question the data that we have and the analysis we continue to see would suggest an elastic demand relative to price that you might move.

We tend to think of price movement more in terms of how the consumer satisfaction with that is and therefore what the lifetime value we're creating from our customer relationships looks likes.

We also think about it in terms of, are we creating an umbrella under which competitor locations can be economically viable.

And frankly, at the moment it's a little early to conclude what would we take away from what's just happened this year simply because we don't have all the competitor data in yet.

We study competitor and client satisfaction, client price value satisfaction from all of our major competitors from around the country and we'll go very deep on sort of our relative price position and competitive position before making a judgment about what to do for the coming year.

I don't think we've seen anything that's different than what we have seen and talked about in the past.

Your next question comes from the line of Kelly Flynn.

Thanks.

Can you hear me?

Sure.

Okay.

Thanks.

A couple of questions back on the tax issue.

You mentioned the 250,000 that you lost through the software and pay stub.

I thought on the last call you thought 250 was just software and that there was additional impact from the pay stub product.

Can you just clarify that?

Did you change that or am I interpreting that incorrectly?

My recollection is that when we talked about this in the past and certainly the analysis that I've seen clearly it's a little tough to segregate one from the other because we didn't have the capacity to serve clients and there was a new product on the market and we didn't see clients.

It could have been either one of those things that they ultimately left us for.

But I think 250,000 has kind of been our estimate from the very beginning.

I would tell you that may be a bit of a conservative estimate.

We don't want to delude ourselves to think that it's just those two things that we can solve the January challenges by just fixing those two things, so therefore that might be a little conservative on our thinking about the impact they had, but I think that's consistent with where we've been.

Okay.

And then can you give us an update on this Elliot Spitzer situation and would I be naive to hope that you might consider settling it?

Well, you know, as we probably, I think it said at the time, we'd rather have this thing litigated in the court rather than through the press externally and we are now in that phase where this is into the court system and it will move through the court system at the pace that it would otherwise move.

There's really nothing new to report and all I can really say about, would we settle it, is we will do what's right for our organization.

Okay.

And then lastly on the buy back I know someone touched on this before but, Bill, could you give us kind of a range of shares that you think you could buy back this year based on your equity, book equity value goals and your guidance?

And then also just clarify that the guidance implies or baked in any type of buy back?

Thanks.

Kelly, I think we'd be in the range of about roughly 15 million.

Okay.

And is that in the guidance?

I beg your pardon?

Is that in the guidance?

Well, certainly, you know, our guidance anticipates our capital allocation throughout the course of the year.

We have not put in our guidance either the major alternative uses like acquisition so I guess it is effectively paid into the share count numbers that we would use for our guidance, yes.

Okay.

Thanks a lot.

Your next question comes from the line of Steve Bilgot.

Yes, my question has to do with your guidance on Business Services.

I believe you talked about low double-digit kind of pretax profit growth there and fourth quarter seemed to be a strong quarter.

I'm not sure if it's out of conservatism or something else, maybe the emerging businesses there that are causing you to think low double-digits as opposed to maybe something maybe even better than that this fiscal year.

Steve, there's a couple of thing that are going on.

First of all, the American Express acquisition, we closed and became effective October 1st.

Those months during the fiscal year from May until September are weak months relatively speaking and we probably expect to have an operating loss during those months that we didn't incur last year from that acquired firm.

Now there may be some reduction or some gains in some of our synergies that we will pick up during that same time frame but we would clearly expect there's a bit of a drag that we will pick up this year relative to the just completed year because of that acquisition.

The other thing to keep in mind is that the fourth quarter is the seasonal high point for that business, not extreme like the retail tax business, but it is seasonal nonetheless but it was clearly a very strong quarter, one that we felt pretty good about.

The other thing that's in the guidance that we've given you for Business Services is a new amount of spend and investment into brand building.

We are clearly the fifth largest accounting firm in the United States and increasingly are expanding our reach around the world yet nobody's ever heard of us.

And as we've looked at branding and brand awareness in the United States, much smaller competitors, firms like BDOC, [inaudible] and Grant Thornton who are half or less than the size of our operation are better known and we think there's an advantage to our business given its scale to improve our brand awareness.

So we have set aside an amount for spending against brand building during the coming year.

Okay.

And then another question about, I believe there was reference made to, Bill said that you had the appropriate capital structure for the Company and I'm curious if you've experienced what I'd call pressure from shareholders to take a more aggressive look at the portfolio businesses that you operate?

Well, we always have discussions and dialogue with our major shareholders so I wouldn't say that pressure is the right word but that analysis that they and you and probably many others have done, we do the same analysis.

We understand it.

I think the key issue for us is, one, are we working for long-term shareholders or are we working for the short-term.

We continue to believe that the right thing to do is to work for the long-term value creation for shareholders for the long-term investment horizon.

And so we are not looking to take actions that might just give a very short-term pop at the expense of long-term investment horizons.

I guess if I could just follow-up quickly on that.

I'm just struggling a bit with whether or not the Mortgage business and the Tax business really have similar capital, ideal capital structures such that you don't end up sacrificing by having them both as under the same umbrella.

Well, what I would say is, actually I think there's a bit of an enhancement to long-term, again, long-term shareholder value because they're together for this reason.

The volatility that exists in the Mortgage business means that you would otherwise have to have a different capital structure for that business as a standalone business.

But because of the stability of the cash flow that come out of the, and the predictability of the cash flows coming out of the Tax business, the two have actually work well together, again, to give us the opportunity to create value for the long-term.

Now if we were ever in a capital raising position you might question that and that might be a time where we would look at the issue somewhat differently, but we're actually in a position, you know, enviable position of generating excess free cash flow for which we principally dedicate to share buy back and therefore it actually works well for us to be in a position to sort of absorb the volatility of the mortgage business and some of the drag that that may create in the short-term on share price.

Okay.

Your next question comes from the line of Mike Millman.

Thank you.

Just quickly to follow-up on that and then to go on, the last question to go on to, that do you see the sub-prime mortgage business as a long-term growth business?

Well, I would say that the boom years of growth are behind the business, behind that industry.

It's, increasingly what you're really seeing happen in the industry is that the line between prime and sub-prime and Alt A are blurring and you're getting much more to a continuum of product that's available from a variety of different providers.

As a provider who starts with a strong position and the, you know, the just miss and the sub-prime business increasingly pursuing Alt A, we find ourselves I think in a good position to benefit from that blurring of lines that's going on and finding ways to price appropriately for the credit risk and become much more refined in the way in which product is offered into the market.

So, you know, I'm not sure that in five years we'll look back and talk about a sub-prime industry in quite the way we think of it today.

Bob, anything you'd say to that?

No, I would say that's right.

Most of our indirect customers are brokers are offering those products now to the extent that we have a good relationship with then.

If we offered something that was competitive I think we would be able to get that business as well.

And I guess another question on Mortgage.

On the Bank you're not portfolioing the loans.

Was there some sort of kind of wait until the market maybe implodes greater and trying to pick them off at a lower price rather than have a consistent policy of increasing your portfolio and taking now portfolio risk?

Well, the one thing I would be sure to point out is we are only taking what would be qualified as prime loans.

We're not portfolioing anything that would be by OTS definitions, or by most people, market participants definition sub-prime loans.

So we think that the way in which we're thinking about building that portfolio does not take undue risk as we're building it.

One more on the Mortgage before going on. , Was [inaudible] for the year with the mortgage business a cash user and if so how much?

When you take into consideration that we sat on $400 million of loans, $408 million of loans at year-end the answer would be yes, but it was because we were sitting on loans waiting for the Bank to open.

So you look for it to be a cash generator in '07?

Absolutely, yes.

It will swing pretty dramatically back in the direction we would expect.

And on the Tax, the franchisees at least in terms of volume out performed in every period last year.

Is that because it has lower prices, less competition, lower average [store range], something else?

Mike, it's Tim Gokey.

Our franchisees did a terrific job this past year.

We think they are a very important part of our operating system.

We see a lot of growth opportunity in our franchise business in the future.

Generally, they compete in parts of the market that are more rural and are a little bit less into the competition.

As we look at the performance sort of office by office, by density of competition we see a stronger correlation with that than with any other factor and we believe that's the primary factor explaining the difference in performance between the two systems.

If they have less competition why aren't they and pricing is elastic, why don't they raise the prices more than company-owned stores?

They are operating in primarily rural areas.

There are a lot of cost differences in real estate and labor between urban areas and rural areas and they are making independent decisions to optimize their business.

You mentioned that you finished the tax year strongly and when I look at the numbers it looks like in April on a day over day you were down 1% and the IRS numbers were up double-digit in April.

Is there a disconnect somewhere?

Yeah, you know, Mike, we actually included in the slides to today's presentation some information on that because we've heard that question, maybe it was from you, in fact.

So if you look at, I think it's Page 38 in the material if you have it downloaded it's in the appendix, but we've broken this out our performance by period identically to the way the IRS cuts off their data so that you can see that.

Except where can we find this?

It's on Page 38 of the --

Where can we find the presentation?

It's on the Web site, we're told.

That doesn't exactly pin it down but okay.

So we'll have Scott follow-up after the call.

We can give you the numbers.

We had reported numbers previously in our press releases in comparison to what we call adjusted day-to-day and what that was is it was our internal pace that we had published at the beginning of the season and we felt obligation to show results relative to that number because we had published it before the season began.

Obviously, with the way the market developed, and it wasn't just us, the market as a whole developed, our internal pace became less and less relevant and because this very question has risen and those numbers are really not giving a clear picture of our performance, we've created a slide within the appendix that has our results on an unadjusted straight up day-to-day basis relative to the IRS in each of the reporting periods.

It doesn't go exactly with each month because we have to do the cut offs to meet the IRS and what that shows, though, is in basically the month of March, March 4 to 31, the IRS overall was up 2.3%, we were up 2.9% day-to-day for both numbers.

And in basically the month of April, April 1 to May 5, the IRS was up 3.4% and we were up 4.8%.

And so we out performed the IRS in both March and in April and actually by a little bit more in April than in March.

I see.

On the pay stub loans, wouldn't it be basically to Jackson Hewitt's advantage if pay stub loans would continue because they would have that bunch of taxpayers and you would have, you and Liberty would have difficulty getting them back?

I guess secondly that their franchisees may be very happy with pay stub loans and it might be difficult to get them to stop using them.

I certainly can imagine that they had a lot of considerations that they should weigh, but I would tell you that as [inaudible] just demonstrated and I think we would find a way to demonstrate again, the people who are attracted to this kind of short-term credit are probably the least loyal part of the tax filing basis out there.

They're really loyal to getting loans more so than to the tax filing experience.

So I'm not sure that it's fair to conclude that once you have a "base" of them that, of clients who have been attracted to that product that they can't be won back through the kind of aggressive responses that we might otherwise choose to do.

I would just add to that that we had many, many, many calls from our clients in the preseason asking if we had those products this year and reluctantly saying that they really needed the cash and were therefore going to a competitor, but that if we offered that product they would want to be with us.

So we would anticipate winning back a lot of those clients if we were forced to offer such a product.

Finally, does your tax guidance assume that you're going to have these products and will be opening your stores, I guess, two to three weeks early?

Our guidance has in it the ability to invest in, reinvest in the business to competitively respond if we need to.

In terms of your growth.

No, in terms of the cost structure.

Okay.

Thank you.

Your next question comes from the line of John Neff.

Hi.

I was wondering if you could break down, give us a little granularity around software and online revenue and profitability?

Yeah, John, we don't breakdown our digital between the two.

It's just not big enough and therefore for competitive reasons we choose not to describe the business in that level of detail.

That would only be relevant to Intuit and so we prefer not to give them that kind of competitive insight.

I can clearly tell you liken to it we saw more of our growth in the online space and software there's no question that there's a clear shift over to the Web.

I would also say that beyond the pay category which is really what we described and what we've quoted as our pay base, we believe that we gained a pretty significant amount of share in the Free File Alliance this year.

That isn't in our reported numbers, obviously, because those people are free, but from our perspective that is an important kind of brand base from which we can build the business in the future.

Could you say if either or both software and online are profitable at this stage?

We don't break the two out.

They are clearly, the business is profitable.

The business is clearly profitable and it is contributing something less than 5% of the earnings in the segment.

Okay.

You mentioned some uptick in delinquency default trends in the Mortgage business.

Can you give a little color as to what, is it relegated to a specific loan type or is it more general?

It's really referring to the first payment defaults.

It really is something that obviously we're looking at it very closely and as of right now there's really no smoking gun, we're looking at it by product, by geography and to see if there's something we need to change from an underwriting perspective.

We're also looking at, from a servicing angle, to make sure that we're doing the proper, following all the steps to make sure that we're collecting it effectively.

But as of right now, it's something we'll continue to monitor on a monthly basis and as of right now it sort of seems like it's something general, sort of anecdotally if we hear this from our competition and it seems like in general it's sort of up for the industry.

It might be early but do you have a read on client retention points for the tax season?

They were roughly flat [inaudible] consistent with what we've seen in the past.

We've got a little bit of a drag because of the January effect so they were down slightly for that reason.

And we had a little bit of a drag because of the mix of clients that we were building the base off of from last year.

But those two factors aside was kind of consistent with where we've been in the past.

Around 70%.

Around 70%.

And last question, do you have an early read on whether or not there's going to continue to be income restrictions at the Free Filing Alliance next year?

Thank you.

Certainly, we don't, while there's noise out there about the Free File Alliance, this is a three-year agreement and this was year one of a three-year agreement.

We don't think that there will be changes, or certainly meaningful changes to the structure of that agreement.

Your next question comes from the line of Jennifer Pinnick.

Good afternoon.

Hi, Jennifer.

Given the increased industry competitive intensity have you had to make adjustments to your office tenuring forecast?

Perhaps are you expecting these new offices to ramp up as profitably in the outer years, four, five?

We have not, I know what you're, we obviously follow what the Hewitt's say about their systems and we have heard both of them talk about sort of the way in which their systems are not ramping at the same pace as they have in the past.

Our office tenuring is performing consistent with the way we expected and have seen in the past.

So from a model perspective we are not adjusting down our models just yet.

We clearly take that into consideration when we think about investment hurdle rates and the risk that may be associated with that, but so far we have not seen the effect or the phenomena that they're both reporting.

Okay.

Also a little bit on refund anticipation loans.

If you could talk a little bit about what you generated this year, an attachment rate.

And sort of a qualitative question, the importance of these loans in the industry, do you see them declining given the increase in the pay [inaudible] funding.

Yeah, I don't know that we will put that out until we file our K, so the statistical stuff around that for the season, rather than kind of -- we have not seen material changes in the kind of overall levels of attach rates and that sort of thing.

There has not been any big shifts in the way in which we see consumer demand for that product or those types of products generally speaking.

And certainly with the implementation, or the early implementation of [CADE], the problem with the early implementation of [CADE] is, consumers don't know who they are.

So from that perspective they don't know if they are going to have access to their refund amounts quicker because they're in the [CADE] pool or not.

That's a major hurdle rate that either until everybody or most people are experiencing faster IRS turnaround times or were able to notify clients if they are in fact part of that pool, I think it's just too early to the expect that that will have an effect on the demands for products.

One thing I'd add to that is we are pretty steady in RALs as a percent of total.

We did see a little bit of uptick in RACs.

As you remember, we eliminated system administration fees last year on sort of a last [inaudible] state and there's sort of a two-year effective growth there and we saw that [taking] a benefit in our system this year on RACs.

Okay.

And then a little bit maybe and the difference in the incremental margin between the tax return through digital or the tax return through the office and where does your preference lie at this point in time?

Well, I think it's been probably fair to say we would prefer clients go where the client wants to go as long as it's with H&R Block.

After that gratuitous statement there's no question that the margin is much more attractive in the retail office network than it is in the digital space at today's pricing for those two channels.

So if we had, if we could pick a place for clients to want to go we'd pick that they want to go to the retail channel.

That's in terms of margin dollars, in terms of actual incremental margin it's probably higher.

The incremental margin is much higher in digital but the margin dollars are lower.

Thank you very much.

Your next question comes from the line of Michael Hodes.

Hi, good afternoon, guys.

A quick question or two on Tax.

Mark, I was a little surprised to here in your expectations for this coming season that you're only looking for 50 basis points of margin expansion.

You've given that you gave up so much more of that this year and you're planning to open fewer offices.

I'm not sure I follow the logic there.

I was wondering if you could give a quick explanation on that and then I just have a higher level question.

Yeah, I would tell you from our perspective, it's way too early in the year for us to ratchet up expectations about what we can or should or will do.

The other thing that is clearly inside the segment margin assumption is that we're going to take a significant portion of the kind of new flexibility we have and reinvest that back into the business in a variety of forms.

We aren't in a position yet to have sort of fully imbedded or pinned down what those are and talk about those.

So we're permitting some flexibility as we go through our planning process.

Got you.

Just higher level, I'm a little surprised I'm not hearing more strategic urgency in terms of making changes at the Company.

The stock today is below where it was four years ago.

We've had several bad tax seasons in a row.

I think this is one of only two years in Tax where we've actually had down year-over-year results.

The other had to do with a major change at the IRS.

I mean, should we assume that there are perhaps more radical changes brewing under the surface in Tax that you're not willing to share with us or more [inaudible] at the management level to perhaps, I don't know, approach the business a little differently?

I think it's clear that the market's gotten tougher on taxes, no two ways about it, but it just doesn't seem like what you've been doing has worked and I just haven't heard that there's a lot of change underfoot and maybe if you can just address that.

Michael, I would tell you if you're going to do something dramatically more aggressive to compete in this industry, you don't announce it in June because competitors are spending more of their time, we're deep into this call and a lot of investors have dropped off and our competitors are still listening.

So from our perspective, this is not the time you really would tee up all the things that we would otherwise have in the works and plan to do to compete much more aggressively.

All right.

And things like buy back, it doesn't make sense to be more aggressive or even, I don't know, I mean consider changes?

I mean years past you had been more open to potentially exiting Financial Advisors.

I realize the Bank has got all new legs but.

I think that question ultimately turns on a, you know, one of, what's the short-term versus long-term view of some of these things and, frankly, we can't, the long-term can't be forever.

On the other hand, to do some of the things that are more, I guess, financially oriented that are sort of radical short-term things, really kind of go against the grain of what we believe is right to do for the long-term for shareholders.

Now, you've referenced Financial Advisors as an example.

Which you bought in 1999.

But, you know, so that business we've been clear for the last year that it was on a, we were working very aggressively to see a performance improvement.

I would tell you that the management team there has delivered all that we ask them to deliver and is on pace to dramatically improve that business even further.

So in an environment like that to say, well, we could do some short-term engineering by exiting that business it's inconsistent with the perspective of creating value for shareholders in the long run.

You can debate what might have been or should have been or could have been in the past, but it is the past.

I appreciate the answer.

Thanks.

Okay.

Your next question comes from the line of Eric Berquist.

Hi.

Can you expand on the comment about what you would do more aggressively if Jackson Hewitt remains in the pay stub business?

Well, actually, that would go consistent with the last question which is now is not the time for us to necessarily lay out our plans for what we will do in January, so I'm not sure that it's prudent for us to answer that question just yet.

But I think that we clearly have a great deal of flexibility to do a variety of different things in the event that we are forced to compete in that part of the market.

And I had one more question, and that was what progress have you made in offering products to the unbanked?

Well, we've had, I tell you, we think there are a couple of things that we've seen this year that continue to give us encouragement.

We believe that there continues to be a retirement plan savings opportunity that we are uniquely positioned to do something with so I think that's an area that we continue to focus on.

We also believe that there are lower cost limited transactional kinds of banking services that could be good fits with our position with our clients and helping them access their tax refunds.

We've had a test of that in offering refunds on plastic this year.

That was reasonably encouraging.

We're not sure what we will do with that yet, but we're looking at that.

There's a variety of things that I think we can do.

Okay.

Thank you.

Your next question comes from the line of Paul Moomaw.

You said the Bank starts on May 1st.

Are there changes in appearance to the balance sheet that we need to be aware of on a go forward basis?

Yeah, there's a couple of things about the way you'll see information reported.

One is a segment reporting difference, we will now report the Bank along with Financial Advisors and the retail Mortgage business in a new Consumer Financial Services segment for income statement purposes.

The balance sheet will clearly reflect both the asset and the deposits of the Bank as separate line items that as of right now, as of year-end would you have seen the $400 million of loans being held for investment.

Those would become, for example, assets of the Bank.

So you'll see the asset levels of the overall combined corporation look larger.

Okay.

And just to remind me, are there two sources of cash balances on which you can earn spread income, then, both the Mortgage business and the Financial Advisors business?

There's a variety of them.

The two largest are Financial Advisors money fund assets, those are the ones that we're moving today as the primary deposit base, the other one, our escrow balances that are part of our servicing operation at Option One.

And those could grow, say we were out here one year from now, would it be possible for those balances to grow significantly beyond year one?

Well, we have agreed with the Federal Banking regulator to cap our asset levels at $2 billion for the early years of our plan.

So I would have to say that is a cap that's out there.

Our plan called for 1.4 billion in year one.

If we are effective at finding the right kind of assets that could go as high as 2 billion but after that we would be capped out for awhile.

When the segment reporting changes will we still be able to see the sort of current version of Investment Services segment losses on a quarterly basis?

No, but I suspect we'll talk about within the segment the kind of key drivers and I don't know if we can tell you precisely what the number is but we'll give you a good progress report.

And strategically speaking would there be now that you have this ability to earn some spread income on those Financial Advisors money fund balances, would there be in the future any way to sort of off load, to say, another entity, the Financial Advisors themselves and keep the profitability of the spread income or something strategic like that?

Almost anything could be done, I suppose.

I'm not sure I thought about that exact example and how it would work but there's any number of different [permentations] of how you might do a joint venture with somebody.

Okay.

And on Business Services, the reported full-year segment margins, are those at all indicative of what margins could be on an ongoing basis?

Well, generally speaking we would say that the segment margins that we were experiencing there are lower than what we would expect from the long-term.

In that segment we have a number of what we call emerging businesses that are experiencing operating losses and we're investing in them through the P&L.

Sort of done fairly consciously so as they reverse or we decide that they're not going to work and we exit, those would, those losses would clearly create a margin lift from a segment perspective.

So some day double-digits would not be out of the question or it would even be a goal?

I think that as we look at the out years this is probably a 10, 11% margin business.

Now you've got to remember that because of the structure of this business, in effect it's not as volatile as that might imply because we share profitability with partners, key employees in the business, roughly speaking one-third, two-thirds.

So from that vantage point, any volatility earnings gets absorbed two-thirds by our key people and one-third through our bottom line.

Okay.

And is there for '07 Cap Ex?

I can't remember whether you talked about this but is there a possibility that would even be below 200 million?

I'm sorry, I didn't hear the question.

Is there a possibility that Cap Ex for the coming year could be below 200 million?

I don't think that number in front of me.

I'm sorry, I don't.

For the coming year?

Well, Cap Ex --

And I'm referring, I'm sorry, only to the, what do you call it, additions to PT&E or something like that?

If you're comparing it to what happened in '06, it's going to clearly be lower in '07.

It could be more than $50 million lower?

I have to pull out the cash flow statement.

Oh, yes.

Most certainly.

Okay.

And last housekeeping question.

Before your interest expense was 49 million versus over 100 million in cash interest paid.

What would create that difference?

That's maybe one we need to take offline.

But if you want to follow-up with Scott Dudley, we'll get an answer to that and you can get it directly from him.

Thanks a lot for your help.

Gentlemen, there are no further questions at this time.

Great.

Thanks for those who have hung in here with us for this long.

Thanks for joining us, and as always, if you have questions let us know.

Thank you.

This concludes today's conference call.

You may now disconnect your lines.