H & R Block Inc (HRB) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2008 H&R Block earnings conference call.

My name is Latosha and I will be your coordinator for today.

At this time, all participants are in a listen-only mode.

We'll be facilitating a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to Mr.

Scott Dudley, Vice President of Communications and Investor Relations.

Please proceed, sir.

Thank you, good afternoon.

Appreciate you joining us to discuss our fiscal 2008 second quarter results.

On the call today are Richard Breeden, Chairman of the Board, Allen Bennett, Interim Chief Executive Officer, and Becky Shulman, Senior Vice President, Treasure and Interim Chief Financial Officer.

They'll comment on second quarter results and we'll open it for questions.

Our call today is planned for about an hour.

To start, let me provide our Safe Harbor statement.

Comments made on this call may contain forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934.

Such statements are based upon current information and managements expectations regarding the Company, speak only as of the date in which they are made, are not guarantees of future performance and involve certain risks, uncertainties, assumptions that are difficult to predict.

Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in such forward-looking statements.

Such differences could be caused by a number of factors including risks described from time to time in H&R Block's Press Releases and Forms 10-K, Form 10-Q and Forms 8-K and other filings with the Securities and Exchange Commission.

H&R Block undertakes no obligations 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's an accompanying slide presentation, which is posted to the Investor Relation section of our website at HRBlock.com.

To get as many participants as possible an opportunity to ask a question during our Q&A session, we ask that when you are called upon that you limit query to one initial question and then one related follow-up question if needed.

With that I'll turn the call over now to Richard Breeden.

Thank you very much, Scott.

Good afternoon to everyone.

Welcome to our review of second quarter fiscal year '08 earnings and I'm happy to be here and to be with our new management team.

In recent weeks, the Company has appointed a new interim CEO and CFO.

We separated the positions of Chairman and CEO in accordance with the shareholder resolution to that effect that passed at our last annual meeting in September.

The Board elected me to serve as initial Non-Executive Chairman.

We completed the transition to Deloitte and Touche, our new Independent Audit Firm.

We destaggered our Board of Directors so that all directors will run for election each year beginning in 2008.

We have appointed a search committee and selected a search firm to begin the process of selecting a permanent CEO.

We reached an agreement to announce December the fourth with Cerberus Capital that permitted us to terminate our agreement relating to the sale of Option One Mortgage Corporation.

The dependency of that agreement required the Company to incur significant continuing operating costs relating to loan originations and the mutual agreement between H&R Block and Cerberus to bring that agreement to a close was a key to enabling us to take the vigorous steps we announced on the fourth to begin eliminating the mortgage origination business of OOMC.

We closed those activities allowing with a cessation of new loan applications and we're in the middle now of a rapid wind-down of origination activities at OOMC.

While the [main] changes the board has been working very well together and these decisions have for the most part reflected board unanimity.

Our former CEO had a long tenure and there are many natural changes that come with a new management team.

The transition to Allen Bennett our Interim CEO has gone very smoothly and we are beginning to work our way through an evaluation of the Company's performance and strategy for the future.

The board's first priority in recent weeks is has been to stop the bleeding at OOMC and to accelerate our exit from that business.

As I mention on December fourth, we announced that we had ceased accepting new loan applications, that we would close our remaining loan origination activities and that we were free to do this as a result of exiting from the ongoing agreement with Cerberus struck last April.

We have been closing offices and separating personnel in accordance with that announcement, we continue to operate our Loan Servicing business, but at the same time we've begun an effort to find one or more buyers for activities of the Servicing business.

We're taking steps to review our overall strategy and the hallmark of that strategic review is to return focus to our preeminent tax business..

We have the good fortune to have the dominant market share in one of what is said to be only two inevitable things in life, death and taxes.

We believe that is a paramount strategic advantage for us in the future and we intend to do everything in our power to strengthen market share and increase profitability in every segment of our existing tax preparation and tax services business.

That will mean renewed focus on our human capital and further enhancing our tax expertise.

We hope to expand our presence in every segment of the market which will mean working to expand vertically up the income ladder and horizontally by further extending our digital, professional, and commercial activities.

More than 110 million tax returns were filed in the United States last year without our assistance and we won't be satisfied until we've begun to compete for every single one of those returns.

We have major opportunities in other business lines both to reinforce our market position in tax and to generate complimentary fee income.

We'll review our strategy and operations in banking, financial advisors, business services or RSM McGladrey.

We do believe that these businesses must generate stronger returns on capital in the future and our initial effort will be to identify ways to improve the return characteristics of each of those businesses.

While these are among our first priorities, we'll be conducting a strategic review longer run to determine the best way to have each of these segments add value to H&R Block shareholders.

Looking forward, we're fortunate to have attracted Allen Bennett to H&R Block to serve as our Interim CEO while we search for a permanent Chief Executive.

Alan comes with a great base of experience and he has already made a wonderful contribution in the short time he's been at the Company.

In the near-term, the primary focus for H&R Block will be on executing our plans in tax services to achieve an outstanding tax season.

With the industry's best tax professionals, continuation of our industry-leading, refund anticipation loan programs built on the Emerald Card platform and what in the future we believe will be an interesting Emerald suite of products and the launch of exciting new products relating to the Emerald advanced line of credit (inaudible) and other commercial market initiatives, we believe we're well positions for the coming tax season.

We also have a strong lineup of digital tax products and a solid plan for continued growth.

With these products and a strong marketing push to emphasize the expertise and knowledge of our tax professionals, we're poised, we believe, to have a very solid tax season.

Our future ambitions go well beyond having a solid tax season as we have traditionally defined it.

Before I turn over to Allen, let me first directly speak to our tax professionals and full-time associates who are listening.

In the short time since I joined the board, I've been impressed by the quality and dedication of both our tax professionals and associates.

On the eve of tax season, we couldn't be more pleased with readiness and focus on the behalf of the entire Board of Directors, I'd like to thank you for your efforts in getting us prepared to serve more than 20 million clients with distinction this season.

Secondly, I'd like to say a word on alternate minimum tax situation which I know is an issue of concern to many people.

As you all know, Congress has yet to enact an AMT patch to limit the effect of the alternate minium tax on approximately 21 million taxpayers or roughly 15% of the filing universe who will otherwise be swept into paying AMT for the first time.

The fact that more and more American's are exposed to the complexities of AMT is, if anything, a factor that we believe will drive long-term growth in our tax business.

As people who may have prepared their own taxes, seek professional assistance with this increasingly complex issue.

In the short-term, we won't know the likely impact on Block until legislative action is complete and the IRS announces how it will handle the delay.

In some scenarios we may benefit, in others we may see a short-run negative impact.

We are pretty sure that whatever Congress does, it won't abolish taxes in 2008 and we'll be there for the public with the solutions expressly tailored to the provisions of the new law once it's enacted.

Now let me turn the balance of the call over to Allen.

Thank you, Richard.

It's a pleasure to be with you today to discuss our results and our outlook.

By now you've all had a chance to review our press release and read through our 10-Q which was filed on DEcember 13..

Let me begin by noting that several members of our Senior Management team are with me here this afternoon and will be actively participating in the Q&A session.

This includes Tim Gokey, our Group President of Retail Tax Services, Joan Cohen, our President of H&R Block Financial Advisors, Kathy Barney, President of H&R Block Bank, Becky Shulman, our Treasurer and Interim CFO and Jeff Neighbor, our Controller.

Since my arrival here three weeks ago, I observed key attributes of H&R Block.

First as Richard observed as well, we have strong businesses and strong brands.

We also have a talented, committed and engaged work force that is focused in providing our clients with the best products, services and experience possible.

The leadership team is focused on repositioning H&R Block for long-term profitable growth.

The first step in this repositioning effort was the announced shut down of Option One's Mortgage origination activities, the next step will be the orderly sale of remaining loan servicing operation.

This will result in H&R Block going forward as smaller, less volatile company and more one that is more aligned with its core strengths and heritage.

Let me start by discussing our discontinued operation results which are essentially all related to Option One and where we recorded a pretax loss of $551 million in the quarter.

This loss is comprised of restructuring costs of approximately $61 million, losses on sale of mortgage loans including an impairment of residuals of $314 million, other operating loss at $53 million and additional impairment charge of $123 million to bring remaining assets of Option One to an estimate market value.

We've been very active reducing our mortgage loan exposure during the second quarter by reducing loan originations and through aggressive sales of loans.

Let me start with loans on the balance sheet.

We began the quarter with a gross loan amount of $248 million.

We originated $128 million, repurchased $188 million.

And sold $429 million of loans resulting in a gross loan balance of $135 million at October 31.

After netting a 65 million valuation allowance, we ended the second quarter with $70 million of loans held on the balance sheet.

With respect to exposure on off balance sheet warehouse, we entered the quarter with $2.1 billion of sub prime loans.

We originated nearly 600 million during the second quarter.

Including $544 million in month of August alone of which about 25% were prime loans.

We sold $2.6 billion and ended the quarter with only $57 million principle amount of loans remaining in the warehouse.

The estimated losses on the future disposition of these remaining warehouse loans which is $14 million have been reflected in our second quarter operating results.

So after the significant sale activity, here's what remains of mortgage loans on our balance sheet and in our warehouse at October 31.

Loans in the warehouse of $43 million at October 31.

Loans held for sale on the balance sheet total $70 million which is reported net of 48% allowance.

We have established repurchase reserves of 86 million for potential losses of repurchases of loans previously sold.

About 55% of the reserve is for potential repurchases due to reps and warranty defects and the rest relates to potential early payment defaults.

This rate is consistent with a lower origination volume in the quarter and higher quality of loans originated since August.

The repurchase reserve in total assumes an average loss severity rate of 42% which is up from 38% in the first quarter.

At quarter-end we also have loan applications in the pipeline of $69 million of which we believe 20 to $30 million will be funded and then our loan originations will cease.

Our total residual interest and securitizations are valued at $38 million at October 31, down from more than $90 million at the end of the first quarter.

The discontinued operations balance sheet has a 427 million deferred tax asset.

As required by GAAP, we have reduced our gross tax asset by valuation allowances for any portion of gross deferred tax that is less than 50% likely to be realized in the future.

Accordingly, the 427 million asset is net of a 56 million valuation allowance.

We expect a significant portion of the deferred tax asset will be monetized as we close our originations business and dispose of remaining assets.

Option One held Mortgage Services Rights or MSRs, covering approximately 58 billion principle amount of mortgage loans owned by third parties as of October 31.

These MSRs were carried on Option One's books at cost which is the lower of cost to market or $200 million at October 31.

At October 31, (Option) One had servicing advances in related assets of $821 million.

These servicing advances primarily represent advances of principle and interest made to borrowers of loan pools when payment is not remitted by the borrower.

These advances are generally considered to have top-of-the-water-fall priority and that we, as the services, are entitled to be the first party to collect monies paid by the borrower or recover in foreclosure.

As I mentioned earlier, at October 31 we booked additional impairment of $123 million related to the discontinued operations balance sheet of Option One.

This brings our total valuation allowance to $338 million and a net book value to $873 million.

I would note that for presentation purposes on this chart, we have removed the asset and off setting liability of $927 million at 10/31 and $300 million at 7/31 related to loans held for sale with optional repurchase triggers.

These triggers give us the right, but not requirement to exercise this option.

Since we have no intention to repurchase, we have zero exposure on the loans.

FAS140 requires that they be included in our 10Q financial statement which we have done.

Before I discuss the operating results from our continuing operations, I'd like to review the mortgage loans held by H&R Block Bank.

At October 31, we had approximately $1.1 billion of mortgage loans held for investment.

Our second quarter loan portfolio characteristics were very similar to those from the previous quarter.

On average the loan size is $219,000, with a 717 FICO score with combined loan to value ratio about 77%.

The average debt to income ratio for the borrowers is 34% and the average weighted average coupon is 7.2%.

The current delinquency rate, defined as 30 plus days past due is 1.96%.

Approximately 68% of the mortgage loans were purchased from OOMC.

The average FICO on the OOMC purchase loans is slightly lower at 711 and the combined loan to value is slightly higher at 81%.

The average delinquency rate is approximately 2.4%.

At the end of each quarter, we recorded an allowance for loan losses representing our estimate of credit losses inherent in the mortgage loan portfolio.

The allowance represents estimated loan losses that we expect incur over the next 12 months.

The majority of the credit loss is evaluated on a pooled basis; however, there will be non-performing loans individually and record loss estimates typically based on the value of underlying collateral.

Loss rates are based on historical experience, our assessment of economic and market conditions and lost rates of comparable financial institutions.

As a result of declining collateral values due to declining residential home prices and increasing delinquencies occuring October and November, we increased our loan loss provision in the quarter by about $9.5 million.

Turning to continuing operations results for the second quarter, revenue was $435 million up 10% from last year.

Our net loss from continuing operations was $136 million or $0.42 per share compared with a loss of $121 million or $0.38 per share in the prior year.

Tax services operating revenues from continuing operations increased 11% over the prior year to $91 million, primarily due to strong growth in Australian operations which achieved revenue growth of 23% over last year..

Half of Australia's revenue growth is attributable to currency exchange rate gains.

The tax segments pretax loss from continuing operations during this off-season quarter was 19% higher than a year ago.

The higher loss resulted from an incremental $12 million write-off of refund anticipation loan receivables and related collection expenses and $70 million in off season losses from our recently acquired commercial markets businesses as well as normal increases in other operating expenses.

The $12 million charge was result of increased withholding of taxpayer refunds by the IRS due to their enhanced (inaudible) prevention efforts to total returns and primarily at the individual taxpayer.

This is not related to any fraud by tax preparers.

Industry-wide the IRS with held refunds at more than five times the rate of the 2006 tax year.

In tax season 2007, our retail tax group, grew clients by nearly 90 basis points, grew earnings by 9%, improve clients retention by 80 basis points, improve clients likelihood to recommend Block by 307 basis points and increased retention of tax professionals by more than 207 basis points.

As we re-energize our efforts on every aspect of tax services in tax season 2008, we plan to build on 2007 success by continuing to drive our focus on building expertise, winning in speed of refund and building a great organization.

H&R Block's retail business is equally attractive to customers seeking expertise or speed of refund.

While Block's current client base is split nearly evenly between these two groups, the market for clients whose main need is expertise is significantly larger.

Growing our penetration in this important segment is our biggest long-term opportunity.

Well this opportunity spans for retail, digital and commercial businesses, I'll focus on retail opportunity here.

Block has considerable assets to address this market starting with our outstanding base of experienced and highly trained tax professionals.

The average Block client is served by a tax professional with over 8 years of experience and the equivalent of 6 University courses of training.

Since consideration of Block among expertise orientate non-clients is currently relatively low, even small increases in considerations can translate into good growth for Block.

Our strategy for winning the expertise client over the long-term includes both strengthening the value proposition of our core retail channel for expertise filers and developing new channels overtime.

In tax season 2008, we are moving in this direction by focusing on tax professionals and helping them to build individual client basis.

The expertise market is largely based on referrals and word of mouth.

In the off season, we've have giving our tax professionals the training, tools and products they need to generate referrals, improve loyalty to them personally, and build their client-base among expertise filers..

Our expertise-oriented marketing in tax season 2008 will directly support these efforts with a particular emphasis on directly exposing potential clients to the expertise of our tax professionals.

The market for speed of refund oriented filers is nearly 40 million taxpayers or about 30% of the total.

Block is particularly strong in this segment and makes up about half our clients base.

In recent years, intense competition in this segment fueled by ready availability of RAL loan facilities through our competitors has led to rapid growth in the number of both branded and independent tax preparation firms focused on this market.

Since we charge fees on credit products that are marketable lower than most firms in the tax preparation industry as a whole, we believe we will benefit if consumers begin to differentiate competitors based on their prices for credit products.

While expertise may be the bigger long-term growth opportunity, we firmly intend to increase our market share in the speed of refund segment.

Our long-term strategy for winning the speed of refund segment is to combine industry-leading tax preparation and client service, with renewed product superiority based on consumer friendly products that simultaneously drive industry reform.

Last year we offered the first 36% APR refund anticipation loan.

We introduced the Emerald Card, an FDIC insured bank account on the next generation prepaid platform and the card gained over 2 million clients for our bank.

As I mentioned in August, we are expanding the 36% APR RAL program and are adding to it in ways that will overtime create lower RAL prices and greater transparency throughout the industry.

We have also enhanced the Emerald Card platform by adding bill pay and money transfer capabilities, by linking it to a pacing account that pays industry lending rates and importantly by adding a simple line of credit, the Emerald Advance.

The Emerald Advance is designed to conform to the FDIC's proposed approach for consumer friendly small dollar lending.

These product enhancements are complemented with our investments in improve client service, peak capacity and targeted growth initiatives.

These plans rest on building a greater organization.

We believe we already have the best people in the industry.

Recruiting, developing and retaining our tax professionals is a key priority.

Last season we began a significant effort to refocus on tax preparer and we intend to increase this in the future.

We have introduced new training for both new and experienced tax professionals, improved our core tax preparation program and provided new tools.

We consciously focused on moderating the number of new preparer we hire while increasing retention of experienced tax professionals.

Last year's 2 point gain in retention was a significant gain compared to prior years.

We expect this to lead to improved productivity, client service and client retention overtime.

Overall the retail business is poised to continues its growth by building on last year's success, seizing the client retention opportunity created by the Emerald Card, utilizing the increased number of experienced tax professionals, taking advantage of our product superiority and leveraging the early season product exclusivity provided by the Emerald suite of products.

The market for digital filers is over 25 million taxpayers.

We continue to view this market as a significant growth opportunity for H&R Block.

Our long-term strategy is to grow our share to an improved online experience, better distribution on the software side and increased awareness of both by leveraging the Block brand.

For 2008 we are focused on improving the bottom line and building on the strong momentum digital achieved last year.

We saw overall client gains of 19%.

Our Tax Cut software named Product of the Year at office products retailer Staples is already on store shelves for the Holiday Season.

Our product lineup features the same consumer friendly bundles we offered last year but with higher price points to reflect the value of our product offering.

We're expanding distribution in places such as Sam's Club and as a result we are clearly well, positioned to increase volume and gain market share once again.

We will continue to invest in this growing segment to capture do-it-yourselfers who migrate to digital and to introduce them to the H&R Block brand.

We also look forward to improved performance from our software and online products.

Turning to Consumer Financial Services, which is comprised of H&R Block Bank, and H&R Block Financial Advisors, the segment delivered strong topline growth.

Revenues from continuing operations were up 24% over the prior year to $101 million while the pretax loss from continuing operations was $9 million compared to $2 million in the prior year.

For the quarter the Bank generated revenues of $23 million up from $11 million the second quarter a year ago and pretax loss of $4.4 million compared with pretax profit of $2.4 million a year ago.

The drop in profit is mainly due to a $9.5 million increase in loan loss reserves which I mentioned earlier.

The Bank's quarter-end assets were $1.2 billion consisting of $1.1 million of mortgage loans held for investment.

As quarter-end the 30-day delinquency rate on the Banks loan portfolio is 1.96% representing $21 million worth of loans.

Of this amount, 0.25% of the loans were at $3 million for delinquent by more than 90 days and the Bank did not hold any repossessed real estate at quarter-end.

As I mentioned previously the Bank increased its loan loss reserve levels in the second quarter to 140 basis points up from 37 basis points at the end of the first quarter.

We believe that we've established an adequate reserve based on current conditions .

We do not anticipate that the Bank will purchase either whole loans or mortgage securities in the foreseeable future.

The Banks deposits continue to be largely comprised of assets from clients of H&R Block Financial Advisors and Tax Services.

H&R Block Financial Advisors utilized the Bank to hold $589 million in FDIC Insured customer deposits and tax clients accounted for $125 million in deposits.

H&R Block Financial Advisors continue to improve in performance.

Second quarter revenues grew nearly 11% to $78.2 million while the pretax loss of $4.7 million was comparable to the loss in the year-ago period.

Both periods include $9 million of intangible amortization which will be completed in the third quarter this year, therefore our second half earnings will significantly improve.

At quarter-end we had over $34 billion in assets under administration up 6% from the first quarter.

Average productivity per advisor during the quarter increased 19% over last year driven by organic growth in our successful recruitment in retention of higher level producers.

The number of advisors at quarter-end increased to 956 up 20 from the end of the first quarter.

We look forward to continuing these positive trends.

Annuity type revenues as a percentage of total production continue to grow in line with our emphasis on long-term advisory relationships with our clients and focused on fee-based annuity and other insurance products.

Production from partnering with tax was up more than (8%) year-over-year and that represents 18% of our total production.

Business Services experienced top-line growth and improved operating results.

Total revenues were $239 million up 4.5% over the same quarter last year.

Pretax income $12 million compared to income of $1 million for the second quarter last year reflecting efficiencies gains from integration of businesses acquired in fiscal '06.

With that, I'll turn the call to

Thank you, Allen.

I'd like to comment on our liquidity position, as we have had a number of questions on this issue.

I'll begin by saying we believe our liquidity sources to be sufficient for the normal scenarios we envision.

With tax season right around the corner, we have 200 million remaining on lines of credit plus our cash on hand, which is about $250 million.

I'd would also like to note that this year's liquidity needs are quite different from last years.

In tax season '07, the Company used approximately $227 million to fund our early season loan products.

For tax season '08, the early season product is being funded by H&R Block Bank which has different funding sources and therefore will not be a use of corporate cash.

Although we're in a larger borrowing position due to loss within the mortgage operations, I would point out that many of the mortgage losses were non-cash and with potential for additional cash losses in the mortgage operations are smaller given the actions taken that were discussed earlier in the call..

There are a few variables which we're watching closely.

First is the volatility in the servicing advance growth.

We believe our expected scenario takes into account the recent stress levels caused by increased delinquencies and reduced payoffs that being said we are working on upsizing our servicing advance facility to ensure we can handle unanticipated increases in servicing advances.

To date we have been successful in increasing our financing as these advances are high quality collateral.

The second is the cash flow timing impact from a potential delay in the start of the tax season due to a change in the AMT.

It is unclear at this time what the outcome will be, but we're preparing for various scenarios and working on arranging additional sources of liquidity for the sake of flexibility including financing our headquarters building.

We expect our $500 million bridge financing to be extended.

So again, we believe our liquidity is adequate and we're working to make sure we have what we need to cover uncertainties.

Allen will conclude with out look for the remainder of the year.

Thanks, Becky.

I'd like to comment on full year 2008 outlook and also our planned efforts to right size H&R Block post Option One.

For full year 2008 we remain confident about the operating performance of our continuing businesses.

As a result we are reforming our previous range of $1.30 to $1.45 per share; however, we will have borrowing cost than anticipated when we set our last guidance and as a result we expect our earnings will be toward the lower end of guidance range.

No adjustment to this estimate has been made for the impact of AMT.

Some (OTS) alternatives could be net positives and some negatives, but I don't want to speculate on that at this time.

I do want to comment on expense-base.

Our Corporate support activities provide services to all operating companies.

With the closing of our mortgage originations activity and hopefully the sale in the he near future of owned servicing , we're now undertaking a comprehensive review of all expenses to realign our cost structure with our new smaller company.

Cost discipline and healthy cost culture are characteristics of high performance companies.

All our businesses must have appropriate cost structures to compete successfully in the market place and add a fair return on investment, We must be razor sharp in investing SG&A dollars into (inaudible) late activities and make certain that we get the appropriate benefit from our spend.

We will be taking action once our review is complete, likely in the mid January timeframe.

At the same time we will continue to invest in the tax segment in advance of what we believe will be a very solid tax season.

I'd like to thank you all for listening and we are now ready to take

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Scott Schneeberger with CIBC World Markets.

Please proceed.

Good afternoon.

A question on the decision to raise debt or equity, if you find you need additional capital, I guess, what is the timing and the quantity, I guess are my questions and I guess, if we're allowed one follow-up, it'd be why cut to the dividend if you're concerned about the capital situation.

Thanks.

The way I'd answer that, we have base cases and stretch cases that say we are fine with our bridge facility and upgrade to servicing advances.

We, we're thinking and looking to raising additional funds to provide a little more breathing room, potentially with the refinancing of our building.

With respect, I think going to market with debt or stock, I think we'd like to keep those open.

We have short-term debt we need to term out, market conditions and other events to determine the size of that, timing of that in the future.

I think with respect to the dividend our approach is a good sign of confidence to the market place that we believe the long-term prospects of the company, does that answer your question?

Yes, thank you.

Your next question comes from Mark Sproule with Thomas Weisel Partners.

Please proceed.

Thanks.

I guess a question I asked with all the volatility in closing the Option One business, how does this change your perspective of longer-term trying to return capital to shareholders in light of some of the restrictions you're under currently?

We're mindful of the impact that Option One has had on the company and its finances, I think the board will see, repairing the damage that has been done as an important priority, but for the future we're acutely conscious of the importance, once that repair is accomplished of right sizing our balance shee and making sure we have tight discipline on returns for our invested capital and growth and shareholder value is a prime focus of the Board of Directors.

And I guess as a follow-up, if you look at (inaudible) .

Is there any impact from a funding capacity perspective on your ability to provide services and operations impact the tax season this

I couldn't hear you.

If you could repeat that, it'd be great.

Are there any impacts to the coming tax season from some of the funding limitations that might be going on currently?

That's a great question, I appreciate the question.

No, actually, we're investing heavily in the tax season.

I think as you look at kind of a short-term strategy here is that the first thing obviously was the announcement to close origination and see the work we've done in some of the talking points with respect to reducing exposure to loan portfolio, we worked hard at not only stopping originations, but really looking hard at the balance sheet..

The servicing platform that we are running right now is actually running about break-even.

It has cash flow positive characteristics assuming that you continue to finance the service advances even with the interest cost.

It's 9 to $10 million cash flow positive which is, which is helpful.

I think as you look at the things we need to get done, obviously we have to wall that off and complete the sale of that servicing platform.

We have to get our operating costs in line, we have to get operating margins improved in all our businesses and as Richard mentioned we're going to go to work and solidify our balance sheet.

During this timeframe, we've not been constricted on the types of activities, investments, products and people and locations within our tax segment.

We're gearing up for a very good 2008.

Thanks.

Your next question comes from the line of Michael Millman with Soleil-Millman Securities.

Please proceed.

That's Soleil.

Follow-up question.

(inaudible)Shareholders elected you to the board, certain options that you talk about including the (inaudible) managed for several years, talk about, you have learned, now that you've been there for a while, some of the things you want to do beyond what sounds like executing better and give us a time table as major items you think need to be accomplished?

(inaudible)

I think I've got the gist of that, you were breaking up a little bit, but I think, what I would say right now is that, based on a 4-week, 3.5-week review of our businesses, we have pretty significant opportunities to tighten up and run in tighter tolerance in all of our business segments.

So to the extent that we can make businesses more competitive through cutting operating costs or improve margins, I think there's opportunities for all our businesses short-term to improve results.

I think intermediate term, post tax season, there's an additional review, just to make sure that, that we have a proper alignment of our segments, there are meaningful synergies, all our businesses add value to our base of tax business, so I think that strategic review that Richard talked about will be ongoing as we look to improve operating performances of each of the business segments.

I think after, it should be clear that after, nearly 10 years under the tenure of the prior CEO there'll be a zero-based review of everything we do.

We're going to focus on changing, history in which H&R Block for the last few years has significantly underperformed the market and the board is going to be determined to review each and every corner of the company and find every possible step that will move us, if we can accomplish this from an underperformed to an overperformer.

(inaudible) The follow-up, in terms of the bank, discuss how you dispose of a bank, if you dispose of a bank, the assets of mark-to-market, where they be.

You're breaking up pretty severely, I think your question, but correct us if I'm wrong in connection with any possible sale of the Bank what the issue would be of mark-to-market of assets.

And also, what, and the different ways you can dispose of the Bank.

I think that's entirely premature at this point.

I don't think it would be useful to go into that.

The Bank is, is something that creates some very interesting strategic potential in terms of what we refer to as the Emerald Suite of products to support our tax business with credit products that competitors may not be able to replicate.

Particularly as some of the traditional large providers of RAL credit exit the marketplace, we may have strategic advantages that others do not.

In the course of the proxy campaign, we raise the issue that the regulatory costs from owning a Bank and in particular, the 3% holding company capital requirement might be in excess of the benefits that the Bank brings to the Company and there are core benefits.

Our first objective will be to try to restructure and reconfigure our Bank in operations to avoid those regulatory costs or minimize them.

In order to then evaluate where we are.

For example, the 3% holding company capital requirement is not in the law and, but it was imposed as a regulatory condition by the Office of Thrift Supervision.

It was done at a time when H&R Block owned Option One.

I know as a former regulator, the regulators at OTS were properly sensitive to risks that OOMC represented.

Indeed, OTS to its credit, since I have something to do with its creation when I was in Washington, I would say this, pride for what they did, they were more sensitive to the OOMC risks than the company was itself.

That regulatory provision, the 3% rule was crafted to solve a, to deal with risks that would no longer exist once we exited OOMC and are no longer in the subprime mortgage lending..

I can't speak for the OTS, but we certainly believe it would be appropriate for them to consider eliminating that 3% requirement.

If so, that would substantially change the economics of continued ownership of the Bank in a favorable way to H&R Block.

We don't know how that will come out, but there are many facets to the strategic decision of what to do with the Bank.

The one thing that is clear, whether we own a Bank or do not own a Bank, we will continue to find, through our own Bank or through partnerships ways to offer the Emerald Suite of products.

Those are directly related to success in our tax business.

Thank you.

Your next question comes from the line of Andrew Fones with UBS.

Please proceed.

Yes, if I could just follow-up to that comment you made, how do you expect to respond, I think you have to respond by January 15 to the OTS's request regarding minimum bank equity?

The issue is not minimum bank equity, the Bank is actually heavily capitalized , the issue relates to how we plan to meet the 3% overall holding company tangible capital requirement.

And that, of course, assumes that any such requirement is still in effect.

We cannot speak for them, it is in effect today and we'll prepare financial projections.

We, the OTS has been working very cooperatively with us.

I met with them on several occasions, as does management on a regular basis, they appreciate that H&R Block, without Option One is a totally different company and doesn't present many of the risks that H&R Block, as the owner of Option One, did present.

And I expect the regulatory community, I can't predict what they'll do, but they'll, in a thoughtful way, review our lower risk profile in the future and adjust the capital requirements.

So the people who look at it simply as assuming the 3%, a discretionary requirement imposed by OTS in the OOMC days, not something mandated by law, people assume that requirement will always be there.

I don't think that's necessarily a good assumption, but we'll certainly be responsive and continue a dialog that is ongoing with

Okay, thanks and then for my follow-up, you mentioned that you're going to have a strong focus on invested, on returns in invested capital.

I was wondering what returns you're targeting or what thresholds you might have for the various businesses.

We're not going give specific guidance on returns.

I think that the focus will clearly be on margin improvement and introduce more capital discipline around that.

We're right in the middle of our strategic plan which will be the basis for next years operating plan.

We'll have more to say I think about that as we go along in time.

I think it would be fair to say that the days in which people focus on revenue growth without focusing on bottom line and margin levels are over.

Okay, thanks.

Your next question comes from the line of Harry (DeMont) with King Street Capital Management .

Please

Hi.

I had two questions, I guess.

You mentioned, Becky mentioned that you guys expect the bridge to be extended, obviously you have four days to come up with $0.5 billion.

Do you have more details on that?

Is it still ongoing negotiation?

IF you do have details, I'd love to know how long it's extended for and how is that going to relate to the lines of credit and clean down provisions there and I have a follow-up.

Yes, we're in discussions right now.

We actually have written approval on one half and we have a verbal on the other.

We're just papering the second half.

We're moving ahead in good pace on that.

What's your follow-up?

I guess, then, just on that one in particular, how is that going to relate in terms of the extension to, to the clean down provisions you have on the see the clocks and sort of the timing of those.

And my follow-up was simply, you mentioned your headquarters building, in general, any sense as to what you think that's worth.

It's it have a mortgage now?

The first division is the bridge would carry us through tax season.

It would clearly be a bridge to our revenue and the revenue would be the driver to taking the clock down.

So that would be a neat package for financing.

With respect to the building, we do not have it now.

Up to 170 million or so, so the question is, how much do we really want to take?

It's silly to borrow more than we need.

We're going through that right now.

Okay, great.

Thanks a lot.

Your next question comes from the line of Larry with Oppenheimer.

Please proceed.

Hi, the, one of my questions was answered, I think both of them have been answered, thank you.

Thanks Larry

Your next question comes from Sey [Lund] with Morgan Stanley.

Please proceed.

Question on working capital, in the context of your comments that you're investing in the company going into tax season, typically when I look at the company historically, you generally need over a $1billion of short-term debt going into tax season, but when I look at your variability right now, there's only about 200 million available on the revolver.

I appreciate the comments on cash flow timing and corporate headquarters, but how do we represent this gap of your typical working capital need in tax season, what your availability is right now?

I tried to lay out, I think at the beginning of my comments, because I've gotten a lot of questions on what last year was versus what this year is.

I think there are significant differences, not just in how we're funding, but also the fact that a year ago we were issuing commercial paper, this year we're working under working capital lines of credit, you don't have overlap in raising funding.

There's quite a few differences there.

Keep in mind, we're in the middle of December now, tax season is just around the corner.

Our expectation is that in December, there's probably all in, about $260 or so million of need.

About 204 is related to tax and our seasonal businesses and then in January, offset with earnings.

So the need declines quite a bit.

So the need from an all-in business is about $41 million in January.

So this is, can you try to explain that in more detail.

If you look at your seasonal CP borrowings, there's a huge spike ahead of tax season and we just won't see that this year?

You're breaking up.

If you look at the company going back six or seven years even, there's always a dramatic increase in commercial paper borrowing in the January timeframe.

I'm trying to reconcile what is so dramatically different this year versus prior years .

One of the primary differences, the company historically funded its participation interests and refund anticipation loans and beginning last year we were no longer responsible for that funding.

But again last year, we were responsible for the early season funding and this year we'll be responsible for none of that.

To many of the questions about ownership of the Bank, it's an important difference on the plus side of the ledger, with a roughly 12% capital level that you are getting 8 to 1 leverage on capital injections into the Bank in terms of its ability to support lending products associated with RAL leads and things that used to be done with corporate cash are now done to a significant volume with supported by bank deposits.

And the funding requirement for Block is roughly 1/8 of those funding requirements.

Okay, thank you.

Your next question comes from the line of Larry with Oppenheimer.

Please provide.

Hi guys, sorry.

How much stock has been bought back in 2007 and one other question, has there been any push back from the H&R Block Advisors about the upheaval that has been going on at the firm, stock price, things like that.

Zero stock buy back this year.

I think the second question was about turmoil within Financial Advisors.

We've had great stability there over this quarter.

We brought in net 20 new advisors in the quarter.

Very successful.

We're retaining some, attracting others.

We're finding there are other firms out there that have turmoil.

We're successfully recruiting against them.

Not only are we adding more advisors we have more experience in total of our advisors in our productivity within our advisors is higher and we're selling more annuitized products.

Key indicators are very positive.

Your next question comes from the line of Ed Shen with Ivory Capital.

Please proceed.

I just wanted to go back and make sure I have the numbers correct on one of your previous responses.

I believe you said in December, all-in cash need, for the tax business of $260 million.

Expect that all-in amount to be $40 million in January.

Did I get that down correctly?

Yes.

And that includes operating losses as well as working capital?

Yes.

Okay.

And against that, you have, $250 million of cash in your balance sheet and $200 million of availability on C-lock, is that correct?

Yes.

Got it, so it sounds like you have a cushion of about $150 million.

I, I, we also have the servicing advanced facility, and the servicing advanced facility, we have $750 million in capacity today and as I said, we're working on an up size there and servicing advances, as those vary, can change those numbers, so there can be additional capacity there, but again, at our peak in November, I think we were $705 million against that.

So there, there's other, other, inflows and out flows.

There are other sources available, but primarily that's right.

Okay.

Got it.

And when do you expect to complete the, the reservicing advanced facility?

Yes, I would say it would probably be very early in January.

Okay.

Your next--

And do you, are you expecting to increase that, the size of that facility substantially or is it going to be an increase to the size you had in November?

We are looking for a substantial increase in the size of the facility, I think, keep in mind though, the facility can only be used to the extent that you have the advances to draw down.

So if we had, if we got the facility up size to $2 billion, it's not incremental liquidity, only to the extent you have advances to put in there.

So we are looking to grow the size of the facility as our servicing advances grow.

Got it.

Thank you.

Your next question comes from the line of Andrew Fones with UBS.

Please proceed.

Yes thanks.

First I was wondering if you could give color regarding the sale of the servicing business, how that's going, if you see interest there?

Thanks.

We've had quite a few, quite strong interests expressed from quite a number of sources in both the servicing platform and possible sale of MSRs.

That process is moving along very smoothly with a lot of interest and so we expect to be able to make some decisions early in the new year.

Okay, thank you.

And then, secondly, regarding the earnings guidance, you say now that you think that the earnings might come towards the lower end of the prior range due to higher interest expense.

Can you quantify the interest expense or the change in your projections there?

Thanks.

Obviously the incremental continuing operations interest cost in the range of $0.04 per share or so.

Okay.

Thank you.

Your next question comes from the line of Scott Schneeberger with CIBC.

Please proceed.

Thank you.

Could you give us an idea of how many incremental tax offices you'll be, you'll be rolling out this year year-over-year and what type of CapEx forecast you have?

I'll take the first half of that question is a modest increase in the range of 150 or so for the upcoming tax season.

And CapEx, we'll get back to you on a CapEx part of that.

Recognizing in the 10-Q that you mentioned share repurchases should not be expected at the earliest until after the FY'09 year as opposed to FY'08 year before.

I assume that business is usual with how the company is structured right now.

Would it be possible to move that up with say a change in the way you're, you're regulated with the Bank, removal of the Bank or any other scenario?

Thank you.

I suppose the easy answer is anything's possible.

We are looking in the next year at, as I mentioned, possible change in the regulatory requirements and I want to emphasize, we, those are decisions that are exclusively within the province of the OTS.

We cannot speak for them, but it is something that they acknowledge that the 3% requirement was created for a set of risks that will be dramatically different in the future and therefore, we're optimistic that we will have a good dialog with OTS and it will lead to a rational solution.

So, one possibility that will change the picture is elimination in its entirety of the 3% holding company tangible rule or modification to reduce it from where it is today.

The other thing that will happen in calendar 2008 is to a, I would say to a very high degree of likelihood is asset sales.

We are in an active marketing process for both our servicing business platform and separately MSRSs and so our current position is a function, or our projected position is going to be a function of both operating results and changes in results and proceeds of asset sales.

Thank you.

Real quick, if I could sneak one more back in on tax, you mentioned that you were increasing pricing this year on software tax bundling, could you speak more to that strategy, how you're expanding that offering.

Any color would be appreciated.

With respect to tax prices, there are retail prices on the range of 6 to 8% and that's really where the guidance we're getting on top line price increases are.

Specifically on, on your bundling, though, I think you mentioned some commentary on increasing pricing there and perhaps a broadening of who you're approaching as a customer base.

Could you speak more on that.

Sure, Tim?

On the tax cut bundling and the sort of thinking strategically on that, pricing, we've been positioned just as good as Turbo Tax, but for less.

We made significant product improvements over the last few years, we see a real ability to narrow that difference.

Particularly in retail on front end pricing.

We'll be at parity to a few dollars less.

We'll still be below them on back end pricing.

We see product changes enabling us to be much closer price to them going forward.

Thank you.

Your next question comes from the line of with Satish Pulle with Merrill Lynch.

Please proceed.

(inaudible) In London, my question was related to the advances against delineate loans.

Typically what is the repayment profile you expect in terms of cash coming back to you in terms of the cash coming back to against advances that you are making?

Can you repeat your question, it was very difficult to hear it here.

All right, maybe I'll try again.

I'm looking for a bit more detail on the servicing advances you're making--

Okay, thank you, I understand.

Servicing advances, just for a little background, servicing advances are monies that we, as services remit to the owners of the mortgage loans where people are delinquent.

We have first priority, top-of-water-fall rights to those assets so that any proceeds, on payoff or on foreclosure or on other settlement to that asset come to us first.

And we also, have the right, not to remit, if we feel that we have impairment, or could possibly have impairment on advances we might make.

This is considered to be a very good asset.

We expect to get the asset back.

Thank you.

This concludes the Q&A session.

I'd like to turn the call over for closing remarks.

Thank you very much everyone for joining us.

If you have follow-up questions, please feel free to call investors relations.

Thanks again

This concludes the call.

You may all disconnect.

Good day.