H & R Block Inc (HRB) 2009 Q2 法說會逐字稿

Good afternoon.

Welcome to today's webcast.

While participating, all lines have been placed on mute and this event will be recorded.

There will be a verbal Q&A session at the end of today's presentation.

(OPERATOR INSTRUCTIONS) We will pause for just a moment to initiate the recording.

Ladies and gentlemen, please stand by.

Welcome to to H&R second quarter earnings call for December 8, 2008.

At this time, I would like to turn the event over to Mr.

Scott Dudley.

Please go ahead.

Good afternoon, and thank you for joining us for our second quarter earnings call.

Presenting on our call today are Richard Breeden, Chairman of the Board; Russ Smyth, President and Chief Executive Officer; Tim Gokey, President of Retail Tax Services; and Becky Shulman, Senior Vice President and Chief Financial Officer.

In addition, several members of our senior management will be available during the Q&A session.

They include Steve Tait, President of RSM McGladrey; Kathy Barney, President of H&R Bank; Sabrina Wiewel, President of Digital Tax Services; and Jeff Brown our Controller.

After discussing results and our outlook for the remainder of the fiscal year we will open up the call to your 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 21-E of the Securities Exchange Act of 1934.

Such statements are based upon current information and management's expectations regarding the Company, speak only as of the date on which they are made, are not guarantees of future performance and involve certain risks, uncertainties and 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 Blocks 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 provides a detailed discussion of risk factors in periodic SEC filings and you are encouraged to review those filings.

In conjunction with today's call an accompanying slide presentation and earnings press release have been posted to the investor relations section of our website at HRblock.com.

We also filed our second quarter 10-Q earlier this afternoon.

To give as many participants as possible an opportunity to ask a question, please limit your query to one initial question, and then one related follow-up question if needed.

Please remember to avoid using a headset or speakerphone as this may cause audio problems.

Finally, a quick reminder that we will be hosting our annual investment community conference in New York City on January 13.

At that time we will be providing a more in depth review of our performance, strategy and outlook including our preview of the 2009 tax season.

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

Thank you, and welcome, everyone.

It is a pleasure to participate in our fiscal 2009 second quarter earnings call, besides being the holiday season, this is a truly wonderful time of year when we finally launch back into our early tax season after many months of preparation.

Russ and his team will go through the details of our results for the quarter ended October 31, in a few moments.

Since those results in and of themselves for a second quarter generally don't tell too much because of the seasonality of Block's businesses.

I would like to make a few opening comments regarding how we see Block in terms of our overall positioning.

It has been just over 12 months since I became Chairman and on my 17 weeks or so give or take a day or so since Russ took the helm of CEO.

Nonetheless we believe we have made significant strides in repositioning and reinvigorating this Company.

We completed the disposition of our subprime mortgage through a combination of an immediate shut town of lending and the subsequent sale last April of the mortgage servicing business.

Our debt load is more than $1.2 billion lower today than it was a year ago, and that gap should actually increase over the next month or so.

Even though we spent nearly $280 million to enhance our tax market share through the acquisition of the Texas region.

Unlike companies that did nothing in the face of the looming credit market catastrophe, we moved fast to pay down debt and to eliminate demands on our liquidity.

On November 3, we completed the disposition of H&R financial advisors.

FA was an earnings drag on the Company for nearly a decade.

Its disposition should improve the Company's return on invested capital while eliminating both risk and diversion of management attention.

Also on November 3, we completed the purchase of our Texas regional franchise.

We believe that transaction as we said at the time we announced it has very good return characteristics for shareholders.

In addition we have already opened 30 new offices in Texas and we believe we will be able to increase market share in several previously underserved communities in that territory.

We completed an equity transaction that raised $141.5 million in net proceeds on October 27.

While we had hoped to avoid the need to issue equity, in advance of our normal equity build in Q4, the Board and management decided that in these turbulent and uncertain markets, we should accelerate the rebuilding of net worth, that would otherwise have occurred in the fourth quarter.

This eliminated any risk of losing access to our main line of credit facility which has very attractive pricing.

In addition, the transaction helped us contribute more capital to H&R Block bank which enhanced the strength of the bank considerably.

This in turn givers us the capacity to raise approximately $1 billion in new deposits which the bank can use to fund Emerald Advances for our tax customers.

We have realigned and strengthened your management team over the past year, most notably with the appointment of Russ as CEO, Becky Shulman as CFO, and other key appointments.

I believe Russ is well on his way to making a strong, positive impact on the Company and the team is working well together.

We have strengthened our Board of Directors, we have six new members since the annual meeting in 2007, and today, 60% of the members of the Board are new within that time frame.

The Board has been extremely active in monitoring risks and developing the many new initiatives to improve accountability and performance.

While our total return to shareholders underperformed the S&P 500 significantly in recent years, before our turn around, to date in calendar year 2008 we have significantly outperformed the broader market.

Of course that only counts if it is sustained over time which we are deeply committed to doing.

We have increased the dividend by $0.03 or approximately 5% to put greater discipline upon, around our return of cash to shareholders.

While earnings can be reported from accruals, dividends can only be paid from cash.

So this has a disciplinary effect beyond mere dollars involved.

We set a target of $2 billion in share buybacks during the next four fiscal years.

From the beginning, these buybacks were to commence only after restoring prudent levels of net worth after the mortgage losses of the last two years, the recent equity offerings accelerated the timetable for rebuilding the balance sheet but did not change at all our commitment to returning cash to share owners or our view of the overall magnitude we can achieve during this time period.

We have not made any decisions regarding the timing of repurchases, since that involves market price levels and other factors including overall economic conditions.

However, we will have the ability to begin purchases in the fourth quarter of this year and the Board has not altered our long term plans regarding share buybacks.

We have begun an aggressive program of mortgage loan modifications to help the banks borrowers avoid foreclosure wherever possible.

We have made blanket offers to segments of our loan portfolio to modify adjustable rate mortgage resets, modify actually to eliminate ARM resets and to offer conversion from ARMs into 30-year fixed rate mortgages in an average interest rate of approximately 5%.

These offers have been made to roughly 25% of the total number of loans in our portfolio.

In some cases these changes have cut monthly payments for the borrowers by as much as 25%.

Early results are quite encouraging, although it is too soon to see what our rate of redefault will be over the next six months.

This program, we believe this program is the right thing to do for our customers, and it helps the bank reduce the rate of defaults and expensive foreclosures as well.

We have implemented cost cuts and hope to create a new cost culture.

This both improves profit margins and gives room for reinvesting in the business.

We have established stiff targets for margin improvements in both tax and McGladrey and managers will be held accountable for meeting those targets.

We believe we can grow the tax business faster than was true in the past although we are not unrealistic about the challenges in doing so.

We will not easily give up any of the market share gains we made at the expense of competitors in retail tax last year, and of course, we are aiming for more.

Our ability to offer financial products with significantly superior terms to those offered by competitors is only one part of that strategy.

We also plan to enhance quality for clients and shift the overall mix of offices more in the direction of franchise locations over time.

We have enhanced corporate governance to improve transparency, greater communications and stronger mandates in our governing documents.

This year we put in place director term limits, say on pay provisions, and made the separation of Chairman and CEO permanent, without a shareholder vote to alter this structure.

We will continue to work on overhauling our compensation programs for senior executives to more tightly link pay and performance.

We think our practices in this regard compared to some companies in the marketplace are notably superior.

As the saying goes, however, so much done but so much left to do.

We know we have our work cut out for us but we believe this quarters results show our trend lines continuing to improve and we are very pleased at our posture for this tax season about to begin.

With that let me turn the call over to Russ.

Thank you.

Thank, Richard.

Thanks to all of you who have joined us on the call today.

I am looking forward to meeting many of you next month and sharing my thoughts on how with we expect to accelerate the profitable growth trends in both our tax services and RSM McGladrey business segments beyond fiscal 2009.

But for today we are going to focus on quarter two results.

As you know, due to the seasonal nature of our business, the second quarter has eliminated impact on overall fiscal results since we make almost all of our earnings during our fiscal fourth quarter: having said that, we reported improved year-over-year results from continuing operations that were in line with our own expectations, and slightly better than Wall Streets.

Our loss of $0.40 per share from continuing operations was better than prior year results, by $0.02 per share, and reflects improved results in both tax services, and at RSM McGladrey, our two primary business segments.

Partially offsetting these improvements was a larger loss in consumer financial services, which consists solely of our retail banking activities, since the results of our former financial advisor business are now reported in discontinued operations.

Our banking results were negatively impacted by a continued decline in residential home prices.

As Richard mentioned, in looking ahead, driving a cost conscious culture continues to be a key priority for the Company.

We recently initiated an enterprise wide review of our procurement and real estate programs in an effort to eliminate redundant and unnecessary expenses and to reduce our overall occupancy costs.

We look forward to sharing more details on these efforts and quantifying our future savings on our next earnings call.

With that, I'd like to provide a more detailed assessment of our second quarter results by segment.

In business services, RSM McGladrey achieved an 11% year-over-year improvement in pretax income this off season quarter.

Despite a 2.5% decline in revenues.

Most importantly, core accounting, tax and consulting revenues increased 8% over the prior year quarter.

Those gains were offset by declining capital markets revenues stemming from fewer transactions.

Also amounts previously reported as leased employee revenue have been eliminated in the current period due to an operational change.

This change had no impact on earnings as related costs were also eliminated.

And excluding this change, revenues at RSM would have been up nearly 2% year-over-year.

Pretax income for the fiscal second quarter was $13.1 million compared to $11.8 million a year ago, reflecting additional savings in ongoing operating expenses and previously committed cost reduction programs.

The McGladrey team is working hard to drive revenue growth by focusing on those business segments less impacted by the current economic downturn.

In addition, we believe our low cost operating model gives us the ability to provide a rate structure that results in significant competitive value for our clients.

Along with these revenue growth opportunities, we are working equally hard to drive ongoing improved business productivity and cost efficiency.

Operating costs are down year-over-year and our previously announced cost reduction plans are well on track.

In consumer financial services which is now comprised only of H&R Block Bank we continue to expand the bank's role in supporting the growth of our tax business through the Emerald platform.

The Emerald Advanced line of credit and the Emerald card have proven to be very popular and give us a great competitive advantage in the marketplace.

We've enhanced our Emerald Advanced line of credit product this tax season making it available to both new and existing clients and increasing the amount available to existing clients up to $1000.

With annual percentage rates between 9 and 36% the Emerald Advance is a far more affordable option than the other financial services clients might use for short term credit.

This year around line of credit was created with the FDICs proposed approach for consumer friendly, small dollar lending in mind.

Given these tough economic times we expect this compelling product to drive more tax clients in a safe and affordable manner.

We also continue to work towards minimizing losses and managing the risks associated with the banks mortgage loan portfolio.

These loans are held for investment and as such these loans are not mark to market.

Since December 2007 the bank has been actively pursuing modification agreements with its borrowers.

As of October 31, 2008, the bank has modified approximately 25% of the loans it purchased from Option One.

About half of these loans were delinquent at the time of modification and as Richard mentioned, based on performance of these modified loans it's having an excellent impact for us and we estimate that this program has already reduced our losses by approximately $20 million.

The balance of our mortgage loan portfolio and related assets declined further as expected during the second quarter.

Down 6.5% to $812 million.

Primarily due to net principal repayments and further loan loss reserves.

The banks pretax loss for this offseason quarter increased to nearly $19 million compared with the pretax loss of $4 million a year ago.

Mostly due to a $13 million increase in mortgage loan loss provisions.

Becky will have a lot more to say about the banks loan portfolio during her remarks.

In digital tax the market is approaching 32 million tax payers and we view this as a significant growth opportunity.

We'll continue to invest to capture pencil and paper do it yourselfers who migrate to a digital solution and introduce them to the H&R Block brand.

It's important to note that we are the only Company that offers our digital clients access to a one of a kind national network of certified and trained tax professionals.

We plan to grow both market share and profitability by enhancing the consumer experience, offering a competitive free product, expanding software distribution, and increasing awareness by leveraging the Block brand and our associated expertise.

At the same time we have lowered our price points by up to $20 on last years comparable products.

On the other hand TurboTax has raised its prices by $15 in some cases and added an additional user fee of 995 in TurboTax software.

Our product layout features consumer friendly bundles comparable to what we offered last year.

Although we have reduced prices we have also made product enhancements.

Adding more features and functionality to further improve our products for customers.

We do not sacrifice quality to deliver greater value to our customers.

Every single product in our do it yourself lineup is packed with expertise, represented by more than 50 years of tax experience and our national network of tax professionals.

Our H&R tax cuts offer is already on store shelves for the start of the season and H&R Block software and online products are now available to purchase online as well.

As a result of this season's unique pricing dynamics we believe tax cut provider an even better choice for our customers and will result in additional unit growth which in turn will further drive our earnings in the digital segment.

As technology has made it easier for consumers to file their returns electronically we're committed to maintaining our position as the industry leader and supporter of e-filing.

We're setting a standard for the industry with 100% of our products and services now offering federal e-file at no additional cost to the consumer.

Our pricing is simple, Tax Cut software customers have the ability to choose, prepare, print and e-file multiple federal returns at no additional costs.

A key consumer dynamic in the software category is that many consumers purchase the initial product for their own use and then prepare several additional returns for other family members.

So as an example, I may file my own return, then complete and submit a return for my children.

With our offering, consumers can prepare and print unlimited returns at no charge using our software.

They can also e-file up to five returns, and it's limited to five because it's a constraint on the number of e-files from one computer that's dictated by the IRS> TurboTax, however, is charging 995 federal tax prop fee on any additional federal returns after the first return regardless of whether it is e-filed or printed.

As a result of this seasons unique pricing dynamics we believe tax cut provides an even better choice for our customers and will result in additional unit growth which in turn will further drive our earnings in the digital segment.

Finally, another opportunity moving forward that will be a clear and distinct advantage for our brand is the ability to more effectively move between our retail and digital services.

Due to our superiority around expertise and technology and the size and scope of our retail network, we see this as a clear and distinct advantage over the competition.

We recently changed leadership and restructured our digital organization to add greater purpose and greater focus around developing new products and services that will further integrate these two businesses.

With that, I'll turn the call over to Tim to discuss our retail task and our outlook for the upcoming tax season.

Thanks, Russ.

As I start I want to thank our tax professionals and all our associates who are doing so much to get us ready for a strong '09 tax season.

It's the experience, skills and effort of these professionals that make Block truly distinctive.

Our tax operations delivered improved results for the second consecutive preseason quarter.

Revenues increased 9% over the prior year driven by a 6% increase in core US retail clients served or 12% including one time economic stimulus tax filers as well as strong results from our Australian operations.

The pretax loss in the tax segment improved by $15 million or 7% over the prior year due to increased revenue and a $6 million reduction in expenses.

Expenses were lower due to our cost reduction efforts initiated earlier this year, the effective management of ongoing expenses and lower bad debt offset by one-time expenses in our digital business including an adverse litigation judgment and write off of goodwill related to previously acquired businesses.

Looking ahead to the tax season we see a number of changes from last year.

We expect the season to start somewhat faster because there will not be a delay caused by the AMT issues of last year and because taxpayers will be seeking refunds earlier, given the economic environment.

Due to job losses in calendar '08 we are currently expecting overall growth in IRS tax filings excluding one-time economic stimulus tax filers for ESA filers to be near 0.

As you recall, we reported our growth last last year excluding one-time ESA filers and we will continue at that approach this year.

Excluding these filings we feel confident about delivering positive client growth and market share gain despite the slower growing market.

Complemented by pricing growth in the 5 to 7% range.

Key uncertainties that could be positive upsides include higher overall market growth, the potential for another economic stimulus package through the tax code and the possibility that banks supplying our competitors with refund anticipation loans will be unable to competitively match H&R Block's funding for these products.

Planning and preparations for the upcoming tax season are substantially complete.

Over 95% of our offices are set up and ready for business which puts us four to six weeks ahead of last year in terms of readiness.

Our tax class enrollment and recruiting has been strong and we are pleased to be partnered with one of the worlds strongest banks to ensure full funding for our refund anticipation loan program.

Finally, integration of our recent Texas franchise acquisition has gone smoothly.

Let me take just a moment to comment more on the Texas franchise acquisition.

The integration has gone exceedingly well and we expect to be right in our financial plan for the acquisition, even though we did not close until November 3, we are as Richard mentioned opening 30 additional offices in the territory of our former franchisee in line with our expectations for this year when we signed the deal.

We continue to see this as an important growth opportunity over the next few years especially in Latino market.

Our retail tax plans target stronger growth and higher margins as we build on the momentum from last year's tax season.

Our core US retail clients grew 1.9% excluding ESA filers, both revenue and pretax earnings increased by 11%.

While client retention and tax professional attention grew by more than 1%.

For tax season '09 we expect to continue to deliver in three categories, growth in market share and tax clients served, growth in profits and margins and other long-term growth initiatives.

Let me briefly touch on each of these areas.

Growing our share of later season filers seeking expertise remains Block's biggest opportunity.

This market is won through referrals, word of mouth and direct contact with tax professionals that have the expertise clients need.

We plan to build on last year's success in helping tax professionals build their client base with enhanced training, more public speaking in the community, more referrals, and continuing to give potential clients direct access to the expertise of our tax professionals through our online tax professional finder introduced last year.

We expect more than 25,000 of our tax specialists will have completed the advanced portion of training and client base building by the start of the season.

An increase of 50% over last year.

Since May, we have already spoken in the community nearly 10,000 times, gathering more than twice the number of contacts than we did all last year.

And we expect to continue to grow referrals which last year were up 30%, yielding 150,000 new tax clients.

We believe Second Look which we introduced last year become an even more important product for H&R Block symbolizing our expertise and enabling us to win clients for life, as we uncover errors and returns prepared by others, we find more money for clients on over half of the returns we check and when we do, the savings average more than $1,300.

At $29, this product is a compelling value and another great way for tax specialists to demonstrate their expertise and further build their client base.

We will be supporting this product with additional marketing this year.

For early season filers, who are seeking quick access to money, Block's superior Emerald suite of products is a significant competitive advantage.

In its inaugural season last year, the Emerald Advance proved to be a valuable retention tool.

Of the approximately 900,000 clients who obtained an Emerald Advance, more than 91% returned for tax preparation.

This year, our Emerald Advance product is significantly improved, including being available for new clients, and being available in amounts up to $1,000, compared to $400 last year.

This product is superior to competitor products and truly an important leverage to retain prior client and to gain new ones.

We began offering the Emerald Advance in mid-November and while it is very early results are in line with our expectations.

At 36% APR our core refund anticipation loan remains [40%] cheaper than our nearest competitor for the average size loan when taken on the Emerald card.

The number of clients who deposited their refunds onto an Emerald card last year grew 30% to 2.6 million: demand for the Emerald card continues to grow and we expect to end the season with more than 3 million Emerald cardholders.

Finally, we have strong strategies in targeted markets including Latino and military filers.

We are increasing our investment in Latino marketing this year and we will significantly increase our bilingual staffing.

As we previously announced we will not offer military RAL this year partly as a result we have secured a presence on 29 additional military bases this year.

The military RAL was not a significant business driver for us last year and we do not expect this change to have a material impact on the size of our military client base.

Another key growth objective for us this year is to significantly drive profits and margin.

We identified substantial cost reductions for the tax business in our corporate cost reduction effort announced last year.

We are on track to fully capture those savings.

Our results for the first two quarters give us strong conviction that we will meet or exceed our stated goal of increasing margins by 200 basis points this fiscal year.

Going forward, we have developed a multiyear program to improve the efficiency of our field operations including optimizing our office network, improving productivity and optimizing field management span of control.

These initiatives will yield additional savings of $100 million over the next five years, as a result of optimizing our office network this year, we expect to add fewer than 30 net new locations overall.

In summary, becoming more efficient and cost conscious as well as achieving a better balance of franchise and Company-owned operations will be important parts of our strategy going forward.

Turning to longer term growth initiative we believe the Block brand can be leveraged significantly more, and we are planning to reinvest a portion of the savings we have achieved in additional marketing to support our client growth initiatives.

We are increasing our investment in new media, behind our Latino clients and enhancing new approaches that can yield additional opportunity in the future.

Our marketing this tax season will continue to communicate the expertise of our tax professionals and encourage consumers to experience that for themselves.

As we continue to invest in the future, we start with the belief that we have the best people in the industry.

Recruiting, developing, and retaining our tax professionals continue to be a top priority.

Last year, tax professional retention increased to 74%, a 1.6 point improvement.

This was a significant gain and we with expect this to lead to improved productivity, client service and client retention over time.

This year, we have seen a significant increase in the proportion of experienced tax professionals enrolled in our upper level courses which bodes well for continued gains in tax professional retention.

We are also continuing to support our tax professionals with updated technology, products, training, and software.

Finally, we are investing to continue to grow the expertise of our tax professionals.

As you know the average H&R Block client is served by a tax professional with more than eight years of experience and the equivalent of six university courses of tax training.

Our overall training hours are up 21% this year, which will continue to build our ability to serve clients, seeking the right expertise for them.

We look forward to sharing more details about our retail and digital tax plans at next month's investor conference.

I'll now turn the call over to Becky Shulman.

Thank you, Tim.

I'll start with the discussion of our corporate segment and the banks mortgage loan portfolio, both of which are part of continuing operations followed by a review of our discontinued operations.

I will also cover balance sheet and other items related to our financial statements.

For the second quarter of fiscal 2009 corporate expenses were $37 million compared with $30 million a year ago.

The increased expenses reflect lower investment income and the inability to allocate expenses to our discontinued operations.

These unfavorable changes were partially offset by benefits resulting from the Company's cost reduction program previously discussed.

We expect FY '09 total operating expenses from continuing operations to be flat to the prior year excluding the Texas acquisition and the bank loan loss reserve.

This is a dramatic change to the almost o 10% year-over-year growth over the last five years.

The bank ended the second quarter with $812 million of net mortgage loans held for investment.

Our second quarter delinquency rate was relatively consistent with our previous assumption; however, underlying collateral values on the mortgage loan portfolio continued to decline.

As a result we increased our expected loss severity used to estimate loss reserves on loans less than 60 days past due to 37.5% at October 31.

That compares to approximately 30% at July 31.

Because the original loan to value on the banks portfolio was approximately 76%, our current loss severity assumption covers a more than 50% decline in property value from the appraisal at origination.

During the second quarter, 30 to 89 days delinquency held flat at 4.4% compared to the end of July.

Loans more than 90 days delinquent increased to 7.2% in October from 5.2% in the prior quarter.

With the additions this quarter of $23 million, our loan loss allowance was approximately $64 million at October 31, representing 7.3% of our total mortgage loan portfolio up from 5.1% at the end of July.

Our net loss from discontinued operations of $3 million during the quarter was down significantly from a net loss of $367 million, in the prior year.

The reported results for the second quarter of this year include H&R Block financial advisors and the continued wind down of our former mortgage operation.

A small profit realized from the sale of financial advisors on November 1 will be reflected in our third quarter results.

Activity related to loan repurchase obligations was relatively benign for a second consecutive quarter.

We made just $15 million of loan repurchases and indemnification payments during the second quarter.

Repurchase activity during the quarter did not give rise to reporting of additional repurchase reserves and accordingly we ended the quarter with $225 million in reserves.

We believe that this reserve is adequate.

At quarter-end our unrestricted cash position and continuing operations was $694 million, up about $450 million from July 31.

Our total outstanding debt of $1.7 billion, reflects nearly $700 million of draws on our committed lines of credit to fund just our normal preseason working capital needs.

The ongoing credit crisis has not materially impacted our CLOC availability.

As a reminder we have $1.95 billion of capacity on our CLOC and we only intend to use approximately half of that capacity through January when we become cash flow positive.

Consolidated nonbank debt of the Company both on and off balance sheet has decreased $1.2 billion year-over-year from 2.9 -- from $2.9 billion to $1.7 billion, consolidated nonbank interest expense consistent with the decreased balance is also down significantly for the first half of the year, about $30 million or 43%.

We ended the second quarter with equity of $833 million, which is substantially above our $650 million CLOC net worth covenant.

In late October, we sold 8.3 million shares of our common stock at a price of $17.50 per share and a registered direct offering through subscription agreements with selected institutional investors.

Because the additional shares are weighted on a daily basis and the equity offering was completed on October 27, the weighted average shares outstanding increased only modestly during the second quarter to 329.8 million.

Our capital expenditures are anticipated to be about 100 million to $110 million this fiscal year, which is slightly lower than the $112 million guidance we provided earlier this year.

We also believe that our continuing operations full-year effective tax rate will be approximately 40%.

Moving to our financial outlook, we are reaffirming our FY '09 earnings guidance at $1.60 to $1.70 per share from continuing operations and expect overall mid single digit revenue growth.

We must be mindful that we are just halfway through the year and we generate almost all of our earnings in our fiscal fourth quarter.

Overall we remain confident in our ability to build on the underlying momentum created last year in maintaining a lean and mean organization, all while we invest wisely in our people and our business for future growth.

With that I think we're now ready to take your questions.

Operator, can you instruct the participants on how to ask a live question, please.

(OPERATOR INSTRUCTIONS) Your first question is from the line of Kartik Mehta.

Good afternoon.

I wanted to ask you a little bit more on the guidance.

Obviously the loan loss this quarter was something that I don't know if you were expecting or not.

I was wondering one, if that was anticipated in the early guidance.

If it was not, maybe what part of the business is doing better than you thought so you were able to maintain your guidance?

I guess I will take that.

Tax services this is the second consecutive quarter in a row where our tax services business has performed very strongly, even though it is not the largest part of our off season business, it has done really well and that's helped mitigate some of the loan loss reserves that we have taken on the bank which are a little bit higher than what we thought we were going to be when we started the year.

That's provided us some cushion.

The other thing that is helping us is the acquisition of Blue, which we have now completed also is going to help contribute quite a bit to profitability in quarters three and quarter four.

Just as a follow-up I think Richard, in your statements earlier, in the fall you said you would see more franchises than Company-owned and I was wondering if you believe this is a business that is better run franchise or if it is just a strategy you want to follow going forward with the new stores.

Well, Block has a long history of mixing both Company operations and franchise locations, and I'm not -- I don't think we believe there is a one size fits all.

Markets can be very different, rural markets versus metropolitan markets, more generalized offices versus those in a intensely ethnic community.

And in some locations, franchisees who bring their own capital and their own commitment to and typically have deep roots in their own communities can do a very effective job and oftentimes better than a Company-owned store might do.

But there are other locations where experience shows us overall profitability is higher through Company operations.

So while we have said is that the current mix which is about two-thirds Company owned and one-third franchisee we expect to see shift over time and it will shift over time in the direction of a more even balance between Company owned and franchisees, we don't see that happening over night but we do see that as a gradual progression that will be sustained.

So I would assume that you're anticipating diverting some of the Company owned to a franchisee to get to that mix?

There could be -- I think when we acquired Blue we indicated that we expected to do some refranchising that in the aggregate across the country would offset the effect of that.

We in essence brought about 300 franchise, what were franchise locations into Company-owned, and that we probably will offset that but we don't have to do it all in Texas.

We can offset that anywhere and we expect to do that.

Thank you very much.

Appreciate it.

Your next question is from the line of Michael Millman.

Thank you.

I guess, I think last year, HSBC lent to you the money for your piece of the RAL funding, can you talk about whether they plan to do that again this year?

And what the terms might be?

And sort of related on the credit, I guess the Emerald Advance, can you give us an idea of how many of those advances you expect to make and to date how many have gone for a thousand or higher than had been and how you prevent double dipping since Jackson Hewitt also has a program that they are promoting heavily?

Yes, Michael this is Tim Gokey talking.

Thanks for the question and we do anticipate that the whole area of RAL lending could end up being a distinctive competitor advantage for us this season.

We do have a contractual obligation from HSBC who as you know is one of the worlds largest and best capitalized banks to fund RAL, and we have had, are obviously in ongoing discussions with them and have every reason to believe that that is going to be the case this year.

We are feeling very good about that.

We do anticipate they will be funding that for us again this year.

So they will be funding your piece of that?

That's correct.

Your 50%.

That's correct.

And can you talk about the terms?

The terms are something that are a matter of ongoing discussion but we do not anticipate that they will change our financial results in any material respect.

The other question you had was around Emerald Advance.

I don't think we want to go into forecasts at this time.

We are expecting the program to be noticeably larger than last year, both as we continue to ramp the number of prior clients to take it and because we are offering the programs to new clients this year.

In terms of how we control double dipping between ourselves and Jackson Hewitt, both ourselves and Jackson Hewitt offered such a program in 2006 so we have that experience to fall back on, and while we are offering this to new clients it is primarily for both of us based on lending to prior clients nd we see a very high return rate back to those -- of those prior clients.

So we feel pretty comfortable about that particular risk.

How many did you do last year, and what was the average loan.

Last year we did 887,000, and the loan size was a little bit under $400.

Thank you.

Your next question is from the line of Andrew Fones.

Yes.

Thank you.

I was just wondering how many new offices you will have open this tax season versus last year?

I think you mentioned that there would be 30 new offices in Texas just wondering how many overall and then also how many new express tax locations they're going to open this year?

Thanks.

Yes.

This is Tim Gokey again.

We are, I think I mentioned in the script really taking a comprehensive optimization of our overall office network.

So we are closing over 150 offices that are not sort of at the top of the performance range.

We are adding about 100 new offers both Company and franchise.

We are also refranchising some of our more distant geographic offices, we're doing about 40 of those this year.

On the express tax item, I don't have the exact number in front of me but I think we are expecting just under 90 additional express tax locations.

Between that and all of the other changes, with alternative channels and other things and you add that all together, that's what you get to the sort of 15 to 30 number that I mentioned in the script.

Okay.

Thanks.

And then, my second question if I could, kind of what you expect the size of the bank to reach at the height of the tax season, perhaps Becky and the assets you would expect to buy with those deposits?

Thanks.

So the size of it, the H&R Block bank during the tax season similar to last season where we have a doubling of our balance sheet, this year we expect to peak around $2.6 billion in total assets.

For a very short period of time and then we'll start shrinking back down the balance sheet as we begin to normalize our total assets.

Okay.

Thanks.

And what you expect to buy with the deposits?

Well, because these are very short term deposits during the tax season most of our investments will be overnight, so it will be such things as fed funds, investments in similar investments such as that.

Okay.

Thanks.

(OPERATOR INSTRUCTIONS) Your next question is from the line of Scott Schneeberger.

Thanks, good evening.

Congratulations on a nice looking quarter.

I guess my first question I heard two things that sounded incremental on potential cost savings.

The first was on procurement and real estate initiatives that I believe you said you would quantify later and then I think I heard 100 million over five years of tax field operations, cost cuts.

Could you confirm A, these are both incremental and then B, any additional color on both or each or whatever?

Yes, Scott, this is Russ.

I will take the piece on procurement and real estate and then I'll ask Tim to take the piece on tax.

The answer is these are all incremental.

In addition to the previous E3 cost reduction efforts, that were announced several months ago.

The work on the procurement and real estate, what we are really doing is rather than just looking at individual business segments, looking across the entire organization, so H&R Block business segments as well as RSM McGladrey.

And looking for opportunities where we can use our size and scale to more effectively buy any number of things.

From mundane everyday expenses like pencils and papers and pens to looking at advertising, media buys, looking at how we are spending our legal spend as well.

So a lot of opportunity we think in looking at this on a broader based approach than what we historically have done.

Regarding real estate, we are seeing the effects of the real estate market on our mortgage business that hurts us.

We need to take advantage of a down real estate market.

We have got a lot of locations, whether it is tax offices or H&R Block or corporate offices with RSM McGladrey that we have got, we think a unique opportunity right now to go in and aggressively renegotiate those leases with our landlords.

We have a great payment history, we're a very reliable tenant, and we are going to be much more aggressive in terms of looking at cost savings opportunities in our real estate portfolio.

So that process has just begun.

And that is why we are not quantifying either one of these two for you at this point but we plan to have some harder numbers for you by the time we have our next earnings call.

With that, Tim, you want to address the tax?

Yes, on the field productivity initiative, this is something we have been working on for a while and we wanted to give a bit more details of it because it is really sort of what supports the thing we said a couple of times before about increasing margins by 100 basis points each year over the next several years.

So we wanted to provide some support for that.

So we think there's an opportunity to optimize our office network over time, to improve productivity in a number of areas and we are getting a start on that this year and see that as a continuing opportunity over time.

Great.

Thanks.

For a follow-up I would like to ask, too, on your initial $125 million cost savings plan, how are you progressing against that?

How, I assume from the comments you've made you think you will achieve that this year, how far along are you and how are you reallocating some of the savings you have there as far as putting it back into the business?

Thanks.

We are, we are tracking right according to plan on the original $125 million, that we said we would achieve.

And again, keep in mind that original $125 million was prior to reinvestment in the business, prior to annualization, merit that kind of thing.

So we're tracking, we've already realized about $45 million of it so far this year.

And again before we announced that we were going to hit that, we had already taken the measures to hit it.

So we knew that those were realizable, the challenges we have talked about is creating the cost culture and continuing it and making sure that we don't rebuild those expenses that we already cut.

So, Russ do you want to talk about the reinvestment?

Yes, in term of reinvestment, Scott we have not specifically given specific dollar numbers to each of the initiatives for competitive reasons.

We have said that some of the money is going to reinvest in additional marketing spend for this year.

We are also reinvesting in some technology that's going into our retail and tax offices which we think is going to help our client experience this year but we are not putting specific numbers to it.

But what you can take away from Becky's part of our previous comments was that year-on-year just looking at annual ongoing operating costs our G&A is going to be flat to slightly down this year.

So clearly, we are absorbing any other normal cost increases like payroll merit increases and other normal course of business things, and so having net investment available and still being at or slightly below where we were at spend-wise last year.

At this time there are no further questions.

Are there any closings remarks?

Well, thank you all for joining us.

If you have any other follow-up questions, please give us a call in investors relations.

Thank you.

Good evening.

This does conclude today's conference call.

You may now all disconnect.