H & R Block Inc (HRB) 2010 Q1 法說會逐字稿

Good morning.

My name is Janice and I will be your conference operator today.

At this time, I would like to welcome everyone to the H&R Block's first quarter earnings conference call.

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

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

(Operator Instructions).

Thank you.

Mr.

Dudley, you may begin your conference.

Good morning, everyone.

Thank you for joining us to discuss our first quarter fiscal 2010 results.

Presenting on the call today are Russ Smyth, President and CEO, and Becky Shulman, Chief Financial Officer.

Following their opening remarks, we will have a Q&A session, and during that time we have other members of our senior management team here to be available during that time.

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 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 Block's press releases and forms 10-K, 10-Q, 8-K and other filings with the SEC.

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

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

Earlier this morning, we issued a press release announcing our results and that is available on our website at HRBlock.com.

To give as many participants as possible an opportunity to ask a question, we ask that when called upon, you limit your query to one initial question and then one related follow-up, if needed.

With that, let me turn the call over now to Russ Smyth.

Thanks, Scott and good morning everyone.

Thank you for joining us and happy Labor Day weekend.

As most of you know, the tax business is generally concentrated in the fourth quarter, so our first quarter results are not nearly as significant as they become later in the year.

However, since our last earnings call, we have made several management changes, experienced some changes in our market environmental conditions, and we made some great progress on our plans for 2010 and beyond, that we want to share with you.

After all, tax season is now only 118 days away.

Later in the call you'll also hear from Becky Shulman and she will cover our financial results for the quarter.

But I'd like to start by briefly highlighting our recent management changes, which have strengthened our executive team as we position the Company for long-term growth.

We are delighted to have Robert Turtledove on board as Chief Marketing Officer, to lead our strategic marketing efforts and the execution of our plans this tax season.

Robert joined us three weeks ago, bringing 25 years of broad consumer marketing experience with some of the world's best brands and companies, including Pepsi, Frito-Lay, Pizza Hut and Lever Brothers.

H&R Block is an iconic brand, and we look forward to Robert's leadership in leveraging this powerful asset as we pursue growth in clients and in market share.

And on Monday of this week we announced Brian Woram as our new General Counsel.

For 14 years, Brian oversaw all legal and corporate compliance functions at Centex, one of the nation's largest home builders, and a publicly traded Company before its recent merger with Pulte homes.

Brian's breadth of legal experience, his business acumen, and his leadership skills make him a valuable addition to our team.

With these two additions, plus CE Andrews having joined us as President of RSM McGladrey, and the changes we made in May to our existing management team structure, we now have a strong team in place that's working very well together as we prepare for the upcoming tax season.

Before we begin our comments about the state of the business, I'd like to make a few remarks about the external environment we expect to see this coming tax season.

Based on IRS projections and unemployment data, we believe that the total number of tax returns filed will likely be down 1 to 2% this coming season.

In addition, we expect the do it yourself category will continue to gain a small amount of market share from assisted tax preparation, primarily driven by growth in the digital online space.

We don't believe there will be any real change in trends within the tax preparation industry, as the digital players will expand their advertising and product features and the assisted competitors will continue to expand their network, albeit at a slower pace than last year.

Turning to the regulatory environment, we don't believe that the new tax law provisions resulting from the American Recovery and Reinvestment Act passed earlier this year, will significantly increase the number of filers as the Economic Stimulus Act did in 2008.

However, various provisions such as the Make Work Pay credit will increase the complexity of tax returns.

Earlier this year, the IRS also announced its intention to regulate and license tax professionals, and we support this proposal.

As the leader in the industry, we are actively participating in this discussion with the IRS, have already submitted our viewpoint in writing, and will be represented on both the Company and franchise perspectives in an upcoming panel discussion with IRS leadership.

H&R Block has provided industry-leading tax and ethics training for many years, and we require annual continuing education for all of our tax professionals.

We believe these practices have provided us and will continue to provide us with a distinct competitive advantage in the marketplace.

As you know, there has been some discussion surrounding potential reductions in RAL pricing by various banks that provide the product widely in the marketplace.

We believe we have the Best-in-Class RAL product to offer, and H&R Block has a great track record for leading the industry in RAL pricing, having initiated the 36% APR RAL back in 2007.

We do not expect these changes to materially impact the economics for our clients, or for us as a Company, given our historical pricing and our long-term relationship with one of the world's largest banks.

However, we will continue to monitor the situation as competitive details become more clear.

There are also important market dynamics impacting RSM McGladrey.

The audit market remains soft due to the current economic climate, and billable rates and hours are under pressure.

However, it's important to note that RSM McGladrey's tax and consulting businesses have not been impacted, as our core revenues were up nearly 6% over the prior year.

I know many of you are interested in an update on negotiations with McGladrey and Pullen, or M&P.

As previously disclosed, on July 21st, we were notified by the board of M&P, the partner owned a attest firm that we have worked with for ten years, that they intend to terminate the administrative services agreement under which the two firms worked together to serve clients.

We have been quite clear in our communications that we believe that the firms are better off together, and that this course set in motion by the ten member board of M&P is risky from both a business and a financial perspective, and is not in the best interest of our partners, employees and clients.

With the exception of the complete independence on professional responsibilities and judgments relating to audits, RSM provides all significant strategic and operational leadership.

In addition, all financing and infrastructure support is provided by RSM.

By leveraging our industry position as the fifth largest full service accounting firm with access to significant capital, we see great opportunity for RSM and are fully committed to growing and improving this business.

The negotiations between M&P and RSM are being led by both CE Andrews and myself.

CE as you may remember is a 29 year veteran of Arthur Andersen as recently joined the Company as our new President.

His extensive industry background and leadership experience are invaluable and he will play a critical role in taking full advantage of the opportunities that lie ahead.

CE and I are working together to resolve this situation in a quick and favorable manner by taking three parallel approaches.

First, we have exchanged proposals with M&P to address their concerns in an effort to keep the firms together and that dialogue continues.

Second, since we are not dependent on the relationship with M&P, there are other audit and attest firms that we can affiliate with to replace M&P should the need arise and we are pursuing those relationships at the same time that we are in discussions with M&P.

Lastly, as the dialogues continue, RSM and M&P are engaged in a legal arbitration process concerning certain provisions of our operating agreements.

This arbitration process is likely to continue well into November.

So we'll continue to evaluate our alternatives as we move forward and work towards bringing this matter to resolution in the best interest of long-term shareholder value.

While this is certainly taking up some of my time, and even more of CE's time, the rest of the H&R Block management team is squarely focused on the upcoming tax season.

Having just completed an on-site review of the business plans in each of our geographic regions, I'm very pleased with the progress we are making to prepare for a strong 2010 tax season.

We believe there are three keys to our success.

Operational excellence, leadership marketing, and strong financial discipline.

In terms of operational excellence, we are working to attract and retain more clients by improving the quality and consistency of the client experience, and delivering greater value to all of our clients, regardless of whether they visit our offices, use our online software, or choose some combination of both.

As we mentioned previously, one of our largest opportunities for growth in our retail offices is reducing client walk-outs, situations where people check in at the front desk, but never sit down with a tax professional.

This is clearly low hanging fruit in terms of client growth opportunity.

In addition, we also know that we have a significant opportunity to improve our client retention rates, and we believe we can address both of these opportunities by making a stronger first impression with our clients.

Many of our walk-outs are the result of poor service or lack of attention when they enter our offices.

And although we can't quantify the number, we also know there are many clients who enter but don't check in, or call on the phone but don't come in, due to service issues.

We also know that the first impression we make on our clients impacts their decision to return next year.

Our research tells us that when clients give our front desk associates a high service rating, their overall satisfaction rating is twice as high so we plan to reinvest funds and effort into improving the first impression we make on our clients this season, and we're confident that this initiative will help drive a stronger 2010 and beyond.

This initiative breaks down into three main parts.

First, we'll get more of our clients in front of our best performing and more experienced tax professionals.

We have already identified the tax pros that best serve our clients.

We will schedule them for more hours wherever possible, and we'll adjust our client scheduling process to ensure that they get priority when clients walk in or call for appointments.

Second, we'll also welcome clients warmly with more and better trained front desk service associates.

We will be much more selective in recruiting these personnel, and invest adequate training to ensure they are well prepared when our office is open.

And finally, we're improving our office appearance by making sure they are clean, neat and well organized.

We're also hard at work making improvements to our digital products and features.

Our clients will see a dramatic difference in the overall look and feel of the products this year and they'll be able to utilize a new suite of smart import capabilities.

For the first time, we also plan to fully leverage the Block brand on all of our digital products.

And while the online space is growing rapidly by itself, we are taking bigger steps to take advantage of our unique opportunity to seamlessly integrate our retail offices and digital products to serve our clients in ways that no other competitor can and we'll provide more details on this exciting opportunity in December.

Beyond these operational improvements, which will enhance long-term client growth, marketing will play a critical role in successfully growing clients and market share.

Improving consideration and trial are critical opportunities for us, especially given that we have not moved the needle on consideration over the last several years.

With Robert's leadership as our new CMO and the help of our new agency, DDB, we are working on a number of initiatives to build consideration.

First, our marketing message will be more credible and serious in tone and more consistent in addressing key client priorities.

Second, we'll focus on the expertise of our tax professionals.

They've been a well kept secret for far too long.

Third, our brand messaging will be broader and delivered across multiple media channels.

Fourth, we'll become more effective in national advertising and messaging about H&R Block and its brand promise, to become the most trusted state-of-the-art tax preparation experience at a great price for everyone.

Part of this effort will center on building and promoting the tax institute at H&R Block, as the most trusted source of tax law interpretation.

And finally, we'll place greater emphasis on reaching consumers in key strategic or geographic segments where we have identified significant growth potential.

We also know that the economy impacted certain client segments last year.

Solving the price value equation is an important opportunity that we will take initial steps toward improving this year.

We are working on the specifics of our pricing strategy and will not go into detail for obvious competitive reasons right now, but as I mentioned earlier, our net average charge will benefit this year from the greater complexity that's expected for most tax payors.

We will also provide targeted value offers this year for client segments most affected by the current economic situation.

And over the long term, our goal is to have quality revenue growth driven by client and market share gains.

To help fund the investments in the initiatives I've just discussed, we plan to continue our strong financial discipline.

We'll continue to aggressively renegotiate real estate leases and close down or consolidate low profit margin locations.

We also plan to manage our marketing spend more efficiently, better leverage our field support infrastructure, and focus on eliminating non-value added costs.

And lastly, I want to update you on where we are on our franchising efforts.

As we've noted in the past, franchisees historically have grown clients faster on average than Company offices, but due to geographic differences, it's difficult to compare the operating and financial performance between the two.

We will become an active franchisor again, and we are starting by refranchising up to 300 Company offices.

In the coming months, we will also create a pipeline of quality franchise candidates to support this long-term initiative.

To this end, we have launched a national advertising campaign to target opportunistic entrepreneurs.

We believe that we have a very compelling offer, given our market leadership position, our strong support structure and unit economics that are far superior to other branded tax franchisors.

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

Thank you, Russ.

To start, I would note that we changed our segment reporting starting this fiscal year to reflect the way we are currently managing our businesses.

We eliminated the Consumer Financial Services segment, which was comprised solely of H&R Block's Bank.

Net interest margin and other gains and losses associated with the bank's mortgage portfolio are now reported in corporate operations and the Emerald suite of products and the remainder of the bank's operations are reported in the Tax Services segment.

We will continue to provide transparent disclosure with respect to mortgage loans held on our balance sheet, and we believe this change will provide a more transparent view of operating results for our tax segment, now inclusive of the results of our bank provided Emerald Products.

We will make ourselves available all day to walk you through any changes or answer any questions you may have, and I welcome your feedback.

As you know, we report a loss in our fiscal first quarter, primarily due to the seasonality of Tax Services.

Our net loss from Continuing Operations was slightly better than our expectations, coming in about $2 million lower than last year and flat on an EPS basis at $0.39.

While our tax rate for the quarter was 38.1%, we still expect that our effective rate for the full year to be higher and closer to our original guidance of 40%.

Tax Services revenues rose nearly 8%, primarily due to improved results from our Australian operations.

And RSM McGladrey's core revenues including tax and consulting grew nearly 6%, but those gains were partially offset by a decline in capital markets revenues due to a decrease in the number of transactions closed.

On the expense side in the Tax Services segment, we incurred the expected incremental preseason cost of $9 million from the Southwest franchise operation we acquired last November.

The net impact of the acquisition including revenues was $7 million.

In addition, we incurred an incremental $4 million of severance costs related to the various tax leadership changes we announced in June, and $3 million of incremental but planned and front loaded IT cost to ready for the upcoming tax season in digital and retail.

Expense increases were partially offset by savings in occupancy and other costs stemming from the renegotiation of real estate and office closures.

In corporate operations, our quarterly pretax loss totaled $40 million compared to a loss of $49 million a year ago.

The improvement reflects impairments of residual interest and other real estate owned in the prior year of $9 million, which did not reoccur in the current year.

Turning to the balance sheet, I'm pleased to note that we continue to strengthen our overall financial position, which enhances our operational flexibility and reduces our overall risk profile.

We ended the first quarter with over $1 billion in nonrestricted cash and no borrowings outstanding under our $2 billion committed lines of credit.

The cash decline of approximately $650 million versus April 30th was primarily due to normal offseason expenses, income tax payments, quarterly dividends and seasonal fluctuations at H&R Block Bank.

Net receivables declined to $379 million from more than $512 million at year end 2009, reflecting the normal pattern of collections, primarily at RSM McGladrey.

Total debt was essentially unchanged at $1.1 billion.

Our equity remains strong at $1.2 billion, that's after the normal preseason loss in the first quarter.

As expected, the net mortgage loans held for investment decreased further to $708 million, down more than $37 million from year end, and more than $160 million year-over-year.

Our loan loss reserve allowance at the end of the first quarter was approximately $92 million, up from $84 million at year end.

And finally, with regard to the RSM McGladrey situation, some you may be wondering if Block will need to report an impairment if the differences are not resolved.

Although some level of impairment is possible, depending on the outcome of a number of variables, we are actively pursuing mitigating actions in the event of a separation including alternative attest partners.

It's important to note that we do not expect the RSM situation to have any impact on our debt covenants.

Overall, we're pleased with our quarterly financial performance as we were able to absorb the planned incremental costs in our Tax Services segment, and we continue to achieve the cost efficiencies we have targeted in the areas of corporate overhead and non-client facing activities.

We remain on track to achieve earnings for the full year within our previously established range of $1.60 to $1.80 per share from continuing operations.

We continue to expect an improvement in Tax Services margin totaling 100 basis points over two years.

I'll now turn it back over to Russ for final comments.

Thanks, Becky.

So as you just heard, we feel good about our financial results in the quarter, and more importantly, we're optimistic about the progress we're making so far this year on our operational excellence plans, our marketing strategies, and our continued financial discipline.

We believe that these initiatives will not only drive improved client and profit growth in fiscal year 2010, but also establish a strong foundation for growth in fiscal years 2011 and 2012.

So that concludes our prepared remarks, and we're now ready to take your questions.

As always, after we finish, Scott and Derek will be available through the rest of the day in case we're unable to address all of your questions within our allotted time.

(Operator Instructions).

We'll pause for just a moment.

Your first question comes from the line of Kartik Mehta of Northcoast Research.

Good morning, Russ.

I wanted to ask you about your comment about the tax business.

You said that the IRS anticipates tax returns to be down about 1 to 2% and then you also indicated that you thought the software business would take some market share and obviously an H&R Block specific issue is maybe the loss of some clients because of Wal-Mart.

If you put all that, and look at the numbers, it sounds like for H&R Block you're kind of starting at negative 3, possibly negative 4.

I'm wondering from your perspective, would you anticipate this year to be a negative client growth year because of all the headwinds or are there other things that you think you'll be able to do to have a positive client growth year for the upcoming tax season.

Kartik, as you know, when we gave our guidance on last quarter's call, we mentioned our guidance was based on low single digit revenue growth.

And we specifically don't want to repeat what we've done in the past, which is say how much of that is coming from net average charge and complexity, how much of it is coming from our tax form pricing or how much of it is coming from client growth.

In the economic environment that we're dealing with and with the headwinds that you mentioned, we need the flexibility to be able to manage and balance all those three factors during the course of tax season.

And so for that specific reason, we think there's a number of different ways that we can get to low single digit revenue growth and we will manage it in a way that gives us the best result for 2010, consistent with our guidance, but even more importantly, also positions us strongly for growth beyond 2010 as well.

So I'm not trying to avoid the client growth question.

There are headwinds but we think we've got a lot of good operational things, like the walk-outs that we talked about earlier, that should help us gain market share and hopefully potentially offset a lot of the headwinds that we face.

And just switching gears a little bit, ask you about McGladrey Pullen.

You talked about having a possible, if things don't work out with Mcgladrey Pullen, maybe going and allying yourself with another attest firm.

If that happens, any thoughts or any comments you can provide in terms of the revenue you would be able to keep as a result of having a newer attest firm and losing McGladrey Pullen, any thoughts on what the impact could be to the business?

At this point, Kartik, until we really get closer to understanding who those potential attest partners might be, and it doesn't necessarily need to be one, it probably likely would not be just one, to be able to replace as many of the clients that we currently have with M&P, I can't tell you.

What I can say is that our hope would be, if we do end up aligning with different attest firms, that we'll be able to keep as many of our M&P attest partners with RSM McGladrey and our new affiliated attest firm and as we possibly can.

So our plan would not be to try to give up our existing M&P audit partners, or their clients.

But be able to realign them with our new attest firm partner.

Thank you very much, Russ, I really appreciate it.

Your next question comes from the line of Sloan Bohlen of Goldman Sachs.

Just another question on RSM.

Could you give us a sense of what the overlap is for those clients that are using the audit services at M&P and also using you for a consulting basis.

I'll let CE Andrews handle that one.

If you just, the breakdown of the way our client base is, about 14% of our clients are attest only and then where we have both joint non attest and attest services, is about 35% as we look at that and that leaves about 51% where we have -- that provide non-attest only services to them.

Okay.

And then just switching gears real quick.

Russ, you mentioned potential new geographies.

Is it possible that we could see something as big as the Southwest acquisition that you did last year?

Are you looking to do something a little bit smaller.

I talked about new geographies not in terms of acquiring new franchisees.

As we mentioned when we did the Southwest acquisition last year, that's really the last large independent franchise network in the system.

Clearly our focus is really on going the opposite way and refranchising offices as opposed to focus on purchasing locations from franchisees.

My reference to geographic opportunity is, we have a couple very large urban markets where we have significant market share opportunities, where they are running at about half of our national market share averages.

Houston is one of those and that was part of our strategic purpose in acquiring the Southwest franchise.

But the other two are New York and Los Angeles where we think we have tremendous opportunities to grow our clients in those two large urban centers.

Okay.

So that was more of a marketing I guess related comment?

Yes, marketing and operational as opposed to an acquisition strategy, absolutely.

Okay.

Great.

Thank you, guys.

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

Yes, thank you.

I have a couple for Becky to start with.

Becky, I was wondering if you could tell us what tax revenue would have been reported on the old basis, if you like, this quarter.

Thanks.

I'm sorry.

I didn't quite understand you.

Can you repeat the question, please?

Yes.

I was wondering what tax revenue, tax division revenue would have been in Q1 if you would have reported it on the old basis, so excluding any revenue you had from like the Emerald product in the quarter, so forth.

Thanks.

I think there is minimal impact and we have -- we intend to file the Q later today and we have restated all the periods in there in a like manner so you'll be able to get visibility to that, but it's minimal.

Okay.

Thanks.

And then the other question for Becky, I was wondering -- I think you said that the loan loss provisions were up about $8 million from Q4 to Q1.

Is that right?

It was $13 million in the quarter, so again, while we are still adding to reserves, we're adding at really overall a decreasing rate.

So if you look year-over-year, we definitely expect to be down this year.

Okay.

So the expense was $13 million but the increase was $8 million to the actual reserve?

Okay.

Thanks.

And then a couple for Russ.

I was wondering if you could give us a sense of the number of stores you expect to have this year, on a Company owned and franchise basis and the breakout between shared locations and regular offices.

Thanks.

So Andrew, again, you were you cutting in and out a little bit.

I heard a piece of the question on where we think we're going to be in terms of number of office locations and then what we think the mix is going to be by the end of the year?

Is that right?

Yes, that's right.

Well, in terms of office locations, we will probably close about another 300 locations prior to this tax season.

And in terms of the mix between Company and franchise, as I mentioned, we're looking to refranchise up to 300 Company offices to qualified franchisees this year.

I believe we did 37 right before last tax season in terms of selling them to refranchisees.

I'm sorry, it's 43.

So we'll get the full year benefit of those as franchise operations this year and we'll continue to refranchise really as many of the 300 as we can, based on the quality of the franchisee pipeline that we're able to create.

Okay.

Thanks.

And then I'd like to take maybe a little different swipe at the client growth question.

I was wondering what we should assume in terms of the impact in terms -- the list of initiatives you mentioned that should impact market share gains for you this year in the retail business, I was wondering which of those initiatives you think are going to have the most impact.

Thanks.

Well, again, we do believe that reducing the number of clients that walk out of our offices after having checked in is the biggest and most and best opportunity to try to impact client growth for this year.

It's something that's directly under our control and is based solely on our ability to execute better and do a better job of greeting and welcoming those clients when they walk in.

In addition to that, as I mentioned in my prepared remarks, there is a number of people that walk in but don't check in, and probably many, many more that call us on the phone but don't get good service, and we miss the opportunity to bring them into our offices.

So those combined areas I think are are our single biggest opportunity for growing clients by improving operations this year.

At the same time, from a marketing perspective, consideration -- I cannot overemphasize the importance of our need to grow consideration.

We're not going to be able to grow trial or new clients unless we get more people to consider us.

And so that is a critical factor for us.

We know if we can grow consideration by a point and get any kind of reasonable conversion rates to actual trial and client usage, that that will grow our client base rapidly and significantly.

So I really think, Andrew, it's based on how well we execute in those two areas in terms of our ability to offset some of the headwinds that we talked about earlier.

We think on the client walkout piece, we've got opportunities to get between 400 and 500,000 additional clients this year that we did not get last year by better executing, so I think that gives you a sense of the order of magnitude that those kind of operational improvements can have, and then consideration could be significantly higher, depending on how quickly we're able to move the needle on that metric.

Thanks.

And if I could just ask one more, perhaps.

Given the potential for regulatory changes here for the tax preparers, I think that in California, perhaps also Oregon, there's already rules related to tax preparers.

I was wondering if you could give us a sense of your market share in those states relative to other states where there's no regulations.

Thanks.

Generally, the comments that we've heard, I want to state clearly that this is not -- I'm not stating our opinion, but feedback from others, is that the initiatives on regulating tax prepares in California has not worked particularly well in terms of accomplishing the objectives that they set out to do.

Oregon seems to be a better working model, and I will tell you that up in the Pacific Northwest we have some of our highest market share rates as we do across the rest of the country.

That's great.

Thank you.

Your next question comes from the line of Scott Schneeberger of Oppenheimer.

Thanks.

Good morning.

Following up on the tax location question, Russ, you mentioned probably 300 would be closed this year.

Is there any intention to add new stores for 2010?

I mean, we will add some in areas where we've got opportunities, as I mentioned.

Part of our opportunity in New York City in particular is likely to include some real estate expansion.

But not a significant amount of new office growth is planned for this year.

So that 300 is safe to say a net number, maybe a little less than that would be the net number?

Brian, what will be the net office count?

Probably a reduction of about 500 would be my guess.

You're talking about for the year?

Including the Wal-Marts too?

Yes.

Yes.

Oh, okay.

Don't forget that we lost the -- we are not going to be in Wal-Mart locations this year.

Thanks.

That's helpful.

Switching gears a little bit, could you just give us a feeling for time frame on resolution of the RSM McGladrey matter?

Do you think next quarter call that will be something that's concluded and we'll know the ongoing structure or will that play into early 2010?

It's really hard to tell I think at this point, Scott.

As we mentioned, we're pursuing three parallel paths.

Some of them can move more quickly than others.

Our hope is that we can find some type of amicable resolution to this with M&P.

We think that is in their best interest and we think it is in ours but it takes two parties to come to an agreement.

So I really don't want to lock ourselves into a time frame.

We certainly want to resolve this as quickly as we can, but we also need to make sure that we resolve this in the right manner and have a resolution that is a permanent solution or at least a longer term solution and not rush to quickly resolve it now but have to be dealing with the same challenges and issues one or two or three years from now.

Okay.

Fair enough.

Thanks.

And then Becky, minimal share repurchase activity in the quarter and I noticed that you didn't tap the [C lock] I don't recall what your historical trend has been in the fiscal first quarter but as you enter the tax season generally you, in a typical year, will have drawn about $1 billion on the c lock.

Could you give us a feeling of how you're managing the balance sheet as you go through this tax season or head into this tax season?

Thanks.

Sure.

So I'll separate that kind of into two questions.

So we definitely have the balance sheet and we definitely have the liquidity, as I said.

We don't have anything drawn on our committed lines of credit at this point.

We still are operating under the $2 billion Board authorization for share repurchase, so that is available to us certainly this year as we think about it.

So from a cash perspective, again, we look really good.

We expect that we will be begin borrowing at some point in December.

But again, those borrowings will be outstanding for probably less than a month all in.

So really, no change to our strategy on share repurchase at this point.

And liquidity and balance sheet look really strong.

Okay.

Thanks very much.

Your next question comes from the line of Michael Millman of Millman Research.

Thank you.

Can you give us your opinion, to what extent tax preparation business, particularly for the speed of refund filers, has become or is becoming commoditized.

Michael, if you could do me a favor and get a little bit closer to the microphone.

You were cutting in and out again it sounded like your question was about our view of refund filers and something about being commoditized.

You got it.

I'm not sure what you mean by that.

Can you be a little bit more specific?

Well, I was asking you to be specific, to talk about whether you think that the tax preparation industry, particularly for the speed of refund filers or RALF participants is becoming commoditized?

No, absolutely not, I don't think it's being commoditized.

In fact, I think it's going to the opposite way.

The reason I know that that's the case is, look at the complexity of the tax code and look at how that is reflected in the increases in net average charge from returns being more complicated.

The IRS continues to pass additional refundable credits and other tax law changes that make it more critical than ever for people to have a tax specialist to help them with this very complicated and unsettling time that occurs once a year.

And so I really think it's getting less commoditized and we believe it will continue to do so and I think that's a big part of our growth opportunity in the years to come.

I guess I was thinking from the standpoint, at least when we look at the numbers for the last year or two, of people, again, early season filers seemingly to be agnostic as to whether they go to Block, Jackson Hewitt, Liberty, or some mom and pop independent.

Well, Michael, as we've said before, certainly last year and the economic situation, people were more price sensitive than ever before when it came time for tax prep.

And we saw the impact on that with our client base, where most of the -- our biggest client losses were in the lower adjusted gross income client segments and that's why we've said that we will have some targeted price value offers for those client segments most impacted by the current economic situation.

I think that's a temporary occurrence.

I don't think that's a permanent shift in how people are going to file their tax returns permanently.

We're seeing a lot of clients come in in the off season, having done their returns digitally last year, that are now having second thoughts or concerns about whether they did it right or not.

And I think a lot of this is incumbent on how we better market our brand and our tax expertise, relative to the other competitors, both branded and independents in the category, to make it clear to our clients why they ought to choose H&R Block as their preferred tax preparation solution.

And a follow-up on the pricing issue.

I think you indicated that there was likely -- we know more complexity this year.

Last year I think your price increase if I recall was very minimal and sounds the same this year, but all in all revenue per return, should we assume similar to the 7% of last year, given the complexity?

Again, Michael, what we've said and will continue to say is included in our earnings targets for this year, we based it on low single digit revenue growth.

I'm not going to get into the specifics of how we're going to manage complexity, which we think could be worth a couple points on net average charge, relative to regular forms pricing, relative to targeted value offers, relative to client growth numbers.

As the situation evolves and we find out what works or what isn't working, we'll continue to react during tax season to find the best balance that drives results for this year and gives us a strong foundation for future years as well.

Great.

Thank you.

Your next question comes from the line of Bill Carcache of Fox-Pitt.

Good morning.

Can you speak a little bit more about the changes to your marketing message this year?

You talked about it, kind of having a more serious tone, but can you maybe just give a little bit more color on how it is that you plan to target expertise filers and kind of what media channels you might kind of focus on to do that.

I'm going to turn that over to Robert Turtledove.

Even though Robert has only been here three weeks, he is fully engaged in all of these discussions so Robert?

Swamped is a better way.

Good morning, Bill.

Good morning.

I think a couple of things.

What's so important in this, we're putting on what we're calling our consumer forensic goggles and we're digging very deeply into the customer, the category and the behavior and looking at it from their shoes.

What we discovered was a tremendous number of insights on their attitudes, their behaviors, their perceptions, how and why they choose to choose what they choose.

Those insights and learnings are going to show up not just in our messaging and our marketing, but they're going to turn up in our products and the way we take those products to market.

I think there's a confidence that we have informed knowledge about how consumers want to see and use our products and how they want to hear about us.

And I think you'll see that.

People take their taxes seriously and what they'll see is we take them seriously too.

I think that's the first point in terms of overall tone and messages.

I think the second piece is we intend to spend smarter, not necessarily more.

What does that mean?

Well, if you've got a good message and you spend -- I'm making up a number, you spend $100 million on it, you'll get a good message at $100 million.

If you've got a very powerful message and you spend the same money, you're going to get a multiplier factor on that, and $100 million can seem like $120 million or $130 million.

Spending in the right places with the more powerful message is another key to us doing more with the same amount.

I think the final piece is a recognition that consumers are consuming the tax products and services in a lot of different ways, and we're going to look like and reflect the way those are being consumed.

That means a balanced focus on our great retail offerings as well as our digital and our online and any other ways they want to consume their taxes.

So at a broader level, those are the marketing changes or the marketing strategies that we're bringing to bear and we're going to have a lot more of that over the next quarter, but hopefully that addresses some of your questions.

That's fantastic.

Thank you.

Based on your experience, can you just talk about how comfortable you feel that the marketing message can have an impact this year or is it something like that would maybe take a little bit longer?

Again, good question.

I think I'm actually pretty confident that we will definitely get some traction.

Now, things like consideration and perception and attitudes do change over time.

And while we certainly believe that this is a longer term buildings process of re-establishing certain brands, regards and credibility, we believe pretty strongly that we've got a good shot of changing some of those consideration perceptions in this upcoming tax season.

And Bill, just to touch on something that happened last year here prior to Robert's time, at the end of last tax season, we changed the tone of several of our ads.

And we have a measure for our ads called Made You Want To Buy, which is probably our best surrogate metric in the short term for what is otherwise longer term consideration by clients.

And with the simple change in the tone and messaging of that ad, we improved the Made You Want To Buy rating on that commercial by 45% from where we had been running with previous H&R Block ads.

So if that is a broader indicator of the ability with the right messaging to change perception, then we are very encouraged.

That's extremely helpful.

Thank you.

Going back to a separate issue on -- that you spoke about earlier on the Business Services and kind of RSM relationship with McGladrey and Pullen, could you talk a little bit more about to the extent that you start heading down the path of just for the sake of argument, alternative attest partners, don't most attest firms typically also offer Tax Services and therefore they would have to kind of give up that revenue stream if they were going to partner with you and would that involve some kind of upfront payment?

I guess how do you think about that?

Go ahead, CE.

Any attest firm would bring with it not just attest practices but whatever their full scope of services which in almost all cases would at a minimum include both audit and tax type services and probably consulting services as well.

Depends on the firm.

If you acquire those businesses, just like we did with RSM a few years ago, all of those would come with them and so with it would come their personnel, their clients, their mix of services.

And then we would -- our challenge would then be and what we would do is integrate the components of the RSM business that we retain, which would be the consulting and tax businesses, into those organizations as best we could, so that we end up with really the combined outcome if you will, of the firms that we acquire, combined with the services that we retained, and that's what we would manage in some fashion as an integrated business going forward.

As I mentioned earlier, one of our objectives would also be to have the high quality audit partners from M&P stay with RSM McGladrey and our new attest firm partner with the goal of not only keeping those great employees but hopefully keeping their audit and attest clients as well.

Okay.

Would there be potentially an upfront payment with any new potential new attest partners?

There could be but we're exploring a lot of different creative ways of partnerships going forward.

Okay.

Great.

Finally, if the I may, I appreciate your answers, on international businesses, does your recent announcement about adding new tax professionals in Canada signal a push toward increasing the contribution of international revenues to the business and should we expect a similar push in Australia?

What drove the improved results in Australia?

And those are my final questions, thanks.

I'll take kind of the high level international piece and then turn it over to Joan Cohen on specifics of Australia.

Our businesses in Canada and Australia have performed extremely well for us for the past several years.

This year is no exception and as we mentioned in our comments and in the press release, part of the reason for our first quarter performance was due to Australia's strong results.

Now, keep in mind that their seasons are opposite ours, so while first quarter is slow for us in the fiscal year, that is their peak season.

But those businesses have done extremely well for us.

I think down the road we see continued opportunity for greater contribution in our international business, both in Canada and Australia, as well as some other markets that we would potentially penetrate over the coming years.

But I think that's a longer term piece of our strategy and obviously more critical importance for us in 2010 and 2011 is growing our clients here in the US tax businesses as well as our market share.

Joan, you want to cover a couple quick highlights from Australia's results this year?

Sure.

So Australia had better than expected results because there was an economic stimulus package that was done in Australia that, while it related to the prior tax season, the tax filer needed to file in -- by June 30th of this year, so we had some great early season results.

We were able to put those clients in front of our best tax professionals in Australia, because they are a year-round tax professionals there, so we're expecting to have great client retention around those new clients.

Both Canada and Australia have been charged with increasing their market share over the next five years and they're in the process right now of putting those plans together and we expect that to be hugely successful.

That's great.

Thank you very much.

Before we end, I do want to clarify on a question that was raised earlier regarding expected office count levels.

In addition to the 300 or so traditional offices that we mentioned that we're going to close, prior to next tax season, the count on the Wal-Mart closings is a reduction of 700 offices and in addition, we have probably got another 200 or so offices in what we consider alternative channel locations, like Sears and other type of places, that we are also likely to close.

So it's more likely to be about a total reduction of around 1200 locations, of which most of those, really other than the 300 traditional offices, are considered alternate channel locations.

So I hope that helps clarify the question asked earlier about office count expectations.

Thanks for your time everyone.

As we mentioned, Scott and Derek will be available during the rest of the day to answer any questions we didn't get a chance to cover today and have a great holiday weekend.

This concludes today's conference.

You may now disconnect.