H & R Block Inc (HRB) 2011 Q4 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the H&R Block fourth-quarter and fiscal-2011 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.

I would now like to turn the call over to today's host, Mr.

Derek Drysdale, director of investor relations.

Sir, you may begin your conference.

Thank you, Zetania.

Good afternoon, everyone, and thank you for joining us.

Today, Bill Cobb, our President and CEO, and Jeff Brown, our CFO, will review our fiscal 2011 results.

Several other executives, including Phil Mazzini, President of Retail Tax Services, Jason Houseworth, our President of Digital Tax Services, and Kathy Barney, President of H&R Block Bank will be available during the Q&A session.

In conjunction with today's call we have posted the press release and slide presentation to the investor relations website at hrblock.com.

We also plan to file our 10-K for fiscal 2011 later this afternoon.

Before we begin, I'd like to remind everyone that today's remarks may include forward-looking statements as defined under the Securities Exchange Act of 1934.

Such statements are based on current expectations and management's expectations as of this date and are not guarantees of future performance.

Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict.

As a result, our actual outcomes and results could differ materially.

You can learn more about these risks in today's press release, our Form 10-K for fiscal 2011, and our other SEC filings.

H&R under -- H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements.

Finally, I'd like to remind everyone that some of the numbers we reference today are presented on the non-GAAP basis.

We have reconciled the comparable GAAP and non-GAAP numbers in today's press release.

At this time, I'd now like to turn the call over to Bill.

Thanks, Derek, and good afternoon, everyone.

It's a pleasure to be here today on my first earnings call as H&R Block's CEO.

Earlier today, we announced fourth-quarter and fiscal-2011 results and I am pleased to say that we have a lot of momentum going into fiscal 2012.

Today, I'll talk a bit about that momentum.

I'll also give you a sense of what I've learned during my first six weeks on the job.

Let's start with our fiscal 2011 results.

First, total returns prepared worldwide were up nearly 6% to 24.5 million.

In the US, we grew returns by 6.5%, our best growth since 2001.

We estimate that industry-wide IRS filings grew about 1%, so that we gained about 80-basis points of share in the US.

In Retail Tax Services, Phil and his team drove much stronger results than many expected.

We gained more than 500,000 clients, and we estimate that we gained 60-basis points of share in the assisted category.

We also showed significant improvement in key leading indicators, including client retention, satisfaction, and new client growth.

So how did we grow share?

In retail, our growth this year was led by improved execution, client service, and aggressive client acquisition programs, such as free federal 1040EZs and second looks.

We also capitalized on industry-wide consolidation to convert competitor returns to H&R Block.

I'm particularly excited about the success of the free federal 1040EZ program.

Introducing young filers to the benefits of assisted tax preparation is a critical component of our long-term growth strategy.

Remember, the majority of these filers migrate to more complex tax returns within two years.

Thanks to the program, we now have a solid pipeline of new and younger clients and the world-of-mouth referrals they generate.

Expect more of this kind of innovative marketing in 2012.

In digital, our share gains were the result of improved marketing, the redesign of our website, and product simplification.

Smart advertising and a clear call to action drove customer acquisition and trial.

Our website turned visitors into clients and an improved product experience helped clients achieve completed returns.

As a result, our client base increased by nearly 800,000, led by online growth of nearly 29%.

Thanks to the fabulous work from Jason and his team, we estimate that we gained 90-basis points of market share in online, and about 60-basis points in software.

In financial services, we leveraged H&R Block Bank this year to offset the loss of RALs.

The bank processed nearly six million [RACS] and approximately 2.3 million Emerald Cards, with $8 billion in total deposits.

Finally, on the international front, total returns in Canada and Australia grew about 1%.

International revenues increased about 8% to $206 million, largely due to favorable exchange rates.

All together, our adjusted non-GAAP net income from continuing operations was essentially flat to last year, and we generated free cash flow of $450 million.

Of course, there is some challenges in 2011.

Our inability to offer RAL impacted our financial results, although the Company did do an outstanding job dealing with the loss of the product.

Another drag on both our top and bottom line came from RSM McGladrey, which had a disappointing year.

Revenue and profitability there fell for the second consecutive year.

Obviously, the challenges at McGladrey are on my radar screen.

And, like many S&P 500 companies today, H&R Block has had to deal with its share of legal threats and challenges.

As you may have heard, some people with their own agenda have used the news media to imply that H&R Block might be liable for all claims in excess of Sand Canyon's ability to pay.

We strongly disagree.

We believe that Sand Canyon's financial position is more than sufficient to satisfy valid rep and warrant-related claims.

We also believe that anyone pursuing rep and warrant claims will have no recourse to H&R Block.

In short, we're confident that Sand Canyon will continue to handle all valid claims and we believe the process will not affect H&R Block.

Jeff will go into more detail later in the call.

As you might imagine, the past six weeks have been a whirlwind of activities for me.

I've spent time with our associates, franchisees, and the best tax professionals in the industry.

I've gotten to know the senior staff and we've spent hours reviewing and considering our plans for 2012 and beyond.

Here are a few of my early take-aways.

First, I believe there is a lot more value to be had across four key growth areas; retail tax, digital tax, the Emerald Card, and international.

H&R Block is well positioned to thrive in the sea of change and competition, and here's what is bolstering my confidence.

First, our core retail business is strong and growing stronger as more clients turn to H&R Block.

The assisted category remains very resilient due the complexity of the US tax code and the value that tax professionals provide clients.

There's been no change in the proportion of either assisted or do-it-yourself returns during the last decade.

Today, assisted returns represent about 61% of IRS filings, the exact same percentage as 2002, and more than 90% of industry revenues.

Second, our digital business is acting as a spring board to a deeper relationship with our existing clients and is opening the door to new ones.

As the digital category continues to grow at the expense of the shrinking pen-and-paper market, the goal in 2012 is to compete with a vengeance and to continue to take digital share.

Third, the Emerald Card is a fabulous product that makes H&R Block Bank a key asset.

I believe we can significantly expand on the success of the Emerald Card by increasing the number of cards in circulation, the amount of direct deposits and the frequency of use.

Finally, I believe H&R Block's business outside the US is underrated and I'm excited about our prospects in this area.

In 2012, we will focus on growing clients and market share in Canada and Australia, while continuing to explore additional countries in which to further build our global presence.

One of the highlights in my first six weeks was the opportunity to spend time with Henry Block.

He patiently listened as I talked about a variety of ideas for the Company he founded.

He could not have been more gracious and he had a wealth of suggestions to share.

Towards the end of our conversation he said, remember Bill, however you approach it our clients come first.

If we stay focused on them and on preparing error-free returns, we'll ultimately increase the number of returns we're a part of, and if we do that, we'll ultimately increase profitability.

Mr.

Block nailed it.

His simple equation will be at the heart of our efforts in 2012.

Now let me turn it over to Jeff to discuss our financial results.

Thank you, Bill.

After a slow start, our tax season finished exceptionally well and our fourth-quarter results reflect the strength of our finish.

Fourth-quarter earnings of $2.14 per share included an after-tax litigation charge in our Business Services segment of $17 million, or $0.06 per share.

Excluding this charge, we achieved quarterly earnings of $2.20 per share.

For the full fiscal year, net income from continuing operations was $419 million, or $1.35 per share.

Excluding the fourth-quarter litigation charge, as well as other previously-announced charges, adjusted income from continuing operations of $471 million was essentially flat to the prior year.

Adjusted earnings per share increased 7% to $1.52 due to reduced shares outstanding.

Total revenues fell approximately 2.5% to $3.8 billion.

In our Tax Services segment, fiscal-2011 revenues fell about 2% to $2.9 billion, primarily due to the sale of Company-owned locations to franchisees, as well as revenue impacts stemming from our inability to offer refund loans this tax season.

Adjusting for special items, pretax income for the segment was essentially flat to the prior year at $830 million.

Cost reduction measures put into place in the first quarter of this year, principally reductions in force and reductions in our office network, offset revenue declines and allowed us to achieve higher margins.

Adjusted pretax margins improved from 28% last year to 28.5% in the current fiscal year.

Our results this year included $45 million of pretax gains from the sale of Company-owned offices, and results last year included gains of $49 million.

Our focus on rebalancing our office network is substantially complete, and we expect little of this activity in coming years.

Gains in 2012 will be limited primarily to the $7 million of deferred gains that existed at the end of the current year.

At RSM McGladrey revenues fell approximately 3.5% to $830 million, as growth in the professional services sectors in which we compete proved challenging.

Reductions in both management fees from McGladrey in Poland and services performed under a large multi-year engagement in our consulting practice also contributed to the decline in revenues.

Adjusting for litigation and impairment charges, pretax income for the segment declined from $88 million last year to $77 million in the current year, and lower profitability was due almost entirely to the decline in revenues.

In corporate, our pretax loss of $139 million compared to a loss of $142 million in the prior year.

Declining mortgage loan balances yielded lower interest earnings which were more than offset by reduced loss provisions on those loans.

The net principal balance of mortgage loans held for investment at year end was $485 million, a decline from $110 million from the prior year, and losses on mortgage loans fell nearly $12 million compared to the prior year.

Results of our discontinued operations principally reflect litigation and related costs associated with the ongoing wind down of a former mortgage origination and servicing business of Sand Canyon.

Losses from discontinued operations were $13 million in the current year compared with $10 million a year ago.

During the fourth quarter, Sand Canyon received new claims for alleged breaches of representation and warranties in the principal amount of $55 million.

Claims of approximately $45 million were reviewed during the quarter, with incurred losses totaling $4 million.

At April 30th, claims totaling $79 million remained under review and Sand Canyon's reserve for probable losses on representation and warranty claims totaled $126 million.

As mentioned on last-quarter's call, Sand Canyon made its final payment of $24 million during the quarter for reserved losses under a $50 million indemnification agreement dated April 2008, and Sand Canyon has now fully fulfilled its obligation to that party.

As a reminder, with the exception of a few instances where H&R Block guaranteed the performance of Sand Canyon, representation and warranty claims are solely the obligation of Sand Canyon.

Since its acquisition by H&R Block in 1997, Sand Canyon has been and continues to be operated as a separate legal entity.

It has maintained separate executive and operational offices, its own management team, IT platforms and separate administrative functions.

Sand Canyon secured its own independent warehouse lines to fund loan originations, and provided separate audited financial statements to its lenders.

There was no overlap of the Sand Canyon and H&R Block executive teams.

Decisions on underwriting, originating, and the sale of loans were made solely by Sand Canyon personnel.

In addition, Sand Canyon never paid any dividends to H&R Block since the business was acquired in 1997.

Based on claim activity that we have observed since Sand Canyon ceased operating activities, we continue to believe its reserve is adequate.

Were ultimate losses ever to exceed reserved amounts, those losses would be charged against the remaining equity of Sand Canyon.

At April 30, 2011, Sand Canyon had equity of approximately $300 million in addition to its accrual for representation and warranty liabilities of $126 million.

We believe Sand Canyon's equity is more than sufficient to satisfy valid third-party claims and that claimants have no recourse to H&R Block, except for the three parties, which H&R Block has guaranteed the performance of Sand Canyon.

As a reminder, these parties were buyers of Sand Canyon loan pools, that required a parent guarantee if Sand Canyon was exiting the mortgage loan origination business.

Guarantees were related to Sand Canyon's performance obligations under the applicable agreements and were not related to loan performance.

Remaining guarantees involve three loan pools with an original principal balance of approximately $1.7 billion.

Over the last three years, Sand Canyon has not received any claims related to two of these loan pools, totaling $1.5 billion, and on the remaining pool, Sand Canyon has received claims of $7 million, with losses totaling less than $1 million.

While we cannot predict what may happen in the event of a lawsuit, or Sand Canyon bankruptcy, we have no reason to believe that a court would disregard the legal separateness of Sand Canyon and H&R Block under any veil-piercing argument.

There have been no cases to date in which an H&R Block entity was held liable for the acts of Sand Canyon.

Now, turning to our overall financial position, we ended the year with unrestricted cash of $1.7 billion, total debt of $1.1 billion, and equity of $1.4 billion.

In fiscal 2011, the Company repurchased and retired 19 million shares at a cost of $280 million, or an average cost of less than $15 per share, and we had 305 million shares outstanding at year end.

Our effective tax rate for continuing operations was 38.1% in fiscal 2011 compared to 37.6% a year ago, and next year we expect our full-year tax rate for continuing operations to approximate 38.5% to 39%.

Depreciation and amortization was $122 million for the current year and we expect a similar expense level next year.

Capital expenditures this year were $63 million and in fiscal 2012 we anticipate capital expenditures of approximately $90 million.

And with that I'll turn the call back to Bill for some final remarks.

Thanks, Jeff.

In 2011 we proved that we can grow both our retail and digital channels simultaneously.

Before we open the call to your questions, I'd like to provide an update on two areas.

First, the Justice Department filed an injunction last month to block our pending acquisition of TaxACT.

Both H&R Block and TaxACT remain committed to the transaction.

Here's why.

First, we continue to believe this merger is the right strategy and that our legal position is strong.

Second, combining H&R Block and TaxACT will do exactly what the Justice Department wants, bring competition to a digital marketplace that's currently dominated by one player, Intuit.

Third and most importantly, we believe consumers will be the primary beneficiaries of the merger through innovation, enhanced functionality and low prices.

As a result, H&R Block and TaxACT have agreed to vigorously pursue litigation against the Department of Justice.

We expect a preliminary injunction hearing will take place by the end of September.

Finally, let me touch on capital allocation.

As you all know, we generate a significant amount of free cash flow.

As we look ahead, our goals are to grow clients and market share.

I see some great opportunities to invest in our business and strategic, complementary adjacencies to accomplish those goals.

To do this, the Board and I have decided to take a balanced approach to capital allocation.

We will focus on strengthening our balance sheet, growing our net worth, and maintaining the financial flexibility to grow clients and market share.

We will make strategic investments while continuing to return capital to shareholders.

We are pleased to maintain our annual dividend of $0.60 per share, which represents a strong yield of nearly 4%, and we plan to continue share repurchases on an opportunistic basis while positioning our balance sheet to support our growth plans.

With that, let's open up the call to your questions.

Operator?

(Operator Instructions).

And your first question comes from the line of Kartik Mehta with Northcoast Research.

Kartik?

Can you hear me, Derek?

Yes.

I'm sorry.

Now that -- maybe start over here, again.

Now that tax season's ended, can you just walk through, again, where you think that -- how the 1040EZ program did in terms of what type of growth it provided and maybe what kind of impact it had to the NAC for this tax season?

So, Phil, why don't you take that one?

Hi, Kartik, hope everything's well.

Thank you.

I'd say, first of all, we're pleased with what the EZ program accomplished.

First of all, it exposed a lot of new clients to our tax professionals and we're very confident that that exposure will turn into long-lasting relationships in most -- many, or if not most cases, so we believe that we're creating a pipeline for the future.

The program exceeded our performance -- the performance we set out in a lot of our testing that we did the prior year so we're pleased with that performance.

And I think in terms of the NAC, I would focus more on revenue from the program versus NAC.

It did have a -- it did drive the NAC down slightly but it accomplished the objectives that we just talked about and I think if you look outside of the EZ program -- outside of EZs themselves, our NAC was up around 3% for other forms.

So as I said, we're pleased with the program and we're looking forward to future results moving forward.

Phil, that's helpful.

Just to circle back on that question, any thoughts into the terms of how much growth was provided by the 1040EZ program for the year in terms of retail tax clients?

Yes, I think you know our growth results in general and I would say the EZ program was a major contributor to that growth.

Okay.

Maybe if we move to the digital business.

I'm just wondering if you could talk about impact to the digital business from the IRS not mailing out tax forms, if you thought that contributed at all to the growth and if so, any way to quantify what that was?

Jason?

Hi, Kartik, this is Jason Houseworth.

Because we don't know which filers previously filed as pen-and-paper it's really difficult to estimate the specific impact on our digital results, but I have to acknowledge that certainly the changes at the IRS naturally caused some of these filers to prepare their taxes online.

And, Jason, was there a change at all this year on pricing for the digital business?

You had excellent results and I know advertising was a big part of it.

Did pricing play a role at all in your ability to acquire clients?

I think that what Bill talked about as far as our tactics, that really pricing was not one of the big drivers as far as our client growth.

We had a lot of activity in our website last year and we simply think that we were much better as far as executing on converting those clients into completed returns.

We had -- we actually had slight increases in our pricing and yet we continued to see strong client growth -- new client growth in non-FFA online of 42%.

I also would add and Jason -- I've spent time with Jason and his team and I think the work they did, not only improving the website but if you walk through the user experience and how they simplified the product, I think that was a big contributor in terms of a product like this, how easy it was to use.

And then just one last question, Bill.

RSM, it obviously sounds like that's a business you want to improve, both from a growth standpoint and a margin standpoint.

And I'm wondering, as the business is structured now, what do you see -- what are the revenue, growth and margin profile of that company -- or that business, I apologize?

I think the prospects -- it's an excellent brand name.

They have an excellent set of professionals there.

Two things have happened to them and basically they've come together.

The economy has hurt them and it has driven increased competition in the industry, so the pressure on their billable hours and the pressure on their rates has been pretty strong.

So I think it's -- they've had a tough situation and obviously, as I'm getting up to speed on this I'm spending time with C.E.

Andrews on this.

Can I just -- Kartik, can I just -- I'm sorry to come back, but I want to go back to the EZ question for one minute -- one second.

One of the other things I wanted to add there is that our growth in the second half was stronger than our growth in the first half and we ran the program in the first half.

So we had pretty robust growth throughout the season.

I just wanted to add that.

No, no, thank you.

That's helpful.

Obviously, the results indicate that you had a very good year.

I was just trying to parse maybe how much of help the 1040EZ had on the overall business, so that was my main reason for the question.

Bill, just a follow up on RSM, do you think that's a mid single-digit growth business, at least the way it's constituted now, or do you think it's more of a low single-digit growth business?

Yes, it's -- I'm not -- I'm six weeks in so I don't think I can make those pronouncements yet, but as I come up to speed on that, we're looking at where that business can take us.

So I'll defer the question.

All right, thank you very much.

Your next question comes from the line of Scott Schneeberger.

Hey, good afternoon.

Hi, Scott.

Hey, Bill, welcome again.

I guess I want to start out with just a discussion of what you think can happen in the tax segment in the 2012 year.

I know no formal guidance, but do you think next year will be an up year?

It sounds like you're excited about free 1040EZ, I'd imagine that comes back.

We heard a little from Phil about pricing on the non-free.

Just care to give us a feel, directionally, what you think happens with regard to revenues, volumes, in the out year?

Thanks.

As I learn this business, I would defer to some of the others in the room, specifically, but I think -- I mean, we're all aware of where the economy is, so I think what we're looking to plan for is a similar macro year.

I do think, though, what does excite me about our prospects for 2012 and beyond is I think the team hit its stride in 2011 on both the retail and digital fronts and that I think we're going to have an ability to take that playbook, improve upon it.

And I look for us to -- our goal is to grow clients and market share and I think that we'll deal with whatever economic situation it is but I know the team is very hard at work, both teams, in terms of developing their plans and building on what they started in 2011.

All right, thanks on that.

Jason, if you could hop in.

With regard to share gains, in digital who do you believe that came from?

Was it TaxACT predominantly, and just that's part one?

Part two is what do you think happens in digital next year with regard to how all the actors participate?

I know that's contingent on if you have success with closing TaxACT but just thoughts on those two.

It's harder to answer the first part of that question, Scott, because given that we don't have the data from all the smaller competitors, I can't tell you exactly where our share gains came from.

But I think regarding the second part, I think within the digital category we're still looking for online category growth in the mid-teens and a software decline in the low single digits and that continues with the shift from pen-and-paper to online.

I think the one thing to note about that is that our view is that there's probably only 2 or 3 years of continued mid-teens category growth for online because that category is ultimately shrinking to a point where we don't think that that growth is sustainable outside that.

Okay, thanks.

That's helpful and interesting.

One more, if I could, it's kind of broad.

Well, actually, it's probably two.

What impact do you think happened this year from mom and pops exiting the business?

And I think you mentioned consolidating business from mom and pops departing.

Just thoughts on what type of industry impact that had and any way you might be able to quantify it.

Scott, I would say that -- the impact I would say right now are -- I would comment just anecdotally.

We are seeing people be more attracted to our brand, given the dynamics in the industry, given some of the change that's taking place.

It's becoming, I think, more attractive to be part of a strong brand like H&R Block with the solid infrastructure we have, et cetera.

So I would say there's certainly some momentum in that regard.

I don't have clear analytics on it or anything like that.

Okay, thanks.

And one thing to clarify.

It said -- it sounds like you're done with the shift from Company -- I wrote down Company-owned to franchisee, but I may have written that wrong.

It sounds like you're willing to take mom and pops on as franchisees and we might see that, but did I get it right?

You're -- any Company-owned shift to franchisee or franchisee to Company-owned internally is -- that program's done?

I think we're happy with our mix right now and I think we'll do -- we will convert Company offices to franchisee -- into franchise locations or vice versa where it makes good business and economic sense for us.

But I think on balance, we don't plan any significant changes in either the mix or footprint for fiscal 2012, which is a little different from what happened in 2010 and 2011, yes.

Thanks and that leads into -- well, the final part of what I said was going be one question.

CapEx, 60 this year -- $60 million, going up to $90 million next year, so that's an increase, curious what that's about?

And then more importantly, it sounds like you're looking to do a cash build, just doing buybacks opportunistically, and just if you could provide a little bit more color there about -- I believe your wording was strengthening the balance sheet, it sounds like you're going to hold more cash, just a little more color on that?

Thanks, guys.

I'll start with --

Take the first part, Phil.

I'll start with the CapEx question.

Most of the increase in CapEx that you're asking about comes from a specific program to improve or upgrade our offices.

We have a program, we're accelerating that program a bit and we think it's important that we create the right environment as we improve our client service and continue to drive client satisfaction up, so that's the first part of the question.

Now with regard to capital allocation, I think -- as we've discussed this, I think the key take-away I think is that we're going to take a balanced approach to capital allocation.

We do have as our number one goal to grow clients and market share, we do want to maintain financial flexibility.

We do think it is important, just as a principle, to not only return capital to our shareholders and we are committed to maintain our dividend.

We will continue to repurchase shares.

We're also looking to grow our net worth, also.

Okay, thanks.

I'll get out there.

Thanks for taking all my questions.

Your next question comes from the line of Michael Millman.

Thank you.

I guess following up on some of the previous questions.

Regarding the reverse on the EZ, could you tell us what was the volume -- year-over-year volume change in the non-EZ retail returns?

Mike, we don't comment generally on form-specific results just for competitive reasons so I think -- what I will say is we had solid performance across all forms.

The strongest results we had were on our EZ forms, no question, but we had solid performance across all forms.

But solid translated into up?

Solid translates into strong performance.

So not clear what that means.

Yes, up.

That's up.

Great.

Regarding digital, could you tell us what the year-over-year changes in revenues and earnings was?

Hi, Michael, this is Jason Houseworth.

Yes, in fiscal year 2011, the digital revenues were $173 million compared with $163 million in fiscal year 2010.

And we're not going to disclose earnings in that segment.

Were the earnings up also?

The earnings were consistent with our growth across the board.

Okay.

And who do you think the OCC proposal will help, besides Block?

I guess I'm assuming that their proposal will allow you to have the advance loan next year.

This is Kathy Barney.

And so we've looked at this very closely and we do believe that their most-recent proposal does include the Emerald advance.

We have been very proactive with this product and have looked and anticipated that this would be formalized, such as the OCC is doing.

So we have the ability to be able to offer our Emerald advance product if we choose to, with very little modifications.

There will be minimal changes to the product to ensure that we are in full compliance with the proposal.

I was looking for the addition to -- during the rest of the tax season, as opposed to having it limited to January, so I was looking at the advance loan product, the Emerald loan.

So the product that we've offered in the past is our Emerald advance, which is a personal line of credit, and we've offered that for the past four years.

It is a year-round line of credit that we offer year round.

We had been working on other products that had different characteristics and different terms.

We have not rolled those out and we're under -- we're still evaluating what products that we want to offer for this upcoming year.

Yes, I think it's still too early to tell what the array of financial products we'll be offering but we're working on that now.

Could you discuss if there's -- what progress you have in updating your credit agreements and maybe in the same line, why do you think you need more equity in the Company?

Jeff, you want to take the first part and I'll take the second part?

Yes, Mike, we really have nothing under way right now to -- in the way of amending loan agreements or covenants.

And I can comment on the equity or Bill, if you wanted to comment on it?

I think, Mike, it's a fair question, but I think it's the right principle.

I'm coming in now.

I think it is important to return capital to shareholders but I do think it's important that we maintain our financial flexibility.

We want to be aggressive, we want to grow our clients, we want to look for businesses to invest in, whether that be in our core business, which it will be, and also adjacencies.

So basically the board and I have decided to take a balanced approach here.

So we will maintain the dividend on an opportunistic basis, we'll make share repurchases, but we also want to strengthen our balance sheet.

Okay.

Thank you.

Your next question comes from the line of Mike Turner with Compass Point.

Hi, good afternoon.

Just a few questions, most of mine have been answered.

As far as your pricing, I guess, tactics this year, did you change that around, compared to last year?

I don't know if you changed your pricing inter-quarter or if there are any opportunities there that helped you out?

That's my first question.

Phil, you want to take a shot at that?

I think you asked two questions, but you're asking about price changes during the year, inter-quarter?

Yes.

Okay.

We don't do a lot of changes in pricing across our quarters.

We didn't do anything real different in that regard.

Okay.

And then on the Emerald advance, I think you talked about this in the past but maybe you could refresh my memory.

What -- this year did you open it up to new clients?

I seem to remember it used to be only returning customers that you provided that line and maybe just refresh my memory for this year and then what your thoughts are heading into next year.

So this is Kathy.

We have tried different underwriting models, we've tried different offerings to find the best results for this product.

So in the past, including this last year, we have offered it to both prior clients, as well as new clients of H&R Block.

We have also opened it to the general public.

Just want to remind you that it is not a condition to apply, nor to be approved for the Emerald advance to be a Block client.

And so we have done it both ways and as we said earlier, we're still evaluating what our offer is going to be going forward and we'll come out with that in the near future.

Okay, thanks.

And then just, you've touched on the capital allocation as best you can.

Any thoughts on potential acquisitions, maybe even outside of the US?

Is that something you'd consider?

I think -- we plan to hold an investor conference in early December, I think -- I hope to have pretty well-formed plans by then.

I think this is a living, breathing approach but we want to build a strategy both for the next fiscal year, but also on the longer term.

I think international, we have two very good businesses in Canada and Australia.

We are investigating other countries we may want to enter.

Acquisitions would be on the table with regard to that.

But I want to be clear on international.

My experience with international, I think the way you grow international businesses is not -- is, I think, in a continuous fashion.

You don't go out and try to place a big bet there.

I think you add a country, you learn, you add another one.

So I think this is going to be more of a step-by-step approach there.

But I do think that the capabilities we have in the Company, the technology that underpins the Company, is quite strong and will travel well and obviously I'm a big believer in the brand and I think the brand will also travel well, so stay tuned.

This is a longer-term play, but I think there is value to unlock there.

Okay.

Thank you.

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

Really just have one, or I guess 2 on financial products, one specifically.

Of the $6 million of RACs and the $2.3 million of Emerald cards can you maybe -- I don't know if you've broken that out, but how many of those were new customers, just given the shake up in the RAL market this year?

I'm trying to recall the numbers for new versus prior and it would be real -- and I'm not sure that I have those numbers so let's see if we can get those quickly.

That's fair, but maybe --

I'll get back to you, Sloan.

This is Derek.

Sure.

I guess maybe just the general question would be how much activity do you think you saw because of the shakeup in the RAL market?

And then looking ahead, of those that were still providing RALs this year I know is very limited, but do you think there's still a pool to be captured?

It sounds like you're pretty optimistic being able to do that with the Emerald product.

Phil, if you want to comment on the RAC/RAL, and I'll follow up with the Emerald Card?

Well, I would just comment that -- we've mentioned this before, but we were able to hold on to most of our prior RAL clients at similar rates that we had in the past.

Our new client generation was stronger this year across the board, but I don't think we have any big, material differences in how the profiles might have changed, new to prior clients, in the RAL/RACS area, okay?

Okay.

So specifically, you don't think that was a big driver of the market share increase in retail?

No, I think we -- I would say that we -- I would say it's not -- no, I agree with what you said.

I don't think it's a big change.

Okay.

I do think there was -- I'm sorry.

I do think there was some impact from people losing -- from other independents losing financial products but I don't think it was a major driver, okay?

Okay.

And regarding the Emerald Card, we were very pleased to see that the take rate held very closely.

We did see some variance but it was a very positive outcome and it just reemphasized that there are many clients that are unbanked and underserved and that this provides a great avenue for them, not just for the tax time but for year round.

And additionally, that we saw large increases on clients using the Emerald Card for IRS direct deposit, without any kind of settlement product.

Let me add something on the Emerald Card, if I could, because I've said this in a couple of calls and I talked about it earlier, the opportunity I see here and I want to step back for a second and then get into specifics.

I think simplifying financial services for this user base is needed and I think the Emerald Card can be the catalyst for that approach.

It's a low cost option.

I don't think we've probably marketed that as well as we could have.

And I think that there's a way that this can potentially be a very big idea, specifically this year.

I think there's three ways we can do that.

One, we've done a lot of education to our clients on the basics of using a debit card but I think there is still aspects of this card that are well-kept secrets that we want to push further.

We're going to use direct marketing this year.

We streamlined the process, we used the tax desk to issue cards but we've never reached out to clients directly around the importance and the ease of use of direct deposit of our payroll and the ability to load cash onto this.

And finally, we're working to continue to improve that product.

We do that every year, but I think we really have a zeal around the user experience.

We think we can simplify the fees and reduce them.

We think we can enhance our service.

So we are actively working to really take not only a taxable approach to 2012, but also look at the larger idea of simplifying financial services for this user base.

Okay, that's great color.

Thank you.

Your next question comes from the line of Mike Grondahl with Northland Capital Management.

Yes, thanks for taking my question.

If you learned one or two things this year throughout the tax season that you could apply to next year and kind of help you move the needle a little bit, what would they have been?

So I -- Mr.

Mazzini, anybody can take that one.

I might have something, Jason might have something, but I would say that we learned a lot about being very focused on specific initiatives for both client acquisition and for improving our client satisfaction and when we get this organization focused on a few of those big things, we can produce strong results.

I would -- here's what I would say and this isn't what I learned, I'd have to say this is what I observed, being on the board and not getting into this.

I think this Company deserves an awful lot of credit for the -- and I think this is a lesson in power marketing or really driving initiatives.

I think we took some excellent marketing, a revamped ad approach.

I think we took service initiatives to a new level.

I think we had a focused organization.

I think things came together in a coordinated way as opposed to trying to do something that was one initiative and it either hits or misses.

I think there was excellent product initiatives and I would credit -- I didn't do this so I get to just praise everyone because I think they did a heck of a job and I think it was the way it all came together and the way the organization rallied on the franchise side and the Company side and, obviously, I've been quite impressed with our tax professionals.

So I think that -- in the end, that integrative ability is really the win -- how we won.

And does that have you pretty excited for next season?

Well, one thing I was going to add to Bill's comments is that what I'm excited about is there's strong demand for our digital products.

I think that's what we learned this season.

I think, similar to Phil, we really put a singular focus to enhance or improve what I think of as the funnel, which is to take the broad set of customers, to attract them with strong marketing that's acquisition oriented and then take those customers from the time they get to our website and ensure that they become a completed unit or an e-filed return.

And I think that we're just looking at learning from the things that we really feel like we can continue to improve and continue that momentum in order to sustain the growth into the coming year.

And I think wherever you look in the Company, whether it be the retail organization, the digital organization, Kathy's organization, the real focus the teams have -- and this is the time of year when we need to do that -- on the user experience, whether it's using the Emerald Card, whether it's using the website and the online product, whether it's the experience they face at the tax desk, there is a relentless approach in this Company now around user experience and that usually is a winning formula.

Great.

That was very helpful.

Thank you.

Your next question comes from the line of Vishnu Lekraj with Morningstar.

Good afternoon, everyone.

Question here regarding DIY returns.

Can you help me understand a little bit clearer what your strategy's going to be with that.

Is that going to be more of an instrument where you're going to use to gain customers and try to upsell them to more of your brand services, or how do you plan to integrate that into your services more?

Well, our primary goal within DIY is to ensure that if a taxpayer wants to do the return themselves that they use an H&R Block product and that is the -- within that, my focus is actually to help them do it in the best way that they can.

It's not to give -- let's say to hand off the return to Phil because we still feel like the digital as a standalone business can grow and can be profitable.

And I think what Jason's trying to do, whether it's the online product, downloads, retail software, is improve the user experience across the board and that we will compete vigorously across all of those areas, whether it be in retail, where we will compete vigorously, or across the spectrum of products that he has.

In the past I've heard you were going to try to integrate the DIY products more with your brand services so what I'm getting from you now is that you're going to try to run those two services, or two products, maybe more separate than what I've heard in the past.

Is that fair?

I'll let Jason and Phil -- no, I don't -- I think we think we can grow them both separately, but we think it's -- these are complementary businesses and what we're trying to do is satisfy user needs.

So if a user needs assistance, we have that offering.

And if a user wants to do it themselves in a variety of fashions, we have that.

So that's really what our approach corporately is, to satisfy user needs, but I'd let Jason or Phil chime in.

And I think this might be, just to repeat.

But we have a mantra, we talk about serving clients the way they want to be served and that's something that we -- we're focused on how the client looks at tax preparation and we want to be there, however they're looking at it and be inside their heads on however they choose to do their tax returns.

We want to be the provider.

And what we see as a benefit coming out of that is we see that when customers do migrate that they migrate back to Block within the brand, at much higher levels than they do coming from anywhere else, if they're coming from H&R Block retail to H&R Block digital or vice versa.

So that's where I think Phil and I believe that if we do the best job we can to create a DIY, or an assisted experience, then that's ultimately going to bring the client growth for H&R Block as an enterprise.

Great, thanks.

And your next question comes from the line of Scott Schneeberger with Oppenheimer.

Thanks for taking the follow up.

I apologize if I missed it, that $0.06, one-time charge in RSM McGladrey for legal, could you elaborate a little bit on what that is?

Sure, Scott.

I think -- actually we filed our 10-K today and you'll see some disclosure around that, but it's been an ongoing litigation matter that we've had and actually entered into a settlement arrangement that's still subject to court approval, but defendant and plaintiff entered into a settlement arrangement this quarter.

Okay, thanks, I'll take a look at that.

Two more and I mean it.

RSM, it's struggling.

It is, I think, predominantly the economy that's creating that.

I don't know that there's a light at the end of the tunnel at this moment.

What is the consideration for keeping it a part of the portfolio, or do you think there could be enhanced value with it separate from the H&R Block corporate?

Right now our focus is on improving the operations.

That's really what C.E.

and the team are focused on.

With regard to anything else obviously I wouldn't comment on that and right now I'm really zeroed in on how we can improve the operation.

Thanks.

And the final one, back on the tax business.

Jackson Hewitt's contract with Wal-Mart has come up for expiration.

Any commentary on what you think may happen or I imagine that's something you're bidding on.

Do you have a timetable for when you would expect that result and how interested are you in perhaps getting in there.

Hi, Scott, this is Phil.

So we have a dialogue with Wal-Mart that's ongoing and has been ongoing for -- since we were in there last time and I think we shouldn't comment on any speculation of what may or may not happen there.

But obviously, we're always looking at where we distribute our services and what the best and most effective ways are to distribute those services.

Okay.

Fair enough and thanks for taking my follow ups.

Okay.

This concludes today's conference call.

You may now disconnect.