H & R Block Inc (HRB) 2013 Q3 法說會逐字稿

Good afternoon, and welcome to the H&R Block fiscal 2013 third-quarter earnings call.

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

My name is Rose and I will be facilitating the audio portion of today's broadcast.

It is now my pleasure to turn the call over to your host, Mr. Derek Drysdale, Vice President of Investor Relations.

Go ahead, sir.

Thank you, Rose, and good afternoon, everyone.

Thank you for joining us today to discuss our fiscal 2013 third-quarter results.

Joining me on the call are Bill Cobb, our President and CEO, and Greg McFarlane, our CFO.

Other members of our senior management team will be available during the Q&A session.

They include Jason Houseworth, President of US Client Services; Amy McAnarney, President of US Retail Client Services; and Susan Ehrlich, President of Financial Services.

In conjunction with this call, we have posted today's press release and slide presentation on the Investor Relations website at www.HRBlock.com.

Some of the figures that we'll discuss today are presented on a non-GAAP basis.

We've reconciled the comparable GAAP and non-GAAP figures in the schedules attached to our press release, and in the appendix of today's slide presentation.

Before we begin our prepared remarks, I would like to remind everyone that this call will include forward-looking statements, as defined under the securities laws.

Such statements are based on current information 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 our Form 10-K for fiscal 2012 and our other SEC filings.

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

With that, I would now like to turn the call over to Bill.

Thanks, Derek, and good afternoon, everyone.

Earlier today, we released our US tax return volume through February 28, as well as our fiscal 2013 third-quarter earnings ended January 31.

Obviously, there's a lot of noise this tax season.

But we want you to walk away with three key points.

First, the entire tax industry has experienced unprecedented delays this season.

Which has created near impossible comparisons to last year's results through January 31 and February 28.

We believe that industry-wide tax filings are running about two weeks behind the comparable period last year.

And we expect that it will take the balance of the season for the industry to fully normalize.

That said, the great thing about our business is that taxpayers must file by April 15.

We continue to believe that industry filings this tax season will grow in line with historical levels of approximately 1% to 2%.

Second, we entered the season with a very thoughtful plan.

And while we've had to make some adjustments due to these delays and competitive factors, I am pleased with our execution to date.

We noticed that many competitors substantially increased their marketing in December and January.

We were pleased that in light of the delays, our marketing was better timed.

As I assess our marketing efforts so far this season, I believe our Chief Marketing Officer, Robert Turtledove, and his team have done an outstanding job.

Everywhere I go, people compliment us on our new ad campaign, which focuses on the expertise of our tax professionals.

While it's still early in the season, we believe we're outperforming the market thus far in both the assisted and digital categories.

That said, there's obviously a lot of execution remaining until the industry fully normalizes by April 15.

And finally, in order for us to be successful and drive long-term shareholder value, we must have a vision and clear goals to strengthen our overall industry position in fiscal 2013 and beyond.

We've made good progress toward these goals.

And this season's performance to date is in line with our long-term vision for the Company.

With that summary, I would like to take a few minutes to provide our analysis of the US tax industry through February 28.

As you know, the IRS typically begins accepting tax returns by mid-January.

Heading into 2013, the IRS had originally planned to open its E-file system on January 22.

So we already expected the season to be delayed by approximately one week.

Then, the delay was further exacerbated by three factors.

First, significant tax legislation was signed into law in early January, which prompted the IRS to subsequently move its opening of E-file to January 30, just before the end of our fiscal third quarter.

Second, the IRS and a number of states and other taxing jurisdictions did not begin accepting certain forms until this month.

Third, we believe that the media coverage on the so-called fiscal cliff tax legislation, and the associated E-file and form delays, has led to changes in the timing of taxpayer filing patterns this season.

We believe all these factors combined have led to industry-wide tax filings running about two weeks behind the comparable period last year.

Turning to our volume results through February 28, it's clear that these delays had a temporary impact on both our assisted and digital channels.

However, our analysis of industry data gives us confidence that we are on track with our plans for fiscal 2013.

While our US tax return volume fell nearly 6% through February 28, we are currently outpacing the overall industry, which we estimate was down approximately 8% on a comparable date-to-date basis.

The temporary impact of these delays has been more pronounced in our assisted business.

This is especially true among complex Form 1040 filers, who often wait longer to file than Form 1040-EZ or 1040-A filers.

It's also important to note that our assisted volume has not been materially impacted by our decision to exit Sears last fall.

We are pleased that the clients we previously served in Sears locations are being retained at levels consistent with our expectations.

In the digital category, Intuit, our largest branded competitor, released their tax volume through February 16, about two weeks ago.

Intuit reported its online filings fell 6% through February 16, while our online returns were down 2% on a comparable day to day basis.

From January 30 through February 16, Intuit grew 32%, while our online returns were up 44%.

As of February 28, our total online returns grew more than 5% fiscal year to date.

In desktop, total filings fell 11% through February 28.

It's important to highlight that the desktop category is in a slow, secular decline.

And we made a strategic decision to target more profitable clients by exiting certain retailers.

Excluding these units, our desktop returns would have been down about 4%.

And finally, our Free File Alliance returns were down 16%, as of February 28.

Overall, our mix of digital clients continues to improve, which should position us well going forward as we continue to gain momentum in this category.

In conclusion, I like the way we're executing.

And we're currently outpacing our competition in both our assisted and digital channels.

However, the industry will not formally normalize until the end of the season.

And there are still over 60 million taxpayers who have to file by April 15.

We have a lot of work to do between now and then.

But I believe we're well-positioned to execute on our plans for this fiscal year.

We look forward to sharing our second-half tax volume results with you in late April.

With that, I'll now turn the call over to Greg to discuss our third-quarter financial results.

Thanks, Bill, and good afternoon, everybody.

Given the seasonality of our business and the fact that nearly all of our revenue and earnings come in the fourth quarter, our third-quarter results generally don't provide a lot of color on our performance.

This is especially true this year, as the unprecedented delay to the start of this tax season led to a material shift of business from our third quarter to our fourth quarter.

Therefore, we do not believe our third-quarter results are indicative of the results we expect to achieve this fiscal year.

Our previously announced cost-reduction initiatives remain on track.

And we continue to believe it will deliver significant earnings and market expansion in fiscal 2013.

Fiscal year-to-date through the third quarter, we have realized $172 million of total expense savings.

It's important to note, however, that our third-quarter and year-to-date expenses are obscured due to the volume-driven variable expense shifts this year that did not occur last year.

As a result, we expect our fourth-quarter variable expenses, primarily tax professional compensation, to increase compared to the fourth quarter a year ago.

Despite this shift, we continue to expect our cost reduction initiatives will generate $85 million to $100 million of pretax earnings in fiscal 2013.

For the third quarter, total revenues were lower by 29% to $472 million, as the IRS opened its E-file system on January 30, just before the end of our fiscal third quarter.

For accounting purposes, we recognized the revenue and associated expenses from a completed tax return once the return has been accepted by the IRS.

As a result, we deferred $15 million of revenues to our fourth quarter, as the IRS did not accept returns that contained forms such as the education credit, as well as a number of other specific forms, before our third-quarter end on January 31.

Our third-quarter adjusted net loss from continuing operations was $60 million, or $0.22 per share, compared to breakeven in the prior year.

In our Tax Services segment, revenues were lower by $191 million, or 29%, due to the delayed start of the tax season and a $15 million revenue deferral that I had mentioned earlier.

The segment's pretax loss of $64 million compares to a pretax income of $32 million in the prior year.

Lower revenues resulting from the delays were partially offset by our cost-reduction initiatives and lower variable compensation costs.

In corporate, our pretax loss improved by 2% to $32 million.

Corporate expenses declined by $1 million, primarily due to lower interest expense resulting from last quarter's refinancing of our senior note.

Corporate revenues declined $1 million due to lower interest income from H&R Block Bank shrinking mortgage loan portfolio.

Our third-quarter financial statements also reflect the impact of a settlement with the IRS, which provided closure on substantially all outstanding issues in our 1999 through 2007 tax returns.

The settlement resulted in a $43 million income tax benefit.

This benefit includes the recognition of federal tax and interest receivables not previously recorded, as well as the release of federal and state income tax reserves.

As I mentioned in our investor conference last December, we are continuing to explore ways to lower our effective tax rate over the long term.

We'll provide more detail once our review is complete and we have more definitive information to share.

Turning to Sand Canyon, third-quarter representation and warranty-related claims remained low at $16 million.

Although future claim activity could vary considerably from quarter to quarter.

Importantly, Sand Canyon reached a settlement with AIG during the third quarter with the settlement payment charged against Sand Canyon's accrual for representation and warranty claims.

With the exception of disclosures we were required to make in our Form 10-Q that will be filed later today, the terms of the agreement are confidential.

Sand Canyon's accrual for representation and warranty-related liabilities totaled $119 million at January 31, 2013.

Turning to H&R Block Bank, I realize that many of you are interested in an update as we continue to explore strategic alternatives.

About all I can say at this point is that we're working closely with our partners at Goldman Sachs and First Annapolis.

And we're pleased by the progress we've made over the past couple of months.

Before we turn the call over for questions, I would like to make an announcement.

Over the next couple of weeks, Derek Drysdale will be transitioning to a new role at H&R Block as Vice President of Corporate Financial Planning and Analysis.

As many of you know, Derek has proven to be a great asset over the past six years in Investor Relations.

We're excited to have an executive of Derek's caliber moving into this new role, where he'll have the opportunity to continue working closely with me, Bill, and the Board of Directors.

I'm also pleased that Colby Brown has been named Derek's successor as Vice President of Investor Relations.

Colby has been with H&R Block for three years, and has previously served in several key roles in finance.

Previous to H&R Block, Colby had a successful career in finance with Wyeth Pharmaceuticals.

I believe Colby's finance background and institutional knowledge of H&R Block will serve him well in Investor Relations.

I know Colby is very excited to meet many of you at our road shows later this summer.

I'd now like to turn the call back over to Derek for our closing remarks.

Thank you, Greg.

Over the past six years, I've thoroughly enjoyed having the opportunity to work so closely with our analysts and investors.

I value all the relationships we've established and I will certainly miss our daily interactions.

That said, I'm very excited to lead our Corporate Financial Planning and Analysis team.

And I would like to thank Greg and Bill for allowing me this opportunity.

Although my involvement in Investor Relations will diminish over the coming weeks, I will be available for calls later tonight and tomorrow.

I also look forward to seeing many of you next week at the Credit Suisse Global Services Conference in Scottsdale, and then in Boston on March 20.

Colby will join me on both trips and I look forward to making the introductions.

I hope you'll join both me and Greg in congratulating Colby.

I know he'll do a great job and you'll really enjoy working with both Colby and Ryan Sands going forward.

With that, we are now ready for questions.

Operator?

(Operator Instructions)

Kartik Mehta of Northcoast Research.

Bill, can you talk about what type of pricing you are getting so far in the tax season?

And maybe how that compares to your long-term goals?

Kartik, good afternoon.

We're not going to talk about pricing today.

It's been a season with a lot of discontinuities.

It is a full seasonal business.

A lot of the pricing is mix-related.

I will say that we put together a -- we described it as a thoughtful plan.

And that included pricing.

And I'm pleased that we're executing that plan in line with our expectations.

Bill, can you talk a little bit about the Emerald Card business?

Obviously you didn't have the free RACs this year as an incentive for people to take the Emerald Card.

Where do you stand in terms of how the Emerald Card is doing, and in light of your expectations for the business, as well?

I'm going to let Susan comment on that in a second.

I will say that with the start of the season being pushed to January 30, there is not a lot of data to share with you.

But I'll let Susan comment on how Emerald Card is going.

As we talked about at investor day, a big part of what we were doing with Emerald Card this year was a focus on product enhancements, with the cash rewards, with the redevelopment of our online banking platform, and the mobile app.

And really the focus has been on growing year-round use of the card.

I would say that what we've seen so far this season, we're pleased with the early indicators around things like online enrollment and the mobile app downloads.

But I think this is going to be a continuing effort.

And then just one last question, Bill.

As you look at this tax season and how it's shaping up, what are your expectations for the digital market in terms of growth for the entire market?

Yes -- and Jason, if you want to add any comments.

I think we said this back at investor day.

We do think it's mid single-digit, circa 5% growing market for this year, as the market continues to really source its volume from the decline in pen and paper.

So we still think that's about the size of what digital will be.

But, Jason, I don't know if you have anything to add.

Yes, Kartik, I would say the same thing I said in December.

Which is, we believe, with the pen and paper forecast, that we think the digital category will grow roughly 5% to 6%.

And I think that's even with what I would call a lot of early season spending by some of our competitors in marketing.

And I would just say that we felt like ours was better timed.

And I'm pleased with our early performance in the category.

Thanks.

Appreciate it.

Scott Schneeberger of Oppenheimer.

You've mentioned there's still a lot of tax season left to go.

With the fiscal cliff-related delays, when do you think we hit that year-over-year inflection point?

Is it something in mid-March?

Is it the end of March?

What's your view on that?

Because apparently we're not there yet.

Yes, we're not there yet.

That, probably, data point keeps bouncing around.

But I wouldn't look for anything this month.

I think it will be sometime next month.

But I'm not spending a lot of time trying to figure out that.

We're just trying to service our clients right now, and do every tax return we can.

Okay, thanks.

I appreciate the commentary on how you're progressing through the season, and giving us the February 15 split on how digital's progressing.

Bill, your response, I assume, just now, was for the whole tax industry.

Specifically to digital, would it be the same answer or might we see an inflection point sooner in relation to that category?

Yes, I was talking about the tax industry in total.

And, Jason, if you want to add anything.

I think I would note that our primary business, the way we look at the digital business, is online.

And through the end of February, our number of returns was up 5%.

But Jason, I don't know if you want to add anything to that.

No, I think that at this point, it's really a question of when exactly.

But what we know is it will be April 15, at the end of the year.

Okay, thanks.

Couple more, if I can, jumping around.

You alluded to a strong Sears retention level at what you had anticipated.

Do you care to share that level?

And just a question relating to that.

How would the season year-to-date have looked, if you can cut it this way, without having closed 200 Block stores and moved out of Sears?

Thanks.

Let me answer the second question.

I'm not sure I got the first one.

I don't know if somebody else did.

We had an initiative and we've been executing against it, called leave no client behind.

To date, we believe we are executing well against retaining the clients, which were in our, what we call, moved offices, because we didn't leave -- these are our clients, obviously, in Sears.

These are our clients.

We've been very aggressive with outreach.

And I think we've been very successful to date on retaining those clients at the levels in line with our expectations.

Not sure I caught the first half.

Greg, do you want to try?

I can.

It's about Sears specifically.

We've had historical experience in closing Sears locations down.

This year, obviously, we closed the rest of them.

And so we used our historical experience, and we went store by store and looked at what we thought would happen, put specific plans in place, have executed a lot of that.

And I can, by the way, tell you, I've been to a number of Sears locations, our former locations, and what we've done in each market.

And I think we've been basically in line with our expectations and I'm quite pleased with where we're at.

Yes, we have no regrets over the decision to exit Sears.

Excellent.

And the latter part, Bill, of that question, was, if you can cut it this way, year-to-date tax returns prepared through February 28, down 5.8%.

It was getting at what would that have been if you hadn't adjusted for Sears.

But if you don't have that handy, you've covered that part of the question pretty well.

Yes, I think we're looking at everything relative to our estimates of where the industry's at.

And we believe that in both assisted and digital, we are to date outperforming both channels.

But there's a long way to go.

Excellent.

And then lastly, you outperformed what I was expecting, just in the January quarter, on the revenue line, but a little lighter relative to what I was expecting on the income line.

And, Greg, I think you were touching on that in the prepared remarks.

But how, with your maintained guidance of $85 million to $105 million of costs coming out, was it simply just the timing and the late quarter of revenue getting pushed into the fourth quarter, and we'll see a much more defined benefit from the cost savings?

If you could just speak to it a little bit more.

Thanks.

I think this is a new record.

It's like question number eight that I finally get asked a question, so thank you, Scott, for getting me in the link.

In the quarter, the main thing here is we had a dramatic late opening here.

And that's affected not just the revenue line, but the expense line.

When you look at the amount of costs that we'll be shifting to the fourth quarter that are variable in nature, primarily being the tax pro compensation, but there are some other variable expenses, those will come back in, as the revenue will.

When you isolate those items, what you'll see, from my perspective, is exactly the kind of track record you would expect to see to deliver the $85 million to $100 million.

So I'm comfortable at the end of the third quarter where we ended up on expenses.

Okay, thanks.

And while I have you, and if I can sneak one more in.

It was quite a low number of mortgage putbacks, new mortgage putbacks in the quarter.

Which was quite a number.

With the AIG settlement, that didn't change the loan loss reserve.

I didn't go back and look where it was last time.

Was there a change to the loan loss reserve or no change?

And now we have that behind us, correct?

The AIG settlement is confidential, so I really can't comment on that, unfortunately.

The settlement was booked through the representation and warranty reserve.

I mentioned that.

And there was changes in the representation and warranty reserve, which you can see in the 10-Q here shortly.

Okay.

All right.

Thanks, guys.

I'll pass it on.

Appreciate it.

Thomas Allen of Morgan Stanley.

Can you give us some more color around how certain consumer tax expenses are trending, both in the third quarter and then season to date?

I'm just simply interested in comp and benefits, occupancy, marketing, and bad debt, especially given the expansion of Emerald Advance this year.

Thanks.

Thomas, I'll start maybe in reverse.

You may have to repeat some of the line items you're looking for.

But relevant to bad debt, the way our model works is we'll originate a loan, the Emerald Advance loan, in the pre-season.

That loan will remain open and at the end of the third quarter, at that point we're really not yet into the collection season, so we will just be booking an estimated reserve at that point in time.

So that's mechanically how it works.

What I'll point out, however, is, we made a lot of changes, both to the underwriting models this season, as well as the collection practices that are in place.

And based on some of the early season -- and this is getting back to summer and fall time for us -- those collection procedures were in place, and I was actually quite pleased with their results.

So it's too early to talk about the trend for bad debt.

I think, generally speaking, that we've got a good program in place and looking forward.

Do you want to comment on it, Susan?

Yes, I was just going to add, Tom, on your question about what happened on the variable expense associated with booking those loans since we started earlier.

I think this year, as well, we were very focused on ensuring that we had efficiency in the program in that regard, too.

So we opened in offices where we knew we would see the kind of volume for applications.

And we worked very closely with Retail Client Services to ensure that we made improvements on productivity there, too.

And I would just add, Thomas, not to speak to any specific line item, but I think you'll see that in virtually every case, the expense controls we've put in place, the Project Runway initiative, we're in below year-ago in virtually every measure.

And I think Greg pointed out that on the variable compensation around the tax pros, some of that will come back in the fourth quarter as we do more volume.

I could talk about occupancy, too, because you mentioned that one.

As part of our cost-reduction initiatives that came out of last season, we targeted a number of locations for closure.

We've executed that successfully.

This was mentioned earlier -- the leave no client behind.

Because we closed a location doesn't mean that we're not going to continue servicing those clients.

And we've been very good at moving those clients to the closest locations that's convenient to them.

We also took that opportunity to renegotiate a number of leases, because of the way the commercial market was.

And those were successfully executed.

We didn't get into specific line items in terms of how we're going to expect these $85 million to $100 million to come into the income statement, but it's specific to occupancy.

And, while it's specific to all line items, they're all delivering what we expected them to do.

Okay.

Helpful.

Thanks.

And then in terms of RACs, I don't think you have touched on it yet.

How is that trending season to date, both on a pricing side and a volume side?

Thanks.

I'll talk to the pricing side.

We have charged for all the RACs that we have done this year.

There is no free RAC.

With regard to volume, we're not disclosing that because obviously we're only two days into the season.

So that is most of the deduct your fees volume is going to be in the fourth quarter.

Okay.

And then final question, if I can fit it in, I think everyone's interested in the potential impact of the Affordable Care Act.

Do you have any thoughts, or can you give any numbers around how it could expand the number of filers or increase pricing for you in the future?

Thank you.

I don't think, Thomas, we're ready yet to talk about volume or pricing, or the business model itself.

We've been studying this market.

We're deeply involved in it.

I do think the tax and healthcare review we have done so far this year has been very well received by our clients.

They appreciate us taking the time to inform them of the upcoming changes, which really starts with being triggered by the 2012 tax return.

As we go forward, this is getting, it appears to be that complexity will be the order of the day here.

Complex tax laws generally are good for our assisted business.

But, as I've said many times, the great thing about our business model is we are here to serve clients the way they want to be served, since we have every form of business and we use the term anywhere, any way, any time.

We're well-positioned to take advantage of whatever happens in the Affordable Care Act.

There's still a lot of initiatives, there's still a lot to hear from HHS and the IRS.

I have to do a stay tuned on this one.

Okay.

Thank you.

Mike Turner of Compass Point.

This is Evan Hutto on for Mike.

I just wanted to follow up on the healthcare.

I know it's still a little premature to talk about healthcare reform and what it will mean for the business.

But just a few questions.

In 2007, when Massachusetts instituted the healthcare reform, can you talk about the impact it had on your business then?

That was well before my time and I think anybody else in this room.

I'm not sure I could speak to the impact it had back then.

I think a couple of points on Massachusetts, and I don't pretend for a second to be deep on this issue.

But obviously the demographics in Massachusetts are different.

You have a wealthier state.

You have a state that actually had a relatively low percentage of uninsured population.

It was, I think, only in the mid -- 5% or 6% range.

The comparable number I've seen in the US is approaching 20%, in the 18% to 20% range.

It's a different law.

It's a different approach.

So I don't think that there is, frankly, a lot to learn from Massachusetts because this is unique with all the various exchanges, some of which are going to be state, some of which are in states are going to be done via what they are calling a federal exchange.

So we're not spending a lot of time looking back on Massachusetts.

We're trying to manage through what are the complexities of this law and how best can we serve our clients as it impacts them.

Okay.

That's helpful.

Thanks.

And I know you don't usually give color around buybacks, but is there any reason to believe you won't be in a market buying back more stock until the bank transaction is completed?

Is there any reason why you guys didn't repurchase anything in Q2?

We don't provide forward-looking guidance, to answer your first part of your question on pretty much most matters.

And then our track record, however, historically has been very favorable to shareholders.

We've done a great job of buying back shares historically.

And as you just saw, we've also just announced our quarterly dividend here, which we're quite proud of.

Okay.

And my last one, if I could.

How has tightened due diligence requirements on EITC filers, how has that impacted the overall number of filings?

Or is it still too early based on the delays?

I'm not sure I heard you correctly.

Could you repeat the question?

Yes, on the EITC filers, the earned income tax credit filers.

Okay.

And the question is?

Additional due diligence requirements that were instituted this year.

I was wondering how that impacted your overall number of filers.

We haven't seen anything.

There is additional data, the extra page, as it's called.

We haven't seen anything of note.

Amy, I don't know if there's anything you want to comment on.

But I don't think -- that hasn't come up.

And I think our tax professionals have done a nice job handling that.

The only thing that I would add is that, just with any regulation and adherence to the IRS, it's part of what we do.

So we have not seen really any impact at all to serving our clients.

Okay.

Thanks, guys.

Michael Millman of Millman Research Associates.

On the ACA, do you think that the -- what we learned from the Bush rebate program will give some indication of what ACA may mean in terms of volume?

Also, regarding ACA, on your review program, are you seeing better retention from those people who use the program?

Are you seeing new clients from that program, as well?

And then to change the subject a little bit, can you give us some indication of whether you think you can make up what you lost in the third quarter in the fourth quarter?

I would assume that you had inefficiencies in the third quarter.

And I would assume you would have some inefficiencies when we get this end of -- or mid-April crunch, as people rush to file.

And then finally, last year, EZ returns were up about 25%.

Are you seeing anything like that this year?

Any other questions, Mike?

(laughter) Let me try the first four.

So, on the ESA, the Economic Stimulus Act from the Bush Administration, we've thought about this, whether that's a proxy for what may happen in the Affordable Care Act.

I don't think -- that was a one-timer.

It was a one-time way for individuals to get money from the government.

This is so different because a tax return filed in 2012, which indicates whether you have eligibility for a subsidy, for an exchange that's opening in October of 2013, which has impact for the insurance you're going to take on in 2014, and then has to be trued up in 2015.

The Economic Stimulus Act was a one-timer.

It was a benefit to the industry.

I think that in the long run, this is going to add a lot of new filers.

I don't know.

I think it is going to be a slow ramp, though.

Our research is quite clear.

People are very confused about this act.

So that's the first area.

I think with regard to retention, you asked about, with regard to healthcare -- this is the first year we're doing a healthcare review.

So we won't see that in any numbers.

We'll see that next year.

But I do think it has certainly been something that, as we print off that healthcare review for people, that they've been very appreciative, our clients.

We believe it has driven new filers into our offices.

So we think that has been a good thing.

With regard to EZ, we won't comment about specific forms at this point.

What I would do, Greg, is maybe turn it over to you to talk about -- Mike was asking about third-quarter inefficiencies and fourth-quarter inefficiencies.

As I turn it over to you, though, I will say I think Amy's team did a terrific job with the change in season on -- obviously we had a lot of clients come in the door in the last two days of January and certainly in the first week.

I think they handled it beautifully.

And I expect them to do the same at the end of the season.

Why don't you speak to any of the financial implications of that?

We spent a lot of time looking at various models.

The good thing about Block is we've been doing this for a long time.

And we know how to do labor modeling, we understand how the cost structure works, we understand how to actually roll that down into the field.

So, as we had leading information and real-time information, we were able to adjust pretty quickly.

There were some inefficiencies -- I think that's a fair statement -- but they were not material.

So I wouldn't get too worried about it from your perspective.

As it relates to the fourth quarter, there are a lot of people who still have to get their taxes done and we're looking forward to serving them.

And I think we'll be fine coming out of the season.

Thank you.

Adam Liebhoff of Loomis Sayles.

Let me offer my congratulations to Derek and Colby.

Just one question really.

I wonder what sort of share gain is implied by the 7.8% decline at retail?

And I suppose said another way, do you have any sense for the overall market for retail returns, how that market trended through February 28?

Yes, Adam.

And then if Jason wants to augment my comment.

We're not going to talk about share gain.

It's a full-season business.

We'll obviously have full information as we get toward final season results.

So I'm not going to speak to any share gain.

Nor do we have good insight into the mix between the system and digital, other than our own estimates.

But Jason, do you want to --?

I think the problem at this point is that the IRS hasn't made any data public that would show the split between assisted and digital filers.

Until they do that, it's very hard to tell.

The down 8% number was our estimate.

And really, beyond that, we're not able to get a read on the assisted to digital breakout.

And that was for the total business, the 8%.

That's right.

Right.

That's fair.

Thanks very much, guys.

Sandy Mehta of Value Investment.

First of all, I would like to congratulate the entire management team.

The stock has had a very good move from the December analyst day, from $18 to $26 here, almost, here in the after market.

Just a couple questions.

On the sale of the Bank, I know you cannot comment much, but can you give us some color in terms of timing?

Is there still an expectation of likely in the next couple quarters?

And the negotiations and what you're seeing, are you comfortable in terms of the revenue sharing of profits and products that are within the Bank?

Does that appear to be in line with the expectations?

We announced earlier in the fall time our decision to find a way to exit the Bank.

To be really clear with everyone, I'm going to say this every time I get this question.

Financial services is a very important part of our future at Block.

We think it's a very important way to add value to our clients, and an important way to add value to our shareholders.

And that commitment, we're delivering through the season.

And we gave you some highlights earlier today.

And at the end of the season, we'll be able to talk more about that.

Since we made that announcement about the Bank back in the fall time, we've engaged both Goldman Sachs and First Annapolis as our advisors.

We've been methodically working through a process to find out what the right option is for H&R Block.

Our objective is, number one, to get the right deal.

Number two is to do it as expeditiously as possible.

The problem is, when you're in the middle of these things, it's hard to provide realtime updates.

But suffice to say we've had good response out there and we're moving quickly along here.

I'm really not going to give any idea what the time looks like, though.

Okay.

And can you give us an update on buyback activity?

Many of us have expectations for sizable buybacks going forward.

Given the stock has moved to more reasonable levels than previously, is it fair to expect that probably we'll see more dividend increases than buybacks going forward?

Let me go first and then, Greg, you should certainly weigh in.

I would remind everybody that for the fiscal year to date, we have bought back 8% of the stock on top of 4% last year.

So I'm pleased with the performance we've had on returning capital this year.

We also, as Greg mentioned, we just announced our two hundred and second consecutive quarterly dividend.

I'll let Greg speak to anything beyond that.

We have a philosophy at Block about being shareholder friendly.

We've been able to deliver that historically.

We don't provide forward-looking guidance, however.

So we'll find out what the future looks like.

Thinking about share buyback is really a two-part question that we need to be able to answer.

The first is, do we have the cash available from our capital allocation waterfall.

And then the second thing we have to do, is do we like the price the stock is trading at.

And that's also a number we're not going to provide.

We don't think that's in the interest of the shareholder base to talk about what points of the market we're going to be in at this point in time.

But we just end up going back to the point Bill mentioned, which is our philosophy is to be shareholder friendly.

Thank you very much.

Steve O'Brien from Jefferies.

I know you're not talking about pricing directly, but I was wondering if you see potential for the late filing season to result in some ASP lift, given normal end-of-season price increases we normally see in the digital DIY market?

I'm not going to signal to competitors what our plans are coming up.

This is a business that you have to manage very closely, as there are seasons within seasons, and there are time frames.

And mix obviously plays into that.

But we're not unaware of where you're going with that question, Steve.

And I just would again say let us play out the season and then you'll have full insight into it.

Okay.

And if I could, on another topic regarding the retail strategic exits, could you provide a little bit more color around what portion of the channel that was for H&R Block?

How do you come to that down 4% figure versus the true reported figure?

And should we think of that as a same-store sales number or something like that?

Just any color, metrics around that you could provide would be great.

There is no true reported number at this point because the IRS has not released anything publicly.

We obviously have a lot of historical data and contacts, and we try to figure out how we're doing.

But we've released what we think is decent progress to date.

But the reality is there's a lot of tax season to go here still.

And that's probably the better time to talk about share and --.

Were you talking about office closings?

Office moves?

Or desktop returns?

I was talking about the desktop, the retail channel.

I misunderstood your question.

I then misunderstood.

Jason is the only one who got it, so he gets to answer it.

In desktop, where we sell our box software, this year we targeted more profitable clients.

And what we see is a declining channel.

And our focus this season really remains on growing online and, within that, mobile units.

And, as Bill mentioned, if you take out the strategic exits that we made, we would only be down 4% as of February 28.

And that was really what we meant to do this season.

Great.

Understood there.

Was it 25% of your retail presence?

Is there any kind of -- just so I can try to get my arms around how big the exit was in terms of getting to the 4% number versus the reported number.

No, I think the plan -- we obviously still have a very viable business.

We did over 1.2 million returns through February 28.

This was certain, a couple of retailers that we just thought the ask was egregious and we decided to focus our money and our desire for space and our merchandising on certain retailers.

So it was not a wholesale shift.

This is a segment of the market that is in a secular decline.

We think that the highest growth, highest profit area is online.

That's where we've really staked our claim.

Jason and his team have had a very successful 2.5 years.

And we have a season yet to complete.

But this is still a fair amount of returns for us.

Jason, do you have anything you want to add?

The only other color I would add, Steve, is just that in this channel, unlike online, we really deal retailer by retailer.

And so, next year we'll look at each specific deal and evaluate it based on the profitability we can make there.

Understood.

Thanks for that.

Mike Hughes of Ascend.

Yes, actually it's James Ellman calling in for him.

Quick question on the Bank sale.

How do you think about what you're going to be giving up in terms of revenue for your financial services products to the new Bank's JV partner versus how much you're going to keep?

I imagine the more you give up to the Bank partner, the more the value of the Bank will be.

The more higher percentage of the revenues you want to keep, the lower the value of the Bank.

I'll provide some guidelines of how we think about this.

And I shared this back at the investor day, as well, for you all.

Our objective is obviously the ongoing business here.

It's not really a present value goal that we have in mind here.

However, having said that, it's going to come down to a function of which partner or partnership model we decide to go with.

And because that deal, we'll have to figure out exactly what that looks like, and then therefore the economics it would be.

It's hard for us to speculate on that.

What I have said about the overall economics, and you have to go product by product, you've got three main products -- Emerald Card, the Emerald Advance, and then the refund transfer.

We have to think of the refund transfer as fairly administrative in nature.

We don't see a lot of risk in that product, and therefore we don't believe we have to give up a lot of the economics.

On the Emerald card, it's a prepaid, reloadable, general-purpose card.

Again, we don't think there's a lot of risk.

Mostly with the partner we'll be dealing with administrative.

And then it's really on the Emerald Advance, the lending product, where we probably have to talk more about what a bank's responsibilities are and understand that.

But that's the smallest of the three products from a revenue perspective.

So that's where we're at in terms of what I can provide you from commentary.

Okay.

And one other question just would be, thinking about ACA.

For better or worse, many of your customers when they walk into the office, they do think of you pretty closely akin to the IRS itself.

How do you manage the process so that there is not backlash against H&R Block for charging additional costs for complexity?

Even if you're not charging for ACA, it's just a more complex and more cumbersome process?

On the other hand, how do you deal with potential political blowback from trying to make money off of ACA when it's known that it's going to be something that at least the Democratic administration wants to go smoothly and be a big win for everyone?

Yes, I think -- and if Amy wants to weigh in.

Our clients -- listen, we don't have a political agenda here.

Let me be crystal clear on this, and crystal clear on this when I go to Capitol Hill.

The Affordable Care Act was put into law.

We are here to interpret the law.

We do not -- our political action committee gives equally to both sides of the House and the Senate.

We are not political activists in any way.

This is the law of the land.

Our job is to inform our clients of the potential eligibility for a subsidy.

If they are eligible, we give them an indication of, based on the silver level of coverage that is currently the only pricing mechanism we know of with the Affordable Care Act, what their monthly charge will be.

If they choose not to take healthcare, what their potential tax penalty will be.

Our clients really appreciate this.

We are not pushing people into healthcare.

We are informing our clients of the choice that they have to make.

So, while you are always, in this politically toxic environment, going to get social media cry, or whatever, it has been very minimal.

And I think the receptively, from our tax and healthcare review, is that our clients view us as on their side.

And that is our principle.

That's what this Company was founded on 58 years ago.

And that continues to be the principle today.

We are only interpreting the law and trying to service our clients as best we can.

Okay.

Thank you very much for the time.

Anna Shtromberg of National Australia Bank.

I just wanted to understand your comfort level with investment grade ratings after you spin off the Bank.

Because you have said in the past that you didn't really need to maintain investment grade.

And I just wanted to get a refresh on that.

I think that the Bank and the investment grade are independent, to be honest.

The Bank, as a regulated entity, holds capital.

It's regulated by the OCC.

We have extra -- we have very well-capitalized Bank at this point, it's safe and sound.

We've been up and running for six-plus years now and we feel very comfortable with that.

When we, obviously, figure out what to do with the Bank, we'll be re-looking at, as we always do, everything.

But the broader question about investment grade is, we are an investment grade company.

We, based on our current capital structure, go into the tax season in a position where we do use the commercial paper markets to fund ourselves.

And that obviously requires an investment grade rating.

But, having said that, there are other solutions out there and we always think about what the right solution is at this point in time.

But as a factual statement, we have been investment grade even through this tax season.

Right.

And just the final question, I don't know if someone's already asked the timeframe on the Bank spinoff and you had already answered that, so I apologize for that.

But can you just repeat, if you had already answered it.

What is the timeframe you're looking at for the Bank spinoff?

We're not providing guidance on what the time line looks like at this point.

All right, great.

Thanks.

Joe Janssen from Barrington Research.

Bill, historically that 2/28 filing number is a pretty useful data point.

Given the delays, you have commented that you believe you're about two weeks behind.

Any thoughts as we move through March, where you think we're at an apples-to-apples comparison, you potentially could release some data points?

I think we're going to release at the end of the season.

This has been such a strange season that we're going to wait 'til the end of the season.

I think Scott or somebody had asked earlier about when I think it's going to normalize.

I don't know.

So I don't think -- in our opinion, this is a full-season business.

So we'll release tax volume results at the end of April.

I thought I would try.

Thank you.

And Mr. Drysdale, do you have any closing remarks?

We just want to thank everyone for joining us today.

We'll put out our next volume results through April 15 during the week of April 23.

And we look forward to talking to you in Investor Relations after this call.

Thank you.

Ladies and gentlemen, that concludes our conference.

You may now disconnect.