H&R Block, Inc. (HRB) Q4 2008 Earnings Report, Transcript and Summary

(Operator Instructions) Welcome to the Fourth Quarter 2008 H&R Block Earnings Conference Call. I would now like to turn the presentation over to your host for today’s call Mr. Scott Dudley, Vice President of Communications and Investor Relations.

Good morning everyone and thank you for joining us to discuss our fiscal 2008 fourth quarter and year end results. Presenting on the call today are Richard Breeden, Chairman of the Board, Alan Bennett, Interim Chief Executive Officer, Becky Shulman, Chief Financial Officer, and Tim Gokey, President of Retail Tax Services. They will comment on our FY08 and our outlook for FY09 we will then open the call to questions. Several members of our senior management team will also be available during the Q&A session. Our call today is planned for about one hour. To start, let me provide our safe harbor statement. Comments made on this call may contain forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such statements are based upon current information and managements expectations regarding the company, speak only as of the date of which they are made and are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results could materially differ from what is expressed, implied or forecast in such forward looking statements. Such differences could be caused by a number of factors including risks described from time to time in H&R Block’s Press Releases and Forms 10-K, 10-Q, 8-K and other filings with the Securities and Exchange Commission. H&R Block undertakes no obligation to publicly release any revisions to forward looking statements to reflect events or expectations after the date of these remarks. H&R Block provides a detailed discussion of risk factors in periodic SEC filings and you are encouraged to review these filings. In conjunction with today’s call there is an accompanying slide presentation which is posted to the Investor Relations section of our website at www.HRBlock.com. In addition, our 10-K has been filed and our earnings press release issued yesterday morning has been posted to our website. To give as many participants as possible an opportunity to ask a question we ask that when called upon you limit your query to one initial question and then one related follow up question if needed. Please, when asking your question remember to avoid using a headset or a speaker phone as this will cause problems with the audio. With that I will now turn the call over to Richard Breeden.

The company enjoyed its best tax season in nearly a decade last year and over the last few months we have surmounted many challenges, arising out of the company’s past mistakes. I would like to start by thanking the people who made that possible. Our tax professionals bring their dedication, training and tax know how to the job of delivering outstanding assistance to millions of clients seeking to meet their tax obligations. They delivered a terrific performance this year for which we are extremely proud and extremely grateful. We’re also grateful for the hard work by all the personnel of at RSM McGladrey and by our associates throughout the rest of the organization. I would also like to thank Alan Bennett for his superb job as Interim CEO and our entire senior management team. Our earnings release and Form 10-K filing yesterday reported in detail on our overall performance particularly in continuing operations. Alan and the rest of the team will discuss results for the year and for the quarter in more detail in a few moments so I won’t repeat those details beyond mentioning a few highlights. For the year net income from continuing operations increased by 21% to more than $454 million or $1.39 per diluted share. Fourth quarter earnings increase by 17% to more than $691 million or $2.11 per share. For the full year revenues from continuing operations grew by 10% $4.4 billion of which more than $2.6 billion came in the fourth quarter. In Tax Services we increased our client base in every segment; retail, digital, and international and we served a record 23.5 million clients not counting the so called free filers in digital of which there was about another million. In Retail Tax we had client growth of 1.9% and pre-tax income grew 11.5%. We believe that final IRS figures will show that our retail tax client growth was more than the growth in overall filers when the numbers are adjusted for the economic stimulus plan and other noise. For the future we’re confident that we have excellent momentum in the Retail market and that we can continue to pull share from competitors. One way we plan to do that is by increasing our commitment to franchising. We acquired the 100% franchise operated Express Tax business two years ago and have been testing and reconfiguring the business in anticipation of a broader roll out. There are just over 400 Express Tax franchise locations at present up from under 200 a year ago. We expect to add another 200 locations in the next year. Express Tax is a supplement to our Block branded efforts for “Speed of Refund” clients and we think it will help us grow share over time in an efficient manner. We also plan to significantly expand our efforts to build share in Hispanic markets. Here again we believe we have an opportunity to supplement our successful Block branded company operations with a strong franchise operation. Beyond efficiency and use of capital good franchisees know their markets and have strong community ties that help to attract both associates and clients which is particularly important in Hispanic communities. While gaining market share we also believe we can enhance efficiency considerably. One way we plan to do that is by optimizing our distribution network over time. This program will include a slower pace of new office openings, closing underperforming office and where appropriate converting selected company offices to franchise operated offices. We believe we have the opportunity to use these and other approaches to significantly improve the performance of 300 or more lower performing company owned offices over the next three years. Finally, we are making customer facing investments as part of our efforts to grow market share and also to boost efficiency. This includes larger marketing budgets but it also includes working to enhance the role of technology in making our offices more efficient and creating stronger networking among our tax experts across the country. A weak spot this year was the Digital Tax segment where we grew customers at a much lower rate than growth of the overall segment thereby losing a bit of market share. We increased online clients about 14%, increased revenue 10% and significantly increased our profitability in Digital. None the less we obviously were not as competitive in this strategic marketplace as we need to be and we’re working on our revised strategy for Digital that will set more aggressive goals in terms of market share while also seeking to maintain margins as much as possible. We believe that H&R Block and our brand position can be particularly strong in the online market but we must also address pricing structures due to the proliferation of popular so called free product offerings by competitors which of course aren’t entirely free. We did not offer a free online product last year unlike our competitors and that is the subject of intense review as we look toward next tax season. We are also looking at the features, pricing, marketing and other aspects of making our Tax Cut software product more competitive. RSM McGladrey is the nation’s fifth largest accounting firm and it has a leading position in tax consulting and accounting services to small and midsize businesses. McGladrey had roughly $1 billion in revenue in both FY07 and FY08 however in fiscal ’08 McGladrey improved its pretax operating margins to 9.4% from 6.4% in the prior year a 52% increase. This helped drive pre-tax earnings to $89 million compared with $58 million in the prior year. We believe McGladrey can continue to boost margins considerably and we are targeting a pre-tax margin of more than 12% in FY09. For the future we expect tax services in McGladrey to be the principle drivers of growth and profit in the company. In both tax and McGladrey we are targeting 200 to 300 basis point improvements in pre-tax margins for FY09. Another strategic challenge is to develop our longer run plans for the Consumer Financial Services. Neither H&R Block Bank nor H&R Block Financial Advisors contributed meaningful operating earnings to the company in fiscal ’08. Both units involved corporate level overhead and risks that cannot be ignored. We’ve made significant progress in transforming the Bank from an entity that largely bought Option One mortgage products to an entity whose focus is on developing products to support our tax services business. We are pleased that in FY08 we were able to shrink total assets and total mortgage loans by roughly $400 million or 28% and we expect that trend to continue. The Bank has been active in issuing more than 2.6 million Emerald Cards and nearly one million Emerald Advance lines of credit. We expect to expand these numbers considerably in support of our retail tax business. Because the Office of Thrift Supervision eliminated the prior regulatory requirement for 3% tangible net capital at the holding company level continued ownership of the Bank is now feasible from a capital structure perspective. At the same time the bank must demonstrate an ability to generate an adequate return directly or indirectly to justify the deployment of both capital and management talent. Similarly while HRBFA has made great strides in recent years it is also not currently generating the returns required to justify consumption of capital and management attention. In both cases we have the time to take a patient look at the issue but in the end both units have to generate adequate levels of profitability. Turning to Discontinued Operations the most important thing about OOMC is that its parts have been closed or sold. We will not miss it. Obviously shareholders wish that that closure had happened much sooner. The major issues remaining at this stage are the risks of potential litigation over prior lending practices and potential liabilities associated with claims for breaches of representations and warranties in connection with the sale of such loans or securities based on such loans. Our Form 10-K filed yesterday contains extensive material relating to such issues and all investors should review it. I do not want to diminish anything in the 10-K which speaks for itself in terms of potential risks. At the same time formal legal disclosure language sometimes focuses exclusively on the negative since that is its ultimate purpose. It is worth noting however that the longer loans stay in the marketplace and perform the harder it may be for a litigant to show that actions of OOMC were the proximate cause of damage to purchasers. There may also be significant defenses to repurchase those claims. While there may be no explicit time limitation as there is by definition with early payment defaults the passage of time is none the less not irrelevant in rep and warranty claims as well. While the company has real exposure to claims in this area the company believes that the reserves that are established are toward the high end of the range of likely requirements given what we know today. The Board reviewed the company’s financial condition, our anticipated earnings growth and issues of financial strength in the future as we rebuild the balance sheet. We decided to increase the dividend by $0.03 per share per year. We also authorized $2 billion in share repurchases over a four year period. We plan to be very disciplined in using this authority in FY09 and we are not likely to commence share repurchases until the fourth quarter of FY09. However, once we achieve desired levels of balance sheet strength we will become more aggressive in using this share repurchase authority. Obviously the company’s earnings, financial condition and market conditions from time to time affect actual purchase decisions. After carefully reviewing last year’s results and the trends we see in the business we expect to see FY09 earnings from continuing operations in the range of $1.60 to $1.70 per diluted share. We have been very fortunate to have Alan Bennett as our Interim CEO during the past few months as we conducted the search for a permanent CEO. We believe we will have an announcement in the very near future. We have considered several outstanding internal and external candidates and we’re very pleased with the process to date. Two weeks ago we announced a package of enhancements to our corporate governance practices. I won’t take time away from the earnings call to discuss these changes which are intended to improve accountability and responsiveness to shareholders in our governance practices. We think these changes collectively will add value to the company over the long haul by promoting an active and responsive Board of Directors. With that I will now turn the call over to Alan.

I will provide a quick summary of the performance of the non-tax segments and Tim Gokey will follow with detailed information on our tax results including clients served, pricing, our Emerald products, client retention and other information. Becky Shulman will then review our balance sheet and financial conditions before concluding with more detail regarding our fiscal 2009 outlook. Within our Business Services segment full year revenues from continuing operations grew 1% to $942 million while as Richard noted; pre-tax earnings and margin both have improved by more than 50%. Results for our core services including particularly solid performances in tax and consulting which grew revenues 8% and 13% respectively as the result of changes in prior arrangements whereby AmEx TBS provided professional staff to affiliated test firms we no longer record the revenues and expenses associated with this activity. Although this had no impact on our earnings it understates our underlying revenue growth in fiscal year 2008. Our revenue growth before the effect of these changes was 8%. In the fourth quarter revenues grew 1% to $318 million and pre-tax earnings grew 16% to $72 million. Our review of non-core businesses within McGladrey resulted in the remaining portion of our payroll and benefits business and our financial process outsourcing business during the year. This year we are redoing several other non-core areas of McGladrey business for possible sale. We are now very focused on growing revenue and margins in our core accounting, tax and consulting businesses. The ability to deliver improved results will be supported by $15 million cost savings program that McGladrey is already implementing as well as future steps to enhance efficiency in margins. Our Consumer Financial Services segment which comprises our Bank and Financial Advisory businesses delivered 6% revenue growth in the fourth quarter despite difficult market conditions. However, pre-tax income declined to $15,000 compared to $14 million in the prior year period. Segment revenues for the full year were up nearly 19% to $460 million yet pre-tax income saw a 49% to $10 million due to higher loan loss reserves at the Bank and poor market conditions in the latter half of the fiscal year. H&R Block Bank continued to benefit from higher Emerald Card volume, the introduction of the Emerald Advance line of credit and lower costs of deposits due to Fed rate cuts. In its second full year of operation the Bank delivered revenue growth of 85% to $143 million while pre-tax income fell to $11 million. The lower income reflects an incremental $38 million provision for loan loss. This was obviously disappointing to us even though we are rapidly shrinking the mortgage book. The Bank’s fourth quarter revenues grew 46% to $53 million. The Bank reported a pre-tax loss of $1 million for the quarter due to a $29 million increase in loan loss reserves. It is important to note that the loan loss provision came from the current year earnings and did not cause any capital issues at the bank. In fact, in fiscal 2008 the Bank paid a net dividend of $43 million of excess capital back to H&R Block while maintaining a leveraged capital ratio above 12% at fiscal year end. Due to the short term nature of Emerald Card account deposits total assets normalized from $2.4 billion at the end of the third quarter to $1.1 billion at fiscal year end. Total assets are down $423 million from a year ago primarily due to the rapid reduction of the mortgage loan portfolio. At fiscal year end we held about $290 million each of deposits for Tax Services clients and deposits on behalf of H&R Block Financial Advisors clients. On the asset side the Bank ended the fiscal year with $966 million of mortgage loans held for investment. Our mortgage loan portfolio was reduced by $59 million during the quarter due to principal payments. Four properties were classified as other real estate owned at the end of the fiscal year valued at $350,000. Additional properties are expected to be added to this classification in the future as severely delinquent borrowers move through the foreclosure process. We are actively managing the loan portfolio to minimize losses. In Fiscal 2008 the Bank modified 148 loans totaling $46 million of which 47 loans totaling $12 million were previously delinquent. The OTS recently reported loan performance for thrifts showing a 3.4% of prime loans, 12.5% of Alt-A loans and 21.5% of sub-prime loans were now delinquent. At April 30 our mortgage loan portfolios 30 day plus delinquency rate was 11.7% or $117 million which is up from 7.1% or $74 million at the end of the third quarter. Within this total loans delinquent by more than 90 days were $74 million or 7.4% of the portfolio up from $22 million or 2.1% of the portfolio at the end of the third quarter. As the result of rising delinquencies and declining collateral values during the fourth quarter and uncertainty in the residential loan environment we increased our loan loss provision substantially. The loan loss reserve as a percentage of all mortgage loans was 4.5% up from 1.5% in the third quarter and our reserve to total delinquencies is now 33% versus 11% in Q1. Although we believe we have established an adequate reserve based on current conditions future increases in the loan loss reserve may occur. At H&R Block Financial Advisors fourth quarter production revenue was flat compared to a year ago while it increased 10% for the full year. We ended the year with our highest production revenue month in over seven years. Full year revenues increased 2% to $317 million and the pre-tax loss improved to $1.4 million from a $3.3 million loss in fiscal year ’07. Fourth quarter revenue fell 12% to $74 million in a very challenging rate environment. Despite benefiting from a $9 million reduction in intangible amortization fourth quarter pre-tax income of $1 million was flat to the prior year. HRBFA results are being negatively impacted by recent Fed rate cuts which cause a decline in interest income as we lower margin rates and rates earned on other asset balances. Average productivity per advisor for the fiscal year increased 6% and we continue to see positive trends in recruiting and retaining higher level producers in spite of market conditions. Annuitized revenues increased 18% year over year and now represent 58% of total annual production. We continue to be encouraged by this trend as we emphasize long term advisory relationships with our clients and focus on fee based annuity and other insurance products. Assets under administration totaled $32.1 billion which is down 3% year over year due to market declines. The number of financial advisors grew to 984 at year end from 918 in the prior year. Discontinued Operations which were essentially all Option One related reported a pre-tax loss of $192 million during the quarter mainly due to an increase of $203 million in loan repurchase reserves. The increase was driven by ongoing deterioration in the housing market which is causing delinquencies to rise which in turn increases the likelihood of loan repurchase demands for representation and warranty breaches. In addition the decline in housing values is causing the severity or loss we incur when we sell a repurchased loan to increase. The overwhelming majority of the operation in Option One has been shut down with most of the costs incurred in fiscal 2008. There will be a minimal amount of shut down expenses taken in fiscal year 2009 and some operating costs related to the small long term staff in place to handle the remaining wind down activities in litigation. The agreement with American Home required Option One to change its name which is now Sand Canyon Corporation. I will now turn the call over to Tim Gokey who will provide a detailed assessment of our tax season results.

Let me first join you and Richard in thanking our associates and tax professionals for their outstanding performance this year as well as their ongoing determination to stand behind every client. It is the dedication of these skilled professionals that makes Block so special. To start I will address Industry factors that provide context to the results that we were discussing today as well as how we think about the business going forward. As you know there is more than 11% growth in total filings this year due to the economic stimulus package or ESP. The industry also saw a significant shift toward do it yourself methods from assisted tax preparation. We believe the magnitude of this shift is temporary and is attributable to dramatic increase in the amount of paper filings by ESP related filers whose tax returns were pre-filled by the IRS. Excluding ESP filers as well as filers related to last year’s telephone excise tax we estimate the increase in total tax filers for the season will be 1.1% to 1.4% when the IRS publishes its statistics later this summer. In this context we’re very pleased with Block’s total customer growth of 2.3% excluding ESP filers. Entering tax season 2008 our key objectives were to improve our position among equities filers, grow in the speed of refund market, and continue positioning our retail business for future profitable growth and to significantly increase profitability among digital tax filers. Due to solid execution on these initiatives H&R Block enjoyed its best tax season since 1999, achieving growth across the board in clients served, average fee charged, total revenues from both company owned and franchise operations and pre-tax earnings. After an unusually slow start in January due to the late passage of the AMT patch US clients came to H&R Block offices in record numbers and the flow of digital clients picked up significantly. We served 23.5 million total paid clients which included 20.7 million clients from our US retail and digital tax channels. In retail our core growth was up 1.9% over the prior year. Core clients exclude those who received a lending product only which was IRAL last year or an Emerald Advance this year and also excluded approximately 291,000 one time ESP filers. Total Retail clients served grew 3.8% over the prior year. Within Digital we saw solid growth among online filers while significantly increasing the overall profitability of our Digital operations. Our International operations also had an exceptional season. The Tax Services segment achieved full year revenue growth of more than 11% to $3 billion and pre-tax income also grew 11% to $786 million. The pre-tax margin was 26.3% essentially flat to last year. Margin growth was negatively impacted by lower prices on refund anticipation loans and incremental bad debt expense incurred earlier in the year. Revenue growth was driven by favorable client growth and by pricing increases in line with expectations. Without ESP filers net average retail fees increased 5.8%. Client satisfaction levels were up more than a full point to 69% confirming that clients find the service we provide valuable and appropriately priced. Including ESP filers overall net average retail tax preparation fees per client grew 4.3%. As we entered the tax season a key priority was building our presence among expertise filers which consisted of clients with more complex returns who tend to file later in the season. Within the expertise market H&R Block continues to have both significant long term growth opportunities and a competitive advantage versus other commercial tax preparers. We made substantial investments this season to provide our tax professionals with additional training on building their client base while promoting their tax knowledge. As a result, client referrals increased year over year by 30% yielding nearly 150,000 additional new clients. Our new Second Look product also provided an excellent approach to communicate Block’s expertise as well as to directly acquire new clients. With Second Look our skilled tax professionals review a client’s current or prior year tax return to ensure its accuracy. With accuracy H&R Block certifies the return and stands behind it with the H&R Block guarantee. In more than half the cases we found clients were missing substantial tax refunds to which they were entitled. On average clients who re-filed saved $1,300 in taxes they would have otherwise overpaid. In total new expertise clients grew over 5% excluding ESP filers while retention among expertise clients increased nearly 1.8%. We believe this progress and the efforts I just described along with strong local marketing and continued growth in referrals will set us up for long term success within the expertise segment. We also had a clear intention to pursue early season clients and to expand our leading position within this important segment. Our innovative settlement and credit products were well received by both our clients and our tax professionals. Our 36% APR Guaranteed Lowest Cost Emerald refund anticipation loan proved very popular. More than 2.6 million clients chose an Emerald Card representing 30% growth over the prior year. We saw important retention gains from clients that chose the Emerald Card last year. These factors drove a 4.5% increase in refund anticipation loan applications and our RAL market share improved more than two percentage points. With the elimination of pre-file products at the beginning of this year including our IMAL we developed an alternative credit product to meet the needs of our clients. The introduction of the Emerald Advance line of credit played an important role in our client retention gains in the first half of the season. We facilitated approximately 900,000 Emerald Advance loans extending more than $400 million of credit to existing clients. More than 90% of these clients returned for paid tax preparation. Overall we’ve clearly demonstrated that we can drive change broadly across the industry and better position our company for long term success. We continue to believe that H&R Block’s ability to provide innovative, consumer friendly products to the H&R Block Bank gives us a competitive advantage. Our third priority for the Retail business was to continue to set the stage for future profitable growth. New training and tools designed to build on H&R Block’s lead as the best place to be a tax preparer led to a 1.6 point increase in tax professional retention to 74%. This is a significant gain which directly impacts future results of client satisfaction and client retention. We also increased our number of enrolled agents who represent the IRSs highest level of certification by 14%. Across both the Speed of Refund and Expertise client segments our client retention rate increased 1.3 points to 73% and our top box score for likely to recommend increased 1.7 points to 69%. Based on the results of this tax season we believe we are heading into tax season ’09 with more satisfied and committed clients and tax professionals. In fiscal year ’09 and beyond our key objectives are to further grow our client base and market share while delivering improved bottom line results driven by both revenue growth and cost control. H&R Block is the preeminent tax preparer in the market with one of the countries best known brands. We plan to support our strong brand with additional investments in marketing to drive new client growth. As Richard mentioned we’ll also be implementing programs to drive client growth to franchising and by expanding our share of the Latino segment. At the same time we will enhance our Emerald product platform and continue innovating to create consumer friendly products. We also believe there are additional opportunities to achieve further efficiency gains and we plan to vigorously pursue these to drive expanding margins in each of the next three years. Turning to Digital, the entire digital market saw a shift this year from software to online and the composition of online was increasingly made up of free services whereby a basic Federal filing is free and a portion of clients paid fees for their state filing or other services. We estimate the total digital industry grew 17% driven by increases in the free file alliance and by competitors offering these free tax products. Within this context H&R Block modestly gained share among online filers using free file alliance, lost share outside the FFA where we did not have a free offering. Our online customers representing filers who paid HRB a fee as well as those who do not grew 14%. While this was solid it is below the online industry growth due to heavy marketing by our competitors and our choice not to offer a free product outside the FFA. In software our major competitor spent heavily to block TaxCut out of key store promotions during the peak season. Software customers were down 12% for the year. Across both online and software our total Digital customers grew 1.6% for the full year. While we were disappointed that our Digital customer growth did not match the market we are very pleased with the changes we made to increase profitability including revenue increases and cost control. These changes led to significant increase in earnings from our Digital operations which was a key objective for this year. While it might be natural to draw a link between these changes and our loss in market share we believe they are separate and that we can profitably grow market share in the future. Based on this belief combined with what we learned this past season we feel good about opportunities for Digital client growth in the next tax season. The one point increase in our client retention and seven point improvement in our net promoters score indicate that the fundamental product changes we have been making are working. Through several pilot programs we tested in March we gained valuable knowledge about the effectiveness of various client acquisition methods that we believe will prove beneficial next year. Before moving on let me note that we have historically only afforded those clients who paid us a fee. Given the growth in free we will now report all customers that use our service including customers receiving services and products for free which is consistent with the way our competitors report. On this basis we saw the growth of 1.6% for the full year as a mentioned a moment ago. This compares with the decline of 4.3% in paid clients excluding free that we reported earlier. For International our operations in Australia and Canada had an exceptional year delivering a 6.1% increase in clients served. Full year international revenues grew 29% to $170 million while pre-tax income increased 60% to $32 million. More than half of the revenue increase and approximately one third of the increase in earnings was driven by favorable exchange rates. Fourth quarter revenues were $108 million up 34% over the prior year. Pre-tax income for the quarter rose 42% to $41 million. Now I’ll turn the call over to Becky Shulman to review our financial position in fiscal year and ’09 outlook.

I’d like to start with a review of our Balance Sheet. We ended the year in a strong position with greater financial flexibility. Our unrestricted cash position at April 30 was a solid $727 million. While this is down about $200 million from the prior year the decrease was entire due to paying down our working capital committed lines of credit. Receivables declined to $553 million from a season high of $2.7 billion in our fiscal third quarter reflecting the normal pattern of collections related to our participation in RAL. Our year end receivables were $556 million a year ago. Given our cash position and long term debt of $1.1 billion at April 30 we ended FY08 with just $441 million of net debt down from $1.2 billion at the end of the prior year. Mortgage loans held for investment by H&R Block Bank declined to $966 million from $1.4 billion in the prior year. We expect the mortgage portfolio to be further reduced as mortgage loans run off and are not replaced. We believe the mortgage portfolio will be less than $800 million at the end of FY09 and $600 million in FY10. In FY08 total stockholders equity was down $427 million versus the prior year due to the losses incurred in our discontinued mortgage operations. We did not repurchase shares in FY08 due to the losses at Option One and our desire to begin rebuilding our balance sheet. We issued three million shares from our treasury for option exercises, the employee stock purchase plan and restricted shares. For FY08 we averaged 327.5 million fully diluted shares outstanding. We ended the fiscal year with equity of $988 million. Our equity will decline due to our normal and predictable off season expenses which we expect to be lower in FY09 due to our cost reduction initiatives. Being mindful of our $650 million net worth covenant and our committed lines of credit we think it’s prudent to delay FY09 share repurchase until the fourth quarter when we will have more certainty about the year. We also expect to be particularly disciplined about the level of repurchases in FY09 as we rebuild the balance sheet. We currently estimate that our FY09 share repurchases will all be in the fourth quarter and therefore there will be no appreciable reduction in total share count due to share repurchase in FY09. In fact we believe the fully diluted share count will be slightly higher. We will continue to run our businesses to minimize the capital necessary to deliver the returns and cash flow we require of our operations while keeping with our historical view that any excess capital should be returned to our shareholders. For FY09 our normal off season working capital needs excluding extraordinary items is about $1.4 billion through mid January when we become cash flow positive. We expect to use only about half of the capacity of our $2 billion lines of credit for these normal off season operating needs. In addition to being near the CLOC credit limit in FY08 we also had a $500 million bridge loan that came due in December of 2007. We do not have any significant debt maturities to worry about this year. Looking at other financial items it should be noted that FY08 earning from continuing operations include non-cash items of $95 million of depreciation, $51 million of amortization of intangibles and $44 million of stock based compensation expense. I would note here that in FY09 our capital expenditures are anticipated to be about $112 million and depreciation should be about $90 million. The effective tax rate from continuing operations for FY08 was 39%. At this point we expect our effective tax rate from continuing operations in FY09 to be slightly higher at approximately 40%. Moving to our fiscal 2009 outlook, H&R Block has undergone significant changes over the last six months to refocus on our core tax business, to improve our cost structure and enhance our ability to grow profitably. While we are extremely pleased with this year’s tax season and our overall growth from continuing operations we will aggressively manage our operations to further improve income and margins in the coming fiscal year. We expect net income from continuing operations for FY09 to be in the range of $1.60 to $1.70 per share reflecting overall revenue growth in the mid single digits. Within our tax services segment we expect mid single digit revenue growth, reflecting a combination of pricing and client growth. We believe pre-tax margin will show an improvement of more than 200 basis points primarily due to the net savings achieved from our expense reduction initiative, the one time bad debt charges taken in FY08 and a mix of pricing actions and client growth. We will continue to meet the needs of our clients including the early season. We intend to build on the momentum from the past tax season in which we drove client growth and retention through product superiority and unmatched service quality. In Business Services we look for continued strong performance in McGladrey core tax and consulting businesses driven by growth in the middle market that we serve as well as by our own efforts to build our client relationship. We will continue to aggressively compete in these markets and will support our efforts through ongoing brand awareness campaigns. Building off the momentum created we expect margin to improve from 9.4% in FY08 to more than 12% in FY09. While we are not giving specific guidance beyond 2009 we do expect significant earnings per share expansion driven by continued client and pricing growth in tax services, effective cost containment and efficient deployment of capital. We have already taken steps this past year to build a lower cost and more efficient operating model and have identified significant additional cost efficiencies that will provide the significant boost to earnings over the next several years. We are targeting expense reductions within both retail tax and at McGladrey. We will continue reinvesting savings back into customer revenue enhancing activities while driving expanded margins. Finally, it is important to note our stronger financial condition and improved flexibility is starting to be recognized by the credit rating agencies. Last month Fitch upgraded H&R Block short term debt and commercial paper ratings to F2 from F3 and moved their outlook to stable from rating watch negative. In addition, Standard & Poor’s placed us on credit watch with positive implication. We believe that we have taken the necessary actions to better position our company for long term success and to deliver significant shareholder value in FY09 and beyond. With that I think Scott we are ready for questions.

(Operator Instructions) Your first question comes from Scott Schneeberger – Oppenheimer. Scott Schneeberger – Oppenheimer: Two separate questions on your guidance for next year you’re saying mid single digit revenue growth could you break out your expectations volume and price?

We think it’s too early to break that out right now so we’re just going to stay with the mid single digits for overall revenue. Scott Schneeberger – Oppenheimer: The other question is with regard to Option One with that entity as a subsidiary obviously a strong move in the reserves this quarter which should position you well. I understand that as time passes you’re better defense with regard to certain claims against some of the originated loans that were sold. If things got very, very bad there whereas the situation arose where you were required to pay extreme amounts of money is it possible to bankrupt that entity or go through a process where that entity could be bankrupted and that would be unique unaffecting the parent company of H&R Block?

I think it’s difficult for us to project or to speculate about future activities regarding Option One or any of our subsidiaries. Option One is a stand alone subsidiary, it operates with its own staff of employees and its own balance sheet. Beyond that we really can’t speculate.

Your next question comes from Andrew Fones – UBS. Andrew Fones – UBS: I had a question about the reserve. It seemed a little coincidental to me that the size of the reserve in the Option One business was about the same as the cash proceeds from the sale of the servicing business can you perhaps help me understand the adequacy of that reserve and what eventuality you’ve reserved against?

We’ve received a lot of questions over the past day or so, if I can I’d like to just take a quick step back and talk about this in more broad terms and then answer the specific question about reserves. Generally speaking originators like Option One, they have repurchase obligations under a number of circumstances such as the early payment defaults and rep and warranties to loan buyers. Those rep and warrants can take several different forms. Some of them are based on activities of third parties like title companies and appraisers. Some are based on information provided by the borrowers. Some are based on originators underwriting and often but not always the rep and warrants are further qualified by the originators knowledge. What we can say is this; Option One believes that its remaining repurchase activity related to early payment defaults will be minimal. In fiscal 2008 Option One had only $82 million of rep and warrants claims presented to it. During late 2007 when the sale of Option One was planned and announced various parties required an H&R Block indemnification in order to do business with Option One. As a result H&R block indemnified approximately $2.3 billion of mortgage loan sales and those potential liabilities are already accounted for in our repurchase reserve through continued ops. Option One operates as a stand alone subsidiary with equity of approximately $300 million and it has cash and inner company balances of approximately $300 million that are available to it to handle these repurchase requests. Finally, Option One they retained a highly capable and experienced team to handle these repurchase claims that are made and they have a great track record of managing the claims process very effectively. Specifically with our reserves our loss reserve for the quarter included an estimate of future claims based both on historical trends as well as an analysis of loan delinquencies and potential losses in loan pools that we’d previously sold. In addition our reserve reflects increasing trends in loss severity as we talked about earlier on the call. We recorded reserves in accordance with GAAP requirements reserving only for those claims that are both probable and estimable. As you can imagine predicting future claims especially in this environment is quite difficult. As such, our loss estimate included development of a range of possible loss outcomes. Given the uncertainty in the market today combined with the fact that we have exited this business we felt it was prudent to record a reserve that we feel is near the high end of our loss range. We will of course reassess our estimate each quarter as new data on loss experienced becomes available. I want everybody to keep in mind too that Option One is always dealt with the claims to repurchase loans. We’ve seen only a slight increase in these repurchase requests but the severity has gotten much worse given its significant down turn in the market. With all that we believe the potential liability for Option One loan repurchases in any HRB indemnities is appropriate reserved given what we know as of today. Andrew Fones – UBS: Just to clarify though you mentioned that you’ve reserved against the $2.3 billion of loans that you indemnified. In terms of the soundness of the corporate would you expect to have to reserve against loans that block the parent didn’t indemnify?

I want to clarify that. We’ve taken a look at everything and the repurchase reserve that we took through discontinued operations. What has been indemnified there is not incremental.

Your next question comes from Kartik Mehta – FTN Midwest. Kartik Mehta – FTN Midwest: I wanted to get your thoughts on the tax business. I know earlier you said you really don’t want to talk about volume or pricing. I wanted to focus a little bit on pricing, you achieved almost 6% pricing this year and I’m wondering your outlook on pricing over the next two or three years based on the competitive nature of this industry right now. Do you believe that’s sustainable pricing level or will it get tougher in the next couple years?

We do not really see any change in the next few years. Our price value which we monitor carefully every year continues to improve. There was a lot of noise in the market this year because of the mix of clients due to the economic stimulus package and I think that affected some of our apparent price increases of our competitors. I believe that once you wash that noise out we really won’t see any change going forward. Kartik Mehta – FTN Midwest: Based on that statement wouldn’t mid single digits be a fairly conservative number for the tax business? If you just assume let’s say 6% pricing and volume of 1% to 2% I think earlier in the call you indicated that you believe you can take market share in the industry. Is there something else happening within the industry that we need to be aware of which would take you down to mid single digits?

The other factor to think about is the economic stimulus package filers will be going away. That was almost 2% of our growth this year. When you look at 2% growth as a hypothetical on top of the non-ESP filers that would leave us in total filers just about flat going forward. I think you have to think about that adjustment as well as you look at the overall revenue impact.

As you look at the guidance we’ve given in the mid single digit on the revenue side is that we’re signaling through our cost reduction efforts too that we clearly want to profitably grow and our intent is to take lots of the support costs or overhead costs out and redirect those into customer enhancing or revenue enhancing over time activities while also improving our margins. The guidance we’ve given on the top side on the revenue may be somewhat conservative but it connotates the fact that we think there is margin opportunities beyond just growing just the revenue number through price increases. Kartik Mehta – FTN Midwest: Do you believe that the tax business is this a business where you can continue to improve margins. I know you’re going to have a significant increase next fiscal year but is this a business because of scale and what you’re doing with inside the business that we should at least continue to see some margin improvement over the next couple years?

Yes, as I look, I’ll only speak to three years beyond this. The horizon is such that we’ve got pretty good visibility that we can continue to grow margins in our tax business through just the revenue cost relationships. Kartik Mehta – FTN Midwest: I think you made a statement and the press release that the use of RALs might be declining and that’s really helped with the Emerald Card. I want to get your overall thoughts on maybe what’s going to happen to RALs over the next two years and the usage of those RALs and maybe the impact of profitability on the tax business as a result.

As you know there have been proposals for significant changes that would effect the availability of refund anticipation loans and I think you also know that we have taken significant steps to improve these products including introducing our popular 36% APR Emerald RAL I talked about earlier. I’ll just note here that as a percent of principle including all fees the Emerald RAL is cheaper than a credit card advance, a bank overdraft or in some cases using an ATM. We gain share with the Emerald RAL last year and we believe the competition is the best way to ensure fairly priced consumer friendly products. Also note that we believe that if others followed our lead there’d be no discussion about any need for changes within the RAL market. All that being said, there clearly is a process going on now a the IRS, we expect to actively take part in shaping any changes that might ultimately occur and in particular we believe there are any number of changes that would continue to improve these products without making them unavailable. To the extent the changes do occur we think those changes are likely to take two or more seasons to come to fruition. We really believe that because the bank, H&R Block would be competitively advantaged in the event that there were to be some significant change in the market. We really see the opportunity for a move to more year round products that would be income increasing not income decreasing for H&R Block. Kartik Mehta – FTN Midwest: My last question was on RSM. You’re going to have significant margin improvement going into next year and is that just a result of scale because of the American Express acquisition or is that just all the cost cutting you’ve done or are planning to do over the next 12 months?

Our margin improvement for next year is coming from two different areas. One would be helped by the cost reduction efforts in continued cost vigilance that we’ve already talked about with respect to all of our businesses but also related to RSM. They also spent quite a bit of time this year putting in a new audit methodology so we gained share in the face of that which served to dampen some of the results. We think the efficiencies of our new audit methodology some of the fruits will be borne next year on that which will also help us in our margin trajectory.

Your next question comes from Michael Millman – Soleil Securities. Michael Millman – Soleil Securities: Could you talk about the synergism you see between your different businesses; tax, McGladrey, and [inaudible]?

The way I view the synergies as you look at this, we talked a lot on the script today about the tax business and McGladrey because I think those are two foundational businesses that have good metrics and good fundamentals, marketing position, etc. I view those as two steps on the stool. With respect to the Bank and FA I would say the Bank with the OTS requirements being lifted are key to, I would view it as the product factory for our tax business. FA has good fundamentals and also provides lots of deposits for the bank which the bank then funds some of the tax products. There continues to be within the Bank and FA good synergies to the tax business and I view tax and RSM as being really the fundamental legs to the stool. Michael Millman – Soleil Securities: Is there reason to have more than one leg to the stool?

There are some strategic potential synergies between McGladrey and the tax business. Remember that there’s probably $450 million of tax revenues in McGladrey’s $1 billion. Tax is a significant component of what McGladrey does. Also when you heard Tim speaking earlier he talked about the opportunities that we see in the expertise market. McGladrey is delivering tax advice to the expertise market today in the volumes that I mentioned. Being probably the leading advisor on taxes in small and mid sized businesses and therefore the leading tax advisor to the owners of small and mid sized businesses is not strategically relevant to where we would like to see growth in the Block branded tax expertise segment. I don’t want to overestimate that, the businesses run fairly independently and yet they are not totally dissimilar businesses. We certainly could envision a structure in which they were independent companies rather than under the same ownership structure and that would be something that down the road would be an option for us to consider via spin off or some other similar transaction that would allow shareholders to own two separate companies rather than one. For right now we believe that it’s been important to make the kinds of improvements we’re seeing and the extremely rapid growth in profitability within McGladrey which I don’t think is close to being topped out. Michael Millman – Soleil Securities: The switch on digital, when I pushed Intuit’s tax numbers it looks like despite all their free and despite aggressiveness they average about $10 a unit higher than the number I work out for you. Maybe you can comment on how they did that or why you didn’t do that.

I think there are a couple things about the difference between Intuit pricing and our pricing. If you look at just the prices that we have for our software and for online products they’re still higher priced that we are even though this year we did have price increases on our software. Getting at maybe the free product we tested free product this year. We found that as Richard alluded to free isn’t always free. We’re considering including that as part of our strategy going forward. Michael Millman – Soleil Securities: On RALs you mentioned applications were 4.5% could you tell us what the actual RAL increase was?

Yes, that’s in our K, it was about 1.4% and the difference there is as you remember last year we had a guaranteed instant product so we had a portion of our product where we had virtually 100% approval rates. Our overall approval rate for RALs this year was significantly below where it was last year. Michael Millman – Soleil Securities: Considering that you had all the advantages of a military RAL the 36% and the advance why didn’t you grow RALs more than that?

We feel very good about the market share gains we made with the 36% Emerald RAL. On the military RAL that is something that there’s been a lot of discussion about in the industry. We really did that as an experiment. It was a relatively small scale event for us and didn’t materially affect our results. It was good learning but the noise you heard from our competitors on that is really over blown.

Your next question comes from Vance Edelson – Morgan Stanley. Vance Edelson – Morgan Stanley: With the strong growth coming out of Canada could you describe how the competitive dynamics there might differ from the US and how the tax code might result in more or less ultimate penetration for the paid preparers in that market? I’m trying to get a feel for what the overall market opportunity is there.

In the Canadian market we have a very strong position. There were some tax law changes this past season that were very favorable in two regards. Probably the most significantly was an increase in the amounts that were balance due to clients and that drove our tax backed business which is similar to our RAL business here in the United States.

Your next question comes from Scott Schneeberger – Oppenheimer. Scott Schneeberger – Oppenheimer: You mentioned 300 company owned offices that would either be closed or converted I believe that was over the next three years. Could you clarify that and then talk a little bit about the absolute level of offices you’ll have over the next year to three years with regard to mix of franchise versus company owned and then just absolute level.

For clarification that 300 was over the next three years. We really see that as part of a broad program of optimizing our distribution which includes some office openings, some office closings and some conversions to franchise. We think about where we’re going with the overall distribution network we’ll be continuing to grow it at a more modest pace than we have in the past. Growing it through more efficient means than we have in the past as we used alternative distribution and franchising. I would expect to see continued modest growth in the overall size. I would expect to see some optimization on the company side and a move toward a somewhat richer mix of franchising over time. Scott Schneeberger – Oppenheimer: Within tax services you allude in your outlook to increasing market expenditure and making other investments to drive share and then some spend for technology advancement. Would you mind elaborating a little bit on each? We know the margin guidance there but those components within there.

We do believe as I mentioned earlier that we have a very strong brand. We believe we have opportunities to leverage that brand further and we’ll be increasing our marketing spend to support that. I really don’t want to get into more specifics than that for competitive reasons right now. In terms of our technology spend we believe it’s important to support our industry leading tax specialists with the very best tools and we will be spending significantly over the next few years to upgrade the tools that they have to work with clients and that will be an important investment for us. The other investments we mentioned are really around training and products and other things to support our tax professionals as they build their independent client bases.

Your next question comes from Andrew Fones – UBS. Andrew Fones – UBS: On the buy back you mentioned looking to reach or maintain a desired level of balance sheet strength is this related to the $650 million of minimum equity required by the CLOC?

Over the course of the next year specifically that’s the constraint that we will be looking to would be the 650 covenant. Towards the end of the year we expect to be able to do a fair amount of share repurchase it just won’t be that impactful in FY09.

In the Board review of all this I don’t think the company can ignore the losses we’ve had. Shareholders equity is down a little over $400 million and while our capital intensive businesses are declining and the company has a mix of businesses today that is a higher proportion of low capital intensity businesses than we true historically. None the less we think that next year needs to be a year in which we restore financial strength. We’d like to see ourselves back in the commercial paper market and not be focused and historically Block has had a range of financing alternatives that is a significant advantage over some of our competitors. The legacy of Option One was getting frozen out of that market. There is a healing process here that will broaden our financing opportunities and reduce costs long run. The Board was very cognizant of that in saying this year we’re going to be more modest in the targets that we have for aggregate repurchases, they’ll come late in the year. Once we’re at that level back to having repaired the damage you can expect to see the foot on the pedal. Andrew Fones – UBS: In terms of putting the foot back on the pedal should we think about the buy backs being related to your free cash flows and net income or would you consider using debt to fund a buy back?

I would focus more on the free cash flow. Our share reauthorization number while we don’t want to give a four year projection of any kind, even though it’s a nice round number it is something we think is quite realistic.

Your next question comes from Michael Millman – Soleil Securities. Michael Millman – Soleil Securities: The $650 million equity is that tangible or book?

That’s just true GAAP equity. If you look, the net worth coming in actually reads $1 billion but it allows for an historical share repurchase add back of $350 million. It implies just a $650 million GAAP equity. Michael Millman – Soleil Securities: On Express Tax I think I missed you indicated number of stores you expected this year and maybe over the next couple years could you remind us what particular strategy is employed by Express Tax?

We had just over 400 offices this year that compares with just under 200 offices last year and we expect to have just around 600 offices next year. In terms of the strategy for Express Tax it’s really a couple things. As far as clients are concerned it is really focused on transactionally oriented speed of refund clients that aren’t necessarily as interested in the full Block experience. A little bit quicker interview, a little bit faster in and out. There is a segment of clients interested in that value proposition, it’s different than the value proposition we offer in our core offices. We think there’s an opportunity there. It is also an opportunity to compete in the market for franchisees. There are clearly a number of entrepreneurs being attracted to the tax industry by our competitors. We believe that a franchise value proposition backed by Block products that can be very competitive in that arena. Michael Millman – Soleil Securities: Typically where are these stores located?

We expect this to be national over time. At present it is more focused in the Southeastern part of the US but we expect that to change over time as we expand. Michael Millman – Soleil Securities: I meant in terms of local typically urban areas maybe lower income urban areas is that reasonable?

We would expect this to be pretty much any where that you would see Speed of Refund filers. In our own network we see those both in urban and in rural areas. I would expect to see both places.

There are no further questions in the queue. I would now like to turn the call back over to Mr. Scott Dudley for closing statements.

Thank you everyone for joining us and feel free to call us in Investor Relations if you have any further follow up questions.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a wonderful day.