H&R Block, Inc. (HRB) Q2 2010 Earnings Report, Transcript and Summary

Let me cover our safe harbor statement. This presentation and various comments made in connection with it including certain estimates, projections, and other forward looking statements. These statements speak only as of the date on which they are made and are not guarantees of future performance. Actual results may differ materially from those expressed, implied or forecast in the forward looking statements. H&R Block undertakes no obligation to publicly release any revisions to forward looking statements to reflect events or expectations after the date of today’s presentation. H&R Block provides a detailed discussion of risk factors in its periodic SEC filings and you are encouraged to review those filings. To start our program today and set the tone for the entire morning we’ll begin with a brief video. Welcome and thank you for your interest in H&R Block.

That video was developed for us by our advertising agency after we had reviewed our long term business plans with them. It was a way they were kind of doing a check to make sure that they captured the spirit of what we’re trying to accomplish with our long term business plans. I think they’ve captured that spirit extremely well in that video. We’ve shown this a few times already internally and the question that we always get: “So is this your new brand campaign, is this your first commercial?” The answer to that question because I’m sure you’re going to ask me anyways if I don’t tell you what the answer is, not quite. You will see, I think, when Robert shows you some of our early work later on this morning you’ll see many of the individual components from that video in our new brand campaign. We’ve chosen those elements that we’re confident that we can actually deliver against in our tax offices and with our digital offerings. However, the reality is we’ve got some work to do over the next few years so that we’re going to be able to deliver on all of the promises that we showed in that brand video. Directionally I think that gives you a good sense of where we’re headed and we are excited about where we’re taking the brand. As we’ve tried to put that into words, the words we chose, where our journey is and our mission is to become the most trusted state of the art tax preparation experience at a great price for everyone. A lot’s happened since we met here last January both in the marketplace and at H&R Block. I’m pleased to share our progress with you as we head into now our 55th tax…

Thank you Russ for about 110 million opportunities to see if I can get it right. I’ve worked with a lot brands and companies over the course of a career bigger and small, traditional, established brands, some that were sparkling, some that had lost their way. Its interesting, at the cocktail party last night a few people asked me, “So what’s your perspective coming in of H&R Block?” A few things jumped out of me right away when I was looking at this brand, it’s only been 90 to 120 days. The first is that H&R Block is truly a pioneer brand. This is a brand that invented a category, the tax preparation category. That says innovator, it says ground breaker and not a lot of brands have that kind of pedigree. There is something inside that that you can’t ignore about a brand like this. The second observation about this category is it’s a very emotional category. Taxes live at the intersection of people’s lives and people’s money. That’s very rich territory but its also very anxious and very emotional territory. Where you’re playing around with that in marketing and preparation you need to tread carefully and just understand that dynamic. Another observation I think everybody probably feels, but it just struck me is it’s an incredibly confusing category. No offense, does anyone really understand the stuff. Who here prepares their own taxes? Probably it looks like five or six hands. I’m not sure that anybody in this category speaks in plain English. This confusion is a clear part of the category but the good news is where there is confusion there is also significant opportunity. There’s another observation and this really goes more to the broad category. This is a good business to be in, it’s a perennial…

We’re really excited to share with you our action plans today for the Tax Network. As Robert just discussed with you, he shared with you the way in which we’re going to increase our overall consideration from a brand perspective. We have one of the most recognized brands in the country and still only one in six people say that H&R Block is for them. This is not just a marketing issue. This is actually a client experience issue as well. People are telling us that they don’t believe that we have a product or a solution for them or even what we have might not be good enough. It’s not enough to just have Robert’s marketing deliver clients to us through our doors through a strong marketing campaign. We have to be able to deliver good service in our retail offices, through our digital products, and through our client service after a client finishes a return. Today Phil and I are going to share with you our action plan to address our client break points. It’s a waterfall that you guys have seen earlier in Russ’ presentation and it relates to the first and last impression when they come in through our doors. It also relates to the price/value equation and the choices that we’re going to offer our clients in our service offering. To set up the framework this morning, I want to take a look at what the people have been saying about our brand and the services we provide. The first thing that we’ve heard clients say to us is, “I walked into your office, I left before starting a tax return, I sat down with a tax professional but I didn’t feel welcome.” Also, as you saw on the waterfall, there are about two million…

As I start here let me just reiterate that tax preparation is a very serious event. In fact, for most of our clients it’s the largest financial transaction they have all year. It’s with this context that we approach client service in 2010 and really beyond. As Sabrina mentioned, our plan is a block and tackle approach to serving clients, one that will create and support an optimal environment for our tax professionals to serve clients and for our digital clients to serve themselves. We know that a positive client experience more times then not leads to return visits. First year clients, we only retain them at 50%. If they come back a second year we retain them at 65%. If they come back a fifth year we retain them at 85%. The key is a positive client experience for every new and returning client. There are four primary touch points or opportunities in the client experience that we’ll address to close gaps in our service. Our goal is to ensure that when clients walk in they stay, they finish and pay, and they come back to us year after year. These four opportunities are the look and feel of the office and the digital products, the welcome, the interview, and the service we provide after the client finishes their return. As Sabrina said, I’ll share the touch points from a retail perspective and she’ll share it from a digital perspective. First, the look of our offices, this is basic. A lot of people asked me about this last night. Like all of us, clients expect professional, clean, comfortable, and secure offices. We’re going to give it to them. Clients tell us we need to improve here. We’ve got a clear plan to get our offices in better shape and…

One of our strongest expressions of personalization is choice and I talked to you about that a little bit earlier. We want to give clients choice. Choice is what our digital and integrated offerings are all about. As Russ mentioned, the industry is seeing a greater shift to do it yourself and do it yourself products, primarily in the free space and we’ve been seeing that happen for a while. We’re not afraid of this trend. In fact, we’re better positioned this year then anyone to serve the clients the way that they want to be served on whatever phase of the lifecycle that they’re in by giving them choices. If they start with us in a free channel or with a free digital product with a simple return, will remain relevant to them as their tax situation become more complex and requires a tax professional. This time last year I reviewed with you our digital product landscape. I also closed by reviewing what we were planning to do in 2010 and beyond to push us to be a more competitive and a customer choice in the marketplace. I want to update you on what we’ve done so far from what I told you last year. The first thing that I had told you in the close was that we were going to focus on share, retention and profit. As the digital industry continues to grow year over year we’re focused on capitalizing on this growth and on building on last year’s success by making our offerings more appealing in all channels; online which also includes free and FFA, and software. We believe that we’re going to see a lift in 2011 based on some significant changes we made to the product this season but I’ll touch on that in…

Improving issue resolution when clients call our contact centers is really a huge piece of the client experience. I don’t think we’ve ever talked about our call centers specifically here but it’s an important piece. We can either turn these callers into brand advocates or into brand attractors depending on how we treat them and how we fix the issues. Our call centers field approximately 90 million contacts annually with nine million of these contacts being fielded by live agents. The seasonality of our business, the complexity of the tax code and the filing process and the Emerald suite of products create a challenging call center environment. Again, also lots of opportunity to impact the client experience. This year we’re investing in key service levers that we know will improve our capability to handle calls and achieve more consistent satisfaction, areas that have been problems for us in the past. These actions include expanding our automated response capacity to improve stability. What’s that mean? Last year we dropped more then a million calls meaning they just didn’t get through because of capacity and this obviously hurts any ability to retain these clients. With this investment we plan to eliminate the issue. Second, higher levels of staffing. Last year we targeted an 80% service level. This is not the client service ballpark we want to play in. This year we’ll target and staff to 95% service levels and this level is consistent with a strong service brand. Better functionality, access and connectivity will allow appointment setting and other important services at the call center. In the past, we asked clients to hang up and call an office to make an appointment. I’m not sure the odds are really high that this can be successful. This improvement that we’re making will eliminate…

I’m going to wrap up the day by discussing the opportunity we see from the changes we’re making in the business. The financial potential is significant if we are successful in moving the needle on consideration, client experience and retention. I’ll cover our plans for further optimization of our cost structure and our plans for reinvestment. We have some meaningful competitive advantages this season that I will highlight from our settlement products and H&R Bank. I’ll close with a discussion of continued improvement in our financial position, our financial flexibility and capital allocation. This organization has formerly looked at regular price increases times a small incremental client growth rate as a formula for reaching a short term target. You all know what I’m talking about. This year, every year at this time we put up there the formula (X% in price increase, X% in client growth). This business is not formulaic. There are several paths to great results the right way. As you’ve heard our team discuss here today there are a number of key business levers to get to the bottom line and we believe they are all interactive. You cannot pull one without impacting the other. It’s the balance of these levers, along with effectively managing our costs that will enable us to grow in a sustainable way. The key tactics in delivering a successful tax season this year are higher brand consideration to adjust the top of the waterfall, enhanced first and last impression to address the middle of the waterfall, increased focus and commitment to digital and greater personalization to impact the lower end of the waterfall, and changing the price/value equation. Each of these tactics will require great execution. Great execution will deliver great results to our clients and to our shareholders. Russ and Robert…

Please raise your hand if you have a question. We want to make sure that we get a microphone to you because the Q&A is also being broadcast over the web so it’s important that the folks in the internet audience can hear your questions as well.

Can you talk a little about what your tax preparers are doing in the other eight months of the year that they’re not preparing taxes? The basis of the question is you went through the fact that every year you lose four million customers. If were a tax preparer and every year I only retained 70% of my clients the majority of my clients came from within a 10 mile radius of my office and I had eight months off I probably would spend some of those months calling those people, emailing them, and making sure that I had better retention the next year so I could actually make more money. Your client base doesn’t change much every year, it’s the same people between 25 and 102 in this country to pay taxes and you know exactly who they are. Over the last five years if you’re losing four million a year that’s 20 million you actually touched and somehow you haven’t gotten them back. Can explain to me what these people are doing in the other eight months that they’re actually not ambitious enough to go back and get the clients that they probably touched in the prior years, given you know who the client is and they have to buy the service?

I’ll turn it over to Sabrina in a second to talk about what in the non-busy season period. One of the things I will tell you before I spin it over to Sabrina is until this year most of our tax pros didn’t know what their retention levels were. In fact, one of the interesting things for me as I traveled to the tax offices last season I would ask our tax pros what is your retention level. They invariably always said I retain all my clients unless they die. I said your retention is actually on your computer screen so let’s go take a look at it. We go and take a look it would say 64% and they would say that can’t be right. We walk them through it and show that it actually was right. Part of what we’ve changed and Phil and Sabrina addressed it in their piece of what we’re changing from an operational perspective is just this is the first time we’ve actually told our tax professionals what the retention levels and what their service levels were. I think that’s a critical part of us improving operations because our tax pros want to do better. They want better client retention, they want to go on and build their business but we haven’t given them the information or the tools necessarily to make their off season time as productive as it otherwise ought to be. I think that’s a critical change that I want to make sure all of you understand that I don’t want to make it sound like our tax pros are lazy we just haven’t given them the right information to let them know what their performance really has been.

First of all I was making sure everybody is also aware it’s a seasonal workforce. We have a percentage of the tax professionals that work all year round; we have in every city or every district there is an office that’s opened, which is one issue. I think the question is a good one in that in the off season, when you talk about the other eight months we actually have associates that are not employed with us, they are off. The question that we’ve been wrestling with is the year round access to email so we had email and then interactions with the clients, we know they’re interacting with the clients via their own email and then providing the tools to actually do outbound calling which we’re doing centrally right now. I think your question is more tax pro based so we’re working on trying to get that. Phil you know in terms of pushing our clients to the tax professionals the things we’re working on there.

You bring up an opportunity, that’s just another opportunity we have I think as a company to enable our tax pros to reach out during those times. I think it’s another lever that we have going forward. There is some wage and hour labor laws that we have to deal with but I think as we move forward working on that challenge and I think we have a lot of potential in that area.

You said that point that tax preparer is seasonal so I guess why not put more of the burden on corporate in the three months beforehand to actually distill the people who’ve been there in the last four years, get their email addresses, hire some temp workers, there’s a high unemployment rate, call every single one of these people and direct them to your offices. Why not actually be proactive in Kansas City and drive those people right to the offices so when I show up January 1st I already have my entire list of people that are actually going to come in and you’ve already called that list for me because you know who they are because you ran the numbers through a database because you have the last 10 years worth of tax returns of people who touched you. It doesn’t seem that extraordinarily difficult.

You’ve nailed it. There’s two pieces to this. What are the tax pros doing during the off season? There’s a huge marketing opportunity for us with a robust CRM client relationship management system for us to communicate on a regular basis. By the way, it doesn’t just happen three months before tax season. One of the things we know and we’ve got pieces in place, tax events happen year round. You have a baby or change a job or move state or get married it doesn’t matter whether that happens in January or June, stuff doesn’t uniquely fit between January 1 and April 14th. We’re developing, part of its infrastructural and making sure we’ve got robust and sophisticated knowledge management and data management systems that allow us to communicate real time, real live events with our tax base so they’re not hearing from us just once a year. They’re hearing from us potentially once a quarter, we’re checking in with them, did any one of these events happen to you, make sure we put it in the folder and the file. When the Government changes tax laws and tax changes we’re giving them heads up on what is the make work credit pay mean to you. I think there’s an opportunity for the communication part of that retention too in addition to what’s going on in our field tax offices.

There are some privacy law issues that do restrict what we’re able to do right now and its going to cause us to change the way we collect the data round our clients to enable us to do exactly what you’re talking about. We agree with you, that is the opportunity but right now we’re not set up to take advantage of it the way we’d like to be.

There is communication that happens in the off season. I think there’s an opportunity to improve it. Not as much as we’d like.

It seemed like the area you had a problem in last year was that the lower AGI levels, the younger client. You’ve explained that you’re going to cut the price of your product on the 1040EZ. Could you detail what else you’re doing to address that issue potentially for this year? The second question relates to guidance. In terms of keeping pricing flat but expecting low single digit revenue growth can you explain what the assumptions are in terms of market share relative to digital growth, rack, and other things that could help also drive some revenue growth?

On the pricing piece for the lower AGI last year that was as you said that was where we lost most of our clients. In fact, I think the client loss in the 20,000 less AGI segment was about 60% of our total loss. That’s really a critical area for us to have an impact on this and to reverse the trends that we’ve seen not only last year but in the prior years. In doing our research in our fact base we think that pricing a big part of the mechanism to get that group coming back to us. Robert also talked about the dollars and cents campaign which is really targeted a little bit probably at the younger side of those millennials the 17 and 18 year olds to catch them a little bit early. In addition to that there’s a lot of other things that are happening at a local level that are not national that are targeted at college students in particular. Many of our geographic areas are doing specific college programs to go after college based students. Those are the other couple things that I think are specifically going after that audience. A lot of our other service initiatives and a lot of our branding is also intended to make ourselves more relevant to that client base as well.

Remember my slide on the business is not formulaic. We’re really trying to get away from the whole exactly what is the price increase, exactly what is the client growth. I think we’ve said that our intent is to overall not increase the prices on our base form or to hold that relatively constant, that we will see complexity flow through but there’s a lot of levers with respect to this and I think we want to get out of the habit of putting in exactly what that formula and our expectation for client growth.

Could you comment more on free file, I think some in the industry have indicated it could lose steam due to growing complexity of the tax code. You seem to think it will be a force going forward. How do you plan to monetize that and take advantage?

There are two components to free file. There’s the component that’s FFA which I know we’re working with Kate Fulton and the government relations team to maintain our presence in the free file alliance, we believe that that’s an important place to be and to serve that client base. Within the free file base we do see a migration of folks that come from the free file into the online space especially as they get more complex and need more forms because it’s a pretty simple approach. We believe that free file is the entree so when we talk about free file online as well its the entree, a lot like the $39, $29, 1040EZ those clients migrate and we’ve seen that happen over time, they migrate to a 1040A just like they do online. As they migrate in the family then they upgrade into other products and we’ve been able to see that actually last year was the first year we were aggressive there and we saw that movement occur in that migration. We feel good about that space.

The government piece of free file alliance its a sight sponsored by the IRS but really all the work is done by companies like us and some of our other competitors. That space has not grown overall over the last couple of years. The reason for that is because we are also providing an entree in the free tax filing directly with our companies. That’s where a lot of the growth has been. The growth in the digital category and we think the battleground for the future is really in the online space. Retail software has been shrinking, people have different prognosis about how long they think that category will last. Its still there but it’s certainly not a growth category. The real growth we think in the digital space is online. When you look at everything online, free is a pretty compelling marketing message. In reality, free is not free. Most folks enter in the free channel and then actually end up paying and upgrading for goods and services. We did that for the first time last year with a lot of great success, we got a lot of good learning’s about how to do that even better for this year. We really believe, as Sabrina talked in her part of the presentation, because we have 100,000 plus capable tax pros we have a lot of other ways to get people options that they can upgrade to even if they enter in the free online space. We think from a competitive advantage standpoint we’ve got a lot of other levers to pull in terms of monetizing clients that enter in free that others in the category do not have. Mary [Inaudible]: Could you reflect on your Wal-Mart experience and possibly talk about how it has affected your business strategy going forward?

When you say our Wal-Mart experience obviously its clear that Jackson Hewitt will be the exclusive provider in Wal-Mart next year. I think when we think about that channel I’ll say a couple things. Number one, we don’t expect, when this initially happened we expected Jackson Hewitt to have many more locations then we actually think they’ll have at this point. We lost about 1,000 locations there; they will not be replacing us in all those locations. That’s upside for us in terms of our internal strategy. In terms of retaining those clients we have a very well defined and I think well performing protocol for when an office closes and we have been very successful transferring clients to different offices and often with the same tax professional which is extremely important in this equation, transferring those clients to the same professional. Last year we retained clients we expected maybe 60 and we were up around 65% range which we think is pretty powerful.

Becky referred to the 2% just to give you a little context on that. Of the 2% of the client base we believe 65% of them will be retained. The effect is maybe about a half a percent.

The other thing we said publicly before that we’ll reiterate is that channel, the Wal-Mart channel was our least profitable business channel, in fact our profitability on those 2% of our clients was marginal at best and that was under the old contract. Had we been tethered to Jackson Hewitt’s terms that profitability would even have been less or negative. We do want to grow clients and we want to grow market share but I’m really not interested in chasing client growth that isn’t also shareholder and profitability growth based. We just decided that that wasn’t the right avenue for us to pursue and we think to Phil’s point by retaining a good portion of those clients we can actually be more profitable with fewer clients then we’ve previously done in the Wal-Mart channel. [Sam Buddrick]: How have you changed or modified the compensation of your seasoned tax professionals perhaps better align it with perhaps some of retention objectives you’ve stated? You mentioned I think taking some of the newer preparers off the commission model for their first year but are there changes that you’ve made or need to make with respect to the larger piece of your compensation expense? My second question on a separate line is your retention statistics if I’m reading them correctly appear to be retail retention statistics I was looking at some of the incremental contributions you were talking about those were retail contributions not digital contributions. Is retail retention, certainly an important measure, but is there a broader system retention objective that you should be considering as well as people perhaps move back and forth or the lines blur between retail and digital?

On the tax pro compensation piece for the experienced tax pro we really think that with the changes we’ve made in getting more clients to our better performing tax pros that they are going to have the opportunity to make a lot more money. We haven’t focused on the compensation side of the package that says what they make per return because in the overall aggregate they’re going to make a lot more money because they’re going to get a lot more clients then they have in the past. One of the things that all of us learned and as we were talking to our best tax pros last tax season is that over the past few years they’ve gradually started reducing their hours of availability because they felt that they were sitting in the office, they had too much open time on their schedule and every time they saw a client come in they saw someone in the office directing that client to one of the newer tax pros. Their perception I don’t think is a reality but their perception was they’re putting it to a newer person because they cost less per return then I do. As a result, they started to then reduce their hours of availability. I think by changing and communicating to them what we are doing in terms of getting more clients to them we are quickly seeing them increasing their hours of availability and they way they’ll make more money is by serving more clients. That’s the way we think they get an immediate benefit out of the program changes that Phil and Sabrina outlines earlier today.

I would say also that we have historically been increasing the weight of compensation that’s tied to retention. As we go forward as that becomes more and more important we’ve obviously talking about that and thinking hard about that.

I believe that that is probably one of the biggest changes we’ve done for the organization has actually been combining digital and retail together in terms of how we are looking at the business and how we are compensating short term incentives, other things in the organization to think about it as one growth, one brand, and one retention. We do have a blending that is occurring at the associate level just so you know from an incentive standpoint to look at it one way. The retention rate between the two, retention on digital versus retail they’re very different. Our retention in the digital channel is much less. We did move it four points last year and increased the retention four points so we think we’re moving the right direction but there’s still a pretty large gap between us and our retail channel and us and the other competitors in the landscape actually on retention. We’re putting a pretty great emphasis on retention from a digital perspective as well.

The biggest reason we had the lower retention on the digital product side were some of the product flaws that Sabrina addressed earlier, lack of ability to do auto import of W-2 or 1099s not enough connections to some of the different financial institutions. The work that’s been done in the last 12 to 15 months really helped close the gaps on some of those product discrepancies of what was TaxCut to some of the other digital competitors. We think that will help us even more so bump up our retention levels on the digital side. Clearly even more work to do on the digital front then we have on the retail front.

My question is on Becky’s slide about your advantage on RAL and Rack versus the competitors. My perception would be that people will go into a competitor’s office expecting a refund. I would assume, I would like you to answer this, they have no idea what the costs or fees are going to be, they could probably do the whole return and then get hit with, Becky alluded to special fee at the end, and not even know that you guys have an advantage. My question is, is my perception of what happens in the office and when the fees and prices are disclosed to the customer, is that correct? Number two, how are you communicating to people that you are much more cost effective option for payment products?

Historically your point about how people thought about fees on financial sentiment products was accurate. In fact many years ago when Block lead the industry in reducing the APR rates on RAL financing and even marketed it I believe in that year there wasn’t a substantial increase in RAL product movement at Block because a lot of folks viewed it as I don’t even know what I get charged for just get me my money as quickly as you can. What we’ve seen in the last couple years I think is a trend from RALs moving to racks and we think a great part of that is driven by people are becoming a little bit more price sensitive or price aware on the cost of some of these financial settlement products. I won’t say that explains all of it but I think certainly people are more price sensitive to it today then they have been in the past. I think your perception was accurate a couple years ago but we think its changed to some degree, not entirely but some degree. How do we address that? It’s got to happen I think from a local marketing perspective and a local marketing standpoint. We know from prior experience when we get on national TV or national radio and talk about RALs and fast money we get a lot of negative perceptions that go along with that. Its works for a small percentage of our client base but it turns off a big part of the population that we’re trying to build and grow our business with. We’ve got to be very local and very targeted in terms of how we message that. I think our messaging is going to be this year to try to take advantage; it’s about the price differential. I also think it’s about the availability of funding that we know we have that clearly the competitors there are many question marks about particularly with our next largest branded competitor who had an early season product that instead of lasting four weeks only lasted about three and a half days. We don’t know what their funding availability is actually going to be and I think Becky mentioned in her piece about likely they will have lower approval rates on RALs then they have historically had. We’re going to go aggressively on a local basis to really get that message out and try to get it to the clients before they ever get into one of our competitors offices.

You addressed substantially your top performing tax professionals and how they’re rewarded with greater client contacts and greater compensation per hour and what not. Can you address the bottom tier, it would seem if retail retention is in the low 70’s and we know there are substantial professionals in the low 80’s in retention there’s probably a substantial number of professionals in the 60’s or even below who could be tarnishing your company on a going forward basis. Have you increased remediation efforts there to help them become better performers or raise the bar if the professionals are below such they’re cycled out of the company?

Yes, we’ve raised the bar. I mentioned that we’re holding our field leadership accountable in looking at our tax professionals and evaluating our tax professionals. I just want to address one thing, tax professional retention because I know many of them are listening, it does vary across geographies and types of neighborhoods and things like that so we account for those types of things. People that are in, after accounting for those things, people that are in the lower tier are getting training and coaching and just like how we evaluate many of our employees if we’re not hitting where we need to his we’re going to have a conversation and this may not be the right business for them.

I think your point is a really important one because from my experience last tax season one bad egg has a significantly negative impact on the whole atmosphere of the office. As part of our training and educating tax pros on their performance levels we are having those open and honest discussions with the folks and telling them where they’ve got to get better and where they need to improve if they want to stay with Block. For those that are doing a terrific job, making sure that we’re differentiating them and rewarding them accordingly. I think in the past, because we didn’t have a performance measurement system everybody kind of blended to the middle so the poor performers thought they were better and we probably didn’t recognize and reward our best performing tax pros as well as we ought to have.

The goods news is that we’re retaining our higher performing tax professionals, what we call higher service level of tax professionals in the 90’s right now. The people that are in the lower tier we’re retaining them at much lower rates on purpose.

We just have not had those kinds of conversations with our tax professionals. We’ve actually gotten in front of 70,000 tax professionals already to date and had these conversations where we’ve ranked them a 3 2 1 and then given them this retention number that Russ referred to. By giving them both of those pieces of information the tax professionals are surprised, they’re having some pretty deep dialogue. By ranking them we have now this ability to have targeted training and targeted conversations with that lower percentage so its either up or out basically for that lower percentage which is a conversation we haven’t had before.

On the share repurchase plan, first can you remind us what the original target for the completion of the plan was? Second to that you’d mentioned the weak economy is being part of the delay. What specific sign post are you guys looking for either economically or operationally that makes you feel better or give you some comfort in completing that plan?

I thought it was important to put it in the context of the $2 billion number that we have out there. When we talked a year ago at this time we talked about the fact that while thankfully we were through all of our financial issues, the market was in a pretty severe state of disruption. Since that time though and as we’ve gone into this year we’ve had the M&P issue and other issues that are outstanding and so as we think about when the right time is for us to go into the market we’re looking at the market as a whole, we’re looking at things we have within our own organization, inside information that we know that can prevent us trading over a window. I can tell you though that as a company we are very committed to the share repurchase plans that we’ve put out there. We have every intention of going after the goal that we’ve put out. I think there have been a lot of circumstances that have impacted the timing of that.

Can you talk about what some of your pilot things have shown you both the good and the bad in the last year that you’re using or not using or changing this year? Secondly, regarding your client growth or lack of growth I think you outlined about 5% but you have a certain retention on that. Is your low single digit revenue based upon retaining 60% of that 5%? Thirdly, can you talk about what you might see for revenue per client in 2011 on the assumption that there’s no added complexity?

We talked in the presentation about a couple of the things that we’re testing this year, one of which we talked about the office remodels of which we’ve got 300 and we want to see the impact that we think that can have from a positive perspective on the perception of our brand and the quality of our tax pro expertise in the office. That is one thing that we are piloting this year. You heard Sabrina talk about the best of both product which is really one way to go after a seamless integration of digital clients and leveraging our 100,000 plus well trained tax professionals. We’re testing that in two major geographies I think Sabrina said about 15% of our country. We are very encouraged by this from a longer term perspective but we don’t want to over sell it because we need to prove and see that it’s a real consumer proposition. I think we have the unique capabilities to provide this but we’ve got to show it’s a compelling consumer proposition as well. We are doing it in two large geographic areas this year and doing it with some marketing support and the right operational support behind it. That is another major pilot initiative that we have going on. Sabrina talked in the pricing piece about what we’re doing with the 1040EZ pricing and also showed you a price quote tool that we have. We have pockets in other areas of the country where we are testing even more levels of what we’ll call price transparency. We really believe that long term we need to get more clarity around pricing for clients in this business. The 1040EZ pricing is one attempt at that for a very specific targeted segment but we’re testing other places where we’re…

Part two was Becky’s numbers to it would seem to be about 5% client loss but the low single digit revenue growth does that assume that you get 60% or 65% of them back? I’m trying to understand.

You’re talking about if you look at the “headwinds” those numbers were prior to us retaining the 60% or 65% of the clients in the closed offices whether they were the Wal-Mart or whether they were in our traditional offices. Those numbers were prior to the retention so if you do it net it comes down to about net of a 3% headwind. That’s before any of our growth initiatives so that’s before about taking into account how much we can move consideration trial this year. It’s before we take into account how much we’re able to reduce the almost two million people that checked into our tax offices last year and then walked about before ever seeing a tax professional. And it’s before the expected client growth that we would get out of our pricing work both in terms of the pricing quote tool as well as the $39, $29 pricing on the Federal EZ and the state return. Those are the three major initiatives that we think should help us grow our client base and help offset whatever headwinds we face.

So the specific bottom line of that is what’s embedded in the low single digit revenue? Is it 3% plus some of these initiatives?

Plus the net impact of the initiatives. Some of the initiatives obviously like the reduction on the pricing of the 1040EZ has a negative impact on your net average charge. We expect it to have a significant impact on our positive client growth. As Becky mentioned, we’re not going to get into the nits and nats and say how much exactly do we think net average is going to go by and how much is client growth because if this 1040EZ pricing really has a big impact its going to drive clients a lot more but it will have more of a negative impact on the net average charge. Net, net with think its going to be a positive.

In year one, then the migration.

The third actually goes to the next year in terms of assuming that there’s no increase in complexity what would you assume would happen to your average revenue per client in 2011?

We’ve said that we think complexity this year is probably worth about 2% to 4%. Frankly we don’t see any reason to believe in the near term that there will be anything but additional complexity going forward. The current administration and all the things that have either passed or talking about passing invariably include other elements of tax complexity. In fact, in the initial drafts of the healthcare bill in the Congress there’s lot of elements around that that will be driven off of the tax code and the tax system. In fact, I believe that that’s going to continue for a lifetime. People will talk about it but I think its just going to get more and more complex because the reality is in America the tax code is the one way that the Government has to redistribute wealth and we know the current administration is committed to redistributing wealth which leads me to believe that they’re going to use the tax code more and more and more. I don’t see an end in the near term to complexity and Kate you’ve been in contact with the Government folks she’s been nodding her head while I was talking. I’ll take that to mean you haven’t heard anything else that you haven’t shared with me and that would indicate otherwise.

Is it fair to say that the company is trying to operate as though you were good franchisee? Is it fair to think that overall what the company is trying to do is to act like what any good franchisee does in terms of service, in terms of promotions, in terms of contact with customers off seasons, etc.?

Yes, I think that’s a good way to think about it.

Becky, on the buyback you’d said that it’s now four to five years. Is that from start date so the implication was $500 million a year?

We’re already a year and a half.

We should expect even though there has been pick ups around about $500 million a year given the right price would be the right number to use going forward?

That would be how the math works.

Russ, you mentioned that on the RSM deal that it was confidential for now. Will we get clarification once the negotiations are done as to everything that’s gone on prior to that?

Yes.

In the retention you guys said that 1% to 3% retention lift just from the Emerald products that you’ve had that would imply given the retention’s been flat the last couple of years that there’s been actually net loss from everything else. Is there a difference between the company owned and the franchised owned retention rates that you guys have seen?

Yes, 4% to 5% of franchisees outperform on client retention, better than the company, 4% to 5% higher retention rates.

That would then lead me to believe that down the road the split between the franchised and the company owned will be different then it is now? Five years down the road could you give us an idea of what you think the percentage of your store base that would be franchise versus?

We said publicly that we’re moving towards a 50/50 mix from where we’ve been and we’ve already taken quite a few steps to do that. Part of it is through the office closings and consolidation of our company footprint. Part of it is through the 300 plus company offices that we have re-franchised for this year and we’ll continue to have some regular amount of normal re-franchising of selling company offices to franchisees. Then I really think the biggest part of this shift in mix going forward is more of our growth I believe is likely to come out of franchise locations. I talked earlier about franchising as a strategic growth opportunity. I think we can use that as a mechanism to consolidate some of this fragmented market out there with the independent tax preparers and so I think we can bring a lot of those folks into the H&R Block system, particularly as the IRS gets more specific about what they’re going to do from a certification and licensing perspective which I think is going to put a lot of financial and just operating constraints or challenges on some of these independent mom & pop tax preparation businesses. Moving towards 50/50 and I think based on the results of what we see happening with re-franchising and our ability to help consolidate the rest of the industry that will dictate how quickly we get there or whether we even go beyond that.

The argument would be that it should be more than that in the franchise given they’re performance advantage over you guys right?

There have always been theories this is why we’re doing the re-franchising program and getting franchisees in urban markets. Historically the way the company is franchised is in the outlying geographies they leave that for the franchisees but the medium and larger sized cities are all company operated. The argument I’ve gotten internally is you can’t compare our performance to theirs because they don’t have any competitors and it’s in a different geography. I flip that around and say maybe they don’t have any competitors because they’ve done a better job of servicing their clients, of retaining their clients, of not raising prices by as much and so they’ve kept the competition out. We really need to test that proposition and see do franchisees outperform the same way, competing in the same locations as they do when they do in different geographies. My bias is that the answer to that will be yes. We want to see what that difference really looks like.

In terms of the spend this quarter from the static loan pool could you give us that number perhaps and help us think about when you may be adequately reserved such that that expense will roll off?

We are still reserving against the mortgage loan portfolio, although at a declining rate year over year. One thing I’ve learned over the last couple years is not to stand up here and predict the mortgage market and where I think the individual components of it are going to go. What I can tell you is that we still are attracting in line with our modeled rates on the delinquency component. We are seeing severity creep up a little bit again. Those things are factored into the numbers that we reported. We expect to file our 10-Q today and there’s a lot more in depth information into the mortgage portfolio, again it will be available to you this afternoon. To reiterate though it is a static portfolio, we are not adding to it, it continues to decline and we have those balances in the book. I guess I’m hesitant to say when I think we will be done. I think we all know that there’s box around it at this point and the box continues to get smaller, it’s within a very manageable number for us. We look 12 months out and at this point I’m not ready to put a definitive stake in it as to when we’ll be done.

Russ, you mentioned at the outset that hopefully you’re just a few weeks away from a completion of the negotiations with M&P. Is there anything philosophically that would stop you from reinitiating the buy back at that point?

No.

You mentioned the impact of the new regulations that we’re expecting for tax preparers and the impact that could have on the growth of the franchise fees and in terms of attracting new franchisees but perhaps you could talk about the other impacts on your business of that regulatory change.

Its hard to say what it is until we actually know what the regulations are going to be. In our many meetings with the IRS one of the things that we think is really important with whatever they come out with is its critical that there be real enforcement mechanisms in place because otherwise this become paper legislation much like their view that there shouldn’t be any pay stub filing. Enforcement, we believe needs to be a critical part of whatever they come out with. I think over time what will happen is they are embarking on this initiative because they believe that there’s lot of people fraudulently preparing tax returns in the marketplace. Lack of certification and licensing is resulting in the IRS not collecting their fair share of revenue because of the fraudulent returns being prepared. Their incentive is clearly to get rid of the fraudulent taxpayers. What impact will that have, I think it will, as it takes effect, get rid of a lot of competitors in the marketplace and think those generally are folks that are cutting corners on things. They cut corners on their own tax training, they cut corners on the prices that they charge people because they don’t have the same brand risk that we have so they don’t devote 10 million hours of training a year for their tax professionals. It will affect number one will be is clean out some of the bottom of the tax preparer industry. On the people that still remain and choose to stay I think it will impact their operating costs. Until we see what the real licensing and certification requirements are its tough to tell. We feel pretty confident that we are going to far and away exceed any requirements that they might come out…