H&R Block, Inc. (HRB) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon. My name is Lashonda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal 2012 H&R Block Earnings Call. [Operator Instructions] Thank you. Mr. Drysdale, Investor Relations, sir, you may begin your conference

Thank you, Lashonda. Good afternoon, everyone, and thank you for joining us today to discuss our fiscal 2012 results. On the call with me today is Bill Cob, our President and CEO; and Greg Macfarlane, our CFO. Other members of our senior management team will be available during the Q&A session. They include Jeff Brown, our Chief Accounting and Risk Officer; Jason Houseworth, President of U.S. Tax Services; and Susan Ehrlich, President of Financial Services. In conjunction with this call, we have posted today's press release and slide presentation on the Investor Relations website at www.hrblock.com. Before we begin our prepared remarks, I'd like to remind everyone that today's call will include forward-looking statements as defined under the Securities Exchange Commission Act of 1934. Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As a result, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2012, which we plan to file later today, as well as our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. With that, I'll now turn the call over to Bill

Thanks, Derek, and congratulations on your promotion to Vice President. Well deserved. Good afternoon, everyone. As you know, we reported our fiscal 2012 results earlier today. Before we provide more color on those results, I'd like to update you on several recent developments. First, the board and I are extremely pleased that our senior management team is now complete with Greg's arrival earlier this month. I'm glad Greg is with us today for his first earnings call at H&R Block. He brings a wealth of experience from his 19 years of managing finance from both Ceridian and various GE entities. He's already making an impact in our organization, and we are confident that he'll be a major contributor to our success in the years ahead. We're also pleased that Jeff Brown has decided to stay with the company as our Chief Accounting and Risk Officer. As many of you know, we also recently completed a strategic realignment that will reduce our cost structure and drive a more cohesive and seamless end-to-end client experience with the more than 22 million clients we serve in the U.S. I'm pleased to have Jason Houseworth, Amy McAnarney, Susan Ehrlich and Robert Turtledove leading our U.S. clients services under my direction. These executives all have a track record of generating strong results, and I believe their leadership and commitment to our clients will serve us well. I'm confident that we now have the right management team in place to deliver better value for our clients and shareholders. We are excited about the opportunities we have in front of us to continue driving innovation and further improve our execution and client service. For competitive reasons, today, we will not provide significant detail on next season's plans, but we'll give some directional insight so you can see where we're heading. We look forward to sharing our plans for next tax season with you at our annual Investor Conference in New York City on December 6. Now in April, we announced that Sand Canyon, our discontinued mortgage subsidiary, experienced higher rep and warrant-related claim activity during the fourth quarter. We believe it's possible this activity is being driven primarily by expiring statutes of limitations. After completing its reserve analysis, Sand Canyon did not accrue additional liability for rep and warrant-related losses during the fourth quarter. As a reminder, Sand Canyon is a separate legal entity from H&R Block, and we continue to believe our legal position is strong on any potential corporate veil-piercing arguments. Greg will go into more detail on the Sand Canyon later on the call. It's also important to note that incremental claim activity has not changed our views relative to our approach to capital allocation. Since I became CEO 13 months ago, we have returned $723 million to shareholders in the form of share repurchases and dividends. Over that span, we repurchased and retired 36 million shares at a total cost of $515 million or $14.38 per share, including 21.3 million shares since May 1 of this year. This represents 12% of the shares that were outstanding at the end of fiscal 2011. We also increased the annual dividend last December by 33% to $0.80 per share. Altogether, I believe our actions demonstrate that we have a lot of confidence in our business and that our philosophy on capital allocation is shareholder friendly. As many of you know, our committed line of credit, or CLOC, expires in July of 2013. Our current CLOC requires minimum equity of $500 million at the end of each quarter. This is a legacy covenant that served us well in the past, particularly when we operated a mortgage origination and broker-dealer business, requiring the maintenance of minimum levels of equity retention. Since we have rationalized our business model and disposed of these assets, we see no value in maintaining this structure. We expect to remove the minimum equity covenant from our financing agreement and replace it with leverage and cash flow tests. Although we have not yet finalized this arrangement, we believe the proposed structure will serve our needs well. With that update, let's move onto our fiscal 2012 results and the takeaways from my first tax season. As I stated at our Investor Conference last December, our top goal this tax season was to grow clients in both the assisted and digital categories. Prior to last year, the company had 2 consecutive years of significant client and market share losses. While we had impressive client growth in fiscal 2011, one year does not make a trend. We believed we needed to demonstrate consecutive years of client and share growth in order to further stabilize our client base and promote long-term growth. With that in mind, here's a recap of our performance, as well as some color on the industry. First, the total number of returns we prepared in our worldwide markets grew 4.3% or $1.1 million additional clients, to a record 25.6 million. In the U.S., we served nearly 900,000 additional clients, up more than 4% over the prior year. We estimate that total returns at the IRS were up about 2% and that we gained 30 basis points of U.S. share. About 60% of Americans chose assisted tax preparation compared to 40% who chose to do it themselves. These are essentially the same proportions we've seen since the year 2000. In the assisted category, we grew clients by about 150,000 or 1%. We believe the assisted category grew about 60 basis points and that we gained 10 basis points of share. We also showed significant improvement in client satisfaction, which grew about 500 basis points to 87%. In digital, returns prepared grew by approximately 750,000 or 11%. We believe that the digital category grew by 8%, and we gained 30 basis points of share in the digital category and 75 basis points of share in the do-it-yourself category. I'm also pleased that our Net Promoter Score grew more than 500 basis points, and that this year's marketing investment drove an 11 point increase in the awareness of our digital products. On the international front, we are continuing to see solid growth. Revenue grew 13% to $233 million, including 10% growth in local currencies. And in financial services, we set a record in Emerald Card units issued, which grew by 24% to 2.9 million with $9.5 billion in total deposits. Altogether, we were very pleased by our client and share gains, especially in light of the competitive environment. We were at a disadvantage since some competitors were able to offer refund anticipation loans or RALs. Having a competitive product was important to us, because 53% of clients in the first half of the season choose the settlement product compared to 13% in the second half. We fought aggressively for each client, and invested heavily in marketing and our Free Refund Anticipation Check, or RAC promotion, which helped level the playing field. The Free RAC promotion helped us retain early-season clients and led to the significant growth in Emerald Cards that I mentioned earlier, which is part of our long-term strategy. We believe the marketing and RAC investments better position us going forward, though they did pressure our fiscal 2012 revenue and earnings. Now after completing my first tax season, I continue to believe that we are on pace with the long-term strategy we shared in December. I also believe that we have many accomplishments to be proud of. We have the best tax professionals in the industry, and our assisted business continues to be very resilient. In digital, we have a lot of momentum as we've now outpaced our 2 largest competitors for the second consecutive year. In both assisted and digital, our clients are being served better, as evidenced by the significant improvement in our client satisfaction and Net Promoter Scores. We've also made great strides in the innovation front with new products such as Block Live and our Mobile applications where the actual user experience is working beyond our expectations. This further solidifies us as the only tax preparation company capable of serving clients anywhere, anyway and anyhow that they choose. And finally, we've resolved outstanding litigation, we've shed non-core assets, which is RSM McGladrey and ExpressTax, which should lead to higher margins going forward. While these actions led to some charges in fiscal 2012, we believe we're now running a better company. Today, we are squarely focused on what we do best, tax preparation. Going forward, we realize that we must generate a better balance of client and earnings growth. We've already taken several actions to achieve that goal. First, we rationalized our cost structure. After a thorough review, we've identified ways to operate more efficiently. We believe this realignment was an important step in becoming a nimbler, more profitable and more client-centric company. As previously announced, we expect these actions will add $85 million to $100 million of pretax earnings to our bottom line in fiscal 2013. Beyond these committed savings to shareholders, we are working to eliminate other low value-added expenses to reinvest in future growth initiatives. Next, we believe RALs will largely lose their importance in the marketplace next tax season. This should create a more level playing field which gives us a competitive advantage as we believe we have the best RAC offering in the market. In light of the improving competitive landscape, we do not expect to continue the free RAC promotion next year, but we have not yet made a decision on the appropriate pricing for RACs. Third, international is our fastest-growing business in terms of revenue which demonstrates that our brand resonates well abroad. I am excited to announce that we have opened several offices in India, which will be our fourth international market. India's current market of 30 million to 35 million taxpayers is growing rapidly. The Indian government is updating its tax codes so that it applies to more of its 1.2 billion citizens. We plan to make prudent investments internationally, focused on profitable and sustainable client growth. And finally, our net retail tax-preparation fees were up 1.2% with pricing up 30 basis points. Although the free 1040EZ program had a short-term impact on our pricing, we were pleased to bring more clients into our brand. The EZ program also has positive long-term benefits, as the lifetime value of our clients far exceeds our revenue from them in the first year. As we prepare for next tax season, we're reviewing our value proposition and pricing across all client segments. The goal is to continue serving our clients in the most effective manner while optimizing client revenue and earnings growth. With that, I'll now turn the call over to Greg and then I'll have a few closing remarks.

Thanks, Bill, and good afternoon, everybody. It's a pleasure being here at H&R Block and starting a dialogue with our investors and analysts. Like Bill, I believe management needs to be transparent and accessible to investors and analysts and look forward to getting to know all of you. In particular, I'm looking forward to our roadshow throughout the summer and getting to meet you in person. I'd like to begin by sharing [indiscernible] H&R Block. First, I believe the company has tremendous strengths, starting with the client experience, that trusts H&R Block to help them through one of their most important financial transactions. When one of our 25.6 million clients walks into an H&R Block location or uses H&R Block software, they know they're getting the best. Second, the company has a strong balance sheet, generates significant amounts of free cash flow and does well on return assets and equity. Third, as you may know, I have a strong background in financial services. When I look at the millions of H&R Block clients that are unbanked or under banked, and see our current offerings and potential, I see a lot of value creation opportunity. Fundamentally, there's a strong complementary nature of financial services in our core tax-preparation business, and I look forward to working with Bill and Susan to grow our financial services business over the coming years. Next, I'm excited about our non-U.S. opportunities. Our international revenue has grown at a 5-year growth rate of 12%, and I believe we have lots of room to grow. Canada and Australia continue to perform well, and I believe there's a lot of opportunity in new markets. And finally, throughout the entire interview process I was very impressed with Bill, his management team and H&R Block's Board of Directors. The words I would use to summarize my interaction, united passion with the H&R Block success, a team dedicated to asking tough questions, a team that recognizes the successes and mistakes the company has made and a willingness to work hard. These are all people I can work with successfully. Since my arrival earlier this month, I've spent a lot of time meeting our associates and becoming familiar with our businesses and our strategies. My top 2 priorities are to create and protect value for our shareholders, employees and clients for many years to come. My family and I are in the process of relocating from Minneapolis, and we are excited to make Kansas City our new home. Over the next several months, I'll be focused on next year's strategic plan, reviewing our capital structure and assessing each of our businesses to identify ways we can grow and create value. I believe that with my background, I bring a strategic vision and the tactical experience that will help us drive consistent growth. Now let's turn to our fiscal 2012 results. Earlier today, we reported total revenue in line with our prior outlook of $2.9 billion. Our GAAP earnings per share from continuing operations were $1.16 per share which includes after-tax charges of $31 million or $0.10 per share. GAAP earnings were slightly above our prior outlook of $1.09 per share to $1.15 per share. Our Tax Services segment total revenue fell 1.7% or $50 million. A decline in financial product revenues offset higher tax-preparation revenues. The segment reported pretax income of $704 million which was down $63 million from the prior year. Let me take a moment to review the primary drivers. First, our free RAC promotion resulted in a $49 million decline in RAC revenue which was partially offset by the growth in Emerald Card units and deposit volume that Bill mentioned earlier. Total Emerald Card revenue grew by $14 million or 15%. Next, we tightened the underwriting related to our Emerald Advance product, although this led to a $35 million decline in interest income, associated credit losses fell by $71 million. Third, we increased our investment in marketing by $36 million or 15% with 3 key objectives in mind. First, to maintain our competitive presence in the category that saw a significant increase in marketing and investment during fiscal 2012. Second, to drive higher awareness of our digital products; and third, to support the launch of Block Live. We believe that consecutive years of client and share growth in both the assisted and digital categories, [indiscernible] the importance of this investment. Fourth, gains on the sale of company-owned tax offices declined $28.5 million as we sold 83 offices in fiscal 2012 compared to 280 offices in the prior year. And finally, last year's results included $17 million of non-recurring revenue from a terminated RAL contract. In Corporate, our pretax loss of $128 million improved $12 million compared to the last year due to lower loan loss provisions on mortgages held at H&R Block Bank. The shrinking loan portfolio and moderation of delinquency and loss rates continued to result in reduced loss provisions at our bank. The net principal balance of the mortgaged loans declined $79 million from the prior year to $406 million as of April 30. During the fourth quarter, we charged off loans 180 days past due, which were previously reserved for in our loan loss allowance. This was due to a change in the bank's regulator from the OTS to the OCC. This change had no cash or income statement impact, but lowered the principal amount of loans outstanding and the related allowance. As we look at our overall financial position, our balance sheet and liquidity remains strong. As of April 30, total unrestricted cash was $1.9 billion and total outstanding debt was $1 billion. During the fourth quarter, H&R Block Bank paid its parent $400 million of dividend of excess capital. As of today, there are approximately 271 million shares outstanding compared to 292 million shares outstanding as of April 30. Total shareholder equity at April 30 was $1.3 billion. Our effective tax rate of approximately 40% was 240 basis points higher than last year, primarily due to changes in the value of investments held within company-owned life insurance, or COLI, policies. We plan to surrender certain COLI policies over the next 12 months, which triggered a one-time tax expense in fiscal 2012 for prior year gains. We expect our effective tax rate in fiscal 2013 to approximate 39%, excluding discrete items. And finally, depreciation and amortization from continuing operations was $89 million in fiscal 2012, and our capital expenditures from continuing operations totaled $75 million. Turning to discontinued operations, which includes the results of RSM McGladrey and Sand Canyon. We reported net loss of $80 million compared to net income of $14 million a year ago. The variance to the prior year is largely due to a $37 million net loss on the sale of RSM. We previously announced $28 million settlement by Sand Canyon with the Securities and Exchange Commission in a $20 million increase in loss provision for representation of warranty claims, which was recorded in the second fiscal quarter. Additionally, the prior year includes 12 months of RSM operating results, while the current year includes only 7 months. Sand Canyon received new claims for alleged breaches of reps and warranties in the principal amount of $543 million during the fourth quarter. As of April 30, total claims of $618 million remain subject to review. Sand Canyon completed a review of prior claims during the quarter with an approximate principal balance of $329 million of which 4% were determined to be valid. Payments related to valid claims totaled $13 million for the quarter. As of April 30, Sand Canyon GAAP equity of $265 million, in addition to a $130 million accrual for rep and warrant-related liabilities. Sand Canyon did not accrue any additional liability for rep and warranty related losses during the fourth quarter. Later today, we plan to file our Form 10-K for fiscal 2012, which will continue additional disclosures related to parent guarantees of Sand Canyon obligations. As you know, we believe rep and warranty exposure at Sand Canyon is primarily related to 2006 and 2007 loan originations. We previously discussed guarantees related to certain 2007 loan originations which had an original principal balance of $1.7 billion. As of April 30, 2012, the aggregate outstanding principal and liquidated balance of these loans had declined to $1.4 billion. In total, there have been just $29 million of rep and warrant claims from the loan pools related to these guarantees, of which $4 million were deemed valid and paid by Sand Canyon. In addition to the 2007 guarantees, similar guarantees were issued prior to 2005. We believe exposure relating to those guarantees is even more limited. The pre-2005 guarantees relate to REMIC's with outstanding principals of $1.2 billion at April 30, 2012. We do not expect a significant amount of claims will be asserted on these pre-2005 REMIC's and the vintage and performance of the underlying loans. In fact, certificate holders have incurred less than $1 million of principal loss and there have been no related rep and warrant claims since 2008. Furthermore, we believe that any claims would not be viable, as it would be beyond applicable statutes of limitations. As a reminder, I'd like to reiterate that Sand Canyon is a separate legal entity from H&R Block, and we believe our legal position is strong on any potential veil-piercing arguments. Our views have not changed relative to our approach to capital allocation. And with that, I'll turn the call back to Bill for closing remarks.

Thanks, Greg. We have made some difficult decisions over the past year, but we believe they are the right decisions to position us for long-term earnings growth, margin expansion and improved shareholder returns. We've rationalized our cost structure, we've shed non-core or unprofitable businesses, we've invested in improving our service and our products, we fought for every client in a highly competitive and unlevel playing field, and we have returned $723 million of capital to shareholders. Not only did we achieve our top goal of serving more clients, we also set records in returns prepared, Emerald Cards and Emerald deposits. As we look ahead to next tax season, we like our competitive position, with a solid pipeline of clients to build upon. We have a lot of work to do to prepare for another successful tax season, but I'm excited by the progress we're making. Our top priority during the off-season is to ensure that our client acquisition is profitable while maintaining an attractive value proposition across all of our client segments. With our management team and new organizational structure now in place, we believe we'll be able to capitalize on the opportunities that lie ahead of us, more quickly respond to our clients needs and invest in our future as we intensify efforts in our core businesses. With that, we are now ready for questions. Operator?

[Operator Instructions] And your first question comes from the line of Kartik Mehta.

Bill, I wanted to get your thoughts on -- your return of capital strategy. Obviously, I saw the statements you've made and we've seen what you've done. In the last 13 months, you've returned a significant amount of money back. And I just wanted to get your thoughts, as we go into the future and you renegotiate this line of credit, what it means and obviously with the RSM sale and where the balance sheet is?

Yes, I think, Kartik, a couple of things at play. We want to get through these negotiations. And Greg is 3 weeks into the job. I want to give him a chance to take a look at our overall capital structure. I want to be judged by my actions, and I think my actions do indicate being very shareholder friendly. We did work with the board because the authorization on share repurchase was about to expire. So we extended that by 3 years. So I'm not going to give an indication of a specific number. We obviously have the increased authorization or the extension of the authorization for another $900 million. And in effect, stay tuned on that.

All right. Well, I guess moving on, the free RAC strategy, obviously, you will change that going into next season. Any thoughts as to what the potential impact could be from a backlash -- consumer backlash going from free to maybe a pay model now?

We'll take that into consideration. That's why we talked about that we haven't settled on the pricing yet. I think with kind of a changing landscape, with RALs really losing their relevance for the most part as we move forward, I think we want to make sure we have the right value proposition there. So we'll take that into consideration. But the plan is not to decline in clients or anything like that.

And then with just one last question, Bill. I was wondering, your thoughts on what happened to paper and pencil tax returns? How much of a decline do you think they had for this tax season?

Yes, let me kick that over to Jason because I think he's been studying that as you would imagine, quite closely. But let me let Jason Houseworth answer that question.

Kartik, this is Jason. We believe that there's about -- going into the season, there were about 8.9 million pen and paper returns. Coming out of the season, we believe that there's about 7.9 million, down 1 million or down 11%. And though we're not really certain on how, let's say, Intuit would derive its category, digital category estimates, the IRS data clearly reflects the growth of 10%, the digitally filed returns. Now, what I would say is that you have to adjust for digital filers who mailed their return, and ultimately, the pen and paper. So that's where we come out with digital category growth at about 8%. And what I would say is that looking at digital growth coming out of tax season '11 at 13%, and looking at digital category growth coming out of this season at 8%, this really further validates what we said and what I said specifically last December, which is with the pen and paper, a set of pen and paper filers, has fueled online growth. With that, with that pool of people declining, you're going to continue to see digital category growth moderate.

And your next question comes from the line of Scott Schneeberger. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Following up on Kartik's first question, I guess, Bill, what do you anticipate the timing for the -- your debt refinancing? Are you going to do the CLOC and the January 13 bond together? I appreciate the color on trying to get rid of the minimum net worth covenant and then focus on leverage. But just curious if there's any more specificity you might be able to go into right now?

So it's time to test the rookie, Scott. So let me throw it over to Greg, cause Greg's obviously been spending some time on this over the last few weeks. But Greg, why don't you take that?

Scott, so the line of credit is the first priority, that process is well underway. We expect to have that completed here in the summertime, barring any foreseen -- unforeseen macro issues. Getting out of the way then we turn quickly to the broader question which is what our capital structure is. That of course, wraps in the medium-term notes that you referenced in your comments. That to me is just part of the broader conversation, what this -- our capital structure look like going forward with the understanding that, that does have a time component, as you mentioned January of next year. So that's kind of where, I think, we're at right now in terms of line of credit and the medium-term notes. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Okay. I'll just switch it up a little bit. I guess maybe for Jason, you guys are mentioning, you're taking storefront growth and then allude to the 2% IRS metric. Could you just back us into the market share achievement in the storefront these days?

Sure. I mean let's start with what we saw was total IRS up about 2.2% to 133.5 million returns. And then we saw assisted up 60 basis points to 80 million returns. And obviously, what you saw in our assisted business, we just saw 1% growth. And really, while in the release, you see a separation in terms of company in franchise, when you take out ExpressTax, what we saw was company of franchise growing at a very similar rate and, therefore, we saw 10 basis points in assisted share gain -- category share gain.

I mean, the simple answer is 1% growth for us in assisted versus 0.6% for the overall assisted industry, if you will. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Got it. Shifting gears again, well, actually let's look ahead on the thoughts on tax business. Do you guys have any preliminary thoughts on what the IRS may grow return next year? Any thoughts on what you'd like to do at revenue margin buyback and what we would see had mirror your income statement? I guess that's a 2 part question, however, you want to tackle that.

Well, at the highest level, we see IRS returns growing 1% to 2%. And then as far as our plans, as Bill alluded, we're going to -- we're not really going to discuss what we're doing for next season. We're evaluating our value proposition across all client segments, assisted and DIY. And we'll talk more again when we come back with a full tax season plan in December at the Investor Conference, Scott. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Great. And then kind of playing off that. The strategic alignment and the expense reduction, is that realignment now completed or the actions necessary now completed or is there's still something left? And then, I think you'd said back in April, $85 million to $100 million in fiscal '12. Is there an exact number you're targeting? Or should we just think of that range and is that range still hold true?

Yes, I would think of that range for now, Scott. I mean, obviously, there is no, nothing, if you will, additional. I mean, Greg is coming in, he's taking a look at, we're always going to be looking at how do we improve on a leverage basis or productivity. I would use that range. There's -- it's up to us to execute now, the plans we have. But the plan is done, we've disclosed that to investors and I've got the whole company moving toward. Because it was a broad look at our overall cost structure, so we've got a lot of elements in place. And Amy is certainly working hard with her team on the field operations. So I don't know, Greg, if you have anything to add. But I think we're underway and we've got to execute now.

Putting the 85 million to $100 million of cost that is 50 plus work streams of activity. And in sort of my view right now, the hardest of the hard decisions have been made and executed. So that's pretty much -- I feel -- I would say, I feel comfortable where it's been, where those programs are -- a number of the programs that -- obviously, have to the take us within the tax season that just comes down to our planning models going into that. From my kind of view here after 3 weeks, it seems like there's a [indiscernible] against everyone, and people are tracking it and there's good level of attention to detail on it. So I don't see any major execution risk in it. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Okay. I have 2 more separate questions, if I could sneak them in. First one, I heard on the radio today in a commercial for Emerald, then -- obviously, well after tax season is concluded. Just curious, what -- kind of what off-season, what longer-term plans do you have for that product?

Yes, I heard it, too. I happen to be listening to the radio, and I heard the ad, too. I think we've got some market specific work going on. The one I heard was actually on satellite radio from New York. So we've got some marketing and the support of the Emerald Card going on in markets. It's not a large initiative, but we are trying to test some off-season plans. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Okay. And then lastly, with one of the international moves going into India, could you address how much you spent on that? What type of first year profitability are you expecting there? And then also, and importantly, the cash that gets generated abroad on any initiative, is that easily repatriated or does that -- can that come back to shareholders in the U.S.? Or is that something that needs to continue to be reinvested abroad?

Well, let me -- I'll let Greg address the second half. I think the first half, I'd say the levels are not material. We have -- we're opening 3 offices -- or we have opened 3 offices in India. We're preparing returns. It's a modest amount of money, but I think the opportunity there is potentially large. And I think it's a 10-, 20-year type of play for Block. We're going to do it, systematically. But we're not going to disclose specific spending levels. So the repatriation issue. Greg, do you want to address that?

Yes. Let's start with the -- we have to make sure that we're going to make money and all that, is an important part of where this whole conversation starts. And of course, we're going to do that prudently and with the goal of making money. Once you start making money, obviously, having some pre-thought about how to repatriate that cash is important. I think it's fair to say, in general, repatriation of foreign earned money into the U.S. can be challenging. It doesn't mean there's not solutions or creative ideas that are there. I just don't have enough sort of thought on that right now to share with you in detail.

And your next question comes from the line of Thomas Allen.

Now that maybe your digital and assisted competitors have reported, any key takeaways or surprises you could share with us related to that competitive environment?

Jason, do you want to take a shot at that?

I think it's a -- I would reiterate the way I felt in the middle part of the season, which is across the DIY business, we took share in online, we took share in software, we took share in the Free File Alliance and we took share in Mobile. And at the same time, we have our primary competitor, Intuit, with the TurboTax product, effectively, looking at digital category growth that's moderating and leveraging a method in which they're saying, "Hey, we've got expert advice." And we feel really, really great about that position as digital growth moderates, that even our primary competitor is indicating that, the importance and need for assisted advice and help. And that's what really where, Bill said this since he's gotten here, that we are the only company that has the ability to serve clients, anyway, anywhere and anyhow they choose. And I think the realignment is a step closer to where we want to be. And I think the last thing I would say is that the realignment was about continuing to be a more client-focused company, and I think you are going to continue to see more of that from us.

Okay. And then addressing 2 points specifically. One of your competitors said that the lack of the Making Work Pay tax credit had a significant impact on the number of returns. Were you able to assess impact to your business? And then the second thing is, people have also suggested anticipation loan alternatives. Is it something that you'll look at?

I'll take the first question. There are always changes to the tax code. To try to pin it on one particular regulation, I think it's really hard to assess the exact impact. I think the Making Work Pay credit did impact some industry refunds this year. But we don't think it materially affected our volume. Now, as for the second question, can you repeat that again, Thomas, I'm not sure I got it completely?

Yes. Some competitors talked about other loan-based products that they may try and offer. Is that something that you would consider, maybe instant cash advances?

Oh, okay, okay. I mean we're going to be -- we're going to look at anything. I think we're pretty satisfied with our RAC product and trying to drive Emerald Cards. We're going to obviously be attuned to the -- anything going on in the industry. But I wouldn't anticipate that being a big part of our growth initiatives as we go forward.

Okay. And then just finally, on the AIG and C-Link threaten claims, any update there?

No. No update. We do have -- well, the 10-K is either out or about to go out. You'll see some additional -- the full disclosure there. But I'm not going to comment specifically on that.

And your next question comes from the line of Michael Millman.

And I guess following on, I think, the industry chatter, can you talk about the heightened concern, the IRS seems to be showing on fraud? And I guess what I'm aiming at is to the extent that they refunds, clients [indiscernible] and [indiscernible] claim... [Technical Difficulty]

Derek, if you have a headset on, you're cutting out pretty bad. Could you...

Okay, I'll try it again.

Much better. That's much better. Sorry, could you start from the beginning, Mike.

Sure. On the -- the IRS is taking a heightened concern on fraud. And do you think that they are going to delay refunds? And if they do, what kind of impact do you think that has on the retail business?

Yes, I can't comment. In my meetings with the IRS, I don't think they have any stated intent in that regard. I think they are concerned about fraudulent returns just as we are. But I can't comment specifically because in my conversations and in our team's conversations, we have not received any specific indication from that. Obviously, this year there were some delays in refunds that did cause some issues for us, really more for our clients. I think I'm really proud of our client support teams and really the way we've managed through that. We've done this for a lot of years. I think we're able to -- we've managed discontinuities in the marketplace like this. But at this point, we're getting ready to operationalize. And if there's something goes wrong, something inevitably seems to go wrong, we're prepared to handle it.

Okay. Pricing. Retail was up 30 basis points. Can you talk about what do you expected the year to be? And also breakout the increase between franchisees and company-owned?

Yes, I think, as you know, we were expecting pricing, the level of price to be higher. It was a very competitive year for us. So the pricing was in -- essentially plus or minus 0. So we did anticipate it being a little bit higher. It didn't work out that way. But like I said, I think that with the client growth that we had and the share gains that we're able to realize, I think we had the right value proposition. As for what we're doing going forward, we're looking at a very thorough study right now. Jason and his team are leading that and we don't have anything to indicate. But we will certainly be looking at the entire value proposition and how we price. As for the franchise-company mix, I'm not going to comment on that specifically.

Okay. You've indicated that you expect cost benefits for this current year, $85 million to $100 million. Does that include the savings from the elimination of a free RAC of some $40 million?

No, it does not...

So you might...

These are structural changes in our overall cost structure. That was a promotional event and that was really an impact on our revenue line, not on the cost structure.

So is it fair to add $40 million to that number and start from there?

I wouldn't make any assumptions because we haven't decided on the level, as I indicated, of what the level of pricing is. So I wouldn't just assume that -- I think the question that came earlier, how do you think clients will react? We haven't decided on the level of RAC pricing. We want to look at our overall value proposition.

Okay, and another pushy question. I guess, I could ask it, in terms of what level of equity are you comfortable with? But what really what I'm asking is the potential for more share repurchases this year?

So I'm wondering why Thomas Allen didn't ask this question. We know have 3 out of 4 people pushing on this. But -- I think -- first of all, I think we laid out pretty clearly what our intent is on the CLOC, so that we don't believe an equity covenant is appropriate anymore. So I do think, as we work through the CLOC, I think that hopefully, if things go as well as we think they will, that will be a thing of the past. I think then, secondarily, I think Greg is taking an overall look, as he said earlier, at our capital structure. I think it's good to have fresh eyes on it, to take a look at our structure. And then I think that as we come out of that and we work closely with our board, we'll see what our level of -- basically, the decisions, and that once we have -- work through our business strategy and then combine that with a capital structure approach, then we'll figure out what we think the appropriate capital allocation going forward is. But hopefully, again, I've proven, if we go back a year ago, there were questions about what I was going to do. And I think, hopefully the actions that we've taken speak louder than anything.

Is it fair to assume additional share repurchases this fiscal year?

I think it's fair to assume that given the extension that we have over the next 3 years, that the board has authorized us to consider additional share repurchases, and we have $900 million left on that authorization. But I'm not going to commit to anything in terms of any specific timeframe other than we have the ability to repurchase up to $900 million during that 3-year timeframe.

And your next question comes from the line of Vishnu Lekraj.

Taking a look here at the restructuring in the context of branch staffing, can you give a little color as to how we should expect strategy in terms of sales and customer service within the branches moving forward, given the restructuring?

I mean, I think, our plan is to rationalize our costs in the office. But that if anything, we're looking to increase our service levels to our clients in the office. We believe that we've done a good job over the past couple of years, and we really want to accelerate the effort to get our clients in front of more and more experienced tax pros. We think that's a key to our client satisfaction scores which you've seen us increasing. So I wouldn't assume that anything we do with regard to the cost structure or the management above the store, if you will, will have any impact on our clients. That was a key governor on any initiative we took during our overall look at the cost structure. But Jason, I don't know if there's anything you want to add to that.

Well, I think what we believe is that, what we are honing in on is really similar to the free EZ program where this year we saw more than 25% of last year's clients migrating to a more complex form, and where we're seeing retention gains on new EZ clients. I think we are honing in on what we feel like works. And the restructuring is really trying to eliminate those things that we don't need to add into our client experience and where we've over engineered our client experience in order to focus on the things that are best for the client. And ultimately, the things that are going to enhance our acquisition and retention opportunities going forward.

Got you. Looking at your incremental margins, let's say beyond 2013, a little bit beyond the near term, how should we look at incremental margins maybe into '14, '15, given where your strategy is taking you? Is it going to be in line with past metrics? Or is that going to be -- how should we do that?

I'll comment and then Greg, if you want to add anything. We're doing a very comprehensive strategy, overhaul this summer. We kind of did the cost work during the late fall and into the tax season. We're now looking at our overall corporate strategy over the coming months. So obviously, I'm going to kick the ball to December again for a longer-term look. So I don't really have anything to add, Vishnu, to answer your question. But I think, we're squarely focused on trying to make sure that as we go forward, we do it in a firm, strategic context. But Greg, I don't if you have anything?

Well, just a general observation, when you talked about margin, there's margin percentage and then there's margin dollars or income. And I think, more broadly we've sort of expect and even expense restructure that's just shared with you earlier and then we've updated you today on. That will, obviously, say, there'll be margin expansion that should be -- have an impact beyond next year just because your not going to get the full annualized impact this year. I think obviously, our goal, as a management team, is to expand the margin dollars. In total, it's probably one thing. Otherwise, I would just say stay tuned, as Bill explained.

One last question for you then. Can you give a little bit of color and update on Block Live and where that's going to be added here over the next tax season, if that's possible?

Yes. I think, and then Jason whatever you want to add, I think we're pleased with the launch of Block Live. We think it's a platform that is going to be very relevant. We think it's on trend. The user, I think we executed it very well, the user experience. Feedback we got was excellent. We're not going to release specific amounts of returns that we did. But we are very pleased with the launch of that. And it's going to be -- we think it's a competitive advantage for us, and we're going to continue to drive against that. I don't know if you have anything to add, Jason?

The only thing I would add is I think we learned a lot from it. It was the first year of the program. And I think that we're assessing ways to integrate that type of capability, meaning video chat, in order to serve clients beyond just the Block Live product.

So would it be fair to say that how should we -- or that the type of service would be part of your long-term strategies, one way or another, either in the current form or if we tweaked a little bit, correct?

I think it's in line with our philosophy. We want to serve clients in a way that -- our job should be to figure out forms and products and services that are in line with our clients needs and their lifestyle today and their life stage, et cetera. And I think that's what a lot of what Jason's team and Susan's team are really focused on, is how do we best serve that client base.

And you do have a follow-up question from the line of Scott Schneeberger. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Just clarity on the expense reduction, the fiscal '13 expense reduction of $85 million to $100 million. Is that going to impact, the full $85 million to $100 million, going to impact the fiscal '13, the fiscal '13 year, or is that what we would expect annualized as we depart fiscal '13? I just want to be rock certain on that.

I mean our intent is that it impacts fiscal '13. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Okay, got it. And then just kind of following up on that. Say, you're going to do what you're going to do but say, revenue was flat, just hypothetically, in '13 versus '12. Will we, because of that, see a net reduction in the cost structure of that amount, half that amount? I know you probably not going to give it with that exactness, but directionally, can help us out there, please?

I'm not sure I...

Yes, I think it was in the fiscal year. I think Bill said that the numbers expected to come out of the numbers this year. But there will certainly be some tail that goes into the following year just because some of the programs. On an annualized basis year-to-year, you'll see some benefit on that. And I can't give you a detailed reconciliation because I don't have one myself yet, but just based on how the costs are going to come out, you're going to have some tail into the next year. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Understood. I guess I wasn't clear on the question. In fiscal '13, and I understand that from the prior answer on fiscal '14 and that sounds good. In fiscal '13, will the cost base of H&R Block total be reduced because of this action? Are there any net -- are there any other offsets of growing of costs that are going to net make us see costs go up next year? Or should we see costs come out to the full tune $85 million to $100 million? Or will it be somewhere in between there?

Cost will come out in fiscal '13.

Yes, that's the plan. I mean the idea is to reduce our cost structure by $85 million to $100 million, the costs that we can identify now. I don't want to get into a variable costs, but really our intent is to reduce the costs, bring those -- take those costs away, and obviously I'm not going to comment on revenue and the like -- but we're not, there's no games playing here. I want to be very clear and I want to go public and hold us accountable not only to our shareholders, but hold us accountable internally that, that's the number we have to deliver. Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division: Okay. I think I get it, but I'm not fully certain so -- the full -- your cost structure, say, is A this year. Next year it's going to be A minus $85 million to $100 million? Or will it be somewhere between A minus $85 million to $100 million?

It will be A minus $85 million to $100 million.

And you do have another follow-up question by the line of Michael Millman.

So to maybe add to the confusion on this cost of business. The $80 million, $85 million is before normal inflationary costs? Or is that taken into consideration?

I thought this was an easy one. I've got to go back what we said here. I mean we want to reduce the cost structure by between $85 million to $100 million. That's our goal, that's what we're driving towards, that's what where the actions. As Greg said, there's 50 work streams. I'm not allowing people to talk about inflation and the like. So you should take the answer that we gave Scott. A minus $85 million to $100 million and that hopefully, we were hoping that there was no confusion, that this was very clear. And if we're confusing you further, tell us because I thought this was the right initiative for us to undertake. I thought it was clear to shareholders, and that's what we're executing against.

I agree. Just...

No, that's okay.

Just trying to confirm.

And there are no further questions in queue.

All right. Everyone, we want to thank you all for joining us today. We hope you and your families have a happy and safe 4th of July. If you have any questions, follow-up questions, by all means, please give us a call at Investor Relations. Thank you.

This does conclude today's conference call. You may now disconnect.