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Executives

Derek Drysdale - Director of Investor Relations

William C. Cobb - Chief Executive Officer, President, Director and Member of Finance Committee

Jason Houseworth - President of U.S. Tax Services

Susan P. Ehrlich - President of Financial Services

Gregory J. Macfarlane - Chief Financial Officer

Amy McAnarney - President of Retail Client Services

Analysts

Michael Millman - Millman Research Associates

Kartik Mehta - Northcoast Research

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Thomas Allen - Morgan Stanley, Research Division

Vishnu Lekraj - Morningstar Inc., Research Division

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Hale Holden

Efraim Levy - S&P Equity Research

Christopher J. Marangi - Gabelli & Company, Inc., Brokerage Arm

Steven J O'Brien - Jefferies & Company, Inc., Research Division

Adam Liebhoff

Charles Stedman Garland - Hamlin Capital Management, LLC

H&R Block (HRB) Q2 2013 Earnings Call December 6, 2012 8:15 AM ET

Derek Drysdale

Good morning, everyone. On behalf of the entire H&R Block management team, it's my pleasure to welcome all of you here today, as well as all those listening in on the webcast to our 2012 investor conference. Before we get started, we do have a few housekeeping items to get out of the way. First, earlier this morning, we released our fiscal second quarter results for 2013. Some of the figures in that release were presented on a non-GAAP basis. We've reconciled the comparable GAAP and non-GAAP figures in the schedules attached to the press release. You can find both the release and the schedules on the Investor Relations website at hrblock.com. I'd also like to remind everyone that today's presentation and various comments made in connection with it will include forward-looking statements as defined under the securities laws.

Such forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions, and our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2012 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. Now shortly after this morning's presentations conclude, we'll post the slides to our IR website. And as a reminder, our webcast will be available on our website around 1:30 Eastern today.

To give you a sense of today's agenda, our opening presentations will run until about 9:30, give or take a few minutes, and then we'll take about a 15-minute break. We expect Q&A to begin around 11 Eastern, and following Q&A, we'll head to lunch in the Rits Salon [ph], which is right out the door to your right. We hope you'll be able to join us for lunch, as there, you'll have an opportunity to meet with various members of our senior management team. And one last note, if you haven't found them already, which I'm sure most of you already have, the restrooms are also out the door, just to your right, past the registration table. So again, welcome, everyone. It's our pleasure to have you here today. We hope you enjoy the presentations. And with that, let's get started.

[Presentation]

William C. Cobb

Good morning, everybody. Thanks for attending our 2012 investor conference here in New York City. Our goal today is to ensure you leave here with a thorough understanding of how we see the industry, where we see opportunities going forward, how we plan to capitalize on those opportunities and ultimately, why we believe HRB is a good investment.

Now I've spent a lot of time thinking about the company, obviously, and the way I look at it is we are trying to restore H&R Block as a great company. It's been a great company for many years. It did lose its way for a while, and my goal and my management team's goal is to restore it to be a great company. In order to do that, we need to understand where we've been, where we are today and importantly, where we're heading.

And we have a great starting point, and that is the guidance I get on a regular basis from our co-founder, Henry Bloch, 90 years young, who every time he sees me, he says, "Bill, the client always comes first. Focus on quality service, prepare error-free returns and clients will return again and again." His simple formula is the basis for everything you will see today. Now if we think about our journey that we're undertaking, and I've tried to capture this in a really simple way.

Phase 1 was when Mr. Bloch and his brother, Richard, ran the company in the early days and for many years thereafter. It was a family-run business, had a deep knowledge of the tax business, and everything was centered on the client. The company then moved into a phase in the 90s and early 2000s where outside management came in, where diversification was the watch word. H&R Block had a mortgage business, a broker-dealer business, an accounting firm. And, yes, a tax business. That was primarily an assisted business with some financial service, but it paid very little attention to digital.

Essentially, H&R Block was a holding company. Today, we moved the company to a much simpler approach. We are centered on tax preparation. We are a tax company that also offers financial services. And essentially, we are now an operating company. Where that leaves us is an operating company that is the largest tax preparer in the world. Over 12,000 offices worldwide, staffed by nearly 100,000 tax professionals. In the U.S., we prepare about 1 in every 6 tax returns.

We have 98% brand awareness. We're the only preparer capable of serving clients anywhere, any way and any time they choose. We offer complementary tax and financial services. For example, our Emerald Card is the third largest U.S. general-purpose reloadable debit card. And finally, we have a global footprint. We have well-established operations in Canada and Australia, and we just entered Brazil and India. So that is us and some.

Now what I thought I would do before we move forward is to look back over the last 12 months. We were able to make real progress in a number of areas. First, we grew clients and share. We outpaced our largest competitors in both assisted and digital. We have set the tone on improving service and the client experience. We grew the number of Emerald Cards issued and the deposits loaded on to those cards. We delivered on what I believe is a shareholder-friendly capital allocation strategy. And sixth, we laid the foundation for significant EPS growth in fiscal year 2013 and beyond.

So let's take a look at each of these. Our top priority this past year was to grow clients. We served a record 25.6 million clients worldwide and just the last 2 years, we have grown the number of clients by 10%. We also increased our market share in the U.S. by over 30 basis points to 16.4%. We also outpaced our largest assisted competitors, taking share over the last 2 years from independents by over 100 basis points and improving our own share by 70 basis points. Similarly in digital, over the same time frame, we outpaced our largest digital competitors by taking share from both Intuit and TaxACT, while growing our own share by over 70 basis points.

Our third accomplishment was an important one, to set the tone on improving service and the client experience. We had a significant improvement in our key metrics. Assisted client satisfaction was up over 500 basis points to 87%. The digital Net Promoter Score was also up over 500 basis points, and awareness that we have a digital offering rose plus 11 points to 62%. And we continue to drive industry-leading innovation through platforms like Block Live and a number of mobile applications, meeting our expectation and also surpassing the expectations of some industry experts.

I'd like to show you a quote from a keen observer of the tax business, the CEO of Intuit, Mr. Brad Smith, who said on September 18 in Intuit's own Investor Day, "H&R Block is a wonderful competitor. What I think they did really well last year is they were fantastic in terms of connecting with the hearts and minds in their marketing message. I thought they had an interesting set of new technologies, which they came out with." We thank you, Brad. And Mr. Turtledove, our Head of Marketing sends a special thanks to you for the shout out for his marketing efforts. Now fourth, we also grew the number of Emerald Cards we issued and how much money was loaded on to those cards. By the way, they're doing construction next door, so I'll try to shout over them.

Last year, we reached almost 3 million Emerald Cards issued, and we loaded almost $10 billion worth of deposits on to those cards. We also delivered on what I believe is a shareholder-friendly capital allocation strategy. Since I became CEO in May of 2011, and if you count the dividend we announced that we will pay on January 2, we will have returned almost $900 million to shareholders in the form of share repurchases and dividends. And finally, we have laid the foundation for significant EPS growth in fiscal year '13 by making some tough decisions.

We have rationalized our cost structure and refocused our organization on the client experience. Plus our efforts here will lead to an $85 million to $100 million increase in our earnings in fiscal year '13. We discontinued the free RAC initiative we will charge for this product this year. We resolved a lot of litigation, and we shed noncore assets like McGladrey and EXPRESSTAX. In the end, all of these company -- all of these efforts will lead to a company of higher margins, which Greg Macfarlane will speak to later. So that's looking back.

Now I want to look ahead, but I want to look ahead from the CEO's chair, if you will, not only in 2013 but beyond. And I want to talk to you about what I'm calling shifts in our business mindset that I'm driving throughout the system and throughout the company. Because this is a company that has done business a certain way for a very long time. And we do want to build on off that effort, but we also want to evolve our business model in the following ways: tax plus, global, year-round and consistent service quality. So let me tell you what I mean by each of these.

Tax plus. We are a company that is centered on tax preparation. That is what we're known for. That is what we're best-in-class at doing and we want to continue to do that legacy by being a client-centric company that continues to serve tens of millions of clients through tax-preparation. But we also want to have an emphasis on the services that we can provide to these clients. And you will hear Susan Ehrlich talk later this morning about the variety of ways that financial services and products can serve our client base. That's what we mean by tax plus.

Second, global. The company has been very U.S.-centric. We need to become a global player. And ironically, international is our fastest-growing business with $233 million in revenue in fiscal year '12. We have well-established international markets. Our largest is Canada where we had a 10% share in fiscal year '12, and where we grew returns by 6% and revenues by 10%. In Australia, where we just completed our tax season and announced our results earlier this morning, we grew returns by 8%, revenue by 11% and share to 5.9% in fiscal year '13. Those are '13 numbers.

We're also looking to expand our global footprint with small low-risk investments focused on profitable and sustainable client growth. The world is not ending, I don't believe, by the way. It's sort of with all the noise in the background.

Now earlier this year, we entered Brazil. Brazil has a total population -- I can just talk really loud so -- of 200 million people, and at this point, the total tax filers of 25 million. And this number of filers should double over the coming years. We also entered India with a total population of over 1 billion people. And a total tax filer base of 35 million. Now this number of filers is going to explode in size over the next 5 to 10 years. Now we'll continue to carefully evaluate additional expansion opportunities but do it in a way that is deliberate, focused and purposeful.

Next, year-round. Taxes have become a year-round focus. We increasingly need to provide tax support to our clients year-round, and you will hear from Jason Houseworth in a little while about an initiative we call My Account, which is going to enable people to access their tax information on a 24/7 365-day basis. As we look to extend our financial products usage, we'll also need to be able to support products like our Emerald Card year-round. Plus, there is a tailwind coming, and that's the Affordable Care Act here in the United States, and the advice people are going to need year-round on this very confusing subject. Jason will expand on this in a few minutes. But this is not as substantial a shift as you may think.

Today, we already have about 45% of our offices in the U.S. open year-round. And we will build on that number, but we will do it deliberately by extending this season with products like Emerald Advance, which we launched 2 weeks earlier this year before Thanksgiving and before Black Friday. So stay tuned here.

And last, consistent service quality or what we're calling in the company, CSQ. CSQ is about our zeal for delivering consistent service quality in all of our products and services to give our clients more than they expect, anywhere, anyway and anytime they would like it. We need to drive CSQ in everything we do, whether it's Emerald Cards, mobile initiatives, online and digital offerings, and of course, at the tax desk in our 12,000 locations worldwide. So those are some of the shifts in our business mindset that we are driving.

But there are 2 other critical responsibilities that I believe a CEO must take on. First, setting the tone at the top. With a company that has had a revolving door of CEOs, this needed to be a deliberate and thoughtful exercise to determine what kind of company we wanted to be. We spent a lot of time on this effort, and I put my personal stamp on this. We have taken this message out to the system the last couple of months. It's on our badges. It's on our website. It's everywhere, and it's taking hold.

First of all, our purpose, the reason we get up in the morning. And the words we settled on were, we look at your life through tax and find ways to help. This was an important statement for us because I wanted this to be something only H&R Block could say. That's what we do at Block. We look at life through tax, and reflecting the humble ways of Henry Block, we simply find ways to help our clients. This purpose has resonated very well in our company.

Next, our vision. To be the leading global consumer tax company bringing tax and related solutions to clients year-round. You can see the shifts that I talked about earlier embedded in this vision. We are about tax, consumer tax. We're about global, and we want to bring tax and related solutions, or tax plus, to clients and we will do this year-round. That is our vision. So we now have our purpose that describes us, our vision that leads us. But we also wanted to define how we want to act our values, and we have settled on a very simple statement, we do the right thing. This is our bedrock for how we want to operate in our offices, our call centers, in our client support center in Kansas City, in India. Wherever we operate in the world, we want to be guided by this simple statement: we do the right thing. And what we do the right thing really means is we believe in our people, we take care of our clients and we deliver for you, our shareholders.

Now laying out these guideposts may be the most important thing I've done to date. I believe we have crafted these words appropriately, and I believe they truly reflect what and who we are at H&R Block. And finally, I now have the right leadership team in place here at Block. I have a set of executives I'm very proud of. They are a combination of people from the outside and people from within the company. And they are meshing beautifully as you will see throughout the day.

The first executives I will introduce are our functional leaders. Kush Saxena is our Chief Strategy Officer. He joined us 9 months ago from McKenzie right here in New York. He is a brilliant young strategist who has served multiple Fortune 500 companies in high-tech, financial services, retail and health care. He has led our strategy work, much of which you will hear about today.

Our Chief People Officer, Aileen Wilkins, is a veteran of H&R Block. Aileen leads the strategies that make the most of our talented associates, including workforce planning, talent management, organizational capabilities and company culture.

Tom Gerke, Chief Legal Officer, brings years of executive and legal experience to the company. He recently served as Executive Vice President for CenturyLink, President and CEO of Embarq, and General Counsel for Sprint. To have an attorney of Tom's stature join us is a huge plus for this company.

Next, our Chief Information Officer, Rich Agar. Rich runs all of our strategic technology and operational initiatives that support our retail and digital tax businesses. His background in business operations, Six Sigma and global enterprise technology has been instrumental in improving quality and operational excellence at H&R Block. Prior to that, Rich spent 23 years at GE.

And of course, many of you know our Chief Marketing Officer Robert Turtledove, who I've known for 25 years. I have tremendous faith in him as he leads our marketing efforts with brand, client acquisition, research and field marketing strategies and initiatives. And these leaders are complemented by people who are driving our businesses.

Jason Houseworth is President of U.S. Tax Services. Jason guides the strategy, planning and development of all forms of U.S. tax services. Leveraging client feedback and analytics, he and his team create the products, pricing and client experience for all assisted and do-it-yourself tax clients. Jason previously served as Senior Vice President of our digital tax solutions and was responsible for the product and technology strategy of H&R Block At Home online and software solutions.

Partnering with Jason is Amy McAnarney, who's our President of Retail Client Service, who is our longest tenured leader, 16 years with the company. Amy has the largest people job in the company, running all of our company offices and leading our franchise system, 90,000 people or so. She previously served as Senior Vice President of Operations Support and Franchise Development where she was responsible for strategy deployment, client experience development, operations support and the company's franchise network. Amy is an invaluable partner to me in leading our efforts here in the U.S.

Susan Ehrlich is President of Financial Services. She has had a long career in financial services and leads our strategy efforts to provide financial solutions to our clients. In addition to building on the success of H&R Block's Emerald suite of products, Susan leads many of the company's new initiatives, including Money Express and Emerald Card Mobile. She is the driver of our tax plus strategy.

And Kip Knight, who's a long-term colleague of mine, he serves as our international President, overseeing our offices in Canada, Australia, India and Brazil. Kip's 30-year career includes senior management and marketing positions with P&G, PepsiCo and eBay. He's a seasoned leader and I'm very pleased to have Kip on our H&R Block leadership team running our international business. So that's the team.

Oh yes, I forgot one. Probably the only person you really want to hear from today, our Chief Financial Officer, Greg Macfarlane, who joined us 6 months ago and who has really completed the team. Greg served as Executive Vice President and CFO for Ceridian Corporation and spent more than 14 years in senior leadership roles at GE. Many of you have met Greg, and I believe you will agree with me when I say he was a terrific hire for our company.

So our team is complete. They are committed to leading this company to new heights. Along with our 40-plus Vice Presidents who have deep experience with the company, with more than 300 years of combined experience at Block, our top 50 is a deep and talented leadership team.

So on today's agenda, you will first hear from Jason Houseworth, who will provide an overview of the tax industry, the company's recent performance and competitive advantage and how we will deliver the H&R Block client experience. Susan Ehrlich will then give you an overview of the financial services landscape, our financial products offering and update you on our H&R Block bank. And Greg Macfarlane will end the presentation portion of today with a summary of our Q2 results, why we think HRB is a good investment and conclude with the general market and H&R Block outlook. We will then conclude the day with a Q&A with the 4 of us, along with Amy, who will join us for that.

So I think we put together an interesting and informative agenda for you today. I'm going to go speak with the management at the Palace right now. If I do not return, I apparently have been jackhammered to death, but we're very glad you are here.

[Presentation]

Jason Houseworth

Good morning. I'm Jason Houseworth, and it's my job to drive continued growth in our tax services by creating best-in-class tax products and a great client experience for all current and future H&R Block U.S. tax clients, assisted and do-it-yourself. These products and services are delivered both through our digital channel, which we call DIY tax services, as well as our 11,000 retail locations, which are led by my colleague, Amy McAnarney.

This morning, I plan to provide you with an overview of the entire tax industry, along with Block's leading position within it, and then we'll look ahead to 2013 and beyond. I hope that when I'm done, you'll understand our position in the tax industry as the only business that can serve the entire population of all 145 million tax filers anywhere, anyway and anytime they choose, a business that has a strong fundamentals and innovation mindset and just as important, momentum as we move into the upcoming tax season. A business that is maniacally focused on creating a great and consistent client experience, a technology-enabled client experience, personalized to meet the unique needs and varying complexity of our clients, and how this focus on our client experience and delivering consistent service quality within it can drive real and sustainable growth to the bottom line and set up our tax plus offerings, which you'll hear more about from Susan Ehrlich after the break, assuming the whole building doesn't come down.

I'll start by taking you through our view of the tax preparation industry and where it's headed. U.S. tax filings chartered here since 1951 demonstrate a remarkably straight line of 1% to 2% annual growth, one so straight you could nearly take a ruler to draw over time, even though this charter have experienced a recession and great economic prosperity. This is an industry that has consistently demonstrated predictable growth.

William C. Cobb

Hey, Jason.

Jason Houseworth

Yes?

William C. Cobb

Let me give you an update. We're going to power through, all right? So bear with us with the slides. This is not the Palace, it's another building next door. We have all of the Palace working to get -- but they don't control this building. This is a total screw up by the hotel. Their head of security is over there. They at times work with them and move to the other side of the building. This is not the hotel. It's -- this is New York City. So we might take up our collection and make some payments in through New York style but anyway, I don't know what else to do except to just say we're just going to power through. And I really apologize, this is very unfortunate.

Jason Houseworth

So the IRS growth is highly correlated with non-farm employment and growth we believe will continue in the upcoming tax season with IRS returns expected to grow 1.5% to 2%. Within the tax industry, there are really 2 fundamentally different types of consumers or tax filers: assisted, which accounts for 60% of filers, and do-it-yourself or DIY, which accounts for 40%. This 60-40 split between assisted and DIY has not changed in the past decade and we don't anticipate material shifts in the next decade because this is a split between attitudes regarding how people want to consume tax-preparation.

Having been in many client focus groups with both types of these clients, I can tell you these are very distinct needs. The 60%, or the assisted clients, see their tax return as inherently complex, regardless of whether they are a 1040EZ, the simplest form, a 1040, filing multiple schedules, one of the more complex situation, whether they're a 22-year-old first-time filer or a 65-year-old retiree.

To assisted clients, taxes are scary. They don't understand why anyone would risk doing their own taxes and they value the time they get back, which on average is about 5 hours. Because of these reasons, assisted clients are relieved to delegate this task to a paid preparer. Now on the contrary, the 40% or DIY tax filers, they don't understand why anyone would want to have someone else do their taxes. They're confident doing it themselves, and they ultimately want control of the process. These DIY tax filers are subsegmented into digital filers, or those who use desktop software online and now mobile solutions, and also pen and paper filers, which have dramatically declined over the past 5 years as DIY users have shifted to digital methods.

So let's talk about the 60% or the 80 million assisted tax filers who are served by a highly fragmented market of independent CPAs and branded players like H&R Block. H&R Block has continued to develop our market share within the assisted segment to over 18%. This has come at the expense of the independent preparers who have lost over 100 basis points of share over the last 2 tax seasons, as the regulatory and financial product landscape has changed the equation for them.

An example of this is Amscot, a relatively large independent chain based out of Florida and commonly known from being a RAL shop. They did 56,000 returns in tax season '12, which was up 35%, up strongly over the prior tax season. And despite their growth, they've recently announced they're no longer doing tax returns. This may have been for a variety of reasons, but presumably their profitability changed over time. Taking advantage of this industry shift is an opportunity I'll talk about later in my presentation.

Now I'd like to discuss the 40% or the 54 million DIY filers. Of these, 46 million chose digital solutions in tax season '12. This growth has primarily come as pen and paper, the yellow portion of the bar chart, has declined dramatically from the 21 million filers it had 5 years ago to just 8 million today. H&R Block is a strong #2 in the digital market, gaining 70 basis points overall in digital share over the past 2 tax seasons, and primarily growing in the online segment at the direct expense of our primary competitor into its TurboTax, represented in blue on the bar chart.

I know you're all very interested to hear what we're planning or what's new for the upcoming tax season, but you're going to have to wait a little bit. First, I want to remind you why at H&R Block, we've led the tax industry for over 50 years by walking you through both our recent performance, as well as some of the key foundational blocks that make up our competitive advantage.

At H&R Block, we are the tax industry leader. This leadership is based on the fact that within the $19 billion tax industry, the assisted tax preparation market, while only accounting for 60% of tax filers, accounts for 90% of the revenues for the industry. If you did break down the share of this revenue by branded competitors, you could see that H&R Block generates more revenue than all of our branded competitors combined. This includes Intuit's TurboTax, other DIY competitors and branded retail competitors. And we've been picking up share and growing the number of tax filers who use both our assisted and our digital tax services.

But I'm going to start by talking about the number and share of assisted clients we've served over the past couple of years. This number has grown by more than 650,000 since 2010, while gaining in key operational metrics: client retention, satisfaction and efficiency of our operations.

As I mentioned in the beginning, we believe our business has strong fundamentals, beginning with key assisted client metrics. Not only do we have nearly universal awareness, but we're relevant. Brand consideration is highest in our youngest client segment, 18 to 24 year olds where it's 50% higher than the average taxpayer. And these clients follow through. They are nearly 30% of our new clients versus 16% of all IRS returns.

Additionally, our clients left more satisfied, following last tax season. Overall client satisfaction was up 5 points in 2012, and a key retention indicator, our client's intent to return based on a post-tax preparation survey, was up 3 points. But we know we can still get a lot better in our execution. We know that the #1 thing we can do to improve retention is to return clients to the same tax professional. But today, we only want -- we only have 51% of clients who do this. The data indicates clients who return to the same tax professional increased retention 5 points, which is obviously a big opportunity.

You'll hear me talk about this opportunity multiple times today. Additionally, we know we can do a better job at getting clients to set an appointment, given this is a key driver of the conversion funnel to ensure we take them out of the market early. And in digital, the fastest growing segment of the market, H&R Block has outpaced market growth, growing over 1.5 million clients since 2010 or 26% over that period. This includes outpacing the largest DIY competitors over the past two years, in particular, TurboTax.

When we think about measuring success in this category, it's hard not to use TurboTax as the ruler. Last year, at this investor conference, I said that I believe we will grow at a rate faster than TurboTax in the upcoming tax season and beyond, and we are. We grew faster in the rate of total digital growth, which you see here. And as a result, we saw segment share flow in the direction of H&R Block, 150 basis point shift in 2012. So this year, I'll say it again. We will grow faster than TurboTax in the upcoming tax season, building on the strong momentum of the last 2 years.

Why do I say this? Well, I'm going to explain this by answering the question a lot of you, a lot of the analysts asked me. Why is H&R Block outpacing the industry in digital growth? At the highest level, this is due to a combination of consumer demand combined with a more effective funnel or the conversion of that interest into completed units. And let me explain this by walking you through how we've improved the conversion of a consumer into a DIY client.

This conversion funnel shows the progress we've made since 2010 beginning with brand awareness. I've always said that we have a great product, a powerful piece of tax software that unfortunately, up until the last couple of years, only 1 and 2 consumers even knew about. This has been our #1 focus and the #1 reason why we've grown. Since 2012, we've added 12 points to our awareness, now approaching nearly 2 out of 3 users recognizing H&R Block At Home as an option for digital tax preparation.

Awareness has driven strong demand across both assisted and DIY clients as they visited hrblock.com. In the last 2 years, we've doubled traffic to the site, with last year more than 50 million unique visitors or just over 1/3 of all U.S. taxpayers visiting hrblock.com. Visits lead to registrations. So we've updated our homepage, hrblock.com, in order to better convert a registration for our online product. But a registration only lasts if there is value in the experience. I think it's the product changes we've made to simplify and strengthen the recognition of the features or added value within the experience that's led to our biggest improvement.

We've moved Net Promoter Score or NPS, a measure of client loyalty, over 10 points in 2 years, a huge move. But honestly, one that still leaves us trailing into its reported numbers for TurboTax in both NPS and retention. We still have more work to do and more opportunity ahead of us. For our online product, the result of this focus on the funnel is a 53% cumulative gain in online clients over the last 2 years, and this excludes returns coming from the Free File Alliance, which are generated by irs.gov.

You'll notice here, there may be some dissymmetry in these numbers because of the difference in growth between registrations and completed units. This is correct. We've grown units faster than registrations because we've improved our product conversion. Though the total number of visitors registering hasn't increased, we're getting a greater percentage of that pool of registrations to actually complete a return. This conversion has improved 3 points since 2010, which produces a better yield on the users who show an initial interest in our product.

These improvements, at every level of the funnel through which we take consumers and move them to clients, are the result of a relentless focus on a great client experience. We are maniacally focused on the details, vigorously attacking every click and framing each feature to ensure that it adds value or it simplifies a tax preparation experience.

Today, I'll talk a lot about H&R Block's focus on our client experience, and it's because results like these demonstrate how small things can have a big impact. And know I'm pleased with this progress, we still only have 15% Online segment share. We know we have room to grow and, as I mentioned earlier, really to improve our customer satisfaction metrics. Therefore, we still view digital as a big opportunity at H&R Block.

As a tax industry leader, I now want to make sure that you understand how we have built the foundational blocks that are our competitive advantage and uniquely position us to be able to serve all 145 million tax clients, whether they're part of the 60% or the 40%. I'll begin with our tax professionals, who created an enormous amount of value for clients and shareholders, the scale of our operations and expertise, the history of innovation we brought to the tax industry, including the best-in-class products and services we've created for tax consumers and the power of our brand.

There are many reasons why our over 90,000 tax professionals are our core foundational block of our competitive advantage, but the most compelling reason is the material difference we see in client retention. The simple fact is that H&R Block has the best client retention in the retail industry, and this is directly related to the number and the depth of expertise of our tax pros. Our tax professionals are better trained and stay around longer, which leads to more satisfied clients than anyone else in the industry.

At H&R Block, we attract and retain the industry's best tax pros. You see here the growth and retention, by tenure, of the tax professional, which overall, for company-owned tax professionals, has improved 9 points to 78% in the last few years. Now, let me debunk a myth some of you may have about our tax professionals. Although highly tenured, our tax professionals' average age is 52. But young or old, our tax professionals are passionate about our clients. One of the reasons we attract the best is because, at H&R Block, they have more opportunity. Our tax professionals prepare more returns, on average, than anyone else in the industry.

While the average non-HRB preparer completes 110 returns, our tax professionals prepare over 150, 42% more than the industry. Thus, our tax professionals stay because they build a solid book of business through their association with H&R Block, one they would lose if they were to leave the company. Our tax professionals also come back because they get the best support and training.

The new minimum IRS-registered tax return preparer exam requirements, which will require tax preparers to pass an exam prior to December 31, 2013, it encourages 15 hours of preparation. At H&R Block, our 90,000 tax professionals get an average of 43 hours of training each year. But our folks aren't average. Many are on their way to becoming a consumer tax expert or an IRS-enrolled agent. This certification level, which requires an estimated 500 hours of exam preparation and passing 3 IRS exams, gives a tax preparer or an enrolled agent the ability to represent clients with the IRS, which is the same treatment as a CPA or a lawyer. In H&R Block, we are proud to have 7,664 enrolled agents whose client retention is the highest within the company. Expertise and preparation matter.

As a company, we are well-prepared for the upcoming IRS requirements that will force all preparers to pass the IRS exam prior to next year. Without this, a tax preparer will not be able to file a return with the IRS. And while enrolled agents, CPAs and attorneys are exempt, the industry is going to be challenged to be ready. Out of the nearly 350,000 tax preparers, only 33,000 or 10% had passed the test as of November 5. Out of this 33,000, over 1/3 were H&R Block tax professionals. Excluding enrolled agents, we have 84,000 tax pros who were required to pass the exam and we're confident they'll be ready.

So far, over 50% have either passed or are registered to take the exam. They are supported with training, and during the season with particularly thorny or complex situations, by the Tax Institute at H&R Block. This is the largest independent consumer tax think tank in the United States. This group of 85 lawyers, CPAs and enrolled agents, literally wrote the book on IRS exam preparation and are focused, each and every day, on ensuring we have the best training and the best trained experts serving our clients. So as you can see, our tax professionals have many reasons to continue to stay in H&R Block.

So why is the retention of our tax professionals so critical to our success? Well, in short, a tax professional who stays longer is better at what they do and they know their clients. Like the tax [indiscernible] you saw in the video before I started, giving them the ability to personalize the experience to better meet the unique and varying complexity and needs of our clients. The illustration in this chart demonstrates how client retention improves significantly with the tenure of our tax professionals.

And as I mentioned earlier, for clients who return to the same tax professional, retention improves 5 points. And as our tax professionals stay longer, so do our clients. You see here, that as a client of H&R Block returns year after year, they become very sticky with HRB. Clients who have been with us with 5 or more years are 3x more likely to stay than new H&R Block clients. Therefore, while our tax professional's tenure has increased, so has the retention of clients who have been served 5 or more years with retention up 140 basis points since 2010.

The next foundational block within our competitive advantage is our scale. We're the fourth largest retailer in the U.S. with more locations than Starbucks and more locations than all of our branded competitors combined. 85% of Americans live within 5 miles of one of our tax offices. But even with this breadth, our offices are continuing to become more efficient, preparing more than 1,400 returns per company-owned office and, by comparison, branded, retail competitors only prepare about 425 returns per office.

The third foundational block in our competitive advantage is our history of innovation in the tax industry. Many of you already know that Henry and Richard Block created the tax industry back in 1955, but since then, we've continued to innovate with the assisted and digital tax products and services we offer to all clients. We were the first to offer Second Look and Peace of Mind guarantees. Last tax season, we introduced Block Live, the first virtual way to have a fully assisted experience. We introduced free audit support and representation for all DIY clients and, over the past few seasons, have launched an array of mobile tax solutions to support our clients. These are things unique to H&R Block.

Tax service innovation that brings to life our vision to serve tax clients anywhere, anyway and anytime they choose. This innovation has also been demonstrated in digital, where we've helped clients recognize the difference they get when they choose H&R Block. We were the first to offer expert advice, we did this in the year 2000. We were the first to offer federal e-file, free, within our desktop software package, and we are still the only digital solution that offers free audit support and representation for all DIY clients. We've also shown tax industry innovation in mobile.

At H&R Block, we don't believe that just because a client wants to embrace technology that, that means they want to shift from an assisted client to a do-it-yourself one. Instead, we utilize technology to make a tax preparation experience better for all clients, assisted and DIY, leading to more engagement, higher satisfaction and, ultimately, higher retention. So last year, we created 8 new mobile apps, and these weren't just tax preparation apps. They're a variety of self-service and tax preparation apps to serve clients, how they want to be served.

At H&R Block, our clients can have both. The technology-enabled experience and get the best service and expertise in the industry. Finally, our competitive advantage is anchored in the strength of our brand. We built nearly universal recognition in an industry that is relatively low churn. Out of the roughly 145 million tax filers, there are only 15 million filers that are switching from one of our competitors each year. The strength of our brand and brand marketing enables us to capture 40%, or roughly 2.5x our share, with 6 million new H&R Block clients each tax season and Greg will further quantify the value of our brand during his presentation later this morning.

Now having looked back, by explaining our leading position within the industry and competitive advantage that serve as a foundation for us, let's now look ahead, as I take you through our plans for the upcoming tax season and beyond. As Bill mentioned earlier, when he showed you this slide, Tax Plus is a big part of our strategy going forward as a company. However, it starts by providing a great tax client experience. We have to get that core of what we offer our clients, tax preparation. We really have to get that right in order to have the opportunity to do more for them, or Tax Plus.

To provide a great client experience, we have to have a clear understanding of our clients and a clear view of how to meet their needs. In the past, we've shown you that we have segmented our clients, both via tax form, which has worked well to define our services, as well as by agent income, which helps us market to our clients. This information was invaluable as we tried to create a picture of who our clients were. But the picture of our clients was not fully complete. Further, we wanted to understand how to better attract and serve high-value 1040A and 1040 clients because we know this is still something that we have to improve over time.

So this summer, we did additional research to understand our clients and their Tax Plus needs. This gave us a richer more complete view of our clients, their tax prep attitudes and motivations. Our view, by looking at all 3 of these, through the client lens, gave us a complete picture of our clients who we were looking for. This is, that regardless of how a consumer is wired, regardless of the method that they chose to have their taxes prepared, they all feel taxes are highly personal, that their situation is unique. And they're right. Because of this, both DIY and assisted clients demand that we personalize their service and price, and they expect consistent service quality.

I know this is an incredibly simple -- but it's a telling view of our client needs. It is also the basis of a much larger framework that we have created to guide our product development and client experience going forward. Is this an a-ha moment? Somewhat. But even more so, it's a confirmation of what we've come to know about our clients. And it is a reaffirmation of our purpose, to see our clients' lives through tax and find ways to help. It's also very consistent with Henry Block's original vision for the business. He's always said, the client always comes first. And while times have changed, the behavioral attitudes and needs of our clients have not. Our service promise today is also very similar. This is about delivering consistent service quality that matches the expectations of our clients. It's about matching the client experience with what they expect, what they need to be reassured that their individual needs are recognized and solved for.

But in today's more complex world, the H&R Block experience is one requires us to be seamless across many channels. Our assisted and DIY clients interact with us in our offices, interact with us online, interact with us mobile. And last tax season, we had more assisted clients interacting with our mobile applications than DIY. Because the delivery of some information, like the information about a client's refund, is best served by mobile. And we have more of our DIY clients accessing the live expertise of our tax professionals that are located in one of our 11,000 locations, but they're accessing them through many of our digital products, virtually.

Today's opportunity is seamlessly servicing across all of the channels. Every touch point, every channel. And going forward, we have a new way, a new door, if you will, to serve all tax clients with a technology-enabled seamless client experience. This year, we will introduce My H&R Block Account to all H&R Block clients. This account, or virtual door, will allow assisted and DIY tax clients to access all H&R Block tax and Tax Plus services through our offices, online or mobile application. This is the first of many steps in Bill's vision to provide more year-round access to our clients, and it represents another step bringing to life the vision of serving clients anywhere, anyway and anytime they choose to be served.

This means that, as tax client of H&R Block, I don't have to choose DIY to have a technology-enabled experience. Further, I have the ability to toggle between assisted and DIY because of my core account remains the same. Let me explain how My H&R Block Account works and why it's valuable to our clients. First, for our assisted clients, by establishing an H&R Block account online or during the tax preparation office -- tax preparation process in the office, our clients will be able to access key information: their prior year tax returns, their Emerald Card balance, as well as connect with their tax professional and other expertise, year-round. Clients will also be able to upload documents to the account, either online or via one of our mobile apps, where a client can simply snap a picture of a document and have it available online within the account.

This virtual, cloud-based data about our clients is then accessible to our tax professionals who will be able to interact with our clients and access their data, like the documents that were uploaded from a mobile device via My H&R Block Account. This is a clear way to provide an assisted client a way to delegate the responsibility of tax preparation, but who may still be served with a more technology-enabled experience, both from H&R Block. But the account serves all clients, the same door can and will be open by our 5.5 million online clients, who already experience a similar set of conveniences through their online account.

The difference, and why this will be unique within the industry, even from multichannel competitors like Intuit, is that H&R Block will allow our DIY clients the same types of mobile capabilities, to snap pictures and upload them to the account through an H&R Block mobile app. This information is then made available to our lives experts and tax professionals, who can serve the DIY clients using a combination of their source documents, as well as the data entered into our online and mobile digital tax products. This type of seamless technology-enabled experience is at the heart of the H&R Block experience we are uniquely positioned to offer all taxpayers.

This lead me to discuss what will be new within DIY tax services. We have many improvements lined up this tax season in order to ensure we effectively serve clients who choose to do their own taxes and continue to grow this segment, as we have the past 2 tax seasons. Today I'll walk you through a few of these.

Starting with new free live advice for all DIY clients. We'll also offer Emerald Cards to our online clients for the first time and will integrate the My H&R Block Account into our online and mobile DIY products which has multiple benefits for our DIY users. We'll provide an understanding of the upcoming health care changes to our clients, a topic I'll fully cover when I get to assisted tax, and we'll build on the launch of our mobile products last year, with new product enhancements for these users. First, this tax season will improve the mechanism through which clients can access expertise from a tax professional by offering this live, via instant chat.

And as I mentioned earlier, we've actually been serving DIY clients with expert advice from a tax professional within our digital products, in one form or another, since the year 2000. But this will be the first year live advice will be offered free to all of our online and desktop software clients via live chat with a tax professional. This capability gives us a chance to save consumers at the moment of frustration, leading to higher satisfaction retention and, occasionally, conversion to assisted.

I have to admit, I am happy to see TurboTax continuing to expand its own live advice offerings and talk about the benefits of live advice within its tax products. Because we've long believed in the need of an expert in support of the tax process. This is, of course, a strength of H&R Block. One we can readily scale, and one clients expect from our brand. In digital, we also will offer the Emerald Card for the first time this year. This change will expand the number of H&R Block tax clients who have a chance to take the Emerald Card as a delivery vehicle for their tax refund.

Today, almost 3 million clients take an Emerald Card out of the 14.9 million assisted clients who are offered it as an option. In the upcoming tax season, with the addition of online clients, we'll offer the Emerald Card to over 20 million tax clients. While this is our first season offering this as an online financial product, we are looking to build on the momentum of the success we've had last year with the refund transfer product, or the product that we've historically called a RAC.

Last year, nearly 40% more DIY clients used the refund transfer, thanks to better positioning of this financial product within our digital products. I've already mentioned the creation of My H&R Block Account which means that all H&R Block clients have the ability to access our tax service seamlessly across channels. And besides additional services, like mobile document upload and live expert integration, DIY clients will also be able to move seamlessly between the iPad and the online versions of our paid product. Here you see that, really, at any point in the flow, I can continue exactly where I left off on the iPad or online.

I also want to assure you that we remain very focused on 2 key areas that have driven our growth, particularly in online, over the last 2 tax seasons. First, although we have improved conversion, or the rate turn in clients who registered into a completed or filed return, by 3 points, we still have more opportunity. This year we have simplified areas in the interview use by more complex clients by directly integrating their charitable donations evaluation which, last season, was a separate application.

Further, our marketing team, led by a Robert Turtledove, continues to focus on one of our biggest challenges, that only nearly 2 in 3 DIY clients know H&R Block makes tax software. Our 12-point improvement in awareness over the past 2 tax seasons is only the beginning. We know that we can improve by telling the story of the power of our tax software and leveraging our unique free audit support and representation. But beyond that, I'm not going to discuss our marketing creative or any promotional plans with you, assisted or digital, because of competitive reasons.

Mobile will also be a key part of our growth plan for DIY. Last season, we launched new iPad and smartphone tax preparation apps for both Android and Apple operating systems. The iPad app is a fully functioning tax prep app with all screens that are available in our online app. The smartphone apps are more limited in functionality, geared at primarily serving 1040EZ clients with minimal data entry needs.

In 2013, we had a number of new enhancements, but the one I'm most excited about, is that our smartphone apps will be available in Spanish. This represents H&R Block's first-ever fully Spanish DIY product. We're also enhancing these products by adding the ability to import data from a W-2, a feature that has historically only been available in online and software. We've dramatically improved the feature to take a picture of a W-2 and have the data imported automatically.

We've given more flexibility to test drive our app before a purchase and we've integrated with My H&R Block Account to allow mobile DIY clients the ability to access and view their PDF prior year returns via a PDF viewer on their phone.

Now I'm going to shift gears, and I'm going to finish by taking you through the other part of our tax service strategy, what we have planned for our assisted tax clients. In assisted tax, our focus is also on the client experience. Breaking it down to deliver consistent service quality in the most critical aspects. I'm now going to share with you the highest level of the playbook that Amy McAnarney has rolled out to the entire level of her organization, just to demonstrate a glimmer of the maniacal focus we placed on delivering consistent service quality within our client experience.

This starts by leveraging technology to create systematic protocols within our offices, and that begins even before the client visits. First, to create appointments. I mentioned earlier in my presentation that we have an opportunity to make more appointments prior to the tax season. Second, when we do this, we must match our clients to the same tax professionals last year, a referred or one with more expertise or the best tax pro. With the priority, of course, to drive retention 5 points higher, by matching clients to the prior tax professional. We then have protocols within the office, at the front desk, to get that to get our clients to get that right match and to ensure our tax professionals deliver our service promise. And to deliver more value through a tax plus mindset at the desk.

We dramatically simplified and revised the process by which financial products are presented to the clients, leading with the benefit, in a way that makes it easy for the tax pro to tell the story about our Tax Plus offerings. Finally, we ensure our clients have the right follow-up, with special protocols for at-risk clients and ensuring that we have clients enroll in My H&R Block Account for year-round access and engagement.

Through the account, clients have 24 by 7 by 365 access to all of their tax documents and can get in touch with their tax professional or office support team. We believe that this will drive a much stickier relationship over time. Now I recognize that I've taken you into the weeds a little bit regarding our retail office tactics.

And while some of you might call this Retail 101, we know we can improve the execution in our offices and when we do the things that we categorize as consistent service quality that they add up. Over time, if we consistently execute just 2 of the items that I mentioned before the visit, we see a retention improvement of 2 to 3 points. The in-office experience items can lead to 1 to 2 additional points of retention and this adds up. Each additional point of retention drives $18 million in pretax earnings. So like I said, we're maniacal about consistent service quality.

Now let's talk about the uncertainty in tax laws that will drive more clients to Block seeking help. The tax law changes and what I will discuss in detail today are the multi-year changes consumers face as part of the Affordable Care Act. This impacts consumers in 2 main areas, their tax returns and their eligibility for a subsidy when purchasing health insurance.

This tax season, consumers who work for companies with over 250 employees, will see information about their employer coverage show up on their W-2. Further, in the fall of 2013, when the health insurance exchanges open for enrollment, the tax return will be used as the easiest way to enroll. In 2014, tax filers will for the first time recognize that health care is, now, a tax. And if they don't have coverage, they will face a penalty on their 2014 return.

The prior year tax return continues to be the method for enrollment in the insurance exchanges. In 2015, anyone who received the subsidy on their health care coverage during 2014, will be required to file a tax return. And additionally, the tax process will then include a reconciliation of subsidy eligibility that could raise or lower the tax refund based on whether eligibility for the subsidy changed during that year. That is to say, for those receiving a subsidy, if income increases or decreases over the course of the year, it may mean that they owe or should have received more. But whatever the outcome, it will be determined as part of the tax filing and refund calculation process.

Did I make this process crystal clear to everyone? This is very confusing and the reality is that consumers have the same reaction. They don't understand it. They don't understand what it means and they're really not sure who is going to explain it to them. So although the Affordable Care Act won't require enrollment through the exchanges until next fall, we believe the time is now to let our clients, and in particular, 1048 clients, understand how these changes impact them.

Our consumer research clearly indicates that our clients don't understand what Health Care Reform means, but it also indicates, they see their tax preparer as a trusted source to understand the implications of these new laws. This tax season, we will ensure all of our clients walk away with an understanding of what Health Care Reform means to them, how for those impacted, the tax return will be the easiest way to enroll, will explain the penalty if no coverage is taken and how to sign up. We believe this gives our tax professionals another way to demonstrate their expertise and value to our clients.

We also like the upside it has for our business in the long-term. Whenever there are tax law changes, even small ones consumers look to our experts to help them navigate the complexity. For example, a few years back, Congress introduced the homebuyer's credit, which impacted around 3.3 million taxpayers. We estimate that this drove an additional 50,000 high-value, high-margin assisted clients to H&R Block. By comparison, the Affordable Care Act is estimated to impact tens of millions of consumers over the next few years.

The over 90,000 tax professionals I mentioned earlier, as one of the key competitive advantages will be well-prepared to help consumers deal with these upcoming changes. Beyond health care, there are other industry trends that will help us grow in the long-term. I mentioned during my overview of the tax industry, the independent tax preparers had declined by 4% over the past couple of years. We think this trend benefits us and are poised to take advantage of it by working to convert independents to H&R Block as a franchisee or via an outright acquisition.

Today, nearly half of independent preparers are -- pardon me, nearly half of tax preparers are independent, but the economics have changed. These small business owners are facing higher compliance and regulatory cost and have lost of RAL profit sources, which make our scale more appealing to small operators. It allows us to be discerning.

We are zeroed in on the 25,000 or so independents who generate more than 500 returns and we're carefully targeting high-quality and independents who cover areas that penetrated key markets, particularly, Latino and other key client segments for H&R Block. We've also recently built a broad integration capability to bring them into the H&R Block family to ensure that we create sustainable performance in years 2, 3 and beyond.

This tax season, we also plan to grow new clients through third-party partnerships, doubling our Walmart locations, our distribution channel we'd historically seen as a source of new client acquisition. We'll also grow Latino clients through the help of Latino associations and partners. And let me be clear: H&R Block serves more Latino tax filers than any other tax preparer in the United States. And we found that we'll grow Latino clients in markets where we have tight partnerships with community-based Latino organizations.

So this year, we'll work with 2 large community-based organizations. We have a new partnership with New Futuro, an organization committed to helping Latinos achieve their educational goals. And we'll expand our partnership with the Hispanic Access Foundation, a grassroots organization aimed at improving the financial well-being of Hispanic families.

Finally, I have to mention our military partner. I'm very proud to tell you that, in tax season '12, 43% of all active and reserve duty service members prepared their taxes with H&R Block. I hope this overview gives you greater insight into how we expect to achieve sustainable profitable growth in the tax business. This begins with a strong focus on creating a great and consistent client experience. It also means deepening relationships with our clients through the expertise of the industry's best tax professionals.

And by delivering consistent service quality at every touch point, we open the door to become more than a tax company: a tax-plus company, a client-centric company that uses the tax interview experience as a springboard to new and innovative products and services that strengthen our clients' financial lives and our company's bottom line. You'll hear more about this topic from Susan Ehrlich when we return from a break. So now let's take a 15-minute break, and let's be back at about 10 'til the hour. Thank you.

[Break][Presentation]

Susan P. Ehrlich

Good morning, everyone, and welcome back from the break. I'm Susan Ehrlich, and I'm delighted to be with -- to be here with you today to share with you the evolution we've made over the last 12 months in developing and executing on our strategy for financial services. My presentation to you this morning will focus on 4 key areas. I'll begin with an overview of our business model for financial services, then I'll spend some time on our observations regarding the marketplace and the competitive landscape. This will then lead into a review of our products and our program enhancements for this tax season. And then finally, I'll finish with a discussion of H&R Block Bank and its role with respect to the future delivery of our strategy.

H&R Block possesses several unique assets for developing and delivering a successful consumer financial services program. There is tremendous leverage in our exclusive distribution channel. We possess an extensive footprint of over 11,000 offices and an army of bank agency-trained tax professionals who provide us with a near-0 cost of acquisition. Through this channel, we will introduce our clients to differentiated products of exceptional value and build on our clients' use of these products to grow year-round relationships with H&R Block. This is delivering tax plus.

So in looking at the tax plus model, which Bill and Jason have introduced you to, how do we take this critical tax preparation experience and leverage it into creating tax plus relationships with tens of millions of our clients? Our competitive advantages are exclusive distribution and seamless integration. Our goal will not be to try and serve everybody but instead to focus on the over 22 million clients in the U.S. who know our brand and our tax professionals and whom we've come to know through the tax interview. Among these clients, H&R Block holds a special place as a trusted adviser to them and their families for handling one of the most important financial transactions of their year. By seamlessly integrating our financial products directly into the client interaction points of the tax interview experience itself, we introduce our clients to the additional value we can provide them.

From here, we can expand our services, support and contact management strategies through online and mobile delivery platforms outside of the tax office and give our clients 24/7 year-round access to H&R Block and our products' exceptional features and benefits. Through this kind of relevant year-round engagement, we provide more value, deepen our relationships and grow our revenue. The result is an H&R Block able to meet the -- our clients' money management needs anywhere, whether that's through the office, online or over the phone; any way, whether that's kiosk, live or mobile app; any time, creating a delivery capability that rivals any in the marketplace today.

The fulfillment of this evolving consumer financial strategy will take us from a company exclusively focused on settlement products to one more broadly focused on an array of financial services, from a company focused on the 3 to 4 months of tax season to one that's serving clients all 12 months year-round, and from a company serving the financials needs of primarily unbanked customer to one with the capabilities of meeting the money management needs of all mainstream Americans.

Now let's spend some time reviewing the market and competitive landscape for executing on this strategy. We've spoken with you over the years about the consumer segment referred to by the FDIC and others as the unbanked or underserved. As reported, the segment represents 34 million households and 68 million people. These households have modest incomes. 68% earn $50,000 a year or less. They're younger, 9.5 million are between the ages of 17 and 30. And their credit is less well established. Only 25% have prime credit scores, and many have no credit scores at all. H&R Block serves millions of these clients today. But today, there are millions more mainstream consumers who are looking for a better solution and are now up for grabs in the marketplace for money management. Following recent changes in account policies and pricing practices, it's estimated by the FDIC that 1 in 10 Americans have closed a bank account and left the traditional banking system.

At the same time, customer loyalty to a single banking relationship is in decline, with nearly 6 in 10 Americans now handling their money management with more than one company, up 9 percentage points from last year. And new technologies and new entrants have further encouraged consumers to explore nontraditional alternatives, with 3 in 10 Americans now having and using a nonbank payment account of some kind.

These transitions and upheavals are not limited to the deposit side of the household balance sheet either. Access to credit and the availability of consumer credit is in decline. Home equity and credit card balances are down. In fact, lending is down in every major category, with the notable exception of student lending which continues to show gains in nearly every quarter since early 2007. This reduction in access to credit gets more pronounced the further down the FICO score bands you go.

These secular changes in the consumer financial services marketplace are driving changes in consumer behavior and product usage. Prepaid is now the fastest-growing segment in the retail financial services -- in retail financial services today. Not only is it an attractive alternative to cash for the underserved, offering convenience and spending control, it's also an attractive alternative to a checking account for mainstream clients, helping them avoid overdraft and other fees.

And while prepaid is growing fast, it's still significantly smaller than either credit or debit, enabling the category to potentially sustain this level of growth for quite some time to come. And within the market for credit, with traditional supply reduced, consumer demand for alternative forms of credit is on the rise. For example, H&R Block continues to see strong demand for our Emerald Advance line of credit in the holiday season. So across the board, we're well positioned to take advantage of these market opportunities and trends. With that, let's now transition and spend some time talking about our product suite for fulfilling on this strategy.

H&R Block's products comprise 4 types of financial services: the traditional settlement products category, our Emerald Card program, our Emerald Advance credit program and our new Money Express program. Let me start with a few thoughts on settlement products.

One of the most common settlement products is the refund transfer. It's also been called the Refund Anticipation Check or RAC. In the first half of tax season last year, 53% of our clients obtained a refund transfer from us, and refund transfer volume has remained strong over the years. A primary benefit of the refund transfer is its ability to enable a client to pay their tax preparation fees out of the proceeds from a tax refund.

This payment option is a convenience that every client can benefit from, and we see a significant opportunity in improving our merchandising and communication at this payment option to grow product revenues. So this season, we're adding office collateral at all desks, which highlights the 2 ways that clients have to pay for their tax prep. They can pay today at checkout, or they can pay nothing today and withhold their fees from their refund through a refund transfer. And this presentation of the refund transfer benefits is going to be reinforced through new screens added into the tax interview itself that mirror the office collateral and present all clients with the refund transfer option for paying for their tax prep.

So now let's talk about Emerald Card. Since its launch in 2007, our Emerald Card program has been wildly successful, with 2.9 million cards issued and $9.5 billion in funds loaded in tax season 2012. In this summer, bankrate.com evaluated all prepaid programs and evaluate -- and rated Emerald Card among their top 3, a very coveted endorsement for us. The Emerald prepaid card offers us a steady stream of fee-based revenues. And historically, we've been satisfied treating Emerald and the fee income it generates as a kind of plastic tax refund check one and done. Going forward, we're focused not only on growing accounts but also on improving year-round usage and the revenues that result. How are we going to go about this?

Let's start with our fee schedule. Heading into tax season last year, we simplified the Emerald Card fee structure. We streamlined a mix of costs and fees into 5 easy-to-understand fees that create one of the lowest-cost client-friendly prepaid programs in the industry. There are no monthly fees, no activation fees, no usage fees, just 5 customer fees for an ATM withdrawal, for an ATM balance inquiry or denial. There's a monthly inactivity fee if an account goes dormant and still has a balance. There's an over-the-counter fee for clients who are withdrawing all of the funds on the card in one go. And there's an expedited card delivery fee for those who are seeking overnight replacement for a personalized card, though a non-personalized card can be reissued free from any Block office. And based on the CFPB's proposed rulemaking regarding prepaid, we're very comfortable with where this positions us in the market. And if low fees weren't enough, we've added the CashBack rewards program this year to help drive new account acquisition and ongoing client usage.

Emerald Cash Rewards was launched to all Emerald cardholders in August. Clients receive a weekly email that notifies them of the card-linked, merchant-funded offers available that week. When a client shops at these participating merchants and uses their Emerald Card, the CashBack discount they earn is loaded onto their card instantly. It's the best kind of rewards program that there is. There are no points to have to keep track of and no coupons to have to remember to use. No other prepaid program is offering anything like this.

And with our focus on everyday-purchase categories from Target and Home Depot, to Burger King and Quiznos, our clients can save over $100 every month by using their Emerald cards at places they're shopping all the time. And clients see that CashBack post instantly. So when they sign up for text alerts, they receive a text message when the qualifying purchase transaction happens, and then seconds later, a subsequent text message notifies them that the CashBack discount has posted back to their card. It's great.

On top of these value proposition changes, we've also made improvements in our account management capabilities as well. Historically, this was not an area of focus or development for us, and we really hadn't provided clients with the kind of experience and product features that they need to make Emerald relevant beyond the tax season, but we're changing that. This year, when a client chooses an Emerald Card in addition to the non-personalized card they'll receive in the office that's issued to them instantly through H&R Block client, they will also automatically receive a personalized card mailed to their home. It will arrive along with a welcome kit explaining all the rich features and benefits of card ownership, another first for us this season. Clients can learn about how to download our Emerald mobile app which helps cardholders view their transaction history or find a no-surcharge ATM to get cash.

And this fall, through our mobile app, Emerald became the first program -- prepaid program in the industry to enable check cashing to the card with instant availability of the funds, no 5- to 7-day delay, which is a critical benefit for a prepaid client. And then finally, just last month, we also launched Emerald Online so clients can now manage their Emerald Card like a bank account, pay bills, write a check, top up a cell phone or transfer money to savings. And it's all integrated to the My Account portal that Jason described to you earlier.

With this impressive array of features and functionality, the Emerald Card program is transformed, and we earn the right to have clients using Emerald Card year-round. And that's important to us because year-round Emerald Card users reload and spend 3x the average of Emerald Card users overall. This new and improved Emerald Card functionality stacks us up very competitively in the market as well, both to the category leaders NetSpend and Green Dot as well as to recent new entrants like Chase Liquid and Amex Bluebird, with a number of impressive features unmatched by any of these programs. Given the recent launch of Amex's Bluebird program at Walmart, let me just take 30 seconds and share with you our thoughts on the impact of that new program.

With its client-friendly features and marquee names, I think the launch of Bluebird will continue to help legitimize the prepaid category. But that said, there are certain features, like the limited merchant acceptance of American Express and the lack of FDIC insurance and the inability therefore to load tax refunds to the card, that make its relevance limited to the typical prepaid client. And we believe our clients will remain partial to their Emerald cards.

Shifting gears from prepaid to lending, let's talk about Emerald Advance. The Emerald Advance small-dollar line of credit program is targeted at customers who don't have as many credit options as others. So our EA program really makes a difference for these clients. Our underwriting is based on extensive knowledge we receive about our clients, including verified ability to pay gathered with their income information.

Offering credit for clients during the holiday season helps us improve client loyalty and retention as well as helps us drive new client acquisition. And our unique access to the tax event, along with enhancements we've made to our collections capabilities, helps us control our credit costs as well.

New for this season, we created a phone application channel. We've made the program available to new and prior clients, and we launched before Black Friday to capture the full holiday season.

In addition, given the marketing opportunity I described or the market opportunity I described earlier, we're piloting a number of new credit programs this year to capitalize on what we see, starting with an installment loan program. We're lending up to $1,000 for terms that range from 3 to 12 months. This program offers clients, who are more comfortable with a fixed monthly payment structure, a great option for borrowing. For clients who are looking for a more traditional line of credit product, we're also offering both unsecured and secured credit cards. These programs will offer credit lines for up to several thousand dollars and give clients the convenience of everyday access to credit and the flexibility of determining their own repayment schedules, subject, of course, to meeting minimum monthly payments. We are very excited about the prospects for all of these new programs.

And last but not least, our Money Express program. In collaboration with start-up company Nexxo, our H&R Block Money Express creates a new way to deliver a host of money services through a stand-alone kiosk, including cash withdrawals, cash reloads, money orders, check-to-card, money transfers, bill payment and prepaid cell phone top-up. Offering these services through a kiosk in our office enables us to provide our clients with lower product fees, a convenient one-stop shop in a safe and secure environment that facilitates year-round use and builds incremental revenue as well as client retention.

This season, we're piloting Money Express in 30 locations. And if you haven't met our Head of Money Express, Greg Simlet [ph], he is in the back of the room and he'll be out in the lobby to take you through a demo of Money Express and show you its capabilities.

And finally, a few words about the H&R Block Bank. Chartered in 2006, H&R Block has built a strong bank enterprise. It's a conservative portfolio of $1.2 billion, which ranks it 430th in size amongst U.S. banks. It has a stable stream of fee-based revenues and generates a strong return on assets. It's a great little bank.

The bank portfolio is very conservatively managed, with 67% of assets in readily marketable securities, a declining portfolio of legacy mortgages, a line of credit portfolio that peaks between Christmas and tax season and a sizable pool of IRA, checking and savings account deposits, in addition to the prepaid account monies. The bank's revenue profile is very conservative as well, with over 68% of revenues generated through fee income for both the prepaid card as well as through the bank's share of refund transfer fees. This helps the bank deliver a return on average assets of 437 basis points, more than 6x the return of the bank's peer group.

Let's talk a little bit about mortgages. And just to be clear, this is not Sand Canyon. Greg will talk about Sand Canyon later. This is the bank's mortgage portfolio. With just over $371 million in net outstandings, the bank's mortgage portfolio has declined in size by nearly $1 billion over the last 5 years. And with loan loss severity flattening and delinquencies trending down, our mortgage provision expense continues to improve to about $24 million in fiscal year 2012, and we project this trend to continue. The result is an overcapitalized bank, with leverage and capital ratios well in excess of the minimum requirements to be considered well capitalized, in some cases over 10x the minimum requirements.

But with all of that said, on October 9, H&R Block disclosed that it's seeking strategic alternatives to owning a bank. Goldman Sachs and First Annapolis have been retained to assist us in assessing our options. We are seeking a partner capable of acquiring our bank enterprise and partnering with us to leverage our unique set of assets, including those 22-million-plus existing clients relationships, our over-11,000 tax offices across the United States, our army of 90,000-plus bank agency-trained tax professionals, our access to over $20 billion in tax refunds facilitated and our insight into verifiable ability to pay information for lending, all this to build an unparalleled consumer financial services enterprise, and I know we can achieve this.

As you may know from my background and experience, this is not the first time I've built this kind of model. And I know it can succeed. The key is in joining with the right partner. So if you know anyone interested in buying a bank, please have them call me.

Let me leave you now with a video of one of our newest features, the mobile Check to Card experience. Thank you.

[Presentation]

Gregory J. Macfarlane

Hi, everyone. I want to spend my time with you today actually summarizing a lot of what you've heard from Bill and Susan and Jason. I want to do that, though, from a financial perspective, of course. And also, because I've only been here in H&R Block for about 6 months, I want to provide you some -- maybe some new-guy perspective as well.

Before I do that, though, I do want to talk about the second quarter. As you know, earlier today, we filed our quarterly SEC registration -- sorry, quarterly SEC filing, and I want to hit some of the highlights with you.

From continuing operations, we reported revenues of $137 million last year, and we improved that by $8 million this year to $129 million. The main driver of this was H&R Block Australia. As Bill mentioned to you earlier, they had a great tax season. They were up high single digits for the number of returns, and that translated to double-digit revenue increases. We're quite proud of the work that the H&R Block Australia team delivered this year. From a pretax loss perspective, we reported a loss of $162 million, which is a big improvement from last year's loss of $204 million.

Now, of course, we get some of the benefits from the revenue improvement from last year -- or excuse me, from H&R Block Australia. But mostly, what's driven this is actually expense favorability. There is really 3 things that drove the expense variability. There's roughly $2 million of sort of small positive cats and dogs and then roughly $34 million combined of 2 other main drivers. The first one was really about 50% of that, and that was really favorable legal progression within our overall business model. We had a number of legal issues that resolved this year successfully. And also last year in the second quarter, we incurred a lot of expenses that didn't reoccur this year.

We also had continued favorability from our cost-reductions efforts. That was about $17 million as well, and we'll talk about that more here in a minute.

In terms of EPS and shares outstanding We reported a loss of $0.37 a share, a $0.04 improvement from last year's second quarter. The main driver there, of course, was the expenses with a small amount from the revenue side. Now as you know, we also have a lot less shares outstanding, and that's roughly 10%. In those quarters, like the second quarter where we lose money, we actually have a negative impact from that. But later this year as we turn to profitability, you will see a benefit on the EPS due to these 10%-less shares from a year-to-year perspective.

On the Sand Canyon side. Sand Canyon reviewed $10 million of new claims in the second quarter -- I'm sorry, they received $10 million more claims in the second quarter and reviewed $257 million of claims within the quarter. The result of that after all those reviews was a very immaterial change to the reserve, and that reserve stands at basically $129 million. At the end of the quarter, they also had $28 million of reserves -- excuse me, of loans that still need to be reviewed.

Specific and probably more broadly to Sand Canyon, we've talked to you a lot historically about the statute of limitations. As you know, this is the time frame in which a buyer can submit a representation of warranty claim against loans that have been sold by Sand Canyon whether they were done through securitization or direct whole loan sales. Now there's some variation within the statute of limitations, but we generally believe that to be 6 years. Within the next year, Sand Canyon will be materially through that statute of limitations for loans that have been sold.

Sand Canyon at the end of the quarter had $129 million in reserves and approximately $300 million in equity. Now historically, claims have come in, in what I consider to be more of a chunky manner. There have been some quarters when the rep and warranty claims have come in quite high, and there have been some quarters where it come in quite low, very much like the last 2 quarters. But importantly, over the last 2 years, the absolute loss rate has been less than 1.5% on those claims. In the event that this is a worst -- worse-worst scenario, when you believe that the reserves get used up, as well as the equity, we believe that any arguments around corporate veil-piercing would not be successful. Sand Canyon has been and continues to be run as a separate legal entity.

Let me talk now about our cost program. Earlier this year, management outlined to you an $85 million to $100 million commitment to the bottom line as a direct result of cost-focused efforts. I'm happy to report, halfway through the year, we continue to track to the $85 million to $100 million. Now because I have you here in person, I thought it would be helpful to spend a bit more time on the cost structure and as it relates to the $85 million to $100 million cost program.

This is a picture of my cost base at the end of last year. Roughly, we have about $2.3 billion in costs and I've segmented them here by the main categories. As you can see compensation people cost, occupancy and marketing are my big 3 expenses. Our cost program was a top-to-bottom review, and there wasn't a single dollar that wasn't challenged through this process. If we actually look at it, on main sort of 3 items which I've summarized here for you, that foot out [ph] to the $85 million to $100 million of commitment.

Year-to-date basis, which is a combination of the second quarter and the first quarter, were at $35 million. Now because due to the seasonal nature of our business and the fact that we're just ramping up expenses, we expect to receive the remainder of the $50 million to $65 million to get to the total $85 million to $100 million for the year. The additional, and this is some new information for you, as I looked at the details of the program, there's actually 51 work streams that sit behind us. And when we look at the annualization benefit, we see additional benefits in 2014 of $15 million.

This is really the summary comments that I have in the second quarter. Later today, we'll have a chance in the Q&A, if you've got some more specific questions to ask. I'll be happy to handle them. And of course, after today, both myself and Derek are available for any further follow-up questions. But with that, I do want to kind of turn it more to the broad picture here, which is really what we're here in New York to share with you all.

Now I did join H&R Block 6 months ago. And before I joined the company, I thought long and hard about what makes H&R Block special. And now after having been here for company for a while, I've been able to validate and think about that further. And I want to share with you the model and how I think about H&R Block. At the same time, I think this is the same reasons that I think H&R Block is a great company that you as investors or potential investors should too.

There's no doubt that H&R Block is a value company. We have a predictable and growing core business. The tax preparation industry is a remarkable industry. When I look at the amount of capital that we required to support a large retail footprint and as well as a large technology part of our business I consider to be generally capital light, we have a long track record of generating strong free cash flow. And we've used that free cash flow to pay a very healthy dividend. We've increased that dividend, and we've bought back a lot of shares.

Now in addition to being a good value company, I think we've got real growth opportunities. We need to start with the fact that our core business is growing every year. To complement that, though, we believe we've got international leverage. We have scale businesses in Australia and Canada, and we are looking forward to additional countries down the road. Within the digital space, H&R Block was a late entrant here, but we're making up ground quickly. And I think you saw today a lot of smart investments and things we're excited about and believe we got a lot more room to grow there as well.

Financial service is an area that I have a lot of background in and I'm excited about. I can spend in all these areas more time, but this is the one area that I'm most excited about from a growth opportunity for the company. Now not only are we a value company that has some growth opportunities, but I think, from a risk perspective, we also got some things we can talk about.

I think we're generally low risk as it comes to mortgage now. We talked about Sand Canyon a little bit. In my view, as time goes on, that risk actually will resolve itself. There has been management turnover at the top, but importantly, you need to recognize that, that isn't all that runs a company. There's actually 50 key people that run the company, and as Bill mentioned, we have over 300 years of experience running a tax business. I've been very impressed the quality of people at H&R Block, as well as some of the new people that have joined the company.

So now let me jump into this in more detail. This is information from the IRS, and what we're showing you here is the number of tax returns filed in the United States every year back to 1951. There were 9 periods over this time frame where the number of returns actually declined. And in almost every circumstance, the next year, it went right back up again. As Jason said, you can put a ruler to this and almost get a straight line. I've not shown you Australian or Canadian data here, but if I did, you'd find the same trend.

Another interesting thing I find about this tax industry is the pricing power that we enjoy. We have generally very low price elasticity in the tax preparation industry. In fact, the only industry that we can find that has similarly low price elasticity is the auto body collision business. What do we have in common with them? Well, first of all, you have to get the service done. The second thing is the client has -- doesn't really understand the amount of experience or skill required to complete the effort. And third is we typically present the price at the end of the transaction. The industry enjoys this as a fundamental part of doing business.

H&R Block, over the last 10 years, has increased price at a greater rate than inflation. I want to be very clear with you today, though, that I'm not giving you an idea of what we're going to be doing going forward, specifically for this season. Instead, I think, as you think about the future, modeling plus 1% annual price increase is a very reasonable thing to do. We are not giving you specific pricing guidance for the season, however.

Also this tax chart, the price chart here on the right-hand side of the page, is what you would see if you went to an H&R Block office. This is what a client actually sees. This is last year's poster. If you want to see this year's one, we have an office on 3rd Avenue or right off of Times Square, and please feel free to go down there and take a look at our pricing structure.

If you take this pricing power and you combine that with the fact that the core business is growing at 1% to 2% per year, and then you apply that to H&R Block that has a level of fixed costs, you should expect to see consistent earnings growth. And that's what you're seeing. And this is a chart that goes back to 1981.It is not lost on me, Bill, the Board of Directors or the management team that earnings have been down in the last 3 seasons. In addition to the $85 million to $100 million of costs that we're taking out that we're committing to, we're very much focused on driving the top line. And a lot of what you heard today are the plans in which we're going do to execute that.

This is a slide that Jason shared with you. This is the tax preparation business in total. It's a $19 billion market, a very large market, and I'm showing you here how it subsegments into the 2 smaller markets of the DIY space which is 10% of the revenues and the assisted space which is 90% of the revenues. I'm just taking that same $19 billion market, and I'm now showing it by competitor. You can see H&R Block here, Intuit, the other brand and competitors and so on. I have 2 observations here.

The first observation is that H&R Block is the only company that can serve clients any way they want to be served, whether it's DIY or assisted. The second observation is, although we are the largest tax preparer in terms of single name in the industry, we do 1 in 6 returns in the United States, we only do 15% of the revenues. The industry is still dominated by independents and CPAs at 71% market share. And we have room to grow there, as well as take some share from our branded competitors.

We do that through our competitive advantage. We deliver the best-in-class tax professionals to the industry year in and year out. We have unmatched scale. We have 11,000 distribution points in the United States, an additional 1,000 in Australia and Canada, as well as pervasive online presence. Our brand is unmatched in the tax industry, no one can come close to it. And then within the industry, not only did H&R Block invent the industry, but I think we continue bring new ideas that add value to clients every day. Ultimately, H&R Block is the only tax preparation company that serves clients anywhere, any way at any time that they want to be served.

This is actually my footprint here in United States. I am not really sure, frankly, why we don't show Alaska, Hawaii, Canada and Australia, but the reality is we've got stores there, too. What I find impressive about this is that we've been doing this for a long time. We have a lot of experience running retail. For me, to open up a new store costs $60,000. It takes me about 1 year to break even on that store. To get to what I consider to be a reasonable level of profitability takes about 3 or 4 tax seasons.

A cool and interesting statistic from my side is 46% of our offices have been opened up for more than 30 years. That's amazing. Now specific to the number of stores we have and the mix between franchisee and company-owned, we will every season look hard about what make sense for us, but in general, we're quite happy with that footprint.

This is an interesting piece of analysis, what I'm showing you here is our staffing levels. During our slower season, which is really the spring and summertime, we have about 9,000 people. Now to be clear, year-round, we already are open year-round in many locations. That typically is a couple of days a week, that type of thing. And as we think about what year-round means, I think you've could be online, it could be through the stores, it could be through the kiosks. And it really, at some point, it comes down to a labor kind of conversation. We don't expect any material shift in this labor patterns in the near term.

As we get ready for the tax season, which is what we're doing right now, we begin to staff up. And when we finish, we'll end up with over 90,000 people. You may not appreciate the infrastructure and the skill required to do that, but let me tell you, it is an amazing skill that H&R Block has to be able to staff up this many people that quickly. What makes us even more amazing is these are not seasonal Christmas people that stand there helping you get a sweater. These are people who are computer savvy, they understand the IRS guidelines, they know how to do customer service and for H&R Block, this is what customers seek. This is H&R Block, and we deliver the best tax professionals to the industry. 34% of our tax professionals have more than 10 years of experience, and over 1/2 have more than 5 years of experience.

For a tax professional to leave H&R Block after a few years is very difficult because if they do, they lose all their clients. They cannot bring their clients with them because they're not their clients, they're H&R Block clients. They don't have access to their records, their phone numbers. And if they were to try to do that, we would sue them.

In addition to that, we invest a lot of money into them, and they know that. And they can make a lot more money, as Jason said, through the productivity and the amount of tax returns that they can do. Our brand is unmatched within the tax preparation space. In fact, when you think about it more broadly, we have the same level of awareness as Coca-Cola, McDonald's and Walmart. We've invested over $3.5 billion in that brand since 1962. Also importantly is not only do people know about the brand, but when you ask them what is it that you think about when you think about H&R Block? They talk about taxes, they talk about expertise, and they talk about trust.

Why does that matter? Well, it matters because for all intents and purposes, we're only open for a part of the year. Every season, people switch tax preparers, that happens. There are also new entrants to the marketplace, and we think that our brand is an important way to make sure that we're considered in every step of that. It's something we take a lot of pride in, and we believe this is a big differentiator within our space. It's fundamentally grounded in the fact that tax preparation relationship is a very profitable one. And if you're able to establish that relationship and deliver consistent service quality, you can establish a lifetime relationship with them. We will spend money here, and we think it's a good investment.

Retention is another thing around the industry that I think is quite positive. There's a number of reasons for that. I've summarized some of them here for you. Historically, H&R Block has compared ourselves to the main branded competitors on the assisted side and felt pretty good about the fact that we're in the 72% range, and they're in the low 60% range. We should be proud because we've invested a lot of time there, and we do a good job for our clients. What we need to do is look to what can we do in terms of entitlement, and we actually look at the CPAs, they typically have retention in the 90% range.

Now there's some reasons for that from a mix perspective. They tend to be more complex type of tax forms, which does lends itself to higher retention because of the deepness of their relationship and the expertise it's provided. But at the same time, there's no reason that H&R Block cannot continue to grow its retention. We're also showing you, on the digital side, that we've got room for improvement as well. We've made progress here, but when you look at the best competitor in the space, which is Intuit, we can see a dramatic opportunity for us to improve our results, and we're very focused on that.

Why this matters is because for every point of retention improvement, I generate an additional $0.04 a share of earnings. It's a big deal for us, and we're very focused on it.

Here's some additional information for you. Last season to this season, we continue to see consolidation within the industry. There are a lot of reasons for that. There's increased pressures on revenues. We think the RAL profitability has pretty much been squeezed out of the industry. We think the cost structure is going up, and ultimately, it's grounded in the fact there's more competition from people like H&R Block. We think, as we look out over the next few years, that may actually accelerate for several specific reasons.

The IRS is very focused in what they see as a real threat around fraud. Part of their response is increasing the certification requirements for tax professionals. It'll be higher cost, it'll be harder to pass, there'll be ongoing educational requirements, and we think this will put pressures on marginal players within the industry.

RALs, we think, are pretty much gone from the industry. The third point, and this is perhaps more anecdotal in nature, is that there's a demographic favorability that we're looking at. A lot of independents, in particular, established their business in the 1970s and '80s once they saw that H&R Block was legitimizing the category that they could make money. Those individuals need to retire. They have a difficult time finding a place to sell their business due to the seasonal nature of their cash flows and the fact they have very little tangible assets.

We believe, overall, that H&R Block is well positioned to take advantage of this. We have the financial capital to be able to do these transactions. We've been doing these transactions for many years. We know what to look for, and we know what makes success look like in a transaction.

Importantly, and this is specific to the independent channel, these are people that have built their clients over decades, and they take a lot of pride in that relationship. And when they do want to leave their business, they want to make sure their clients will be taken care for -- taken cared of. H&R Block has that reputation and we have the brand.

And lastly, and this is perhaps most selfish from my perspective, is we're likely just down the street from these competitors. And what that means financially for me is if I buy them, I typically can consolidate them and take some costs out of the transaction. And I can be more competitive.

On the digital side, we are now the second largest digital provider out there, and we take great pride in that. Jason and the team have worked quite hard on developing a full suite of digital offerings, and going into tax season '13, we're quite excited about what we've done. We continue to make investments here and frankly, I'll continue to make disproportional investments here, and we've resulted in actually taking market share, and we think that trend will continue.

Now importantly, we believe that the digital and assisted are ultimately a complementary type of offering. There are synergies between the 2. And at the same time, we continue to believe there are 2 distinct subsegments here, the DIY space and the assisted space. If you disagree with us and believe over time that may end up being more overlap between the 2, I think fundamental to that assumption is that the DIY providers will need to provide more assistance to their clients.

H&R Block is best positioned to do this. Last season, we completed 15 million returns in the assisted side, and we did that with 90,000 people. If I'm an at-scale digital player and believe I need to increase the amount of assistance that I need to provide to my clients, how many tens of thousands of people they need to hire and how will they do that?

This is another slide that Jason shared with you, and I'm not going to go through all the details about some of the things that we're investing and focusing on. The point of this page is at 16.2% market share, we believe that H&R Block has further room to grow within the digital space.

Let me talk about financial services now a little bit. I spent a lot of my career at GE Capital, in fact, actually mostly worked at GE Money, and that's really their consumer lending business. When I look at H&R Block, what I see is a tremendous opportunity in financial services. I'm not sure how many people actually understand the relationship that we have with our clients. A client will come to our location, will sit next to a tax professional for 45 minutes.

During that 45-minute interview, they will share very intimate information financially and about their personal situation with us. From a financial services perspective, that is golden information and a golden relationship. What makes us even better is the vast majority of our clients get a refund. And for most of those people, that's 10% to 20% of their annual income. That also is quite interesting from a financial services perspective.

The third thing about this relationship is they come back next year, 70-plus percent of the time. And that, for me, as you can imagine is also a great thing from our overall financial services opportunity. This is a great relationship, and as long as we have the right products and we position them properly, we think we have a real opportunity to grow here.

What's also really neat is who walks through our door. Susan shared some of this information with you, but our clients do tend to skew towards modest incomes. They're a little bit younger, and they have less well established credit. Historically, we have talked about the non-bank and under banked as a primary focus for H&R Block. And I think that as time goes on, we own -- or actually reposition and think about that differently. There are fundamental changes that are happening in the United States around access to credit from a regulatory perspective and overall risk return relationship. The financial services provider, specifically traditional ones, are thinking about it differently. And H&R Block has a role to play here.

In terms of the right products, these are our products, the main one's that we're going to market with the share -- the refund transfer products, the Emerald Prepaid MasterCard or general-purpose reloadable debit card as well as the Emerald Advance line of credit. These products are complementary to the tax relationship that we've established. And it's a natural part of the discussion we're going to have with our clients. Our ability to sell these products has a direct benefit not only to the client, where we can increase satisfaction and retention, but translates to my bottom line.

One financial services product on average results in 55% more margin for me in the first year, and the overall lifetime value that client's also gone up by 32%. Let me talk about each product here a bit more specifically. For a lot of clients who walks through our doors, paying $180 for their tax preparation is a big deal. That's the average roughly cost that we charge them. Instead, because most of our clients receive a refund, 87% and it's also quite large, two thousand six hundred of odd dollars, we have the ability for them to pay that $180, 2, 3 weeks later when the IRS actually refunds their money. That's what a refund transfer is.

Last year, we gave away that product as a promotional opportunity effectively for free. This year, we're not. And we expect that our revenues from the refund transfer product in 2013 will approximately -- like that we did we did back in 2011. It will be a good source of improvement from a year-to-year perspective. On the Emerald Card, this is the one product that I'm personally most interested and most excited about. When you look at ourselves, the current program that last year issued 2.9 million cards and compare that to both NetSpend and Green Dot, we have a tremendously large program, it's the third largest in the United States. We issued that many cards. I find that quite impressive. What we've not done a good job at is convincing our clients that they can use these cards year-round.

And you can see that clearly here on the revenue per account, which is really the main driver that the more they use it, which is really a year-round statement, the more money we make. Susan and the financial services team have increased utility of that program, we'll provide better education and ongoing incentives for clients to understand that they can use this card year-round. We're also, of course, focused on issuing more cards but in particular, what I'm watching is I want to see how the number of times they use that card per year. You can now do some quick math if you see us doing $36 per year, compare that to Green Dot and NetSpend, and understand that we have a huge opportunity here. It's something we're focused on, and it's something we're investing in.

Ultimately, our financial products are going to be a core part of our tax preparation strategy. They are adjacent and they make sense from our clients perspective, and we're very focused on them. It all starts, though, with the tax origination activity.

Let me now talk about our cost structure a little bit. What this page is showing you is actually my EBITDA margins over the last 4 years here. I've also shown you -- and ours is in green -- what I'm also showing you is the S&P 500 EBITDA margins as well as the S&P 500 Consumer Index margins for comparative purposes. And I said, "Hey, let's throw up Intuit there as well." We have good EBITDA margins in this company. They're strong and they're healthy. We're very focused this year in taking an initial $85 million to $100 million cost out, and that will benefit my 2013 margin percentage. I get a lot of questions about what happens after that, and so instead of giving you a specific number for 2014 and beyond, what I want to talk to you about more is a concept.

Our objective at H&R Block is not to have EBITDA margin percentages at 100%, it's not possible. Instead, our goal is to drive EBITDA dollars at acceptable margin percentage rates, and we spent a lot of time talking about that concept, analyzing our cost structure, comparing ourselves to the industry, looking at the individual sources of revenue, and where I come out at is we should be in a target range between 27% to 32%.Two main points here: first is, at the point at which we do get within this range, let's say we get to the higher end of the range, that does not mean we stop worrying about costs. Bill would not tolerate it, and my job at H&R Block would be rather limited at that point in time. We will continue and always be focused in our cost structure. What happens, though, is when we do hit the higher end of the range, we will then reinvest those cost savings into growth, which translates to more EBITDA dollars.

The second main point here is this is not a range that will stay forever at H&R Block. As we continue to grow, we may be disproportionately growing within certain areas like financial services or digital, and they do have different cost structures. I think as a point here with Intuit, that's one of the reasons they're so high is they don't have that same fixed cost basis that we do from a retail perspective as well as some of the variable costs that we incur from a tax preparation. So we will continue to reevaluate this range.

So let me now kind of summarize probably one of the main topics that people here talk about, which is capital allocation. I've been here for 6 months. I've met over 100 investors and potential investors. I've talked to a lot of the sell side analysts. We've done 2 quarterly calls, and the number one question I get, and I'm just going to boil it down here is why don't you go and borrow a bunch of money, lose your credit rating, your investment-grade credit rating, and buy back a bunch of shares? Was that about right? Not everyone asked that question, that's the number one question I get.

For those of you here today, to get an answer to that question, you're going to be disappointed because we're not going to give you the answer to that. Instead what I want to talk about is the methodology by which we think about capital allocation at H&R Block in more detail. It starts with the preferences waterfall [ph]. As I have cash available, my first priority is funding the operational needs of the business. Once I do that, I also have to worry about, at the same time, our liquidity profile. We're a very seasonal business, and this matters to us. After that, I think about our strategy and how to fund that. Sometimes that's a source of cash for us, and sometimes that's a usage of cash for us. Once I finish that, I then have to support the dividend. We have been paying a dividend for 200 consecutive quarters. We're about to be at our 201st, it's something we take a lot of pride in and we take it as a big responsibly.

After that, and as I have available cash, I then examine whether I'm going to repurchase shares, increase the dividend or hold the cash. Important to you, you need to understand that H&R Block, we always have a guiding principle, which is generating meaningful shareholder returns. We know that this is how we get measured. An important part of this concept is -- actually, probably to me the most important short-term focus, which is what I call the requirements. We need to have disciplined evaluation at each step of this preferences waterfall.

When we do choose to spend money, we need to have accountability to ensure that when they give the money, we get the proper return back on it, and ultimately we need to be guided by a clear view of what drives value. For the sake of being labeled too honest in an Investor Conference, I'll give you some perspective after being here for 6 months. This is the area that H&R Block has full room for improvement in, and it's been something I've been very focused in on and will continue to be very focused in on, which are these requirements.

I'm now going to talk what each one of these more specifically. As a large retail company, we need to have a professional appearance. When a client or prospective client walks into a retail location, the carpet, the paint, the signage matter, and we're going to spend money on that. As a large technology company, our business in the assisted space is supported by technology. In the DIY space, it is our business, and so we will invest in ongoing software as well as hardware investments. At the same time, though, because we're a mature company, most of the capital that we're spending is, in many cases, replacement. And so when I look at what we need from a retailer and a technology perspective, I feel -- especially when I compare ourselves to other large technology retail companies, that we spend relatively light capital. In fact, when I look back over the last 5 years, this is my CapEx as it relates to revenues. Going forward, I believe the right number for us is around 3% of revenues. If you notice here in 2011, we were at about 2%, and I can tell you firsthand that was a mistake, and it's not the right number for the company. We will obviously challenge every dollar we spend, but in general, I think 3% of revenues is the right number.

As it relates to liquidity, you cannot think about H&R Block and not understand the seasonal nature of our business. This graph at the bottom actually shows my cash profile over the last several tax seasons. At the end of the U.S. tax season, which is my high-water point from a cash balance, to the trough, which is really the beginning of the U.S. tax season, I go through about $1.5 billion. The capital structure's set up right now, so that roughly in the third quarter, my third quarter every year, are now borrowing money to fund the operational needs of our business. That is the current capital structure.

And we have historically used an investment-grade rating to access commercial paper as a cheap and available source of funding to get us through that time period. This past summer, as all of you know, we have successfully renegotiated our committed line of credit. We also sized it for what we think was the appropriate amount of $1.5 billion. We are quite happy with the terms of that, and importantly, we switched the main covenant from an equity-based covenant to a cash flow-based covenant, which we think is more appropriate for a business like this.

The second thing we did, which is just recent, is we had some bonds due here in the beginning of the new year. We successfully refinanced those and placed $500 million just last month that have a 10-year maturity. The interest rate savings on that is about $18 million or $19 million year, which is $0.04 a share in savings.

I want to now talk about our strategic needs, and I want to start maybe looking a little backwards here. A lot of what management has been consumed with over the last several years is unwinding this structure. We sold our Sand, McGladrey in a broker-dealer and returned most of that capital back to you. We focus very much in Sand Canyon and what the future of Sand Canyon looks like, and I think, in my opinion, that's really a time will tell type of this conclusion. What we are today is a focused tax preparation and financial services company.

Now let me talk about our strategic initiatives going forward, and I want to actually pick up some of the key themes you've heard about today, but put it in the context of capital needs. I'm going to start with international growth. This is not Canada and Australia. These are at-scale, large individual companies that are generating good returns. Of course, we'll continue to invest there, but that's pretty much in the self-funding part of my world right now. What I'm talking about here is Brazil, India and another country or 2 over the next year or 2. Last year, Brazil and India in total cost me less than $10 million. Our objective in those markets and in new markets is to determine a model that is actually scalable and profitable, and we're prepared to take a few years to figure that out. Once we do that, we will then add capital, but we'll be convinced that's a good investment.

Overall, I consider this to be a small negative use of capital, with the key word being small. Within the digital space, this is a core focus area for the company. We continue to invest money here and are quite happy with the results. Because we're a scale digital player, a lot of those investments turned back into current year return. So therefore, for me, I consider this to be a positive source of capital strategically.

I get asked a lot how do we think about acquisitions at H&R Block. And those of you who followed us for a while know that we haven't done a lot here in the last several years. This does not mean we're not thinking about things nor does it mean we're not evaluating things. We are, constantly. At the same time, we need to be guided by what we are, which is a tax preparation company with adjacent services, and we're going to use that as a very high standard to pass any acquisition screen. So for now, I'm going to put this as an unknown in terms of capital. Financial services, typically when you're building that program quickly which is what we're doing, you, would need capital to be able to do that. The reality is at H&R Block, we have a typical financial services products.

The Emerald Card product as well as the refund transfer products are sources of capital immediately, it's really just Emerald Advance which is the more typical financial services product where you lend money out and then collect the return over time. We believe the Emerald Card and that refund transfer program's growth will help self fund the Emerald Advance program. And so overall, we think this will be a good positive source of capital for the company as we grow it. This does not include H&R Block Bank conversation in, which to me is integral to but also separate. I'm going to talk about this in a bit more couple of pages here with you. But in general, as we find a solution to the bank, we expect to unwind capital from that. Right now, the bank has $450 million of capital at it. And I'm not saying that we're going to get that all back, but what I am saying is we'll get some of that back.

So now let me talk about the bank a little bit. What is important to us is that we still want to maintain basic control of the relationship with the client. We have a lot of value to add as it relates to the overall strategy for Emerald Card, the Emerald Advance as well as the refund transfer. And we continue to want to be the driver of that conversation. What we're looking for is a relationship -- or relationships, that's possible as well -- for someone who understands that and is happy to play a backseat type of a role with us. They're going to be a partner with us, but they're going to really be more on the administrative side.

For us, making sure the client is not impacted is a very important factor here. And ultimately, our goal is not a fast deal, it is the right deal. Once we do find that deal, there will be some additional benefits that we receive. Of course, I just talked about some capital that were released from the bank. At the same time, we will be able to reduce overhead on my cost structure because as I just described to you, our bank partner will actually be -- brought the administrative services to us, and therefore, I don't need to replicate that and we'll be able to take that under my structure.

We are currently at the bank, regulated by the office of currency, the OCC, and the parent bank is actually regulated by the Federal Reserve Bank. Obviously, when you get rid of the bank, those oversights go away, and we believe that's a positive for the company. Ultimately, by simplifying the bank, we end up on a continued theme of a simpler, more focused business.

Now I'm going to talk about the economics of the bank a little bit. I know this is a lot of people -- on a lot of your minds. What does the future look like from an economic perspective? And when you think about H&R Block Bank, there are really 3 pieces, and I'm going to talk about the first 2 here to start with. The first piece are the customer deposits. As you can see there, we have assets of roughly $100 million. These are IRAs, CDs, broker deposits, checking, savings, all lower risk and low yield. There is an active market for these things, and I can find a home for them quite easily.

I'm not worried about these at all. We also have legacy mortgages that Susan talked about, assets in total of $375 million. These are mortgages that were purchased by the bank from Sand Canyon many years ago as well as some additional mortgages they bought in the open market several years ago to fulfill some of the chartered requirements from a regulatory oversight perspective. Those mortgages are mature and they're in wind-down position at this point. Importantly, they do not need to be held at an insured entity or a bank level or a savings-and-loan company. If we choose to, we can keep them at the parent level. How we decide that is an economic-based decision.

There's also, I mean to be clear, a market for these mortgages, if we wanted to. The customer deposits in the mortgage portfolio are not strategic to our future, it is not a growth area or a source of investment for us. It is also not a material source of revenue nor EBITDA for the company. What we do end up talking mostly about is the third piece of the bank, which is financial products. And these are the 3 financial products in particular we talked about, refund transfers, the Emerald Card and the Emerald Advance. I'm sharing with you here the revenues last year on those products. And I want to talk about these a bit more specifically.

The refund transfer is a great product that has real utility for our clients. As I shared with you earlier, a lot of clients don't want to pay the approximately $180 at the point at which we complete their taxes. They know they're getting a refund, and what the bank does is establish us a one-time used bank account, that when the IRS refunds their money, it goes to that bank account, we then net out $180 fee that we received for the tax preparation as well as the refund transfer fee.

What I've just described to you is automated and quite easy for a bank to do, it represents no risk. We believe that this is a very easy type of a service to be able to find from a third-party provider, and it will not cost a lot of money, and I'll be able to take some of the cost out of my infrastructure that I'm currently incurring to do that. For many of those same reasons, that's how we think about Emerald Card. The Emerald Card is really, from a bank's perspective, not a really risky transaction. It doesn't have much statutory capital requirements.

In fact, it's a source of capital because what happens is when they open it up, they put a lot of money under the bank account. We're going to continue to want to be the strategy, the program manager and the marketing minds behind this product and obviously, expect them -- and our welcoming good ideas from our partner, but ultimately, we're just looking for the simple mechanisms behind the scenes to do all the money movements, reconciliations and all their insured requirements that a bank entity brings to the table. We do not believe we'll be giving up a lot of economics.

On the Emerald Advance though, this is more of a traditional lending product, and this is an area where we probably will need to do a bit more of a profit-sharing with the partner. At the same time, and probably more importantly, when you look at the future of refund transfers, plus Emerald Card, plus Emerald Advance, we expect the economic pie at H&R Block to get larger and larger for a lot of the reasons you've heard about today. We will have to share some of that with a third-party provider, but I think in general, you will find that H&R Block at the end of the day still has a lot of economic pie here, and we feel pretty good about that.

As we make further progress on the strategic and alternatives for the bank, we'll share those at the appropriate time with you.

Let me get back now to capital allocation and talk about dividends. We have paid $3.5 billion of dividends since we went public in 1962. As many of you know, we went x dividend today and we'll be trading -- we'll be settling to that in the new year. Just in case -- anticipating a question by the way, we did examine whether we'd move it into the new year, did the math on it, we decided that was immaterial and it didn't make sense, so we'll continue to pay in early January. Over the last -- since 2005, we've increased the dividend by 8% on an average annual basis. And when you look at our yield and compare that to some of the comps that are -- we're showing you here, we believe it's a compelling return. We take a lot of pride in the dividend and take our obligations here very seriously.

When you add the dividends plus the share repurchases, you see a good story, and this is last 4 years plus year-to-date for this year. Since Bill has taken over as a CEO, we have returned a total of almost $900 million to you, the shareholders. I'm also showing you on those graph at the bottom how much we've distributed as a percent of net income.

Specific to share repurchases, I have 2 requirements: my first one, do I have cash available to buy shares? The second requirement is, do I like the price of which it's trading at? If it's undervalued from our perspective, that seems like a good buying opportunity. If it's overvalued, we won't be buying. We're not going to tell you what that price is. In fact, our overall strategy and belief about share repurchases is, it's best for all shareholders that we don't tell you what our plans are until after the fact. And we'll continue to be very focused on that.

In summary, about capital allocation, we're going to be very focused on this waterfall. Our first priority is making sure we've got proper liquidity protection and the operational support for the business. I want to be very clear here. Our historic practices around liquidity do not necessarily suggest will be due in the future here. We will continue to evaluate what the right way to provide liquidity protection to the company is, always being guided for what is the right way to earn shareholder returns. Getting taken cared of the CLOC and the bonds in my first 6 months were major steps forward and we'll continue to think about that. We'll continue to think about what the right strategy is and fund that appropriately. And as I've shared with you, we think in total over the next 3 years, we'll be generating cash out of that versus using a lot of cash in those areas.

Third, we'll continue to support the dividend. After we've done that, we will continue and we'll always be focused in on how do we use that extra cash. Do we buy back shares? Do we increase the dividend or hold the cash? Our objective is consistent meaningful shareholder returns, and we're always be guided by that. I, and the management team, will be very focused on making sure that when we do make those decisions, that we're disciplined and that we're accountable and we're always guided with a clear view of value. That's our commitment to you.

So this is a page I started with, and really as I said was what I think makes H&R Block unique. And so I want to kind of want to use this to close things down. We have ability to grow this business. We have international leverage. We're proud of what we've done in Canada and Australia and look forward to what we'll do in India, Brazil and future companies. We relate to the game in the digital side. We're making up -- gain ground here very quickly. We'll continue to invest money here and expect to have a good tax season this year.

I'm excited about what I've seen in the financial services, and I expect this year to be a good next step in our journey towards providing a truly robust relationship that starts with the tax-preparation events but also understands that we have a role to play here within financial services. Time goes on and I think that the mortgage exposure will be fairly limited, but we'll see.

The management team has had some changes, that's for sure, but as I said to you before, there's a wealth of experience that sits within the top 50 people of the company, and I think the quality of individuals that I've seen, I've been very impressed with. In time, we'll also show that the stability will be a real benefit to you. We have a great track record of paying dividends. In the last year, we increased the dividend by 33%. We also have a long track record of buying back shares, and we're -- we take a lot of pride in that. We generate a lot of cash flow. Our ability to increase revenue, continue to control our expenses. Keep in mind that 27% to 32% EBITDA margin range that I talked about is a big focus for us.

As part of this, I'm also very focused on bringing additional capital out of the business model. Okay, the bank is part of this, of course, but we'll be continuing looking for other opportunities to produce the capital base in the company. Specific to CapEx, we talked about roughly a 3% level of investment of revenues as the appropriate level for a large retail and technology company of a mature nature like H&R Block.

And lastly, and this is really probably the most important thing, is the core business of tax preparation is a good one. It grows every year and we have real pricing power, and that's a great place to be. In the last year, we've actually done a pretty good job of delivering value. This is the latest 12 months performance. Of course, we paid our dividend, and we've also had share price appreciation. The overall markets have been up during this time frame, no doubt, but when you actually put it all together, we think a 20% return last 12 months has been a good result.

Now we're going to get to the Q&A here in a minute, anticipating some of your questions, I wanted to take just 2 more quick pages to kind of give you some specific numbers that I think through the presentation we talked about, or maybe I just want to bring up some to be clear on. This is general market outlook. We expect the number of filings this year in United States to be up 1.5% to 2%. Over the next 3 years, we expect it to be in the historic range of 1% to 2%.

As it relates to complexity and tax law changes, there are a substantial amount of changes that are going on right now or theoretically will be going on very soon. In addition to the fact this will be a very late tax season from a normal calendar perspective, as well as from some of the IRS guidelines that's been provided, we expect to see a material shift from the Q3 to the Q4 this year. What's important for you to know is this is not like a retailer that gets a bad storm wreck for Christmas and you lose the sale. This is taxes, people need to do their taxes. So for us, it's ultimately what happens at the end of the season that matters here, whether it's the third quarter or fourth quarter isn't as important to us specifically.

We are not going to give you guidance of how much we think that shift will be because frankly we don't know the level of changes and when they're going to come in place. At the point at which we have better clarity on that and we feel it's appropriate, we'll share that with you. As we think about more of the 3-year time frame, I'm very interested and very excited about what I see in health care reform. It will be a benefit for the industry. There is no doubt about that. And to be clear, that benefit is not listed in that 1% to 2% above there. We believe that's separate. We also think, from a simplification perspective, that the -- there's always lots of people talking about it but when you look at actions in history, there's nothing to support the fact that we see any major simplification happening.

From an industry consolidation perspective, we've seen that happen in the last several years. This year, in 2013, we expect to see that continue. And I think as time goes on at some of those factors that I shared with you earlier, we believe that may actually accelerate.

Let me talk now about H&R Block specifically. In terms of the number of returns that we're expecting this year, of course we start with what the IRS expectations are, about 1.5% to 2%, but we think we're going to take market growth above that both in the DIY space as well as the assisted space. And we think that's a true statement as well for the 3-year expectation.

On the cost side, we're committed to delivering the $85 million to 100 million, and we're well on track to do that. Additional piece of information I provided very early on is we will have incremental savings from that initiative that spill over into 2014, and that's $15 million. As we think beyond that, we'll continue to be disciplined and very focused on cost management. The overall guidance I'm providing there is 27% to 32% of EBITDA margins as a right target for H&R Block. The refund transfer product, we are going to charge for it this season, and we expect revenues in 2013 to approximate what we did in 2011. Beyond that, we continue to believe that refund transfer has value to the industry, and we'll continue to focus on those product.

In terms of the effective tax rate, it's hard for me right now to pay more taxes than I do, and some of the people in the audience know that very well. We are working very hard at finding ways to lower that. For this season, though, I think being in a 39% is where we're going to end up. But there will be discrete items that impact that. Once I do have a better idea of what opportunities we have on our tax rate, we'll share those with you. And until I do that, I don't think it's appropriate to guide into a right effective tax rate.

Specific to CapEx, we think the 3% of revenues is the right level of investment for a company like ours, and I think for this year and years beyond, that's the right number. And then I'll give you some numbers here just for DNA, to help round out some of your models. So I really sincerely want to thank all of you for taking the time here and also dealing with some of the logistics issues we had earlier today in terms of next door. We're going to invite the management team up here, and Derek up here, to begin the Q&A. But I do, once again, thank you, all, for your attention.

Question-and-Answer Session

Derek Drysdale

Okay. As we get the stools up on stage, I want to just point out 2 things quickly. The slides again will be posted about 25 minutes, so about 11:30. And then secondly, we will have a transcript of this event, that will be posted on Monday. So you can pull that down from the Investor Relations website. Along with -- for the Q&A portion, along with Bill Cobb, Susan Ehrlich, Jason Houseworth, I'd also like to introduce Amy McAnarney, who is our President of U.S. Retail Client Services. So for Q&A, we have a couple of runners for mics, please raise your hand. We do ask that, for the transcript, to do state your name and the company you're with. So let's start here in the front with Mike.

Michael Millman - Millman Research Associates

Michael Millman, the Millman Research Associates. So this week Liberty Tax on its conference call said that you think that the opportunity for price increase is about 5% to 6% a year, that they thought that block held us back. You, today, said that you find it nonelastic, and yet you're guiding to around 1% over time. Can you tell us why you're not more aggressive on pricing?

Derek Drysdale

Greg, you want to start?

Gregory J. Macfarlane

Yes. So first of all, I think Liberty increased their prices by 5% or 6%, that would just be great, and so please pass it onto them. Our belief is that from a competitor perspective, it's a mistake to forecast what our price is going to be, we would really just say wait and see the season -- how the season goes and see how we do this in 2013. Beyond this, Mike, what we've talked about is a 1%. And frankly, as a CFO, I'm a conservative guy so to me, that sort of represents the floor. As you well know historically, H&R Block has been more aggressive on pricing, and we very much recognize that this low price elasticity in the marketplace.

Kartik Mehta - Northcoast Research

Kartik Mehta, Northcoast Research. Susan, one of the things for Emerald Cards is, last year, you had a free refund transfer. Does that obviously drove a lot of Emerald Cards for you this year, you will not? How do you make up the gap to make sure that you have growth in Emerald Cards?

Susan P. Ehrlich

Kartik, we are introducing a number of different programs this year, built around trying to incent acquisition and usage of the card. I think the rewards program is going to be a strong future for folks who may not have considered Emerald Card in the past to see the benefit that clients will receive from having their refund on the card and take advantage of year-round usage. We're also in the digital channel this year, which is new for us and represents a sizable portion of our tax clients. So that's all fertile territory for us this season, so...

William C. Cobb

We've also driven some improvements with Amy's team in terms of the flow within the -- our software contract professionals are lead there. We're also driving some incentives to the tax [indiscernible] we'll also do that.

Kartik Mehta - Northcoast Research

And then just one last one for you, Greg, remiss if I didn't ask this, but any thoughts on timing as to when you get to that EBITDA goal you've laid out looking at, you have the industry growth and block growth and cost-cutting?

Gregory J. Macfarlane

I mean, job number one is to deliver the $85 million to $100 million of cost out, and as I shared with you, that will happen this season. The 27% to 32% is a very important concept for us. I'm not giving specific guidance, though, about when we'll be able get to there.

Derek Drysdale

Right here, Scott.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Scott Schneeberger with Oppenheimer. Starting off with the tax season. Is there any concern with regard to likely a later start to the tax season as you've outlined with regard to preparation and perhaps loss on financial products, which are often geared towards earlier season filers, might there be a decrease in need, if the season gets later, increase? Just thoughts around that and preparation.

William C. Cobb

Yes, I'll go first, and then if anyone wants to add anything. I think -- I don't think decreasing need is a particular concern. I think the need will be there. I think this is an industry issue, it's not a block issue. We've been equipped in the past. We've dealt with issues like this in the past. So it will cause some discontinuities, I think. But Amy's team and the rest are prepared for that. We have people ready to hear whatever the final resolution and some of the issues is. So as Greg pointed out in his presentation, in the end, we're fortunate with this industry, everybody has to file, and in the end, it's going to be more about the total tax season as opposed to some movement between January and February.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

And Greg, 2 questions for you. One, you mentioned your most frequent inbound question is, why not lever up and return capital? I was just hoping you could address leverage credit rating and your thoughts on that? And I have one more. I'll let you get there first, please.

Gregory J. Macfarlane

Yes, and I should tell you about, actually most popular question I got is, did you really move to Kansas City? Okay, and I did, so just to be clear. The second question was around capital allocation. So I mean, I'm not sure of this sort of new information to share, but I'll kind of hit what I think the key points are. We think about it a lot, no doubt. In the first 6 months that I've been here, I mean, I've only been here 6 months, we did the CLOC and we redid the notes, which frankly were time-focused. We had to take care of them, and that took a lot of our time. I was quite satisfied with both how we resolve the CLOC and by the bonds by the way for what it's worth. In terms of liquidity profile, I haven't been through a tax season yet. I want to see how that works. I think it's important, and then hopefully, we've all learned a lesson from a liquidity perspective. When you need liquidity, so does the rest of the world. And there is about 4 or 5 months in the year that if I don't have access to liquidity, I can jeopardize the overall value of this company very quickly. So it's something that I take very seriously and very deeply. Now having said that, there are many solutions to that problem. And I think by making progress in the CLOC in particular, we were able to solve a key part of that, so we continue to think about that. The investment-grade, we've used that historically. It's been a way we've accessed through commercial papers. We need that to support that. And not saying we're going to keep it; I'm not saying we're giving it up. It's something we're considering and thinking about deeply.

William C. Cobb

And I think, Scott, also, the reason we can't what seems like a relatively straightforward question, we are now regulated by the Federal Reserve as a savings and loan holding company. And obviously, one of the reasons why we're seeking alternatives is that, as Greg put it, we'll be in a position where we can make autonomous decisions across a whole range of issues.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

That's a great segue into my question. But before, nice job on the CLOC. Yes, I was just curious on the strategic alternatives on the bank, a better feel for timing on when that may occur. Also, to the extent you can share on partnering with others for some of the financial products.

Gregory J. Macfarlane

Yes, I'll talk about timing and maybe Susan talk about the ideal partner sort of profile or whatever part of the question. What's important to us is get the right deal and not the fast deal. The other part that I mentioned within the strategic considerations is we want to minimize the amount of client impact. We, in terms of the tax season for all intents and purpose performance of the year, we can't do anything, right? So we end up having windows that open up, okay. And so you need to be -- I mean, I think most of you are aware of that. So in terms of actually getting a transaction completed, you have a window that opens up next spring and summer and then you basically have to go to the next year. We're going to figure that out. We don't know what the answer right now.

William C. Cobb

I'd add one thing and then Susan, you should talk about the partner. Bear in mind that this isn't just the selection of a partner. It will be a regulatory approval process that is very hard to predict how long it will take. We hope to -- we work very well with regulators. We have good relationship with them. The Federal Reserve is very open. But we're at the mercy at the regulators also on that particular topic. Do you want to talk about ideal partner?

Susan P. Ehrlich

Yes, I think from a structure standpoint and a partnership standpoint, I mean, there's -- I've worked with small banks and I've worked with large banks in these kinds of partnering arrangements for financial services in the past, and they bring different skills and benefits to them, right? A large bank is going to have a well-developed product set, that we should be able to accelerate in our channel. A small bank gives us the benefits of more of the program management control that Greg spoke to. So I think we can structure it either way. I think we're just looking forward to the continuing dialogue with potential partners, the structure -- the program that's going to be the best for us and right for our clients.

Derek Drysdale

Thomas?

Thomas Allen - Morgan Stanley, Research Division

Thomas Allen from Morgan Stanley. Two questions. First, on the refund transfer revenue. You said you expect to be flat to fiscal '11. What does that imply in terms of volumes and pricing? And then the second question, in your 27% to 32% EBITDA margin goal, does that include the impact of outsourcing the financial product? So assuming that would mean that you would get less revenue and a higher margin, is that built into that assumption or is that -- could that push your range higher?

William C. Cobb

So let me take the first part, and Greg, why don't you take the second. I would stay with what Greg kind of have in the slide that he's giving you an indication that we expect revenues to approximate fiscal year '11. We're not going to go through volume and mix. You want to go to the second part?

Gregory J. Macfarlane

Yes. So I was -- I think hopefully, I was or maybe I wasn't clear, but the 27% to 32% is what we think right now as things change, as mix changes, then we'll continue to reevaluate that. So the specific, Thomas, the answer to your question is, it does not include any of the unwinding of the bank and things like that.

Derek Drysdale

Vishnu?

Vishnu Lekraj - Morningstar Inc., Research Division

Vishnu Lekraj, MorningStar. The question here on -- sorry, the long-term pricing. You said 1% moving forward. Can you give us some thoughts behind that given the price points at DIY, assisted, along with some of your competitors price points? And how you're thinking about furthering that number?

Gregory J. Macfarlane

So let me say something generally, we're not going to talk about pricing. We have -- as our pricing board is out, we price -- you go back to Jason's thesis, which is, everyone's situation is complex. We price according to each individual. Their needs can be moved around. We -- this is not a Happy Meal that we're going to drive around the price up 5% or 6% like others have talked about. So we have our pricing board, we spent a lot of time on the modeling of that. That's a situation that we have set up for this year, and we're not in a business of forecasting that. Greg was giving you an indication that in the long-term, if you want to look at an expected model, we gave you industry growth, we gave you an expected area for pricing. So I don't mean to be -- but it is a decision that we've taken as a company and certainly shared with the board. I don't know, Jason, do you have anything else you want to add?

Jason Houseworth

Well, I think the other thing is that the way we look at our clients and really the productivity that they drive to the bottom line is not just about price. I mean, we do look at their individual needs in order to determine the price, but we also look at the mix of clients, as well as the financial products that we can offer our clients to provide a more value. And overall, we look at how that revenue adds up and how we can build it, not only in assisted but also in DIY.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

So looking at the other side of the equation, given your cost reduction programs, how do you look at staffing then in terms of trying to retain the most experienced folks to make sure that you're driving customer retention and then their comp along with that, if that's possible?

William C. Cobb

So Amy, why don't you take that?

Amy McAnarney

We have focused effort over the last couple of years to continue our -- retention of our most experienced tax professionals. And in fact, just about 75% of our client see our most experienced tax professionals, and that's grown from maybe about 400 basis points over the last couple of years. We have found that, again, it's a strong brand that we have, not only attracts the clients but our tax professionals continue to stay with us more year after year is that incremental investment that we're making in training and preparation so they can serve our clients. So we're very pleased with our retention rates, our best tax professionals.

William C. Cobb

The only thing I would add is we incent our more experienced tax pros at a higher rate than the first year. We have actually, this year, with the tax pro compensation system, if you will, accelerated that, so that we've made it more lucrative for more experienced tax pros. Because as you saw from the charts that Jason displayed and Greg displayed, it's a direct line. The better and more experienced tax pro, the higher our retention is, and obviously, we are really focused on that area.

Derek Drysdale

Let's go to Mike Turner and then right here.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Mike Turner, Compass Point. Just a couple of questions. On the do-it-yourself segment, and I apologize if I've missed it earlier, what percentage of those clients are on unbanked? Do you know that, or...

William C. Cobb

I'm not sure we know that org.

Gregory J. Macfarlane

We certainly haven't released it or discussed in the past. We have to get back to you on that.

William C. Cobb

I think we've generally looked at -- I don't know. I can try to follow-up with you on that.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay. And then also on the Emerald Advance, I think -- was it 2 years ago, you opened it to new clients, and then last year, I think you shut that down just to the existing clients, in your open and back up. Have you -- maybe you could talk about the underwriting or the things you've changed because I seem to remember you took a couple of losses when you open it to the new clients. I'm guessing you made some adjustments. Any color there will be helpful.

William C. Cobb

I mean, we feel good about steps. Susan, why don't you go through it?

Susan P. Ehrlich

Yes, it's a program that -- as I was joining H&R Block last year, it was right into the season, and so it gave me an opportunity coming off my experience in credit and credit card lending to take a look at how we were running the Emerald Advance program. And one of the things that affected the performance 2 years ago was the fact that we really did not have a robust collections focus outside of the 3 to 4 months that our offices were open, and that's really been the biggest enhancement that's been put in place. So we've really established what look like more traditional credit collections activities that really begin with even the friendly reminder that a payment on your loan program is due. And that continues for the life cycle of collection. And that was really not a strength of ours 2 years ago, and that has been completely overhauled and a better foundation has been set. In addition, we've done some work on the underwriting on the front and bringing in some folks that, in my experience, I've worked with over the years who do a phenomenal job, focused on middle-market segment, which is where we're collectively focused. And so we feel good that we've improved both on the front end and on the back end of the lending spectrum to get better results.

William C. Cobb

And I'll add, just do a little plug for Susan. Susan has brought in some terrific professionals on her team who have done this, who understand this, who have given us the ability now to do, as you stated, open this up to all clients coming in.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

Okay. I know it's really early. Any early color on the acceptance or the usage of the Emerald Advance? I know it's really just been...

William C. Cobb

Yes, we're -- we've -- it's an in-quarter issue, so we've been advised not to discuss it.

Gregory J. Macfarlane

You're welcome to go apply for one of those.

Michael Turner - Compass Point Research & Trading, LLC, Research Division

And then last, maybe Greg or whomever, on the capital or money that's presumably in Sand Canyon, call it, $450 million or so, at what point do you say that, okay, we have clarity now, maybe we could do something with that capital. I mean, is it the end of next year when the 6 years expires? Or sort of maybe what's the catalyst or what's -- how do you know you've passed that point?

Gregory J. Macfarlane

Well, the answer is I don't know truthfully. Sand Canyon is very focused, obviously, and continue to support their obligations, and they handle that very professionally and they're very thorough, and I came -- part of my job at GE, I work in subprime mortgage, so there's -- people at Sand Canyon worry about this. I think time will tell on how this is resolved. But specific to your question, it would be, at some point, happy conversation hopefully, but I still don't know when it would happen, so...

Hale Holden

I just have 2 quick ones, it's Hale Holden from Barclays. I just want to understand the sequence of events. So the possible bank resolution sometime in the spring or the summer because it can happen during the tax season even in open window. At that point, you made a capital decision of whether investment-grade ratings are core or not. And I think that's a critical point because you just sold $500 million in 10-year notes to the market with NIG rating. So those guys are going to want to know, whether you stay investment-grade or not. And then I have one follow-up.

William C. Cobb

Is that a statement?

Hale Holden

No, I mean, I think it's not a statement, but I'm just curious on whether the -- it's unclear to me whether the investment-grade rating is core or not?

William C. Cobb

Okay, that's a question.

Gregory J. Macfarlane

Is that your question? Okay.

Hale Holden

That's the question.

Gregory J. Macfarlane

Well, I guess my perspective on this is that we have historically used the investment-grade rating as a way to access commercial paper, cheap and available to fund us through that 3, 4 months a year. That was important for the business from an operational perspective. We've made material steps forward this year in renegotiating our CLOC, as well as these notes that we're doing in the new year, and I feel pretty good where that's ended up. We're going to continue to look at doing an investment grade or not. We're certainly well aware of the fact that the people that are in the line of credit, as well as people who lent us money through the notes, went in a certain way, so that's not lost on us. But overall, our focus is doing the right thing for the company. We got to protect, obviously, liquidity needs, but at the same time, we're very focused on what's the right thing for our shareholders.

William C. Cobb

I would also step back and say that since I've come in to the job, hopefully we've been very consistent and persistent tackling issues. So I hear you jumping out ahead. Right now, we are working through -- we report each quarter on Sand Canyon. We've announced strategic alternatives for the bank. We are working through those. When that partner is chosen, we'll then go through a regulatory process. Greg is giving you some guidelines, but that is not set in stone what the timing is. And as far as any comment or anything on liquidity, we're investment-grade today. We're we do have liquidity needs. We are not here to make a forward-looking statement on liquidity. So I hear you, but I think we're just trying to move along and knock things down as they come along.

Hale Holden

Okay. And my second question is, the disclosure that's been in the 10-Qs and Ks on AIG litigation. Obviously, there's probably not a lot you can say and it AIG driven not by your driven, but is there a sense of when that could be resolved or move to the next step, or be eliminated?

Gregory J. Macfarlane

Yes, I mean...

William C. Cobb

Not only I am not allowed to say, there's actually nothing we can say about that, so stay tuned.

Derek Drysdale

This right here.

Efraim Levy - S&P Equity Research

Efraim Levy, S&P Capital IQ. When looking at that video you had before, the gentlemen beginning, he's getting a -- he's not getting a refund, he's actually consuming a lot of services, it looks like. Are you able to recoup that, that -- the cost for that, or is it sometimes you take a loss leader for future gains?

William C. Cobb

That's a great question, and in fact, the audit services that we have year round for our clients are covered in many cases, and especially for those who take our Peace of Mind guarantee. However, in that case, we are using that as a client acquisition, where we offer audit in order to demonstrate our expertise, as well as to the Second Look product. This is exactly what we find when people come in and they’re shocked at the expertise of our enrolled agents that their tax pro could have done it wrong. And in many cases, for whatever reason, they've done it wrong, and it has a big financial impact for them. And what I really like about that video is the gentleman said, and I told everybody in my church about it, which is exactly how we grow our business.

Gregory J. Macfarlane

You think about it from an economic perspective, so I mean, yes, there was a big investment time. He's a lifetime client, he has given us great PR. He -- I mean, specifically people, there probably damaged credit, so we have credit products available to them. That's a path to additional products when they have to do, and we believe that it's a good investment overall, because once you get something like that type of relationship, you got a tremendous lifetime value, too.

Efraim Levy - S&P Equity Research

Sure. And that brought me to my second question regarding the Second Look. Can you disclose what the volume is and what the conversion rate for those who take advantage of that?

William C. Cobb

Yes, we don't disclose those specific numbers. But suffice to say that the product, the service continues to grow, and we will be doing that again in tax season '13.

Christopher J. Marangi - Gabelli & Company, Inc., Brokerage Arm

Chris Marangi from Gabelli. Two questions. First, can you give us some incremental information on this scale and the pace of the rollout of Money Express, and if there's any additional capital involve there? And then secondly, Greg, I think you mentioned you are happy with the store footprint. Does that extend to happy with the mix of franchise and owned stores at the moment?

Susan P. Ehrlich

Chris, I'll start with the comments on Money Express. As I mentioned in the presentation, we're in 30 locations this tax season. We think the program's a great program, and that it is a, as you can see, a very functional, very easy-to-use kiosk that is providing an awful lot of services and giving money management to our clients at a very affordable price point. We have 11,000 potential points of distribution currently for the kiosk. We have that real estate year-round, so the ability to make Money Express accessible to clients 24/7, 365 days a year we think is a real opportunity for building revenue from our locations on a year-round basis. Right now, Money Express supports Emerald Card, but it's possible that it can support other prepaid programs as well, as well as be distributed to other locations outside of block. And so, all of those, I think, are in the potential development roadmap for Money Express as we look to what to do with it in the future as we get through the pilot phases. In terms of scaling of that, it's really going to be a function of us continuing to like the economics we see as we get through this season and into the year-round.

Gregory J. Macfarlane

We have a lot to learn still about Money Express and the business model since it's behind that, because it isn't just simply about putting a machine there. But we want have 7/24, which means directly you may have to have a different footprint in the offices, we have to understand how that would drive traffic. We need to learn a lot more, so I think it's premature to talk about from a capital need because I'm not sure what the business case is yet. Inherent to the question is we're going to be disciplined, we're going to be consistent and we'll always be with a clear view of value we do make investments, okay. The second part of your question about the footprint, we're very happy with the mix between franchisee and company store, and don't expect any major change in that the near term.

William C. Cobb

And let me just augment that a few years ago, the company had been on the path to re-franchise. That is not a philosophy of the company anymore. We are making the decisions on a trade area by trade area. We are buyers and sellers, so we're trying to optimize that footprint, and Amy and Greg work very closely with the real estate teams on those decisions. But the former, I just want to make sure that it's clear, the former philosophy of re-franchise of a certain amount of stores every year is not part of the company anymore.

Derek Drysdale

So let's take this one in front, and then we'll go into the back.

Steven J O'Brien - Jefferies & Company, Inc., Research Division

Steve O'Brien from Jefferies. You're clear on the price points or the pricing strategy. But looking specifically at the DIY filers, is there an opportunity to grow average revenue per filer? What would be the driver? Does it take rates on any file, or potentially this health care situation coming up? And then maybe looking back, how has revenue per DIY filer gone trending?

William C. Cobb

Okay. Jason, do you want to take a shot of that?

Jason Houseworth

Well, within DIY, I think there are 3 primary methods. I think the first is better monetization within the DIY product, as we think about how we upsell from a free to basic or deluxe premium. I think the second is adding financial products, and we're obviously doing that by introducing Emerald Card within our online product. And then the third is a continued focus on mix and looking at more complex clients. And that's also where I said within our conversion funnel, I think that we're starting to go deeper and deeper as far as focusing on now the more complex aspects of our interview and really thinking about that. And this is a thing that, that I really like about technology is that we can see within the conversion funnel the exact points where we have clients drop out. And we can then work with our usability team and do AB testing in order to really find the right way to either simplify the screen or to position the value that we need to, to keep clients moving through the conversion funnel.

William C. Cobb

Jason and his team, and Jason has done a terrific job as leader of this over the past 3 years, and his team just continues to get stronger. They are relentless on user experience, they are relentless on how do we improve as we move up the chain. And I think as we get -- we have now a product that is in line or in some areas Jason believes is superior to TurboTax. We are continuing that kind of relentless assault and how do we improve the user experience, especially as we move forward on more complex returns.

Adam Liebhoff

It's Adam Liebhoff from Loomis, Sayles. Could you maybe give us a sense for how big the International segment can be over the next 3 to 5 years? And then somewhat related, maybe talk about the go-to-market model there?

William C. Cobb

Yes, and then, Greg, if you want to add anything. I don't have a number for you. I do believe that as I think companies, great companies today have a footprint beyond the U.S. and beyond the English-speaking world. We are, as Greg mentioned, we'll probably look at a country or 2 to add over the next 12 to 24 months. These are 5- to 10-year plays for us. We're looking for countries that have scale. I think I said this last year, I'll say it again. We're not going to be Apple in 100 countries. We’re going to have large economies, with large middle-class, with governments that are cooperative and trying to collect revenue from their citizens. So I think the mix, the percentage, it's a single-digit part of our business. I think it will go to double-digit, but I don't have a good sense for you in terms of how to model this, if you will, because we are -- because we have chosen to make small disciplined investments. Now, as for the model, we are looking at a variety of ways as we head in the year, in the second year in both India and Brazil. There's a traditional -- what we grew up on in the United States, our retail models, but we're looking at a number of ways through employers, through distance or through digital initiatives. So we don't have a model yet. Right now, we're in the test-and-learn phase. But again, I think part of the responsibility you have leading a company is to start to make investments that are going to pay off in multiple years, and I think we're pleased with -- or I don't know if you have anything else to add.

Gregory J. Macfarlane

Last year, international was $233 million for the revenues. Canada and Australia both growing at high single digits to low double digits. Brazil and India, as Bill has rightfully said, you should be thinking more 5 or 10 years out. We're happy to experiment for 2 or 3 seasons, maybe 4 seasons till we figure out the right model. I don't think it's appropriate to share that with you right now for competitive reasons, but I can tell you that the main work that we use in these markets is entrepreneurial. Okay, we want to be very flexible, but we don't want to be grounded in what makes us special, which is tax preparation and the things that go around that.

Derek Drysdale

So let's go back to Scott real quick, and then Thomas.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Bill, last year, you approached Investor Day with some aggressive OpEx spend into your first year in a role, and you covered some of the primary spends were mobility, sounds like you're happy with the what you achieved and where you are going ahead. We have an update from you on your RT strategy this year and the pricing of that. I'm curious on Block Live and this new My HRB account. Is Block Live still a viable investment and a growth objective, or this is My HRB account kind of point of view?

William C. Cobb

No, they are 2 different things. I'll let Jason comment on the second. But no, we are very committed to Block Live, and I think it's very consistent with the basic business model we have. But Jason, why don't you comment on that, since you're driving those initiatives?

Jason Houseworth

Yes, with Block Live, I mean, we have to look at Block Live as part of the overall suite of products, so we have an order to serve all taxpayers, and Block Live fits in as part of that. It's the second year. We feel like we got a great consumer response and we're going to continue to use that in order to fit that piece of kind of virtual assistance. And then, if you look at the account, the account, as I talk about, that whole spectrum of solutions, the account is what binds it all together. It's at the center of it in order to make sure that regardless of what kind of person you are, even if you look now and you bring up the homepage today. In the upper right-hand corner, there's one log-in. We literally used to have kind of a Best of Both log-in, we have a Block Live log-in, the have-not. So we have one log-in. All clients, and what we have is we have that log-in for mobile, we have it for online, we have it for our office clients, and it accesses the same types of services for all those tax clients. And this is what we see as something that using that as a platform. It's going to give us the ability to give assisted and DIY clients a technology-enable experience.

William C. Cobb

And we think it's also a great manifestation of what we're trying to drive, which is this year-round thinking. Let's not just think about this event during the year, whether it'd be digital or assisted, but that's where the development of My Account do that people can access this, they can -- there are tax events during the year, they're able to load it into My Account. So it's not a product. It's a service that will feed in to the various products and services that we have in our core business.

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

And then just shifting from that to this year, obviously, a very good and reiterated cost-reduction approach to the year. I'm curious, usually at these events, we see maybe a glimpse of TV advertisements for the year to come. I'm not sure, I think, these that we saw today were just for this. Curious what the go-to-market strategy is with marketing this year, the media means of how you go to market, what the message will be? Often you have a tagline. And then, advertising spend year-over-year and contemplation of that?

William C. Cobb

Sure, which one of those I can answer. I'm not going to talk about marketing spend, I'm not going to tell you the message...

Scott A. Schneeberger - Oppenheimer & Co. Inc., Research Division

Are you going to be on the commercial?

William C. Cobb

The research came back and -- No, I mean, Scott, obviously, it's a great question, and we're weeks away. Mr. Turtledove is not here today because he is very busy getting everything, but I think he'll be pleased with our message. It will be a broad range of -- we'll use traditional TV, radio, but we will be very active online, very active in social media, so -- and we're not going to talk about specific messages because some of our friends may be listening.

Derek Drysdale

Because we were working on the borrowed time, Jack hammer is back. Let's go to Thomas in back up there.

Thomas Allen - Morgan Stanley, Research Division

Following up on marketing question. One of your competitors talked about spending more early on to stay in front of their clients during the delays, during IRS delays. Do you expect to do the same thing? Is that something that could drive up costs?

William C. Cobb

I think from the time, we're going to be -- we'll be active early in the season as we always are, as we were last year. Immediate plans are set. We can move money around. But I think people will see H&R Block, hear our message, so I don't know what that mean. I mean, last year, tax advertising started about 12:01 a.m. on December 26, so I'm not sure how much earlier we could -- any of us could go. So I think I feel good about where we're at.

Susan P. Ehrlich

And I would just add on to that. There are other ways that we connect with our clients before tax season. We make -- we reach out to them personally through phone calls and obviously direct mail. But that personal touch that we do before tax season is really a key for us.

William C. Cobb

And Amy has put a big emphasis on this. As a matter fact, she's taken over. There are changes, such as we have an expression we use a lot of words matter, she no longer calls, people who lead our offices, office managers, they are client service leaders. And again, it just shift, too, and that's why she's been pushing her teams very hard on the proactive outreach for reasons like you said, Thomas. Up here, Ryan [ph].

Charles Stedman Garland - Hamlin Capital Management, LLC

Charlie Garland, Hamlin Capital Management. Can you describe the in-store technology systems? Maybe tell us the last time the tax professional facing systems were upgraded, and are they happy with those systems?

William C. Cobb

That's why you want somebody who's been around 16 years or so to do this, because if I answer this question -- no, I mean, this is a lot what Amy and Jason spend time on, so I'll let the 2 of you.

Amy McAnarney

Right now, we are currently going to be going through a refresh of our tax preparation software that we use in the offices. As we've seen on the digitals and the do-it-yourself side, refreshing that technology and the user experience is great for our business. And we need to keep track in front of that in our -- in office experience. So we are refreshing that technology and the software. It's going to be a multiyear rollout as with any major system that is client facing.

Jason Houseworth

Yes, and I think the -- this actually gets back to the idea that everything, whether we're talking about the assisted or the DIY side of the -- our tax business, it starts with a great client experience. And the existing tax preparation system that we have on our offices is 20-plus years old. And what we recognize is that if we really want to take it to the next level, we've got to first change out that platform and then evolve it. And I give Bill a lot of credit for coming in and really challenging us with taking the multiyear steps that we need to really make that type of change, that type of transformational change in our client experience.

Derek Drysdale

Any other questions?

William C. Cobb

There's one in the back.

Derek Drysdale

All right, it doesn't look like there are any other questions. Again, thank you all for joining us today and those of you on the webcast. That does conclude our presentation today. Please, we do hope you join us for lunch. Susan, Greg, Bill, Amy, and Jason and others of the senior management team will be there, so we hope you can join us. Thank you.

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