H&R Block Management Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: H&R Block Inc. (HRB)
by: SA Transcripts

Operator

Good afternoon, and welcome to the H&R Block Fiscal 2013 Third Quarter Earnings Call. [Operator Instructions] My name is Rose, and I will be facilitating the audio portion of today's broadcast. It is now my pleasure to turn the call over to your host, Mr. Derek Drysdale, Vice President of Investor Relations. Go ahead, sir.

Derek Drysdale

Thank you, Rose, and good afternoon, everyone. Thank you for joining us today to discuss our fiscal 2013 third quarter results. Joining me on the call are Bill Cobb, our President and CEO; and Greg Macfarlane, our CFO. Other members of our senior management team will be available during the Q&A session. They include Jason Houseworth, President of U.S. Client Services; Amy McAnarney, President of U.S. Retail Client Services; and Susan Ehrlich, President of Financial Services.

In conjunction with this call, we have posted today's press release and slide presentation on the Investor Relations website at www.hrblock.com. Some of the figures that we'll discuss today are presented on a non-GAAP basis. We have reconciled the comparable GAAP and non-GAAP figures in the schedules attached to our press release and in the appendix of today's slide presentation.

Before we begin our prepared remarks, I'd like to remind everyone that this call will include forward-looking statements as defined under the securities laws. Such statements are based on current information and management's expectations as of this date and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As a result, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2012 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. With that, I'd now like to turn the call over to Bill.

William C. Cobb

Thanks, Derek, and good afternoon, everyone. Earlier today, we released our U.S. tax return volume through February 28, as well as our fiscal 2013 third quarter earnings ended January 31. Obviously, there is a lot of noise this tax season. But we want you to walk away with 3 key points.

First, the entire tax industry has experienced unprecedented delays this season, which has created near impossible comparisons to last year's results through January 31 and February 28. We believe that industry-wide tax filings are running about 2 weeks behind the comparable period last year, and we expect that it will take the balance of the season for the industry to fully normalize. That said, the great thing about our business is that taxpayers must file by April 15. We continue to believe that industry filings this tax season will grow in line with historical levels of approximately 1% to 2%.

Second, we entered this season with a very thoughtful plan. And while we've had to make some adjustments due to these delays and competitive factors, I'm pleased with our execution to date. We noticed that many competitors substantially increased their marketing in December and January. We were pleased that in the light of the delays, our marketing was better timed. As I assess our marketing efforts so far this season, I believe our Chief Marketing Officer, Robert Turtledove, and his team have done an outstanding job. Everywhere I go, people compliment us on our new ad campaign, which focuses on the expertise of our Tax Professionals. While it's still early in the season, we believe we're outperforming the market thus far in both the Assisted and Digital categories. That said, there's obviously a lot of execution remaining until the industry fully normalizes by April 15.

And finally, in order for us to be a successful -- to be successful and drive long-term shareholder value, we must have a vision and clear goals to strengthen our overall industry position in fiscal 2013 and beyond. We've made good progress toward these goals, and this season's performance to date is in line with our long-term vision for the company.

Now with that summary, I'd like to take a few minutes to provide our analysis of the U.S. tax industry through February 28. As you know, the IRS typically begins accepting tax returns by mid-January. Heading into 2013, the IRS had originally planned to open its e-file system on January 22. So we already expected the season to be delayed by approximately 1 week. Then the delay was further exacerbated by 3 factors. First, significant tax legislation was signed into law in early January, which prompted the IRS to subsequently move its opening of e-file to January 30, just before the end of our fiscal third quarter. Second, the IRS and a number of states and other taxing jurisdictions did not begin accepting certain forms until this month. Third, we believe that the media coverage on the so-called fiscal cliff tax legislation and the associated e-file and form delays has led to changes in the timing of taxpayer filing patterns this season. We believe all these factors combined have led to industry-wide tax filings running about 2 weeks behind the comparable period last year.

Turning to our volume results through February 28, it's clear that these delays had a temporary impact on both our Assisted and Digital channels. However, our analysis of industry data gives us confidence that we are on track with our plans for fiscal 2013. While our U.S. tax return volume fell nearly 6% through February 28, we're currently outpacing the overall industry, which we estimate was down approximately 8% on a comparable date-to-date basis. The temporary impact of these delays has been more pronounced in our Assisted business. This is especially true among complex Form 1040 filers, who often wait longer to file than Form 1040EZ or Form 1040 A filers.

It's also important to note that our Assisted volume has not been materially impacted by our decision to exit Sears last fall. We're pleased that the clients we previously served in Sears locations are being retained at levels consistent with our expectations.

In the Digital category, Intuit, our largest branded competitor, released their tax volumes through February 16, about 2 weeks ago. Intuit reported its online filings fell 6% through February 16, while our online returns were down 2% on a comparable day-to-day basis. From January 30 through February 16, Intuit grew 32%, while our online returns were up 44%. As of February 28, our total online returns grew more than 5% fiscal year-to-date.

In desktop, total filings fell 11% through February 28. It's important to highlight that the desktop category is in a slow secular decline, and we made a strategic decision to target more profitable clients by exiting certain retailers. Excluding these units, our desktop returns would have been down about 4%.

And finally, our Free File Alliance returns were down 16% as of February 28. Overall, our mix of Digital clients continues to improve, which should position us well going forward as we continue to gain momentum in this category.

In conclusion, I like the way we're executing, and we're currently outpacing our competition in both our Assisted and Digital channels. However, the industry will not formally normalize until the end of the season, and there are still over 60 million taxpayers who have to file by April 15. We have a lot of work to do between now and then, but I believe we're well positioned to execute on our plans for this fiscal year. We look forward to sharing our second half tax volume results with you in late April.

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

Gregory J. Macfarlane

Thanks, Bill, and good afternoon, everybody. Given the seasonality of our business and the fact that nearly all of our revenue and earnings come in the fourth quarter, our third quarter results generally don't provide a lot of color on our performance. This is especially true this year, as the unprecedented delay to the start of this tax season led to a material shift of business from our third quarter to our fourth quarter. Therefore, we do not believe our third quarter results are indicative of the results we expect to achieve this fiscal year. Our previously announced cost reduction initiatives remain on track, and we continue to believe it will deliver significant earnings and market expansion in fiscal 2013.

Fiscal year-to-date through the third quarter, we've realized $172 million of total expense savings. It's important to note, however, that our third quarter and year-to-date expenses are obscured due to the volume-driven variable expense shifts this year that did not occur last year. As a result, we expect our fourth quarter variable expenses, primarily Tax Professional compensation, to increase compared to the fourth quarter a year ago. Despite this shift, we continue to expect our cost reduction initiatives will generate $85 million to $100 million of pretax earnings in fiscal 2013.

For the third quarter, total revenues were lower by 29% to $472 million, as the IRS opened its e-file system on January 30, just before the end of our fiscal third quarter. For accounting purposes, we recognize the revenue and associated expenses from a completed tax return once the return has been accepted by the IRS. As a result, we deferred $15 million of revenues to our fourth quarter, as the IRS did not accept returns that contain forms such as the Education Credit, as well as a number of other specific forms, before our third quarter end on January 31. Our third quarter adjusted net loss from continuing operations was $60 million or $0.22 per share compared to breakeven in the prior year.

In our Tax Services segment, revenues were lower by $191 million or 29% due to the delayed start of the tax season and a $15 million revenue deferral that I had mentioned earlier. The segment's pretax loss of $64 million compares to a pretax income of $32 million in the prior year. Lower revenues resulting from the delays were partially offset by our cost reduction initiatives and lower variable compensation costs.

In Corporate, our pretax loss improved by 2% to $32 million. Corporate expenses declined by $1 million, primarily due to lower interest expense resulting from last quarter's refinancing of our senior notes. Corporate revenues declined $1 million due to lower interest income from H&R Block Bank's shrinking mortgage loan portfolio.

Our third quarter financial statements also reflect the impact of a settlement with the IRS, which provides a closure on substantially all outstanding issues in our 1999 through 2007 tax returns. The settlement resulted in a $43 million income tax benefit. This benefit includes the recognition of federal tax and interest receivables not previously recorded, as well as the release of federal and state income tax reserves. As I mentioned in our investor conference last December, we are continuing to explore ways to lower our effective tax rate over the long term. We'll provide more detail once our review is complete and we have more definitive information to share.

Turning to Sand Canyon. Third quarter representation and warranty-related claims remained low at $16 million, although future claim activity could vary considerably from quarter-to-quarter. Importantly, Sand Canyon reached a settlement with AIG during the third quarter, with the settlement payment charged against Sand Canyon's accrual for representation and warranty claims. With the exception of disclosures we were required to make in our Form 10-Q that will be filed later today, terms of the agreement are confidential. Sand Canyon's accrual for representation and warranty-related liabilities totaled $119 million at January 31, 2013.

Turning to H&R Block Bank. I realize that many of you are interested in an update as we continue to explore strategic alternatives. About all I can say at this point is that we're working closely with our partners at Goldman Sachs and First Annapolis, and we're pleased by the progress we've made over the past couple of months.

Before we turn the call over for questions, I'd like to make an announcement. Over the next couple of weeks, Derek Drysdale will be transitioning into a new role at H&R Block as Vice President of Corporate Financial Planning and Analysis. As many of you know, Derek has proven to be a great asset over the past 6 years in Investor Relations. We're excited to have an executive of Derek's caliber moving into this new role, where he'll have the opportunity to continue working closely with me, Bill and the Board of Directors.

I'm also pleased that Colby Brown has been named Derek's successor as Vice President of Investor Relations. Colby has been with H&R Block for 3 years and has previously served in several key roles in finance. Previous to H&R Block, Colby had a successful career in finance with White [ph] Pharmaceuticals. I believe Colby's finance background and institutional knowledge of H&R Block will serve him well in Investor Relations and I know Colby is very excited to meet many of you at our roadshows later this summer.

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

Derek Drysdale

Thank you, Greg. Over the past 6 years, I've thoroughly enjoyed having the opportunity to work so closely with our analysts and investors. I value all the relationships we have established, and I will certainly miss our daily interactions. That said, I'm very excited to lead our corporate financial planning and analysis team and I'd like to thank Greg and Bill for allowing me this opportunity. Although my involvement in Investor Relations will diminish over the coming weeks, I will be available for calls later tonight and tomorrow. I also look forward to seeing many of you next week at the Credit Suisse Global Services Conference in Scottsdale, and then in Boston on March 20. Colby will join me on both trips, and I look forward to making the introductions. So I hope you'll join both me and Greg in congratulating Colby. I know he'll do a great job and that you'll really enjoy working with both Colby and Ryan Sands going forward.

With that, we are now ready for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Mr. Drysdale, your first question comes from the line of Kartik Mehta of Northcoast Research.

Kartik Mehta - Northcoast Research

Bill, can you talk about what type of pricing you are getting so far in the tax season and maybe how that compares to your long-term goals?

William C. Cobb

Kartik, the -- we're not going to talk about pricing today. I mean, it's been a season with a lot of discontinuities. It is a full seasonal business. A lot of the pricing is mix-related. I will say that we put together a what -- we described it as a thoughtful plan, and that included pricing. And I'm pleased that we're executing that plan in line with our expectations.

Kartik Mehta - Northcoast Research

Bill, can you tell -- talk a little bit about the Emerald Card business? Obviously, you didn't have the free RACs this year to -- as an incentive for people to take the Emerald Card. Maybe where you stand in terms of how the Emerald Card is doing and in light of your expectations for the business as well?

William C. Cobb

Yes, I'm going to let Susan comment on that in a second. I will say that with the start of the season being pushed to July 30 -- January 30, excuse me, there's not a lot of data to share with you. But I'll let Susan comment on how Emerald Card is going.

Susan P. Ehrlich

Kartik, thanks for the question. As we talked about at Investor Day, a big part of what we were doing with Emerald Card this year was a focus on product enhancements, with the cash rewards, with the redevelopment of our online banking platform and the mobile app. And really the focus has been on growing year-round use of the card. I would say that what we've seen so far this season, we're pleased with the early indicators around things like online enrollment and the mobile app downloads. But I think this is going to be a continuing effort.

Kartik Mehta - Northcoast Research

And then just one last question, Bill. As you look at this tax season and how it's shaping up, what are your expectations for the Digital market in terms of the entire -- growth for the entire market?

William C. Cobb

Yes, and I'll -- and, Jason, if you want to add any comments. I think we said this back in the -- back at Investor Day. We do think it's mid-single-digit circa 5% growing market for this year as the market continues to really source its volume from the decline in pen and paper. So we still think that's about the size of what Digital will be. But, Jason, I don't know if you have anything to add.

Jason Houseworth

Yes, Kartik, I would say the same thing I said in December, which is we believe with the pen and paper forecast that we think the Digital category will grow roughly 5% to 6%. And I think that that's even with what I would call a lot of early-season spending by some of our competitors in marketing. And I'd just say that we felt like ours was better timed, and I'm pleased with our early performance in the category.

Operator

Your next question comes from the line of Scott Schneeberger of Oppenheimer.

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

You've mentioned, hey, there's still a lot of tax season left to go. With the fiscal cliff-related delays, when do you think we hit that year-over-year inflection point? Is it something in mid-March? Is it the end of March? Or what's your view on that because apparently we're not there yet?

William C. Cobb

Yes, we're not there yet. And it's -- that probably data point keeps bouncing around, but I wouldn't look for anything this month. I think it'll be sometime next month, but I'm not spending a lot of time trying to figure out that. We're just trying to service our clients right now and do every tax return that we can.

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

Okay. The -- Appreciate the commentary on how you're progressing through the season and giving us the February 15 split on how Digital is progressing. Is that, Bill, your response I assume just now was for the whole tax industry. Specifically to Digital, do you say -- would it be the same answer or might we see an inflection point sooner in relation to that category?

William C. Cobb

Yes, I was talking about the tax industry in total. And, Jason, if you want to add anything, I mean I think I would note that our primary business, the way we look at the Digital business is online, and to the end of February our number of returns was up 5%. But, Jason, I don't know if you want to add anything to that.

Jason Houseworth

No, I think that at this point, it's really a question of when exactly. But what we know is it'll be April 15 at the end of the year.

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

Okay. A couple more if I can, jumping around. You alluded to a strong Sears retention level at what you had anticipated. Do you care to share that level? And just a question relating to that, how would the season year-to-date have looked, if you can cut it this way, without having closed 200 Block stores and moved out of Sears?

William C. Cobb

Yes, I -- let me answer the second question. I'm not sure I got the first one or if somebody else did. We had an initiative, and we've been executing against it, called "leave no client behind." And to date, we believe we are executing well against retaining the clients, which were in our, what we call, moved offices because we didn't leave, these are our clients. Obviously in Sears, these are our clients. We've been very aggressive with outreach, and I think we've been very successful to date on retaining those clients at the levels in line with our expectations. I'm not sure I caught the first half. And then, Greg, do you want to try?

Gregory J. Macfarlane

I can. It's about Sears specifically. So we've had historical experience in closing Sears locations down. This year, obviously we closed the rest of them. And so we've used our historical experience and we went store by store and looked at what we thought would happen and put specific plans in place. Have executed a lot of that, and I can, by the way, tell you I've been to a number of Sears locations, our former locations, and what we've done in each market. And I think we've been basically in line with our expectations and quite pleased with where we're at.

William C. Cobb

Yes. We have no regrets over the decision to exit Sears.

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

Excellent. And the latter part, Bill, of that question was, if you can cut it this way, year-to-date tax returns prepared through February 28, down 5.8%. It was getting at how -- what would that have been if you haven't adjusted for Sears? But I have -- but if you don't have any idea, I mean you covered that part of the question pretty well.

William C. Cobb

Yes, I mean I think we're looking at everything relative to the -- our estimates of where the industry is at. And we believe that in both Assisted and Digital, we are, to date, outperforming both channels, but there's a long way to go.

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

Excellent. And then lastly, you guys outperformed what I was expecting in -- just in the January quarter on the revenue line, but a little lighter relative to what I was expecting on the income line. And, Greg, I think you were touching on that in the prepared remarks. But how, with your maintained guidance of $85 million to $100 million of cost coming out, was it simply just the timing and the light quarter of revenue getting pushed into the fourth quarter and we'll see a much more defined benefit from the cost savings? If you could just speak to it a little bit more.

Gregory J. Macfarlane

I think this is a new record. It's like question #8 that I finally get asked a question, so thank you, Scott, for giving me the [indiscernible]. Well, in the quarter, we had a -- I mean, the main thing here is we had a dramatically late opening here, and that's affected not just the revenue line but the expense line. When you look at the amount of costs that we'll be shifting in the fourth quarter that are variable in nature, primarily being the Tax Pro compensation, but there's some other variable expenses, those will come back in, as the revenue will. When you isolate that -- those items, what you'll see, from my perspective, is exactly the kind of track record you'd expect to see to deliver the $85 million to $100 million. So I'm comfortable at the end of the third quarter where we ended up on expenses.

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

Okay. And while I have you and if I can sneak one more in, it was quite a low number of mortgage putbacks, new mortgage putbacks in the quarter, which was quite a number. With the AIG settlement, that didn't change the loan-loss reserve. I didn't go back and look where it was last time. Was there a change in the loan-loss reserve or no change and now we have that behind us, correct?

Gregory J. Macfarlane

So the AIG settlement is confidential, so I really can't comment on that unfortunately. The settlement was booked through the representation and warranty reserve, I mentioned that. And there was changes in the representation and warranty reserve, which you can see in the 10-Q here shortly.

Operator

Your next question is from Thomas Allen of Morgan Stanley.

Thomas Allen - Morgan Stanley, Research Division

Can you give us some more color on how certain consumer tax expenses are trending, both in the third quarter and then kind of season to date? So simply interested in comp and benefit -- comp and benefits, occupancy, marketing and bad debt, especially given the expansion of Emerald Advances here?

Gregory J. Macfarlane

Thomas, I'll start maybe -- and I'm sorry, you may have to repeat some of the line items you're looking for. But relevant to bad debt, the way our model works is we'll originate a loan, the Emerald Advance loan, in the preseason. That loan will reopen [ph] , and at end of the third quarter, at that point, we're really not yet into the collection season. So we will just be booking an estimated reserve at that point in time. So that's mechanically how it works. What I'll point out, however, is we made a lot of changes both to the underwriting model this season, as well as the collection practices that are in place. And based on some of the early season, and this is getting back to summer and fall time for us, those collection procedures were in place and I was actually quite pleased with their results. So it's too early to talk about sort of the trend for bad debt, but I think generally speaking that we've got a good program in place and looking forward. Do you want to comment on that, Susan?

Susan P. Ehrlich

Yes, I was just going to add, Tom, just on the -- your question about what happened on the expenditure, the variable expenses associated with booking those loans since we started earlier. I think this year as well, we were very focused on ensuring that we had efficiency in the program in that regard, too. So we opened in offices where we knew we would see the kind of volume for applications, and we worked very closely with retail client services to ensure that we made improvements on productivity there, too.

William C. Cobb

And I guess I would just add, Thomas, not to speak to any specific line item. But I think you'll see that in virtually every case, the expense controls we put in place in the project runway initiative, we're in -- below year ago in virtually every measure. And I think Greg pointed out that on the variable compensation around Tax Pros, some of that will come back in the fourth quarter as we do more volume.

Gregory J. Macfarlane

I could talk about occupancy too, because you mentioned that one. As part of our cost reduction initiatives that came out last season, we targeted a number of locations for closure. We've executed that successfully. We -- and this was mentioned earlier, we leave no client behind. Just because we closed the location doesn't mean that we're not going to continue to service those clients, and we've been very good at moving those clients to the closest location that's convenient to them. We also took that opportunity to renegotiate a number of leases that -- because of the way the commercial market was, and those were successfully executed. We didn't get into specific line items in terms of how we're going to expect these $85 million to $100 million to come into the income statement. But it's specific to occupancy and -- well, it's specific to all line items, they're all delivering what we expected them to do.

Thomas Allen - Morgan Stanley, Research Division

Okay, helpful. And then in terms of RACs, I don't think you guys have touched on it yet. How is that trending season to date, both on the pricing side and the volume side?

William C. Cobb

Well, I'll talk to the pricing side. We're -- we've charged for all the RACs that we have done this year. There is no free RAC. With regard to volume, we're not disclosing that because obviously, we're only 2 days into the season. So that is -- most of the deduct to your fees volume is going to be in the fourth quarter.

Thomas Allen - Morgan Stanley, Research Division

Okay. And then final question, if I can fit it in. I think everyone is interested in the potential impact of the Affordable Care Act. Do you guys have any thoughts or can you give any numbers around how it could expand the number of filers or increase pricing for you in the future?

William C. Cobb

Yes, I don't think, Thomas, we're ready yet to talk about volume or pricing or the business model itself. We've been studying this market. We're deeply involved in it. I do think the tax and health care review we have done so far this year has been very well received by clients. They appreciate us taking the time to inform them of the upcoming changes, which is -- really starts with being triggered by the 2012 tax return. I think that as we go forward, this is getting -- it appears to be that complexity will be the order of the day here. Complex tax laws generally are good for our Assisted business. But again, as I've said many times, the great thing about our business model is we are here to serve clients the way that they want to be served since we have every form of business, and we use the term anywhere, anyway, anytime. So I think we're well positioned to take advantage of whatever happens in the Affordable Care Act. There's still a lot of initiatives. There's still a lot to hear from HHS and the IRS, so I have to do a "stay tuned" on this one.

Operator

Your next question is from Mike Turner of Compass Point.

Evan Hutto

This is Evan Hutto on for Mike. I just wanted to follow up on the health care. I know it's still a little premature to talk about health care reform and what it'll mean for the business, but just a few questions. In 2007, when Massachusetts instituted the health care reform, can you talk about the impact it had on your business then?

William C. Cobb

Yes, that was well before my time and I think anybody else in this room. So I'm not sure I could speak to the impact it had back then. I think that -- a couple of points on Massachusetts, and I don't pretend for a second to be deep on this issue. But obviously, the demographics in Massachusetts are different. You have a wealthier state. You have a state that actually had a relatively low percentage of uninsured population. It was, I think, only in the mid -- 5% or 6% range. The comparable number I have seen in the U.S. is approaching 20%, in the 18% to 20% range. It's a different law. It's a different approach. So I don't think that there is, frankly, a lot to learn from Massachusetts, because this is unique with all the various exchanges, some of which are going to be state, some of which are in state. They're going to be done via what they're calling a federal exchange. So we're not spending a lot of time looking back on Massachusetts. We're trying to manage through what are the complexities of this law and how best can we serve our clients as it impacts them.

Evan Hutto

Okay, that's helpful. And I know you guys don't usually give color around buybacks, but is there any reason to believe that you guys won't be in the market buying back more stock until the bank transaction is completed? Is there any reason why you guys didn't repurchase anything in Q2?

Gregory J. Macfarlane

So we don't provide forward-looking guidance, to answer your first part of your question, on pretty much most matters. So -- and then our track record, however, historically, has been very favorable to shareholders. We've done a great job of buying back shares historically. And as you just saw, we've also just announced our quarterly dividend here, which we're quite proud of.

Evan Hutto

Okay. And my last one, if I could. How -- tightened due diligence requirements on e-tic filers, how has that impacted the overall number of filings or is it still too early based on the delays?

William C. Cobb

I'm not sure I heard you correctly. Did anyone -- could you repeat the question?

Evan Hutto

Yes. On the e-tic filers, the earned income tax credit filers?

William C. Cobb

Oh, okay. And the question is?

Evan Hutto

I just wondered, the additional due diligence requirements that were instituted this year, I was wondering how that impacted your overall number of filers.

William C. Cobb

We haven't seen anything. There is additional data, the extra page as it's called. We haven't seen anything of note. Amy, I don't know if there's anything you want to comment on. But I don't think -- that hasn't come up, and I think our Tax Professionals have done a nice job handling their clients with that.

Amy McAnarney

The only thing that I would add is that, it's just with any regulation and adherence to the IRS, it's just -- it's part of what we do, so we have not seen really any impact at all to serving our clients.

Operator

Your next question comes from Michael Millman of Millman Research Associates.

Michael Millman - Millman Research Associates

Some more on the ACA. Do you think that the -- what we learned from the Bush rebate program will give some indication of what ACA may mean in terms of volume? Also regarding ACA, on your program, on your review program, are you seeing better retention from those people who use the program? Are you seeing new clients from that program as well? And then to change the subject a little bit, can you give us some indication of whether you think you can make up what you lost in the third quarter and the fourth quarter? I would assume that you had inefficiencies in the third quarter and I assume you'd have some inefficiencies when we get this end of -- or mid-April crunch as people have rushed to file. And then finally, the last year EZ returns were up about 25%. Are you seeing anything like that this year?

William C. Cobb

Any other questions, Mike or -- but let me try the first 4. So on the ESA, the Economic Stimulus Act from the Bush administration. We thought about this, whether that's a proxy for what may happen in the Affordable Care Act. I don't think -- that was a one-timer. It was one-time way for individuals to get money from the government. This is so different because a tax return filed in 2012, which indicates whether you have eligibility for a subsidy, for an exchange that's opening in October of 2013, which has impact for the insurance you're going to take on in 2014 and then has to be to trued-up in 2015. I mean, it is just -- the Economic Stimulus Act was a one-timer. It was a benefit to the industry. I think that in the long run, this is going to add a lot of new filers, I don't know. I think it is going to be a slow ramp, though. Our research is quite clear. People are very confused about this act, so that's kind of the first area. I think with regard to retention, you asked about with regard to health care. This is the first year we're doing a health care review, so we won't see that in any numbers, that we'll see that next year. But I do think it has certainly been something that, as we print off that health care review for people, that they've been very appreciative, our clients. It -- we believe it has driven new filers into our offices, so we think that has been a good thing. And with regard to EZ, we won't comment about specific forms at this point. I think what I would do, Greg, is maybe turn it over to you to talk about -- Mike was asking about third quarter inefficiencies and fourth quarter inefficiencies. As I turn it over to you, though, I will say that I think Amy's team did a terrific job with the change in season on -- obviously, we had a lot of clients come in the door in the last 2 days of January, and certainly into the first week. I think they handled it beautifully, and I expect them to do the same at the end of the season. But why don't you speak to any of the financial implications of that?

Gregory J. Macfarlane

Yes. So we spent a lot of time looking at various models. The good thing about Block is we've been doing this for a long time and we know how to do labor modeling. We understand how the cost structure works. We understand how to actually roll that down into the field. So as we had leading information and realtime information, we were able to adjust pretty quickly. There were some inefficiencies, I think that's a fair statement, but they were not material. So I wouldn't get too worried about it from your perspective. As it relates to the fourth quarter, there are a lot people who still have to get their taxes done, and we're looking forward to serving them. And I think that we'll be fine coming out of the season.

Operator

You have a question from Adam Liebhoff of Loomis, Sayles.

Adam Liebhoff

Let me offer my congratulations to Derek and Colby. Just one question really. I wonder what sort of share gain is implied by the 7.8% decline at retail? And I suppose said another way, do you guys have any sense for the overall market for retail returns, how that market trended, I guess through Feb 8 -- 28?

William C. Cobb

Yes, Adam, and then if Jason wants to augment my comment. We're not going to talk about share gain. It's a full season business, we'll obviously have full information as we get toward final season results. So I'm not going to speak to any share gain nor do we have good insight into the mix between Assisted and Digital other than our own estimates. But, Jason, do you want to...

Jason Houseworth

Yes, Adam, this is Jason Houseworth. I think the problem at this point is that the IRS hasn't made any data public that would show the split between Assisted and Digital filers. And until they do that, it's very hard to tell. The down 8% number was our estimate. And really beyond that, we're not able to get a read on the Assisted to Digital breakout.

William C. Cobb

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

Jason Houseworth

That's right.

Operator

You have a question from Sandy Mehta of Value Investment.

Sandy Mehta

The stock has had a very good move from the December Analyst Day, from $18 to $26 here almost, in the aftermarket. Just a couple of questions. On the sale of the bank, I know you cannot comment much, but is there -- can you give us some color in terms of timing. Is there still an expectation of -- likely in the next couple of quarters? And the negotiations and what you're seeing, are you comfortable in terms of the revenue sharing of profits and products that are within the bank? Is that -- does that appear to be in line with the expectations?

Gregory J. Macfarlane

We announced, earlier in the fall time, our decision to find a way to exit the bank. To be really clear with everyone, I'm going to say this every time I get this question. Financial services are a very important part of our future at Block. We think it's a very important way to add value to our clients and an important way to add value to our shareholders and that commitment we're delivering through the season. Let me give you some highlights earlier today and at the end of the season we'll be able to talk more about that. Since we made that announcement about the bank back in the fall time, we've engaged both Goldman Sachs and First Annapolis as our advisors, and we've been methodically working through a process to find out what the right option is for H&R Block. Our objective is, number one, to get the right deal. And number two, is to do it as expeditiously as possible. And the problem is when you're in the middle of these things, it's hard to provide real-time updates. But suffice to say, we've had good response out there and we're moving quickly along here. I'm really not going to give you any idea what the timing looks like, though.

Sandy Mehta

Okay. And can you give us an update on buyback activity? And many of us have expectations for sizable buybacks going forward, given the stock has moved to a more reasonable level than previously. Is it fair to expect that probably we'll see more dividend increases than buybacks going forward?

William C. Cobb

So let me go first and then, Greg, you should certainly weigh in. I would remind everybody that for the fiscal year-to-date, we have bought back 8% of the stock on top of 4% last year. So I'm pleased with our -- the performance we've had on returning capital this year. We also, as Greg mentioned, we just announced our 202nd consecutive quarterly dividend. But I'll let Greg speak to anything beyond that.

Gregory J. Macfarlane

We have a philosophy at Block about being shareholder-friendly. We've been able to deliver that historically. We don't provide forward-looking guidance however. So we'll find out what the future looks like. Our thinking about share buyback is really a 2-part question that we need to be able to answer. The first is, do we have the cash available from our capital allocation waterfall. And then the second thing we have to do is do we like the price the stock is trading at. And that's also a number that we're not going to provide. We don't think that's in the interest of the shareholder base to talk about what point of the market we're going to be in at this point in time. But we just end that point back to the point that Bill mentioned, which is our philosophy is to be shareholder-friendly.

Operator

You have a question from Steve O'Brien from Jefferies.

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

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

William C. Cobb

Yes. I'm not going to signal the competitors what our plans are coming up. This is a business that you have to manage very closely as there are seasons within seasons and there are time frames, and mix obviously plays into that. But we're not unaware of where you're going with that question, Steve. And I just would again say let us play out the season and then you'll have full insight into it.

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

Okay. And then if I could on another topic regarding the retail strategic exits. Could you provide a little bit more color around like what portion of the channel that was for H&R Block? I mean how do you come to that down 4% figure versus the true reported figure? And should we think of that as a same-store sales number or something like that? Just any color or metrics around that you could provide would be great.

Gregory J. Macfarlane

Well, there is no true reported number at this point because the IRS has not released anything publicly. We obviously have our -- a lot of historical data and contacts and try to figure out how we're doing. But we've released what we think is decent progress to date, but the reality is there's a lot of tax season to go here still, and that's probably the better time to talk about share and...

William C. Cobb

Were you talking about office closings, office moves?

Jason Houseworth

Desktop returns.

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

I was talking about the desktop, the retail channel [indiscernible] on it.

William C. Cobb

Desktop -- oh, I'm sorry. We...

Gregory J. Macfarlane

I misunderstood your question.

William C. Cobb

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

Jason Houseworth

Thanks, Steve, I appreciate your question. Well, in desktop, where we sell our Block software, this year we targeted more profitable clients in what we see as a declining channel. And our focus this season, it really remains on growing online and, within that, mobile units. And as Bill mentioned, if you take out the strategic exits that we made, we'd only be down 4% as of February 28. And that was really what we meant to do this season.

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

Great, and understood there. I mean was it 1/4 of your retail presence or is there any kind of -- just so I can try to get my arms around how big the exit was in terms of getting to the 4% number versus the reported number.

William C. Cobb

No. I mean I think the plan -- I mean, we obviously still have a very viable business. We did over 1.2 million returns through February 28. This was certain -- a couple of retailers that we just thought the ask was egregious, and we decided to focus our money and our desire for space and our merchandising on certain retailers. So that -- it was not a wholesale shift. This is a segment of the market that is in a secular decline. We think that the highest growth, highest profit area is online. That's where we've really staked our claim. We've -- and Jason and his team have had a very successful 2.5 years, and we have a season yet to complete. But this is still a fair amount of returns for us. Jason, do you have anything you want to add?

Jason Houseworth

The only other color I would add, Steve, is just that in this channel, unlike online, we really deal retailer by retailer. And so again next year, we'll look at each specific deal on a valuated basis on the profitability we can make there.

Operator

Your next question is from Mike Hughes of Ascend.

Unknown Analyst

It's actually James Hellman [ph] calling in for him. Quick question on the bank sale. How do you think about what you're going to be giving up in terms of revenue from your financial services products to the new bank JV partner versus how much you're going to keep? I imagine the more you give up to the bank partner, the more the value of the bank will be, the more -- the higher percentage of the revenues you want to keep, the lower the value of the bank.

Gregory J. Macfarlane

Okay. So I'm going to provide some guidelines to how we think about this, and I shared this really back at the Investor Day as well for you all. Our objective is obviously the ongoing business here, not really a present value goal that we have in mind here. However, having said that, it's going to come down to a function of what -- which partner or partnership model we decide to go with. And because that deal, we have to figure out exactly what that looks like and then therefore the economics it would be. It's hard for us to speculate on that. What I have said about the overall economics, and you have to go product by product, you've got 3 main products: Emerald Card, the Emerald Advance and then the refund transfer. We have to think of the refund transfer, as it's fairly administrative in nature, we don't see a lot of risk in that product, and therefore, we don't believe we have to give up a lot of the economics. On the Emerald Card, it's a prepaid reloadable general purpose card. Again, we don't think there's a lot of risk, mostly with the partner what we'll be doing is administrative. And then it's really on the Emerald Advance, the lending product, where we probably have to talk about it a bit more -- about what the bank's responsibilities are and understand that. So -- but that's the smallest of the 3 products from a revenue perspective. So that's kind of where we're at in terms of what I can provide you from commentary.

Unknown Analyst

Okay. And one other question, just would be thinking about ACA. For better or worse, many of your customers walk into the office, they do think of you pretty closely akin to the IRS itself. How do you manage the process so that there is not backlash against H&R Block for charging additional cost for a complexity, or even if you're not charging for ACA, that it's just a more complex, more cumbersome process? And then on the other hand, how do you deal with potential political blowback from trying to make money off of ACA when it's known that it's going to be something that at least the Democratic administration wants to go smoothly and be a big win for everyone?

William C. Cobb

Yes, I think -- if Amy wants to weigh in. So our clients -- listen, we don't have a political agenda here. Let me be crystal clear on this and crystal clear on this when I go to Capitol Hill. The Affordable Care Act was put into law. We're here to interpret the law. We do not -- our Political Action Committee gives equally to the both sides of the House and the Senate. We are not political activists in any way. This is the law of the land. Our job is to inform our clients of the potential eligibility for a subsidy. If they are eligible, we give them an indication of, based on the silver level of coverage that is currently the only pricing mechanism we know of with the Affordable Care Act, what their monthly charge will be, and if they choose not to take health care, what their potential tax penalty will be. Our clients really appreciate this. We are not pushing people into health care. We are informing our clients of the choice that they have to make. So while you are always, in this politically toxic environment, going to get social media cry or whatever, it has been very minimal. And I think the receptivity from our tax and health care review is that our clients view us as on their side, and that is our principle. That's what this company was founded on 58 years ago, and that continues to be the principle today. We're only interpreting the law and trying to service our clients as best we can.

Operator

And your final question is from Anna Shtromberg of National Australia Bank.

Anna Shtromberg

I just wanted to understand your comfort level with investment grade ratings after you spin off the bank, because you have said in the past that you didn't really need to maintain investment grade, and I just wanted to get a refresh on that.

Gregory J. Macfarlane

I think that the bank and the investment grade are kind of independent, to be honest. The bank, as a regulated entity, holds capital. It's regulated by the OCC. We have extra -- we have a very well capitalized bank at this point that's safe and sound. We've been up and running for 6-plus years now and we feel very comfortable with that. When we obviously figure out what to do with the bank, we'll be relooking at, as we always do, everything. But the broader question about investment grade is we are an investment-grade company. We, based on our current capital structure, go into the tax season, the position where we do use the commercial paper markets to fund ourselves, and that obviously requires an investment grade rating. But having said that, there are other solutions out there and we always think about what the right solution is at this point in time. But as a factual statement, we have investment grade and even through this tax season.

Anna Shtromberg

Right. And just a final question, I don't know if you have or if someone's already asked the time frame on the bank spin-off and you had already answered it, so I apologize for that. But can you just repeat if you had already answered it. What is the time frame you're looking at for the bank spin-off?

Gregory J. Macfarlane

Yes, so we're not providing guidance on what the time line looks like at this point.

Operator

We do have one more question from the line of Joe Janssen from Barrington Research.

Joseph D. Janssen - Barrington Research Associates, Inc., Research Division

I just thought I'd sneak one in there. Bill, historically that 2/28 filing number is a pretty useful data point. Given the delays, you commented that you believe you're about 2 weeks behind. Any thoughts as we move through March, when you think we're at a apples-to-apples comparison, you potentially could release some data points?

William C. Cobb

I think we're going to release at the end of the season. I think this has been such a strange season that we're going to wait till the end of the season. I think Scott or somebody had asked earlier about when I think it's going to normalize. I don't know. So I don't think -- in our opinion, this is a full season business, so we'll release tax volume results at the end of April.

Operator

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

Derek Drysdale

We just want to thank everyone for joining us today, and we'll put out our next volume results through April 15, on -- during the week of April 23. And we look forward to talking to you on Investor Relations after this call. Thank you.

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