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H&R Block (NYSE:HRB)

Q4 2013 Earnings Call

June 12, 2013 4:30 pm ET

Executives

Colby R. Brown - Vice President and Corporate Controller

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

Gregory J. Macfarlane - Chief Financial Officer

Derek Drysdale - Director of Investor Relations

Analysts

Kartik Mehta - Northcoast Research

Gil B. Luria - Wedbush Securities Inc., Research Division

Thomas Allen - Morgan Stanley, Research Division

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

Michael Millman - Millman Research Associates

Operator

Good evening. My name is Keisha, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to Mr. Colby Brown. Sir, you may begin.

Colby R. Brown

Thank you, Keisha. Good afternoon, everyone, and thank you for joining us to discuss our fiscal 2013 results. As many of you know, I transitioned into the Investor Relation role last quarter and have enjoyed getting to know many of you. I look forward to working with you over the coming months.

Joining me on the call today 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.

In connection 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've 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'll now turn the call over to Bill.

William C. Cobb

Thanks, Colby, and good afternoon, everyone. Earlier today, we announced our results for fiscal year 2013, which ended April 30. As many of you know, this was a challenging season for the industry as a whole, and while we're continuing to analyze some of the details, there are 3 important takeaways from the season.

First, the challenges faced by the U.S. tax industry this year were unprecedented, resulting from late tax legislation, filing delays and an overall decrease in returns filed with the IRS. I'm proud that as an organization, we showed a tremendous ability to adapt to this unique environment and to execute on our plans in the U.S. Globally, I'm pleased that we again served more than 25 million clients worldwide. As the leader in the tax industry for over 58 years, H&R Block has become the largest tax preparer in the world, and our unmatched presence and expertise gives us an advantage as we look to 2014 and beyond.

Second, although we executed well on many of our initiatives this tax season, we have room for improvement. Difficult decisions were made this tax season, with a focus on growing the business profitably. And we delivered better financial results in fiscal 2013, achieving our margin expansion goals. I'm also pleased that we grew and took share from Intuit for the third consecutive year in the digital online category, which is the largest and fastest-growing category for do-it-yourself filers.

And finally, though there's still plenty of work ahead, we remain confident in our long-term strategy to be a global year-round tax-plus company. We continue to see growth opportunities in digital, financial services and international. And while some of these opportunities may take a few years to develop, I am optimistic about our ability to expand our business profitably and serve our clients better. In our core Assisted category, the value our tax professionals provide is only getting stronger as changes in legislation and economic conditions continue to add complexity to Americans' tax situations. The percentage of filers who choose to seek assistance has remained at close to 60% for the last 12 years, and growth in the digital do-it-yourself category continues to moderate as a number of pen-and-paper filers declines.

Our strong industry position and financial strength continues to give us a competitive edge as we look to 2014 and beyond.

With that summary, I'd like to take a few minutes to provide our thoughts on the U.S. tax industry. As I mentioned earlier, this was a challenging tax season for the entire industry as significant legislative changes in early January prompted the IRS to delay the opening of e-file to January 30. Additionally, certain forms issued by federal, state and various other taxing jurisdictions were unable to be filed as late as early March. With little time to react to these changes, these delays presented challenges to our industry to update systems and plan for operational needs throughout the season. Similarly, the delays confused and frustrated many taxpayers and significantly impacted the timing of filings during the season.

You will remember from our previous earnings call in March, we expected that these delays would impact the timing of filings, but that ultimately, the season would normalize to historical growth rates of 1% to 2% by the end of April. Nonfarm employment, which has historically been the best leading indicator for tax filing growth, was up 1.7% in calendar year 2012. Based on this indicator and other information we had at that time, we had little reason to believe that growth levels this year would be different than average historical levels.

Instead, at season's end, IRS returns were down approximately 1%, a result no one was expecting.

So what drove the decline and does this mean we've set a new expectation for future growth in IRS filings? At this point, we're still analyzing IRS and other industry data to understand many of the details. And it's likely going to take a few months before we have a complete picture of the 2013 tax season. There are, however, a few possible factors that we can point to.

First, the delays I mentioned earlier may have created confusion for certain taxpayers or a delayed sense of urgency to file for others. The IRS has not reported extensions yet, but it's possible there could be more return files in the upcoming off-season than in years past. We also know that taxpayers on average received lower refunds this year, and that more tax returns had tax balances due. It's hard to say whether this changed taxpayer obligations, but nonetheless, it may have created less incentive for some Americans to file by the middle of April.

Finally, the IRS has applied more rigorous procedures in processing returns in an effort to curb inaccurate or fraudulent filings. Certain credits, such as the Earned Income Tax Credit, also known as the EITC, are rightfully receiving considerable focus. According to the IRS, the rate of improper EITC payments has remained high and had estimate that the EITC improper payment rate was 21% to 25% in 2012, which equates to $12 billion to $14 billion of improper payments.

To address this, the IRS has become more vigilant in processing the 27 million returns that contain the EITC, evidenced by additional due diligence requirements put into place in 2012 for paid preparers who prepare returns with EITC claims, as well as a number of other changes. Additionally, Congress increased penalties for preparers who file fraudulent EITC forms, and the IRS has begun aggressively assessing these penalties.

We believe that these efforts have contributed to the decrease of the number of EITC filings as a percent of total IRS filings over the past 2 years.

Reducing fraud through such targeted efforts by the IRS and Congress benefits the country, our clients and our company. In particular, reducing the abuse of the EITC protects the benefit for all citizens, including our clients who legitimately qualify for it. We expect the IRS and Congress to continue focusing on ways to reduce fraud, and we fully support their efforts in applying consistent rigor for all returns filed.

That said, considering long-term trends in IRS filings, there isn't enough evidence to suggest this was anything more than just an abnormal season. The IRS' annual growth in tax filings of 1% to 2% is supported by 50 years of data. And as such, this year's results do not cause us to change our expectations for future tax filing growth.

Taxes are here to stay, and I'm confident that H&R Block will continue to play a significant role in improving and simplifying our clients' lives.

With that context, let's turn to our performance for the year. Our estimates on market share are largely unchanged from our end-of-season volume results announced in late April. Though we won't have final data from the IRS until the fall, we estimate that total returns at the IRS were down about 1%, and our preliminary analysis suggest that we maintained our share of the overall U.S. market.

At the end of last year, we talked with you about our client and market share gains, which are important, given the challenging competitive environment we are in after discontinuing our RAL offering. I also explain, however, that to grow the business long term, we would have to rationalize our cost structure, invest prudently to grow the business and focus on a better balance of client acquisition and profitability. In line with that long-term strategy, there are a number of decisions we made to improve the overall profitability on returns filed with the company this year.

First, in Assisted, we shortened the timeframe for our Free Federal 1040EZ promotion and made various other systematic changes to optimize the rebate and referral programs in our offices.

In digital, we exited certain unprofitable desktop software retailers and focused on optimizing our online offerings. Excluding the impact of these efforts, total desktop returns would have been down about 4% compared to the 7% we reported.

In financial services, we discontinued the Free Refund Anticipation Check, or Free RAC promotion, which resulted in revenue growth, though it did negatively impact the number of Emerald Cards issued.

And in Canada and Australia, similar to our U.S. strategy, we enhanced our promotional offerings to focus on high-value clients, and were able to exceed our revenue growth expectations in these markets.

Heading into the season, we knew these actions would create headwinds for client count, but as you know, not all clients generate the same economics for our business. While our past focus on client volume and related market share gains was necessary for competitive reasons, we are in a new stage of growth for this business, with a focus on improving mix and profits over time. It's important that we balance our initiatives to gain market share with the associated cost. And the actions we took in fiscal 2013 do just that, positioning us well for long-term sustainable growth.

With these actions in mind, let's take a look at our overall 2013 performance in each market category.

In Assisted, the number of returns prepared by the company declined just under 3%. We believe the overall Assisted category was down about 1% in filings, and that we lost approximately 30 basis points of share. We obviously would have liked to perform better here. However, as I mentioned earlier, it's not just about increasing clients, it's about growing the business profitably. In the off-season, we'll be evaluating a number of things to continue our focus on driving a better mix of high-value clients. We'll also be taking a look at how we can continue integrating our adjacent financial products and deliver more value for our clients year round.

That said, we set aggressive targets in client satisfaction and exceeded those targets, and we continue to retain clients at a significantly higher rate than our nationally branded Assisted competitors. Service must remain at the core of what we do, and metrics like these are usually good indicators of future health of our business.

It's also important to note that our Assisted volume was not materially impacted by our decision to exit Sears. We're pleased that the clients we previously served in Sears locations were retained at levels in line with our expectations.

Now consistent with our focus on growing profitably, we've also decided not to renew our relationship with Wal-Mart in the United States. At the end of the day, this was an economic and operational decision for us. Unfortunately, results in this channel did not meet our expectations, and we're confident that we can serve our clients better in our other 10,000-plus convenient neighborhood locations. We have offices minutes away from most Americans, and our tax professionals have lasting relationships with our clients. Importantly, we do not expect our decision to exit Wal-Mart locations to have a material impact on our results going forward.

Turning to the do-it-yourself category. Total H&R Block At Home returns increased 232,000 over last year. In the key online category, returns grew approximately 11%, leading to a 50-basis-point gain in online share. Our marketing strategy was well designed and executed, and we believe our investments were better timed and more efficient than our competitors. Overall, the increase in online returns was offset slightly by the decline in desktop filings and Free File Alliance returns. Our mix of do-it-yourself clients continued to improve, which positions us well going forward as we continue to gain momentum in this category.

In financial services, the discontinuation of our Free RAC promotion did result in an increase in fees earned from RACs, offset by lower RAC volume. However, it also resulted in the issuance of fewer Emerald Cards, with 2.5 million cards issued and $8.7 billion in total deposits. While we issued fewer cards compared to last year, this still represents a 9% increase over 2011, the last comparable year in which we similarly did not offer the Free RAC promotion. Though we've seen strong initial progress in efforts launched this year to increase card usage, we realize this was the first season for many of these initiatives. And it's going to take time before we can assess our true performance in this area.

Finally, on the international front, I'm very pleased that we're continuing to see solid growth as revenues grew 7% to $249 million. Canada and Australia have strong management teams and have executed well to drive consistent profitable growth over the past few years. We remain under-penetrated in these markets when compared to the U.S., and I'm excited about the opportunities to broaden our global presence.

Overall, we are making progress in our long-term strategy, and this year provided important lessons that we'll take into the off-season as we prepare for next year. Facing an array of challenges, our tax professionals and other associates remain focused on serving our clients, and they went the extra mile to finish the year strong. I want to thank all of our tax professionals, our other associates and our franchisees for demonstrating the strong values that truly set H&R Block apart.

Now I'll talk for a few minutes about where we're headed in 2014 and beyond. But before doing so, I want to turn it over for Greg to discuss our financial results for fiscal 2013.

Gregory J. Macfarlane

Thanks, Bill, and good afternoon, everyone. From a financial perspective, considering the challenges that we faced this year, I believe we executed well and pleased that we continue to drive our strategy. Importantly, we exceeded our goals related to our cost-reduction initiatives, which contributed to significant earnings and margin expansion in fiscal 2013.

For the year, pretax earnings increased $126 million to $702 million. A large part of this was driven by exceeding our targeted cost-reduction initiatives, which contributed to a $118 million decline in total expenses compared to last year. The savings are primarily driven by lower compensation and occupancy expenses.

Our net income from continuing operations was up $119 million to $465 million. When considering these results together with share repurchases that occurred during fiscal 2013, we increased earnings per share from continuing operations 46% to $1.69. On an adjusted non-GAAP basis, earnings per share from continuing operations increased 25% to $1.59. These non-GAAP results exclude after-tax adjustments of $28 million, or $0.10 per share, primarily related to a tax benefit received in the third quarter from settling outstanding issues in previously filed corporate tax returns. EBITDA of $874 million resulted in an increase in our EBITDA margin of 4 full points to 30%. Total revenues increased modestly to just over $2.9 billion.

While we would like to see better top line results in a normal year, I'm pleased, overall, that we remain disciplined and focused, achieving solid earnings growth.

In our Tax Services segment, revenues increased $16 million, or about 0.5%, due to these actions taken this year in line with our strategic focus to improve overall profitability. Specifically, higher RAC and digital revenues were partially offset by lower Assisted tax prep-up [ph] fees. The segment's pretax income of $821 million compares to a pretax income of $704 million in the prior year.

Let me take a moment to review the primary drivers for the year in greater detail. First, total expenses in Tax Services was down 5% to $2.1 billion, driven by our cost-reduction initiatives mentioned earlier.

Next, total Assisted tax prep fees and royalties were down 1%. Lower overall tax filings this year contributed to a 2.7% decline in the company's U.S. Assisted volumes, which was offset by a 1.7% increase in pricing, in line with the long-term outlook we shared with you in December.

Finally, in financial services, the discontinuation of our Free RAC promotion resulted in a $26 million increase in RAC revenue, which was partially offset by a decline in Emerald Card revenue. While core financial product revenues increased $21 million overall, we'll be reviewing ways to optimize these programs in 2014 as financial services remain a key part of our long-term strategy.

Turning to Corporate. Our pretax loss improved by 7% to $119 million. Corporate expenses declined by $12 million, largely due to lower interest expense resulting from the refinancing of our medium-term notes during fiscal year 2013. Additionally, we saw a decline in provisions related to our legacy mortgage loan portfolio, which is more seasoned and is experiencing lower delinquency rates.

As we look at our overall financial position, our balance sheet and liquidity remain strong. As of April 30, total unrestricted cash was $1.7 billion, and total outstanding debt was $907 million.

And as of today, there are approximately 273 million shares outstanding compared to 292 million shares outstanding as of April 30 last year. As many of you recall, during fiscal 2013, the company repurchased and retired 21.3 million shares at an average price of $14.82 per share, or $315 million, representing an approximate 8% reduction in shares outstanding. We continue to evaluate share repurchases opportunistically, but we will not offer forward-looking guidance on share repurchase activities. The company has executed well on its repurchased strategy in the past due to our disciplined approach of buying shares at the right price.

Our effective tax rate of approximately 34% was 6 points lower than last year. This decrease was primarily driven by a $43 million tax benefit received in our fiscal third quarter, settling substantially all outstanding issues in our 1999 through 2007 tax returns with the IRS. While the decrease in our tax rate this year was largely driven by a onetime event, we are focused on lowering our effective tax rate for future years.

And finally, depreciation and amortization was $92 million in fiscal 2013, and our capital expenditures totaled $113 million or about 4% of revenue. We made specific investments this year but I think were necessary, given lower historical levels of spend, and we'll continue to make similar investments in 2014. Beyond 2014, we expect that capital expenditures will approximate 3% of revenues long term.

Turning to discontinued operations. We've reported a net loss of $31 million compared to a net loss of $80 million a year ago. The variance to the prior year is largely due to the loss on sale of RSM McGladrey in the prior year.

At Sand Canyon, fourth quarter representation and warranty-related claims remained low at $23 million, though future claim activity could vary considerably from quarter-to-quarter. For the year, Sand Canyon received $190 million of claims, of which $41 million remain subject to review at April 30. Total losses increased settlement payments amounted to $11 million in fiscal 2013.

This quarter continued a trend, in which Sand Canyon has experienced a decline in loan-level claims. Sand Canyon believes this decline in claim activity is attributable in part to the existence of tolling agreements entered into with certain counterparties from which Sand Canyon has received a significant majority of its asserted claims. The purpose of these tolling agreements was to engage in settlement discussions related to previously denied and potential future claims. Although Sand Canyon has not experienced anything that would indicate a significant increase in future claims, future claim activity may increase if current efforts to settle with these counterparties are not successful.

Based on initial settlement discussions with these counterparties during the fourth quarter and other considerations, Sand Canyon recorded a provision of $40 million for potential losses related to its representation and warranty obligations, bringing the total accrual at April 30 to $159 million. It's important to note that the provision is the result of the events that occurred in the fourth quarter and is not a reflection of an expected increase in future claim activity.

There are several points that are important to understand as we think about the provision recorded this quarter. First the provision is a reflection of a shift in the representation and warranty space for Sand Canyon. As revenue [ph] rates decline, certain counterparties are seeking remedies outside of a continued loan-level representation and warranty claim. These remedies may include bulk settlements for losses on previous claims that Sand Canyon deems invalid and potential future claims as discussed earlier. The rep and warrant landscape continues to evolve, and Sand Canyon believes that the movement away from loan-level claim activity is a positive development.

Second, Sand Canyon remains confident that it has strong defenses related to representation and warranty claims, including applicable statutes of limitations. Sand Canyon will, however, continue to have discussions with counterparties and will enter into settlements regarding previously denied and potential future claims when it believes it is in its best insurance to do so.

Third, Sand Canyon believes, based on its assessment of probable losses, that its accrual for representation and warranty obligations is adequate. It is important to note, however, that because of the nature of settlement discussion, it is possible that the accrual balance may fluctuate more in future quarters compared to previous quarters.

Finally, Sand Canyon is and has always been operated as a separate legal entity from H&R Block. We believe our legal position is strong on any potential corporate veil-piercing arguments.

Overall, Sand Canyon believes this is a positive development as it works to wind down obligations related representation and warranties. Sand Canyon is now in settlement discussions with the counterparties that represent the majority of its historical claim volume. While Sand Canyon cannot be certain that settlements will be successfully negotiated, its accrual reflects the losses it believes are probable related to its representation and warranty obligations. There is the work ahead, but Sand Canyon continues to make important strides in its efforts to bring this loss contingency closer to its conclusion.

Turning now to a topic that I know many of you are interested in, H&R Block Bank. As a reminder, our 2 objectives for divesting H&R Block Bank have been and continue to be to stop being regulated as a savings and loans holding company and to find a partner or partners that will help us to continue to grow our financial services business. I'd like to share an update on there were at.

First, as it relates to our objective to find the right partner or partners to continue growing our business, this is a decision that will impact us for many years, and we continue to be very thoughtful and deliberate to find the best solution.

As I've said before, the goal is not a fast deal but the right deal. Since the fall time, when we announced our decision to exit the bank, we have received strong and varied interest from perspective partners, and that interest remains It's important to recognize this is not a typical retailer selling its card portfolio to a bank partner or a retail bank selling to another retail bank.

H&R Block Bank is a captive bank that provides unique tax-related products that any potential partner needs time to understand. Also, due to the seasonality of our business, it's wise for prospective partners to get actual 2013 tax season results to better understand the opportunity. I'm confident about our ability to come to a solution. But given these considerations, we are taking the appropriate amount of time to ensure we get the right deal done. We'll continue to share updates with you when it's appropriate to do so.

Next, in order to achieve our objective to stop being regulated as a savings and loan holding company, we effectively need to either sell or surrender the bank charter. Since announcing this process last fall, we have been exploring all options as it relates to exiting the charter. After looking at all options, we can share with you that regardless of how we structure the transaction, it is unlikely that we will generate any meaningful premium related to a sale of either the bank charter or the bank's assets and liabilities.

And finally, pertaining to these assets and liabilities, among the bank's assets is a legacy mortgage portfolio, which, as you may know, is held for regulatory purposes. This portfolio is seasoned and stable, now has moderate delinquencies and losses, is winding down fairly quickly and has a net book value of $339 million at April 30. We have examined in detail our options in selling all, part of or none of this portfolio. It is our conclusion right now that continuing to hold these assets at the time we exit the bank charter is the best economic decision. We will continue to evaluate the portfolio as it winds down. And based on market conditions, we may decide to sell all or some of this portfolio in the future.

Before handing the call back to Bill, I want to talk about the timing of our financial reporting. I'm sure many of you realize that we chose to have this year-end call earlier than in years past. This action was deliberately taken so that we can have more relevant and timely discussions with investors and analysts following the tax season. We are very focused on providing timely and accurate information to our shareholders and analysts, and we'll continue to evaluate ways to improve our communications.

With that, I'll turn the call back over to Bill.

William C. Cobb

Thanks, Greg. As we look ahead, our strategy remains focused on being a global, year-round, tax-plus company. And our #1 purpose for this company is to look at our clients' lives through tax and find ways to help. One of the ways we are well positioned to help taxpayers is in their understanding of how health care reform will impact their lives.

As many of you know, the Affordable Care Act mandates that all Americans obtain health insurance in 2014 or pay a penalty through their 2014 tax return. For those electing to receive subsidized coverage when the state and federally-operated insurance exchanges open in October, one is the easiest ways for them to verify their income during the enrollment process is by using their 2012 tax return. Those who receive subsidies will have a mandatory filing requirement in 2015 to report income earned during the calendar year 2014.

And we've performed a lot of analysis in this area, and our research suggests that Americans need help in understanding how the new law will impact their lives, their personal finances and their tax returns. We know that many are simply unaware of the resulting complexity that lies ahead.

Our job is to understand the law as it is written and help our clients comply with these new requirements as it relates to their tax return. We have not taken nor will we take any position on the law. We just want to help those who are impacted by it.

And our clients are among those most heavily impacted by -- affected by the new law, low-to-middle income Americans for whom the tax return represents one of the most significant financial events each year. Based on information we've gathered, we estimate that a greater proportion of our clients will be eligible for subsidies under the Affordable Care Act compared to the overall U.S. population.

While this may not be indicative of the choices they will make, it does indicate that many of our clients will face decisions regarding their health care coverage. We believe they will be looking for assistance in making some of these decisions.

Our clients have a tremendous amount of trust in us. And with the newly created intersection between health care and taxes, we have a unique opportunity to offer them unmatched service in meeting their needs in these 2 areas.

On the health care front, we're still analyzing the right long-term approach, but we've begun to invest in resources and technology that we expect will enable us to roll out a few initiatives this year that we believe will benefit our clients.

First, I'm excited that we're planning to launch a do-it-yourself tool on hrblock.com to help our clients across the country enroll into federal and state exchanges. We expect to partner with a third-party to provide simple and easy-to-use platform that provides helpful resources and facilitates the enrollment process.

Next, we'll continue to offer our tax and health care review in our offices. Our tax professionals will also refer our clients to the digital tools and resources I just mentioned.

Finally, we're also looking at running a pilot in one state, where properly licensed agents are on staff in our retail locations to offer our clients health care advice and subsequently processor enrollments.

Turning to taxes. There remain several elements of the law's implementation that are unknown at this point, which may have an impact on taxpayers' filing decisions.

First, we still haven't seen a form that helps us understand exactly how tax filings will be impacted by the new health care law. Our clients who receive subsidies will likely have significant changes in their tax return in 2015, and we expect there to be increased complexity in preparing their taxes.

Next, we don't have clarity on how several aspects of the law will be implemented. As an example, the cost of health care premiums on the exchanges and related subsidies remain unclear. Until we can better understand these and other related issues, we cannot know for certain how our clients' lives will be impacted and how we can best serve them at the tax event.

Finally, we can't say with certainty that the law will drive a significant amount of new filers into the market. There's simply no concrete way at this point to determine how many people will ultimately elect to receive subsidies, whether they were already filing taxes and, and how the new law impacts their future tax filing decisions.

So based on what we do know and believe, we think that any increase in filings will occur over several years as Americans increasingly adopt health coverage through the exchanges, and the associated tax penalties for noncompliance are gradually increased through 2016. In 2014, which is the first year of implementation, we do not expect a material amount of new filers into the market. In 2015, those who received subsidies will be required to file a tax return to reconcile any differences in their income and adjust subsequent tax obligations.

As I said earlier, Americans will need help with this, and I believe H&R Block is well suited to assist them in this process. With our size, scale and resources, we are well positioned to capitalize on opportunities associated with the ACA. We also think it adds a compelling value in our call-to-action with clients who we think will seek assistance and will be more likely to trust a long-standing brand, such as ours.

If we develop and execute the right strategy, this could have a positive effect on returning clients, do-it-yourself filers who switch to assisted and taxpayers who may have used other preparers in the past. The benefits to H&R Block, however, will take time to be fully realized. Although we are currently putting resources behind this, we do not expect the ACA to result in a significant benefit for us in the near term. Rules and tax forms are still being developed, and we'll have to adjust our operating model as the law is implemented. While we hope to provide as much value as possible for our clients, this law is introducing big changes to the health care market, and it will likely take us and other companies in this space more than just next year to figure it out.

After evaluating our initiatives at the end of fiscal 2014, we'll have a better idea of our long-term strategy in this space.

Now in conclusion. I like our competitive position, and I remain optimistic in our ability to grow the business profitably and ultimately to continue improving shareholder returns. This year, there were 4 key highlights regarding shareholder returns.

First, we increased our EBITDA 15% to $874 million, or 30% of revenues. Next, we returned $532 million to shareholders in the form of dividends and share repurchases. Third, we increased earnings per share from continuing operations by 46% to $1.69, and finally, our stock outperformed the S&P 500 Index by 74 points, growing 89% for the year ended April 30.

I'm excited about where we're headed in digital, financial services and international. And in our core Assisted business, I feel that our capability is unmatched across the industry. The industry is changing, with the prospect of stricter regulation and increased complexity from possible legislative changes in the future. Our experience shows that new complex tax laws consistently drive the need for assistance, and we have been providing assistance to our clients in preparing their taxes for over 58 years.

We will share much more about our strategy and where we're headed in 2014 and beyond at our Investor Day, which will be hosted at the New York Stock Exchange on Wednesday, December 11. So mark your calendars, and I look forward to seeing many of you there.

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

Question-and-Answer Session

Operator

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

Kartik Mehta - Northcoast Research

A question for you on the pricing side of things. You said you achieved 1.7% pricing. Are you able to give us a little more breakdown on how much of that came from the franchise side and how much of it came from the corporate side?

William C. Cobb

No, I won't give you a breakdown. I would say it was similar, but I'm not going to go into the breakdown. I think it's better for us to really focus on the system average. A lot of this is due to mix. Our franchisees are primarily in more rural locations, so there are differences in pricing in terms of the amount. But I would look at it more as here's what the system did. Because a number of our franchisees do follow our lead on the pricing front, so I think the system number is sufficient.

Kartik Mehta - Northcoast Research

Okay. So were your franchisees able to -- are you able to say, Bill, were the franchisees able to get a price increase?

William C. Cobb

Yes, I can say that.

Kartik Mehta - Northcoast Research

Okay. And then you talked a little bit about the do-it-yourself tool on the health care side. Is there a revenue opportunity here for you, Bill, or is this some more about client retention, at least as you look at it today?

William C. Cobb

Yes, I think -- Kartik, let me say this. We obviously are doing this because we think there's going to be ultimately a business impact. I don't know at this point. But certainly, we're going to look at this as a commercial effort, whether that would be in the first year, how that would play itself out. As we get closer down the road, we'll probably have more to share with you on that. But clearly, I think as we would make an investment in that platform, we will be looking to monetize that at some point. But like I said, I don't want to go into it right now and, frankly, I don't know at this point as we make our plans, and as I stated, as we find out how this whole thing unfolds, how exactly that plays out.

Kartik Mehta - Northcoast Research

And then just one last question, Greg. You look at the cost savings this year obviously did better than expectation. How much of those cost savings will spill into FY '14? I'm assuming some of those, you've gotten halfway through the year. So just trying to figure out how much of that we should look for in FY '14 as well.

Gregory J. Macfarlane

About $15 million is a number that we've communicated to you before, and I feel comfortable that, that will flow into 2014. And I guess while we're talking about the expense results, I think it's worth noting, I know there were a lot of questions along the way about will this translate to bottom line. And we've shared with you today that we exceeded the $85 million to $100 million. And I mean, I've only been here for a year, so a lot of this was in play when I got here. But full compliments to Bill and the leadership team, frankly. And I think, hopefully, the rest of you believe it when we said it goes off the bottom line. You can see that now in the results.

William C. Cobb

Yes. And if I may just give a little plug also, we have a lot of our associates listening in. I mean, this was a top-to-bottom initiative, and there's a lot of people who have contributed. And I'm proud that we were able to deliver beyond what we had stated a year ago.

Kartik Mehta - Northcoast Research

Greg, even though you exceeded your expectations by a decent amount, you still only expect about $15 million to kind of carry into FY '14.

Gregory J. Macfarlane

That really represents the annualization of cost decisions that were made in fiscal year 2013. Back in December, when we had our investor meeting with all of you, we talked about a concept more about targeting a 27% to 32% EBITDA margin range. We ended in the low 30s. We're not going to give specific guidance for this year. Our focus on expenses will continue forever, and we've got some good ideas. We've got some benefits coming in from last year. We're not going to give you specific numbers for this year. But I think, generally, in and around the margin percentages that we were at this year, plus or minus, is about where I expect it to be.

Operator

Your next question comes from the line of Gil Luria.

Gil B. Luria - Wedbush Securities Inc., Research Division

So first of all, on the Affordable Care Act, just to confirm, you're saying you don't expect a volume increase for fiscal '14. In 49 of the states, the advice is all going to be complementary, so no material impact to fiscal '14. First of all, I want to make sure we got that right. But then the second part is the pilot in that one state, are we talking about your day-to-day tax advisors providing that type of advice, an additional person that specialized in this in the store? Are you going to try and to fit it into the navigator box that was designed into the Affordable Care Act, maybe go for some federal grants? Can you tell us a little bit about that pilot?

William C. Cobb

So let me answer your first question. As we sit here today and what we're trying to disclose in our -- in the comments I made earlier is there's a lot of unknowns at this point. So as we go forward, we've done a tremendous amount of research in this area. I think we're as close to this as anybody else in our industry. It's very hard to say at this point what the impact is, so that's what we're trying to convey to you that as it goes forward, there's still lots to play out here. With regard to the potential for a of pilot in one state, here's what I would say: it would be a situation where I'm not going to go into describing, but where you would come into a Block office and you would be able to enroll with the assistance of someone who would, in effect, be licensed to enable people to enroll. I'm not going to get into what box is being checked or whatever, but just the user experience is someone would come to a Block office and be able to enroll in an exchange.

Gil B. Luria - Wedbush Securities Inc., Research Division

And then secondly, one of the key reasons, it seems like the overall tax funds this year were down. I think you discussed was the reduction in fraud or the attempts by the IRS to reduce fraud. Did you see this -- do you see evidence of this in the store? Did you have a report -- did your colleagues report from the stores that they had customers sit down and once they realized that the mechanism has changed for reporting some of those tax credits, get up and leave? Or is it the word-of-mouth among the fraudster community kept them out of the stores? Did you get any reports from the field that would indicate that?

William C. Cobb

Yes, I think, Gil, you're hitting -- I can't quantify it, but that's exactly the sentiment we got back, which is unfortunate. But I think this is one of the reasons why we do think it's important that the return preparer initiative, which is tied up in the courts right now, I think is important for the country. I think it's important for reputable tax preparers. We already comply with that because it's important for us with our brand and our reputation and our history that we provide accurate legal returns. But yes, your hitting on the qualitative feedback we received.

Gil B. Luria - Wedbush Securities Inc., Research Division

And finally, the Emerald Card, you grew that 9% on a 2-year stock. Have you also been able to get any uplift on the reload, on getting your employees and colleagues to get consumers to reload those cards, keep them longer? Has there been any level of success around that?

William C. Cobb

Yes, and Greg, if you want to add anything on this, we're not going to disclose specific numbers. But reloads are up, revenue per card is up, usage stats are up. This is building. In our view, we have a long way to go still. But the strides that Susan Ehrlich and her team made this year not only on enhancing the actual product, the value proposition around the product and the features, but also now as we start to become smarter about marketing and how we teach people how to use the card. The cards are now all personalized. We've made a lot of steps. So I'm very hopeful that as we go forward, this will continue to grow as we go on.

Gregory J. Macfarlane

The strategy for Emerald Card, Gil, remains the same. We want to get more cards issued, although we have a very large number right now; we're effectively the third largest general purpose reloadable debit card program in the United States. But more importantly, in my opinion, is the year-round usage. And we shared statistics with the community before, which shows the average revenue per card per Block comparative to Green Dot and NetSpend, and we have multiples of opportunities to increase that. And so Susan and her team have worked very hard in features and functions, education, incentives, communication plans. And all of you on the phone, it's a great product. I encourage you to get one yourself if you don't already have it. But that's really what the opportunity is. And we've obviously just been about 3 months’ worth of vintage at this point, maybe 4 months of vintage. We can't -- we don't want to get into, what, with the month of June, at this point, already past our fiscal year. We saw some encouraging early results from the first 2 months. What I think we'll probably plan on doing this December when we have the next kind of major get-together, we'll talk a little bit more what our path looks like and some of the, I think, early results there.

William C. Cobb

And make sure you sign up for text alerts. It's my favorite feature.

Operator

Your next question comes from the line of Thomas Allen.

Thomas Allen - Morgan Stanley, Research Division

When you announced the potential bank sale, it seems like tax season was a limitation you wanted to keep the bank for the tax season. So just as we think ahead for timing, should we expect you to sell the bank by next tax season?

Gregory J. Macfarlane

So yes, thanks, Thomas, for the question. We continue to work very diligently on finding the right partner or partners. We had a lot of complexities that have to be dealt with. We have spent a substantial amount of time in the last 6-plus months through this process. We continue to be encouraged by opportunities, but it will always come down to finding the right deal at the right time with the right partner or partners. And the point at which we reach there, we'll let you know. Having said that, we are very sensitive to the tax season. And we don't want to disrupt the client experience, the tax pro experience, which is essential to delivering successful Emerald Card, Emerald Advance and the refund transfer to the 3 main products here. So I think your question, the way I would interpret it is, we're not going to announce something in the middle of a season and move it would be kind of the way I'd think about that so.

William C. Cobb

Well, the other thing I would add, Greg, and you certainly know this very well, the principle is correct that the tax season must be executed, that our clients do not see a disruption, that this is seamless to them. We will also have to get regulatory approval as we go forward. So it's not a simple sale on a closing. There will be a regulatory aspect of this. At the appropriate time, we will share more on this obviously.

Thomas Allen - Morgan Stanley, Research Division

So you start doing Emerald Advances, I think, around Thanksgiving. Does that mean that you would need to do something before then? And then if you add in the regulatory approvals too, does that mean you need to assign a couple of months before then to do it ahead of this tax season? Or can timing be pushed a little bit?

Gregory J. Macfarlane

So you're correct that we opened up the Emerald Advance season this past year right before Black Friday, U.S. Thanksgiving. And that -- when you back up to the operational requirements of training, certifying, providing the materials to the offices, the system requirements, there is some operational lead time that's required from that. But in terms of specific, how do the timeline walk, I'm not prepared to talk about that right now.

Thomas Allen - Morgan Stanley, Research Division

Okay, that's fair. And then you talked about typical tax filing market growth of 1% to 2%. But just as we think about next year, you also talked about the potential that there were more extensions this year. From extensions, could we see market growth in fiscal '14 of 3%, 4%? Or should we think it's still probably pretty close to that 1% to 2%?

William C. Cobb

I hope you're right, Thomas. But extensions were up. I think a number of preparers have seen that. Obviously, we're working hard right now to translate those extensions into returns. It mystifies to some level what happened last year. I think that I go back to what I said earlier, the 50 years of data would indicate things would normalize. That's certainly our expectation. Folks probably talk about this more in December. But I think we believe things will normalize. But for conservative purposes, we might be thinking more in the 1% range. But we want to get the final numbers from the IRS in the next couple of months and take a look at that. But extensions, converting those extensions into returns could have an impact. But I don't think it would be anywhere close to the levels you just talked about.

Thomas Allen - Morgan Stanley, Research Division

Okay. And then finally, just on the RACs, can you give any color on or can you quantify the volume decline versus the revenue per unit increase? Did the delays have any impact? And I think it came in slightly below your expectations. What do you think drove that?

William C. Cobb

Yes, and, Greg, if you want to add anything, I think the -- we now have some doing the vacuum outside -- but I think, the season did have -- all the stuff that went on with the season did have a delay, did hurt us volume-wise. And I think we're looking hard at our user experience, the flow of our software. I mean, we're uncovering everything right now. To your point, we're disappointed that we didn't get up to the same level. Now clearly, we charged this year, so that was probably the biggest impact on the volume. But we want to hold ourselves to high standards, but I think that between charging for the project or the service and the convenience for the consumer and then also some of the disruption for the industry.

Gregory J. Macfarlane

The only thing I would add, Thomas, on that is the main -- I think the main miss, in my view, was really just the lower volume for the overall industry was the main driver. There were some price-mix-driven things behind that, but that was really a smaller part of the delta.

Operator

Your next question comes from the line of Scott Schneeberger.

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

Just following up on the last questions. It makes sense that with regard to a bank transaction, your counterparties would want to look in and see how the full year completed. And it sounds like there's some puts and takes there. But would you feel stronger now than prior to the tax season with regard to consummating [ph] something with the results you have? And I'll stop there.

Gregory J. Macfarlane

Well, so back when we announced the deal, we hired Goldman Sachs and First Annapolis as advisors and ran a full process. And every step of the way, we've had strong and varied interest from a lot of different financial institutions, a lot of quality institutions. And so we've obviously worked through that list at this point in time, and we've worked down a fairly narrow list at this point in time. But my expectation about getting a consummated deal was the same then as it is now. Obviously, you're going to get distracted by the operational details and all that kind of fun stuff. But I know that there is -- these are great products, and we're a great company. We run them really well. We're proud of what we do from a compliance perspective, and all the banks that have gone through the process with us have all come back with very positive feedback. So I guess I don't have a difference of opinion about getting a deal done.

William C. Cobb

Yes. And I would just go back; I thought Greg laid it out very well in the script. I mean, if you could do this in a way that had perfection, if you will, you'd announce the deal April 17 and you move on. But this is a unique situation. It's a captive bank; you need tax-related products. Partners need to understand that. Given the seasonality, we have to run through that. In today's world, compliance -- I mean, there's a lot behind the scenes here. As Greg put it, it's not a retailer selling its card portfolio or a retail bank selling to another retail bank. Having said that, the teams have done some tremendous work. I think there has been great progress here, but we just aren't in a position yet to say -- we will not delay when we feel we're in a position that we have struck a deal.

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

And just following up on that, is there -- you mentioned in the prior question, the reloading of the card is up, and I imagine that would be important to track for a counterparty. Do you think there's more time needed for your counterparties to review? Or is it that -- you mentioned you have it narrowed down, so it sounds like a good positioning. But would there be something extracurricular that requires more time?

Gregory J. Macfarlane

So I can't comment necessarily what the counterparties are wanting to see. So I can't specifically say it's Emerald Card usage. But at this point, I mean all the transactional details from '13 have been digested and shared as appropriate.

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

And then you guys referred to the regulatory review period. Could you, one, just for all of us, give us a feel of what type of period, would that a 6 to 12 months, just a feeling? And also on your -- just your decision not to return capital during this period until you have a transaction, is that still the case?

William C. Cobb

So let me try the first half. I mean, Thomas, our business is the government. That's part of what we pride ourselves on is the ability to deal with government and regulators. I really don't see it that I could speculate. I think, hopefully, we'll position this well. The regulators will be pleased. We're taking steps to make this obvious to them with what we're trying to do, but I can't even remotely give you a date. Greg, do you want to take the second part of the question?

Gregory J. Macfarlane

Well, just to be clear, we have returned capital during this time period when we paid quarterly dividends of $20-odd million per quarter, earlier in 2013 fiscal year, we bought back a substantial amount of shares that we talked about. In that entire time period, we were regulated. So we've been very clear that as a regulated entity, we have requirements with our regulators. But we have, during these pen [ph] periods, done capital reallocation to shareholders.

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

I'll switch it up. And the -- with regard to the ACA, did you see -- Bill, I understood what you were saying for the 2014, '15 and '16 and how it's going to be a build. Do you see a complexity pricing opportunity as soon as fiscal '14? And then a follow-up on that one.

William C. Cobb

And again, Scott, I don't want to dodge here, I haven't seen the first form. I don't know whether it's a simple form, it's a complicated -- so I don't want to dodge your question. I think the point we're trying to make here is I think we've done a lot of research in this area. I think we're as close to this as anyone in our space. But it's unclear at this point, and there's still a lot of knowledge we need to get. Certainly, we're approaching this, that on a variety of fronts, we do think that there is a retention opportunity. Ultimately, we think there is a monetization opportunity, but I'm not trying -- I'm trying to be as open as we can be here. We just don't know at this point. But believe me, we're staying very close to this.

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

That's fair, totally understandable. Following up on that, you mentioned the one state, could you let us know if that's a larger or small state? And is there the potential for more states with regard to the exchange process?

William C. Cobb

Do you mean by geography, population or...

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

Any way you want will be fine.

William C. Cobb

If you want, all 50 of our states, Scott...

Gregory J. Macfarlane

And territories.

William C. Cobb

And territories. Yes, well, I mean, at the appropriate time, we'll talk -- I'm not going to talk about that for competitive reasons, obviously.

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

Okay, fair enough. And I realize it's getting late. If I can sneak one more in, on the tolling agreements, Greg, could you just speak a little bit to more to that? I'll leave that as an open-end question, which is to help us better understand what may happen in future quarters and how the process is going [ph] over thinking?

Gregory J. Macfarlane

So I believe this is a new record for H&R Block that it was question 31 or something, where we got to Sand Canyon, of the development. So the future is uncertain. I guess what I would say actually is for the accrual for representation and warranty reserves that is going to be reported here officially with the SEC shortly, what we've disclosed to you today, is the best estimate of that liability. So I can't -- what I did say is based on the methodology change, you may expect more volatility, but we'll have to wait and see.

Operator

Your next question comes from the line of Michael Millman.

Michael Millman - Millman Research Associates

Several questions as well. On the EA, on the card, it looks like your bad debt was up, yet your fees cards were down. Talk about that a bit?

Gregory J. Macfarlane

I can, Mike. The bad debt always needs to be put in relationship to the revenue line when you're in financial services, specific to the Emerald Advance, which is where the majority of that sits. This past season, we continue to enhance the program. We had a longer time period. We invested more into the credit score remodels, better education. We had, I think, a better approach to the business. We also, as we've experimented with historically, opened it up to new clients, as well as prior clients. And really what you see that delta is just the change in sort of that profile of clients. But in my mind, it was a good decision. And when you look at the bottom line, we were okay with the results there.

Michael Millman - Millman Research Associates

What extent did those new clients become clients of the tax business?

William C. Cobb

What proportion of the time does an Emerald Advance client turn into a -- or an Emerald Advance client turn into a tax-preparation client, is that the question, Mike?

Michael Millman - Millman Research Associates

Typically, this year, of the new clients.

Derek Drysdale

Yes, Mike, this is Derek. It's actually about 92% to 93% generally come back for tax preparation.

Michael Millman - Millman Research Associates

And that was the case this year as well?

Derek Drysdale

I believe that's the case, yes. If not, we'll get back to you.

Michael Millman - Millman Research Associates

In terms of revenue per return, if you will, could you talk about the percentage of Free EZs this year versus last, the increased pricing on the non-Free EZs than last?

William C. Cobb

So I think, Mike, we're going to stick by what we disclosed was the overall pricing was up 1.7%. We don't talk about specific number of returns from EZ. It's a promotional activity for us. It's been very effective for us. But I'm not going to get into the specific numbers. And as I spoke with Kartik earlier, the pricing, I would stick with the 1.7%.

Michael Millman - Millman Research Associates

And then your focus on profitability, why aren't you pushing price in an industry that's been known for non-elasticity?

William C. Cobb

Yes, I think that as we've indicated last December, we made some very considered choices about pricing this year. We chose to reduce some prices, which were clear on our pricing boards. In other areas, we changed the pricing. We made some moves during the year. We really focused on our discounting. So it's a complex web here. And I think we're-- every year, we'll evaluate the economic situation, our situation. And so I would say that we certainly delivered slightly above what we had indicated in December. And as you obviously know from your years here that we're hard at work, trying to figure out what our plans are for next year. And we'll talk about that more in December.

Michael Millman - Millman Research Associates

This year, the 3 brands looked like they kind of underperformed a bit. Who's taking that incremental share and why?

William C. Cobb

I'm sorry, which -- what brands are you talking about?

Michael Millman - Millman Research Associates

I'm talking about Block, I'm talking Jackson Hewitt, and Liberty, if and when you make adjustments to their report.

William C. Cobb

Yes, again, I'm not going to comment on any competitor's situation. I think that overall, with the industry down, we're still trying to -- awaiting a full review, if you will, of where things went. But it's pretty obvious that the primary competition in this space is independents and CPAs. But again, with the overall industry down, it's hard for me to say at this point.

Michael Millman - Millman Research Associates

Can you give us an update on certification?

William C. Cobb

The return preparer certification?

Michael Millman - Millman Research Associates

Yes, please.

William C. Cobb

I think it's an important area that we are in full support. I think any reputable tax preparer is. It is tied up in the courts right now. We believe this is important for Congress and the IRS and to work with the courts. I think this was a bad decision. I think it's completely misunderstood. But really, this should be something that -- given the importance of filing tax returns, given the situation the country has with debt, this is -- this doesn't make a lot of sense for this not to be part of our industry. But right now, it's tied up in the courts and, hopefully, a resolution will be had, so that everybody has to use the standards that H&R Block and others use.

Michael Millman - Millman Research Associates

Any guess on timing?

Gregory J. Macfarlane

We'd love to have it tomorrow, but we have no other estimate than that.

Derek Drysdale

And Mike, just for clarification, I mentioned 92%, the Emerald Advance clients return back for tax preparation, that was last year's rate. This year's rate was 91%, so it was down 1 point.

Operator

And we have no further questions at this time.

Colby R. Brown

Thank you. We appreciate your participation in the call, and we look forward to talking to you all soon. Thank you, Keisha.

Operator

You're welcome. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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