Good morning. I'm Colby Brown, Vice President of Investor Relations. And on behalf of the H&R Block management team, it's my pleasure to welcome you here in attendance and those participating via the webcast to H&R Block's December 2015 Investor Conference. We have an informative and exciting morning plan for you, and are glad that you're able to join us. Before we get started, we have a few housekeeping items to take care of. Yesterday, we released our fiscal 2016 second quarter results. That release as well as today's presentation includes certain non-GAAP financial measures. We've reconciled the comparable GAAP and non-GAAP figures and the schedules attached to the press release, and you can find those, both the release and the schedules, on the Investor Relations page of our website at www.hrblock.com. I'd also like to remind everyone that today's presentation and various comments made in connection with it will include forward-looking statements as defined under the securities laws. Such 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 such, our actual outcomes and results could differ materially. You can learn more about these risks in our Form 10-K for fiscal 2015 and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. Shortly after this morning's presentations conclude, we'll post the slides on our Investor Relations website. As a reminder, our webcast will also be available for replay on the website. To give you a sense of today's agenda, opening presentations will run until approximately 10:00 Eastern and then we'll take a 15-minute break. Refreshments will be available throughout the morning and on a quick logistical note, restrooms are out the door and to your right, just past the registration table. We then expect to begin Q&A around 11:15 Eastern. So again, welcome everyone. Thank you for being here today, and we hope you enjoy the presentations. I'd now like to introduce our President and CEO, Bill Cobb.

Good morning, everybody, and welcome to this year's investor conference. We're pleased to have you join us. Today, we're going to share with you a look back at this company's transformation, the opportunities we see going forward and how we will continue driving value for shareholders. And we have a great lineup of speakers this morning. So let me begin with those introductions. First up, Kathy Pickering, our Vice President of Regulatory Affairs and the Executive Director of the H&R Block Tax Institute. Kathy is going to talk about the impact of tax fraud and the lack of standards on this industry and how H&R Block is leading the industry in partnering with the IRS and others to address these problems. Next on the agenda, Laura Scobie, our Vice President of Client Insights. Laura will talk about the dynamics of the tax season, our seasonal promotions and the launch of a new brand to better serve clients with more sophisticated tax situations. Then Jason Houseworth. Jason leads our Tax Product Strategy and Development group and is going to discuss trends in the DIY industry and how we're positioning ourselves for continued success in that category. Then, as Colby said, we'll take a 15-minute break and when we return, Mark Ciaramitaro, our Vice President of Taxes and Health Care Services. Mark will discuss the Affordable Care Act, what we learned in 2015 and how we see that impacting our business in the industry in 2016 and beyond. And finally, Greg Macfarlane, our Chief Financial Officer. Greg will talk about our second year and year-to-date results, review all the recent changes and activities and then pull it all together with a detailed financial view of why H&R Block is a good investment. But before we get to them, I want to spend…

Hello, I'm Kathy Pickering. I've been with H&R Block for over 17 years and I've held a number of different roles during that time. Today, in my current role as Vice President of Regulatory Affairs and Executive Director of the Tax Institute at H&R Block, we're talking about the impact of fraud and the lack of standards on the tax industry. You've heard the term fraud thrown around a lot, but I'm going to talk about 3 very different types of tax refund fraud: Improper payments on the Earned Income Tax Credit or EITC, return preparer standards and Stolen Identity Refund Fraud or SIRF. On the surface, these types of fraud seem quite different, but there are 2 common themes: A lack of consistent minimum standards and the anonymity of the DIY product, which opens the door for tax refund fraud. But why should you care about these issues? Well, as you will see later, we believe that fraud is distorting industry and competitor results, and the solutions that are being implemented for next tax season and beyond will help level the playing field and Block will benefit because of this. But you should also care because the amount of fraud and the dollars represented are staggering. Of all the EITC payments, 22% to 26% a year are improper payments or between $14 billion and $17 billion. Of all the federal benefit programs, including Medicare and Social Security, the percent of EITC improper payments is, by far, the worst. For comparison, Medicare has an 8.5% improper payment rate and Social Security, it's less than 1%. On return preparer standards, H&R Block has unique insight on competency across the industry. Over the last few years, our acquisitions team has screened thousands of independent tax firms who are interested in becoming H&R…

Good morning. I'm Laura Scobie, and I lead the client insight team here at H&R Block. I'm going to talk to you today about 3 things that focus on growing our assisted tax business. First, I'll review our strategic foundation for growth, and that is consumer segmentation. Because the customer is the driving force behind all major business decisions, you will see it woven throughout other topics in today's discussion. Starting with our plan for achieving growth in the assisted business early in the tax season, and moving into a new brand launch that focuses on an important consumer segment that until now was only partially addressed with our current model. Starting with segmentation. Just a quick overview for you. We have decades of experience understanding tax filers and their needs. We constantly refine and deepen this knowledge base. This deep knowledge of the tax filing universe, some 135 million filers in the tax season, shows us exactly what they want from tax-preparation. This customer knowledge is a sustainable advantage for H&R Block. We're able to group people with similar tax needs into distinct segments. This isn't data for data's sake. Our understanding of the tax marketplace is deeper and better than anyone else in the category, and we're leveraging that knowledge in every decision we make. Today, we're talking about segments in terms of 3 broad groups. This is just to illustrate a point. It's actually much more complex than we'll discuss today. There are defining attributes that surround each segment, and I could go into great detail, but I summarized it into the key things I want you to know about each segment. First, for people in Segment A, these clients have needs that are all about the money. For these tax filers, the refund is likely their…

The Block Advisors website is now live, so we encourage you to go to the website for more information at blockadvisors.com. In closing, we're excited about our plan for growth. It's based on understanding and meeting client needs across all segments. H&R Block now has 2 distinct brands and each is positioned to serve different types of clients. These brands can literally sit side-by-side, and prosper and grow because they have 2 distinct value propositions. This focus allows us to build solutions that differentiate rather than just trying to meet the basic needs for all. Thank you.

Good morning. I'm Jason Houseworth, and as the President of Product Strategy and Development, my role is to create great experiences for all of our tax clients. And today, I plan to share what we believe is a winning formula for DIY clients and discuss how this formula is designed to succeed going forward within the digital category, given 2 key trends shaping this dynamic category: the material presence of fraud, and the convergence of value and premium. But I'm going to start by outlining our winning formula in this competitive environment with the goal year in and year out to outpace the category in overall e-file growth, and grow profitably as we do it. As Laura just mentioned, at the highest level, we categorize tax filers into 3 general groupings. We look at these groupings aligned with the 60-40 split of assisted and DIY users and believe strongly our DIY products should be designed for the roughly 40% of tax filers who choose to do it themselves. These users have specific needs that they're looking to be fulfilled or validated within the tax offer experience. They're confident in their ability to perform tax-preparation. And, in contrast to the assisted user, they want to control the process. They love the flexibility and convenience of preparing taxes on their own schedule. And finally, they expect a trade-off, that is to say, to be rewarded for the investment of their time with a lower price. This is the do-it-yourself client, and these are the requirements that form the basis of our maniacal approach to build the best tax software in the digital category. You should recognize our formula for this client from last year's investor conference. It has 3 components: product innovation or delivery to the consumer of intelligence as a service;…

Okay, everyone, thank you so much for taking your seats. And now, I'd like to introduce Mark Ciaramitaro, our Vice President of taxes and health care.

Good morning. As Colby said, I'm Mark Ciaramitaro, Vice President of taxes and health care services at H&R Block. And as Bill indicated earlier, I'm back again to provide an update on the Affordable Care Act, both in terms of what happened this past tax season and what's to come. The Affordable Care Act, along with introducing new health plan regulations, insurance marketplaces and coverage mandates, effectively created a new and dynamic intersection between taxes and health insurance. This intersection exists because many of the ACA's key provisions are administered via the federal tax code. You'll soon see that we expect the breadth and depth of the intersection will continue to grow as new mandates, new notice types, higher penalties and increased IRS enforcement begin to phase in. You'll also hear that we believe H&R Block is best positioned to take advantage of the opportunities tied to the growing impact of ACA on tax filers. We can't talk about the impacts of the Affordable Care Act without understanding its long-term goal, which, simply put, was to expand health insurance coverage among a large pool of historically uninsured households. And by doing so, reduce overall health care costs. ACA sought to accomplish this by driving higher quality, improved affordability and greater access. To achieve these ends, ACA regulations created a number of new mechanisms, including the individual and employer mandates, new federal and state-based insurance marketplaces and expanded Medicaid. So with this ACA context, as an investor, you may reasonably ask, "So why should I care and what does it have to do with H&R Block?" Well first, it's important to understand that because of this new intersection, ACA has brought significantly more complexity and confusion to the annual tax filing process. We believe that these newly embedded tax impacts will…

I always want to hear Mark's point of view on that stuff for me. Anyway, good morning, I'm Greg Macfarlane, and I'm really going to wrap things up here today. So I'll conclude the presentation by providing a financial view on the strategy and topics that were presented in more detail today. Now, I'll do so by focusing on H&R Block's unique role in this industry, with a specific look at the company and the issues impacting our industry. I'll also provide some thoughts about our financial structure and our outlook. Before those, however, I'd like to take a moment to review the pass quarter. It's been a busy quarter, and I'll provide some context around the recently completed bank divesture and the changes to our capital structure. First, a few words about our second quarter results, which we released yesterday. As you're likely aware, this is a seasonally slow quarter for us. One in which we report a loss. Revenues for the quarter decreased by 4.6% to $128 million. While we saw a slight improvement in our off-season result in the United States, these were more than offset by the negative impact of foreign currency rates in Australia and, to a lesser extent, Canada, as we translate those results into U.S. dollars for financial reporting purposes. Total operating expenses increased by $43 million, or 13.5%. This increase was expected, resulting primarily from approximately $22 million in transaction costs related to the bank divestiture and capital structure actions, which I'll talk about shortly. Additionally, occupancy costs and amortization expenses increased due to the annualized impact of acquisitions of independent tax preparations -- preparers and in particular, the franchise businesses last year. As a result, net loss for the quarter increased 26% to $143 million and a loss per share increased…

Before we take questions, one quick ask. If you all could please state your name and your company, just for the transcript purposes, when we get the mic to you. We have a couple of runners with the mics and please stating your question into the microphone would be great. So starting there with George.

George Tong with Piper Jaffray. I want to talk with EITC fraud. It accounted for about 2/3 of the volume decline last year in the assisted business, so clearly an important part of the business. Bill, can you talk about how the conversations are going with legislators, with the IRS in terms of addressing the fraud? How much you expect the fraud to slow in the coming years? And what additional steps need to be taken?

Yes, so -- and then Kathy, if you want to add anything after I try to answer George's question. The conversations, I mean, there is clear recognition that for this program to sustain, and there is support for the EITC program generally on both sides of the aisle. But that $14 billion to $17 billion in the last year of, call it, as Kathy said, improper payments for fraud, is not sustainable. When you have 25% of the payments going out that are improper, something needs to be done about that. So there's great recognition on that. There's clear understanding now that the disparity between the documentation requirements between DIY and assisted is not -- doesn't makes sense. So that's why, for this year, the number of questions has been reduced for paid preparers. And then as Kathy indicated, there's a pilot going on, which ourselves and a few other DIY preparers are participating in with the intent that, in '17, the following tax season, we would have parity along those lines. So that is proceeding quite well. Again, we're working with the -- there's always a misbelief that the IRS controls everything. IRS basically takes their direction from the Treasury. So there is real understanding with the Treasury -- I've talked to the highest levels of the Treasury and the IRS, that this is the way forward. So I'm very pleased -- sometimes people will say, why are you guys -- you'll never get anything done with the government, et cetera. Well, Kathy and Marie van Luling and the whole GR team works really hard on this. So we have made some real progress on that. How this translates to how much of the fraud will decline, hard to say. It's difficult for us to really forecast that that will lead to X, Y or Z. The public-private partnership that Kathy referenced where we're doing a lot of things, which is more around SERF, but really impacts EITC because all of this stuff is tied together, are ways forward. So we've got real change on the documentation requirements. We have a public-private partner. We've all signed a memorandum of understanding, all the names you know in the DIY space. So I do think the ball is being advanced. But I think Kathy said at the end, is it going to stop fraud, no, but I think we are moving along. So I'm pleased that we're making -- this is part of the job is really to try to impact this. Is there anything else you want to add just...

I think you really captured it. We're in great shape for the progress that we've made for 2016, really pleased with the pilot and the changes in the audit questions. And then for 2017, we're really looking to see those form changes for consistency across the filing channels and then the additional legislation that the IRS is pushing for. And with all that, I think we'll definitely see more progress in that area.

Okay. Scott?

Scott Schneeberger with Oppenheimer. First, I'd like to start, you guys typically do not provide a revenue guidance and there is a lot of guidance here and it's appreciated. Could you just speak to the top line a little bit outside of these puts and takes, but how you think about it perhaps in this year, if you want to share, and then again longer term?

Yes, I'll let Greg address that. And again, Scott, I think Greg will, I think, reiterate what he said earlier about the 4 components of revenue with -- go ahead, Greg.

Yes, we try to provide you with things that we think will be meaningful for you. I mean, I know it's always a question where people want more. But the reality is when you go into a tax season, when you look at even our internal models, we've got sort of lots of champion-challenger models. There's still a fair amount of -- even coming down to the last week, and so that's partly why we don't do it. But there's also a portion of why we don't do it is because the reality is that we are the industry leaders and a lot of competitors' strategy is to copy what we do and so we don't want to make it easy for them. But in terms of our ideas about revenue, it really is those 4 drivers: it's price, it's volume, it's mix and it's attach. We feel good about 3 of the 4, but the reality is, for us to be successful, it's got to be 4 of the 4 moving together. These are things that take time. These are things we're optimistic about. We're continuing to make investments smartly into a number of programs that will drive that. But when you only really have a chance to do business once a year, progress is measured over time and that's just a reality for our business. That's kind of our high-level thoughts on it, Scott.

I appreciate that. And just a similar question, different category. In return of capital, just your thoughts on what you're going to do with the dividend longer term. And also have you been buying back stock since the tender? And I know you're not going to forecast that, and I haven't done the math of what's implied in this year's share count guidance. But just thoughts on those two, dividend, and then what's the ongoing plan with the repurchases?

Yes, so let me start with the dividend. I mean, as you all know, we've been paying a dividend for 50-plus years. It's something we take very seriously. We did increase it, but the increase was actually 3-plus years ago. We were prohibited also during the time we were a savings and loan holding company from increasing the dividend. We did ask, but we were prohibited from doing that. We have chosen not to yet clarify dividend policy for a number of reasons, the main one is that we had a lot of other things we wanted to get out of the way. We understand, as a company, this is one of the things that we can do to create value for us. So you'd expect sometime in the near future for us to have a more specific articulation of dividend policy. As it relates in the share repurchase, we bought back 1.5 billion of shares, it was a very material execution for us.

$1.5 billion.

Sorry, $1.5 billion. Thank you, Bill. So soon, I forget. So we completed successfully $1.5 billion and the reality is that that was a very big step forward. There were a lot of things that were moving. Since then, we've not bought back shares. To be very clear, we're very happy at buying them back at $37. But the way we think about share repurchase is opportunistic, and we think about creating medium- and long-term value. And we want the historic record to reflect that we were very smart on how we bought those shares back on your behalf. Part of which you heard from us in our articulation is, over the years we think we've done a good job at that, so let us do our jobs here for you. We have $2 billion of remaining authorization. We have some time to work with, but we're also going to be smart about how we do that.

Okay. Let's go with Anj and then Gil and then Kartik.

Anj Singh from Crédit Suisse. Really appreciate all the color and transparency that you guys gave around ACA, EITC, fraud and even the financial outlook. But wanted to get a little bit more color on the ACA opportunity as we think about it longer term. You guys said 16.4% of your clients were impacted, 16.6% for the overall market. Could you, I guess, get into why are you still trailing the market in that category. And also I'd be interested to see how much of your ACA impacted mix is DIY versus assisted. And do you have a sense of how much of the market is DIY versus assisted in that ACA-impacted category?

So let me just understand trail. When you say trailing in the market, I just want to understand what do you mean by...

So you have slightly lower...

16.6% versus 16.4%.

Yes, it's slightly lower.

Oh, okay, okay, okay. You guys want to take that?

Go ahead, Mark.

So first of all, I'm just going to say, generally, this is going to take time to play out. We don't believe that there's a material difference between ourselves in the category. One of the -- probably what would account for that biggest change this year, as you saw, a lot of exemptions are being done in the DIY space, and so that's part of the explanation of what's going on, at least in this current year results. If not for that, we would be at or above. I also indicated that on our assisted side, a significantly larger percentage of our retail clients are -- were the ACA impacted and that's going to begin to play out at a greater degree going forward. But it's going to be a long term kind of -- we gave you a little bit of a sense of where we think we're headed ultimately, but it's going to take a number of years for this to play out, we've always said that. And we believe that over time, as Greg said, that the mix of that impact will change over time. More complicated reconciliation and exemption clients, fewer penalty clients will be impacted. So there's both a volume and a mix impact.

I will say that from last season, more sort of broadly as management, we were very pleased with how ACA went from Block's perspective. We were really looking at the client experience because the reality is it was a lot of education that we had to provide to our tax professionals through all the changes to our DIY experience, and we looked very carefully at the client experience from that. And we also compared ourselves to a lot of the competition out there, and the reality is, there was a lot of very poor execution by other companies out there. And we think over time that will matter because this is a very real issue for people. As Mark said, the penalties are very real here. The notices are going to start coming. People will have to sit down and account for their decisions as it relates to their taxes, but also for their health care. And that's why, for us, it wasn't so much about the numbers last year, it was about our execution and we were very pleased with that. Yes, Gil.

We had a very -- you had a very interesting discussion about...

Just say -- I know who you are, but say your name first.

Gil Luria, Wedbush Securities. We had a very interesting conversation about identity fraud and you don't have the numbers for this last season, but based on anecdotal evidence, it went from $3 million a couple of years ago, maybe double in the last couple of years. That's a very big number. Assuming that's all online and digital, I'm assuming there's very little of that happening in the stores. Do you think the steps this year will be effective enough to either reduce that number or reduce those growth rates? And then if it does, per the charts that you put up there, there is still a gap between the rejection -- you file rejection rates online versus in-stores. So wouldn't that impact your digital business somewhat? Your competitor from Mountain View has talked about the fact that yes, it would impact them if there was less fraud, but it would impact everybody. Wouldn't you be concerned that if that particular line, that you'd have some impact from the fraud declining?

So yes, about 3 questions in there. So let me try to carve it up. One is you're correct, the IRS commissioner himself acknowledges that, still on identity refund fraud, it's virtually all DIY. So it is not an assisted issue for any assisted preparer. It's really a digital preparer. Now when it comes to the volume piece, I guess, Jason, you should take that. And then your middle question was, I think, more for Kathy, was you wanted to know the -- would that affect our volume if everything went down?

Do you expected the decline or just slow growth and then if it does decline or slow growth, wouldn't that impact the digital line?

Jason, you want to take that?

Well, so what I showed as far as our own reject rates, there is a difference between assisted and DIY because for a do-it-yourself user, as I mentioned, they're really confident in their preparation skills, but that doesn't mean that they're very good at it. So we would always expect the difference between assisted and DIY, there to be a gap or potentially double. Our rates, when we look at it -- we're always trying to improve our reject rate and I think that we're making progress. But as I mentioned, there are -- there's a wide disparity in the reject rates among competitors and the tax software industry and I think that you see those rates and how they correlate to e-file growth. As those come down, what I think that you'll see is competitors in the industry looking more like H&R Block tax offers. I think our own tax offer, I think we have opportunity, but I do think that it will affect other competitors going forward.

Then a question on Block Advisors. Do you feel you have the appropriate staffing? Or are you going to need to hire CPAs or fold in other CPA practices in order to deliver the Block Advisors and extend the brand? And then Bill and Greg have worked really hard over the last few years to get out of all the ancillary business and you put up a slide that says you're getting into payroll and bookkeeping. Is there a slippery slope there that extends you into far-field businesses that after all that hard work of getting into it, how many -- 600 and how many days, Greg?

Yes, all right. So let me take both of those, and Laura, if you want to add anything. So for this year, it's essentially a transition, translation of what was formally H&R Block Premium to Block Advisors. So we have staff in place already, and these are -- as part of H&R Block Premium, these are among our most experienced and knowledgeable. The H&R Block Premium team has always dealt with more sophisticated tax clients. We think that we can build a brand here that would involve having to train and potentially be able to absorb more CPAs, so that, in the long run, you're in the right zone. But in terms of for this particular tax season, we feel very confident that we have the staff to handle that and we have obviously recruited more. And we think that we're going to be able to attract more people to a brand like this that might be more for CPAs or independents serving that kind of clientele to really impact that -- to want to seek to be part of Block Advisors. So we feel good about that. Now with regard to the payroll in that regard, I would caution you not to go too far because we have a business services Package today. We have an ability to serve clients on their business returns, both tax, et cetera. This is a small movement out. We're testing it. I don't see it as a slippery slope at all. I see it as a natural extension of what a more sophisticated client would want. As Laura said earlier, about 1 in 5 in our research are small business owners, so we want to be able to serve them on what I would call -- and this is small -- when we're talking small business, we're talking everyone from self-employed to a few employees. So that's -- I think it's in pretty close here. It's more of a bookkeeping play. That's what I would say.

Just keep in mind, Gil, offering doesn't mean that we're actually doing it right, so we typically are leveraging partnerships to do a lot of that.

Yes.

So then last one, for you, Greg. You talked about the cost of the [indiscernible] being 1 point of EBITDA margin and that's the extent of reduction in EBITDA that you have from last year to this year. What about operating leverage? To the extent that you get revenue and you're getting very high incremental rates, when do we start seeing the operating leverage on that?

So if you think top-down about our business model and the way our costs behave, we tend to be kind of a mix between fixed costs and variable costs. The main variable cost we incur, there're really 2 forms, and one is on the assisted side, the tax professional's variable comp, okay. But that represents for the next dollar of revenue, about 1/3 of that goes in their pocket, and after that, once you've paid for fixed costs, its margin. On the DIY side, it's really actually the marketing dollars because those actually are quite variable and we push those up and so, there's also the next dollar of revenue, there's something less than 50% that goes up into our variable costs. When we model all that out, you include things like wage inflation and rent inflation in that, we would typically hit our fixed costs inflection point at about 3.5% of revenue growth. There are some, depends on what the revenue is, but for all intents and purposes. So as we're able to get to 4%, you then would have a natural impact on your margin percentage expansion. So as I've said to many of you over the years, Block is able to successfully get to 4-plus percent of revenue will naturally be EBITDA margin expansion and so that's what we're focused on, is getting to that fixed cost leverage point.

Let's go to Kartik in the third row.

Kartik on the aisle.

You talked a lot about EITC and maybe the processes that are going to take place over the next couple of years. But as you look at this tax season, is there another headwind you're anticipating because of EITC at least for the retail business, and if so, what would you -- how would you quantify that?

Another -- I don't know. No, I don’t see...

No, I mean, for example, 2 years ago we decided to eliminate the free EZ program. That had an initial 1-year impact. Last year was sort of the echo effect, that's not going to recur this year. But really there's nothing that I would -- that jumped to my mind unless Bill's got something I've forgotten about.

No.

Well, I thought last year, you said 2/3 of the clients that you didn't retain were because of EITC that migrated away from retail to digital. So you don't expect that to happen this year? You don’t expect any type of migration from retail to digital on the EITC side?

No, I don't think we -- I thought you meant for a new -- I think until we get real parity, real -- I think that that possibility, we're going to work hard, we've got a lot of programs against that, but that -- the trend on that would, at this point, probably continue. The question is how deep? Will it be as extensive as past seasons? I'm not going to forecast any of that. But that would be a continuing issue because we don't have documentation requirements at parity. There's still all the stuff that Kathy talked about with regard to the fraud piece. There's still 25% impact. That doesn't flip in a year. I think we're making some strides, but -- so that will be -- I guess, you could term that a continuation.

Just to be clear, Kartik, we never said that all of them went to digital. Some of them went to digital, some of them went to other assisted competitors, yes.

Yes. And then, Jason, just for you. You showed the products you're going to have on digital and what your competitors are doing. Does this mean you don't anticipate having an absolute 0 product or a product that has no cost for federal and no cost for state, and no cost a financial product?

Thanks for your question, Kartik, but I'm not going to comment on any pricing or promotion that we might offer in the upcoming season.

You'll find out soon.

Could we go back to Thomas Allen back there.

Thomas, we'll try to get you a better seat next year, okay?

If you guys can please just state your name and company.

Thomas Allen, Morgan Stanley. So 3 initiatives you guys are doing, buying back the franchisees and buying independents is the first. Second one is obviously all your investments are in the Affordable Care Act. Third one is switching from the Premium to Block Advisors. Can you just talk about kind of the investment period? For example, I think you invested heavily in ACA last year and then when do you start to see these be tailwinds rather than headwinds?

Yes, so let's take them one at a more time. I think, as Greg said, we've made a big investment on the A&D side, especially on the franchise buybacks, we will have completed 600 in 2 years, 600 buybacks. It has moved the mix to 65-35. As Greg said, and I said in my opening, compelling returns. We're buying these really well. But they do increase our expense base, especially in off-quarters like you saw here. So I think that that -- we're near the end of the runway or at the end of the runway on the franchise buybacks. We'll continue to look at independents. So that -- and obviously, when we look at independents with the stuff that Kathy talked about, we have to make sure we're buying somebody that we think can fit our ethics, our accuracy, et cetera. Then on ACA, big increase last -- or big investment last year in training and marketing. We think we're going to be able to realize that. We think we did a great job with our tax pros. The refresher training is much more limited, as Greg pointed out. So we actually think we're going to start to reap the benefits of that investment from last year and being the place to go for ACA. The third area was Block Advisors. Okay, so I think that, we're going to see how this plays out. We did convert 300 offices. We want to see how this plays out. Our plans are in the, longer term, that this fits within our capital structure and our expense structure as we said. The offices will be profitable this year because they are essentially going concerns, so I think we'll be able to realize that. We're not indicating levels or amounts or anything like that, but we feel good about the transition. I know our tax pros that are in the office are very excited about it. In various markets, you can stop in and see them. There're a couple here in New York that are almost finished. So I think we feel pretty good about -- that's obviously an investment we did, but I think we'll start to reap the benefits of that. I don't know, Greg...

Yes, and just to kind of get a summarized answer. Basically, 3 to 5 years is when we would say it pays back. Do you want to go down to an IRR perspective? The reality is that we have more good ideas to invest in and then we have the resources, the people to be able to execute. So we continue to think sort of most of these -- we're not solving for 3 to 5 years. We typically think IRR is the best benchmark. But we continue to see good opportunities out there and it's really just a matter of how much the system can handle with the number of good people we've got available to do these things.

And then since you closed on the bank sale, there's been some scrutiny around your bank partner. The stock's down a decent amount. Can you just talk about the diligence you did before you picked a partner to kind of assuage some of the fears around what's going on there.

Yes, I mean I'm not going to comment on that issue, that's another company. But the diligence was extensive. We're very comfortable with the execution and the integration that's happened over the past few months. We're off to a good start with EA in terms of integration. We look forward to the tax season that's executing it so...

All right. There's a question on this side of the room and then we'll go to Michael after that.

This is Herb Buchbinder, Wells Fargo. Years ago, you had executive tax, which didn't really take off and then it became Premium and now Block Advisors. But is it that the problem that the market perceives Block is serving the lower-income taxpayer and you never really are able to do that well with the middle- or upper-income taxpayer? So how can Block Advisors overcome that and succeed this year and longer term?

We'll find out. We believe that we've done extensive research on this. Laura has led the team in terms of looking at the segments. I think, we kind of rolled the ball onto the court before and said let's see who wants to pick that up. I think now we have a much more focused marketing effort. I think we have a much more focused value proposition and we think we're going to be able to, both in terms of the real estate we pick, the services we provide, be able to offer at a very compelling service. So I don't -- the world's different now. I don't worry about what executive tax service was. We think we have the right proposition. And by the way, H&R Block Premium was doing fine. We just think we can accelerate it.

You don’t have any regrets that you got rid of RSM McGladrey?

No, I do not. I think it was a good deal for H&R Block and it was a good deal for the partners that are RSM McGladrey.

The other thing is it's a simple deal, but the fact that your clients got a less refund last year, might that have a negative influence on them coming back with them looking for help somewhere else because they may not understand why their refund was down?

No, I think all of our indications from the offices were people understood this was the law of the land. This was -- we did -- I don't recall one instance where anyone blamed the tax preparer. So I don't view that was a threat at all.

Okay. Let's get to Michael and then we'll go in the back with Paul.

Michael Millman, Millman Research Associates. Just following up on the BofI question. Is there a plan B if that blows up? Couple of other questions. On investment grade, can you quantify the cost and the risk of being off investment grade and maybe discuss, I guess, why investment grade is so wonderful? And on Sand Canyon, can you give us kind of a bid-and-ask between what you're offering and what's asked? And if indeed you were able to close it out at this level, how much cash would you free up?

Okay. So on BofI -- there's no plan B. We have a 7-year deal we signed with BofI and we're confident that that will be executed. With regard to investment grade, quantifying the cost and I don't know...

Yes, I mean, what we've said consistently is we have been investment grade for 60 years and we have now publicly said that we're committing to that. We've not said these are the 16 reasons we don't think that's a very valuable exercise to go through. We're comfortable being at the low end of investment grade. We've now quantified what that looks like and that's who we are.

And with regard to Sand Canyon?

Yes, so the way I would best answer this always is, look at the 10-Ks, look at the Qs because there are lots of great disclosure in there. The representation and warranty reserve is the best estimate of the expected liability. So that is the best estimate. That reserve, as you looked at it over the last several years, has changed very modestly, really just to reflect kind of real-time negotiations the Sand Canyon management team is in. We've had some successful settlements through that process. They continue to be in a limited number of engagements to go through that. I get frustrated with the time personally, I'm business person in life, which is move on with life, but the reality is you're dealing with very complex legal issues with a number of counterparties and so it just takes time. It's frustratingly slow. In addition to the $154 million reserve, of course, they've got additional equity, which, I think Mike, you were asking about, to the tune of $200 million-plus of additional equity. Our view at Block, I think, if you talked to the Sand Canyon management team, they'd say it's going to take multiple years to unwind. And frankly our case that we think is most likely is it comes down to 0. So I'm not expecting any cash back in the future. I'd be happy at a 0 outcome.

When you say 0, you're talking about the equity as well?

Correct.

And why have all these banks -- and obviously there's good reason, but why have they been able to settle some years ago and Sand Canyon's still working this out?

Yes, it's actually good question, Mike. I mean, the broadest answer is they have ongoing relationships with the GSEs, they have ongoing relationships with their regulators and they have motivation to settle that and move on so they can continue to do business. Sand Canyon's perspective is we don't do mortgages anymore. We're not in the banking system. And realistically, the best strategy that Sand Canyon's Board of Directors and its management has said, this is just something that we think will take time and we're going to do it properly and thoroughly. There is no rush to a simple answer because of other reasons.

So we'll go to Paul in the back and then Jeff right next to Michael.

Paul Hamilos from RS Investments. You guys make a compelling case about eliminating EITC fraud and identity fraud. And as a taxpayer, I'm outraged by it. I'd love to see that effort succeed. But how does that actually drive revenue for H&R Block? I can see how it might change the market share statistics to look more favorable, but how would that -- how would eliminating fraudulent returns actually drive more revenue?

So let me take an attempt and then, Greg, if you want to add anything. First of all, as a principal, I don't want to make money on the fraudulent returns, as the CEO of this company, as a company that's been in the business for 60 years. If we eliminate fraud and -- I don't want to make money on fraudulent returns. I think taxpayer confidence, I think that overall, fraud is not a good thing for an industry. So the first thing is, I think, as an industry, we have to concentrate on trying to have as much integrity in this system as we can. So that's part of the -- part of the reason why I push on this issue so much. I think, though, as we can get to better compliance, getting fraudsters out of there, I think the net benefit as an industry leader is that we will benefit. I can't quantify what that amount is, but that's probably the way I'd answer it. I don’t know, Greg, if you have anything to add.

Yes, I mean, Paul, I can go on for an hour here, but a couple of ones that come to my mind; 40% of all returns in the United States are done by independents and independent can be defined as a lot of things. Half of those half or 20% of all returns are people that do less than 100 returns. Half of the half or 20% of all returns are done by the people that do over 100 returns. And the reality is that the quality of work that gets done there is awful and it's increasingly where most of the fraud is. A lot of those people have no business doing tax returns. In the event that there are minimum standards in place, they're going to have difficulty meeting those and will likely, to some extent, some of them will exit the system. That return still has to get done somewhere. We would be a natural place for that, we would think. So that's one example. And just to be clear, there are a number of independents that do a very fine job and we see those as well. But when you actually look and -- we shared some statistics. I mean, when we go on diligence and we're actually reunderwriting tax returns from better quality people and we're saying 1 in 4 have an issue, and of those, like half of them are basically committing fraud, it's shocking, okay. The DIY side, I mean, that is one of those ones that, I think, Bill's point is when a brand is -- if you've got a product that people have belief in that you see yourself as a safe harbor, as people are impacted personally by fraud or as fraud is fixed in the system, those people who have their taxes done will naturally gravitate to, we think, to companies like Block. There are other examples, but those are just some.

It's Jeffrey Silber with BMO Capital Markets. I actually wanted to go back to the DIY products. I'm not going to ask you about pricing, don't worry about that. But maybe if we can talk just about overall marketing? Maybe I'm not your target market, but I'm just surprised that we don't see more marketing specifically for your DIY product. Can you talk about the strategy and how you think you can increase awareness on it?

Let me try that first and then Jason, okay. There's a lot of marketing on the DIY. The large majority of our spend is online, which we think that is the most effective and most payout, but we spend very competitively with -- as Jason terms them, the market leader. That is a real grind it out, day by day, hour by hour. So we spend a large majority of our spend online, which you maybe don't see or whatever. We also have historically, and again we're not going to comment on this, have run over the year television advertising and other broad market advertising. We're not going to comment on whether we will or will not do that. But as Greg said earlier, the real variable cost we have with DIY is the marketing line. We don't break it out specifically. I don’t think the market leader does either. But I'm satisfied that we have sufficient weight behind DIY. I don't know if there's anything you want to add, Jason.

No. I appreciate the question, Jeff. And as I mentioned, we've increased awareness by 16 points in the last 4 seasons. And I haven't seen tax awareness numbers, but I don't think that they come anywhere close to that. That's the first thing I would say. But to me, the best way to ultimately market the product is by having a great product. And I think, that's where, regardless of how much we've marketed and how much we've seen the awareness grow, I think our product is what's really changed over the last 4 years and I outlined some of that. But even coming off last tax season, we saw our retention increase over 200 basis points. And coming off last tax season, we feel really good about the changes that we have in place for the product this year. I mentioned that we've done a lot of work to make the product responsive, we're multiscreened, but this year, really behind the scenes, we've completely rewritten the beginning; the middle, the topic transitions, which is really where the client looks for the software to tell me what's next and what should I expect, what do I need to do and the logic we've put in there is brand-new; and then we've completely rewritten the ending experience where we really close the client. And then we proactively used our analytics team in order to put what we call pro tips to look at specific clients and figure out what something we can tell them provocatively throughout the interview in order to help them explain something and use our expertise that otherwise they might have missed. And so those are just some of the changes that we put in place this season, but I'm really excited about the product that we released and just went live last Friday.

Any other questions?

Last one.

Scott, yes.

Scott Schneeberger, Oppenheimer, again. Greg, going over the -- all the pieces of guidance for this year, it looks like there's going to be a significant reduction once everyone updates their models for EPS. Could you speak to the first 2 points, the bank divestiture? That's incremental to what we've had modeled for the transaction for a couple of years, correct?

So the numbers that we outlined should be consistent with prior numbers that we've shared with you.

We've said $0.08 to $0.10 all along.

Yes.

And that's -- and what you provided today was just reiteration.

Details to make sure that you're all up-to-date and squared away with that.

And it was also to break out between revenue and expense. We had generally given a large -- and Greg and the accounting team have worked through that piece. So that's what -- Greg was trying to give you real specific details so that you could build those models.

Got it. That's helpful. And then the $22 million, that's onetime and we wouldn't -- that's not in the 29% to 30% EBITDA margin, correct?

That's one time. So that was adjusted EBITDA number we gave you, yes. That's adjusted out.

Okay. And then, lastly, I know the maintained long-term guidance is 28% to 32%, just a bit of feel from the 29% to 30% EBITDA margin this year. How -- are we going to have a nice rebound directionally thereafter?

Yes. I mean, we -- 28% to 32% is kind of what we think is the right margin for now. Our goal is not to increase margin percentage other than if it's a byproduct of revenue growth, which is the question that Gil had asked earlier. The way to create real sustainable value for shareholders is to get revenue growing greater than 4%, we then get natural margin expansion. If we don't get that, then -- so what my point is we're going to take costs out of the system, but we're reinvesting it in future revenue opportunities that we believe will happen. If under some hypothesis that doesn't happen, we can take costs out of the business and move margin percentage up like we've done. I mean, it wasn't that long ago that we were 26% EBITDA margin. So the 28 % to 32% is really reflective of a short term -- to sort of short term, medium term. We may revise it. But it really is going to be mostly a function of our revenue performance.

And Scott, I think what we're trying to do, because we want to be clear that from the highest level, we are very excited, very committed. We're finally, if you will, running the company we wanted to run, focused on core tax preparation. This is a transition year, so we have to go through the onetimer of the BofI piece we just talked about. We have the literal onetime transaction costs, which also are not only BofI but include all the capital structure stuff that we did effectively onetimer. And then, with really the number being higher than what we had probably anticipated a couple of years ago, that 600 franchise locations coming back in, some success on the independent piece, that there are expenses associated with -- especially on the franchise, just we're paying for the payroll now and the rent and everything else and the revenue will catch up. So that what we'll find is, what Greg was trying to lay out is, take those to the side here. Beyond that, we think we have controlled expenses pretty well in this company. Greg has put a terrific productivity team together that's stamped on everyone's heads, so I wouldn't assume that we're trying to set a new course in terms of spending or whatever. I think you can count on us being within -- executing the way we have in the past. And when there are investments we have to make, like last year's training piece and we think that's going to pay out, we'll do that as a onetimer. But for the most part, setting those 3 things aside, we're sort of within the balance of what we've been doing.

And I agree and then, there has been a good job of expense control. One final question of a financial nature. The, I think, it's 240 locations bought in this year, about $100 million, I think you spent about the same last year for more locations. Is this just going up higher on the tree to pick the fruit? And I understand you're getting great margins for what you're acquiring. And if you could elaborate a little bit more on strategically where are these locations, is this is Latino market targeted? Or just any elaboration there.

We'll clarify with you off-line, but the numbers are not -- they were more different and it was reflective of -- the average purchase price per store is really not that different year-to-year, so I think that's maybe just how you wrote your notes or something. We can get you those exact numbers. The markets themselves typically were, I would call, the middle sized cities around the country. It isn't -- I wouldn't point out that it was heavily Latino or not. But these are sort of secondary, third sort of, say, like Springfield, Missouri, Lansing, Michigan places like that.

And it's 260 for this year, not 240. Last year was 340.

We'll do one last question with Herb.

Can you just comment briefly about the focus of your TV advertising this year and how much you'll hit on ACA issues on television?

Not going to talk about marketing. Never do with these meetings.

You'll like it.

All right. We'll wrap. Yes.

Well, thank you all very much for coming. And thank you for those of you listening online. And here's to a great tax season.