hrb h&r block investor conference 2015
TRANSCRIPT
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COLBY BROWNVice President, Investor Relations
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Forward-Looking Statements This presentation contains forward-looking statements within the meaning of the securities laws. Forward-looking statements can be identified by the fact that they do notstrictly to historical or current facts. They often include words or variation of words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," ""forecasts," "targets," "would," "will," "should," "could" or "may" or other similar expressions. Forward-looking statements provide management's current expectations oof future conditions, events or results. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future areforward-looking statements. They may include estimates of revenues, income, earnings per share, cost savings, capital expenditures, dividends, share repurchases, liquiditcapital structure or other financial items, descriptions of management’s plans or objectives for future operations, products or services, or descriptions of assumptions undeany of the above. All forward-looking statements speak only as of the date they are made and reflect the company's good faith beliefs, assumptions and expectations, but tnot guarantees of future performance or events. Furthermore, the company disclaims any obligation to publicly update or revise any forward-looking statement to reflect cin underlying assumptions, factors, or expectations, new information, data or methods, future events or other changes, except as required by law. By their nature, forward-statements are subject to risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that mcause such differences include, but are not limited to, a variety of economic, competitive and regulatory factors, many of which are beyond the company's control, that aredescribed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2015 in the section entitled "Risk Factors” and additional factors we may describe fromin other filings with the Securities and Exchange Commission. You may get such filings for free at our webs ite at http://investors.hrblock.com . You shoulpossible to predict or identify all such factors and, consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.
Non-GAAP MeasuresWe refer to certain Non-GAAP financial measures in this presentation. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measu
financial performance prepared in accordance with GAAP. Because these measures are not measures of financial performance under GAAP and are susceptible to varyincalculations, they may not be comparable to similarly titled measures for other companies. For a description of these non-GAAP financial measures, including the reasonmanagement uses each measure, and reconcilia tions of these non-GAAP financial measures to the most directly comparable financial measures prepared in accordance wplease refer to our previously filed press releases posted on our investor relations website at http://investors.hrblock.com .
Market and Industry Data The data included in this presentation regarding the tax preparation services industry, including trends in the market and the Company's position and the position of its comwithin this industry, are based on the Company's estimates, which have been derived from management’s knowledge and experience in the industry, and information obtaicustomers, trade and business organizations, internal research, publicly available information, industry publications and surveys and other contacts in the industry. The Chas also cited information compiled by industry publications, governmental agencies and publicly available sources. Although the Company believes these third-party soureliable, it has not independently verified the data obtained from these sources and it cannot assure you of the accuracy or completeness of the data. Estimates of market srelative positions in a market are difficult to develop and inherently uncertain and the Company cannot assure you that it is accurate. Accordingly, you should not place unweight on the industry and market share data presented in this presentation.
Safe Harbor Statement
http://investors.hrblock.com/http://investors.hrblock.com/http://investors.hrblock.com/http://investors.hrblock.com/
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BILL COBB
President & CEO
H&R Bl ock
T he Leader i n Tax Pr epar at i on
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Today’s Objectives
A Look Back at Our Transformation
Opportunities Going Forward
Continue Driving Value ForShareholders
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Jason HousPresident U.S. Tax Pr
& Develo
Greg Macfarlane Chief Financial Officer
Kathy Pickering Vice President, Regulatory Affairs
Mark Ciaramitaro Vice President, Taxes and Healthcare Services
Today’s Presenters
Laura Scobie Vice President, Client Insights
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WhoToda
Positio
the F
A Look BackIndustryIssues
What I’ll Cover
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A Look Back
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A Look Back
A Companyin Turmoil
LaggingResults
“FinSuper
Unsure of what we wanted to be… and who our clients were
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Activist involvement Revolving leadership- Four CEOs from
2007 – April 2011
LeadershipChallenges
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Why I Took the CEO Job
Great Company Great Products Gr
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The Need For Focus…The Need For Focus
Core tax bus
Sustainably the top line
Improving m
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Exiting Non-Core Businesses
d h l
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BEFORETHE TAX EVENT
EMERALDADVANCELine of credit
DURING
EMERALDCARD
Reloadable debitcard
Year-round
THE TAX EVENT
REFUNDTRANSFER
Fees from refund
AF
PEACE OFMIND
Audit rep,covers additional tax if
HRB error
THE T
The only company with a suite of products like thi
Innovated With Tax Plus Strategy
l d
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$1.2 billionof product revenue
11% growth over 3 years
Tax Plus Strategy Has Generated…
S bl L d hi
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Executed our strategy
Continuity of leadership
Multiple tax seasons with proven results
Stable Leadership
B k Di i
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Final step in transformatioback to a focused tax com
More value for shareholde
through new capital struct Freedom to make decisio
Bank Divestiture
f l h h ld
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consecutive quarterlydividend
A History of Returning Capital to Shareholders
213 th 33%dividend increase
C it l St t
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$3.5B share repurchase program throughJune 2019
$1.5B Tender Offer – 40.5M shares at$37 per share
Upsized line of credit from $1.5B to $2B
Issued $1B of new long-term debt
Capital Structure
Si M 2011
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Repurchased 76.4 million shares
That’s 25% of outstanding shares,average price of $26.38 per share
Since May 2011…
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We DidWhat We Said We Would D
A Transformed Company
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2007
Mortgage
Option One
Broker Dealer
RSMTax
Preparation
Consulting
Non-Core Add-onsBank
TaxProd
• Assisted• Online• Mobile• Desktop• International
• Emer• Refu• Emer• Peace• Tax I
Today
A Transformed Company
TaxPreparation
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…and Our Business Results?
Revenue Has Grown Three Straight Years
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Revenue Has Grown Three Straight Years
$2,906$3,024 $3,079
FY13 FY14 FY15
( m i l l i o n s )
Profitability Has Dramatically Increased
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EBITDA i ncr eased $136 mi l l i on si nce FY11
2011 2012 2013 2014 2015
31%31%30%26%
28%
EBITDA ma r gin up 5 poin t s si nce FY12
Note: EBITDA (earning before interest, taxes, depreciation, and amortization) is a non-GAAP financial measure. Please refer to our Dec 7, 2015 earning release for more specific information.
Profitability Has Dramatically Increased
Digital
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Revenue growth outpacing industry
Consumer awareness has increased 16 pts to 6since 2010
Digital
International
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New Markets
India and U.S. Expat Tax Services
Australia6% Market Share+5% Revenue
Growth in FY15
1
10% Market Share+13% RevenueGrowth in FY15
1
Canada$239M of FY15
revenue
1In local currency. USD results impacted by foreign currency translation impacts. Canada includes tax prep fees for returns preparedthrough May 5, 2015 due to the extension of the Canadian tax season.
International
Invested Back Into the Business
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Continued enhancements of our retail stores
OutsideInside
Invested Back Into the Business
Technology Investments
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Technology Investments
Bought Franchise & Independent Locations
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Bought Franchise & Independent Locations
The Market Has Responded
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Nov.$
May 2, 2011
$17.48
The Market Has Responded
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We’re Committedto Leading This Industry
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Industry Issues
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Dealing With Fraud
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Public-Private Partnership
Federal Government State Tax AIndustry
Dealing With Fraud
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Stolen Identity Refund Fraudis Just One Part of the Problem
EITC Fraud & Improper Payments
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DIY filers don’t have to anssame eligibility questions
Migration from assisted to dprimarily due to fraud
Excluding fraud, percentageassisted filers may have gro
EARNED INCOME
TAX CREDIT
1Source: H&R Block estimates
EITC Fraud & Improper Payments
Lack of Return Preparer Minimum Standards
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Unscrupulouspreparers
Only 4 spreparer
That Makes No Sense
All 50 states setstandards for barbers
ac o etu epa e u Sta da ds
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We Need…Mandatory Testing, Continuing
Education & Background Checkfor All Paid Return Preparers
The Industry Leader in Fighting Fraud
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“…we must come together as an industry, with government, to mthe system safer for consumers and stop the billions of fraudulenrefunds that are issued every year.”
- Bill Cobb, Feb. 17, 2015, New York Times
“…we urge Congress to listen to consumove to enact minimum standards for
preparers and implement consistent anmeasures for all taxpayers…”
- Bill Cobb, April 8, 2014, testimthe Senate Finance Committee
The Industry Leader in Fighting Fraud
Why We Continue Talking About Fraud
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“…we urge Congress to listen to consumers andmove to enact minimum standards for return
preparers and implement consistent anti-fraudmeasures for all taxpayers…”
- Bill Cobb, April 8, 2014, testimony beforethe Senate Finance Committee
ReduceFraud
Level PlayingField
Better Cons
y g
Complexity and Tax Reform
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Candidates Air SharpDifferences on Taxes- Politico
p y
Complexity and Tax Reform
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Public PoliciesAdministered
Through the TaxCode
We FLaw…80,000
Eve
ComplexityImpacts Us Too
p y
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Over 3 million ACA clients served last seaso
Millions enrolled through the exchanges
ACA opportunity will take several years to un
Enduring Taxpayer Truths
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Want AccurateTax Return
Pay Only WhatThey Owe
Want MaximumRefund S
g p y
7The Tax Code
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In 1955, much simpler butpeople still wanted help…
74,000+ pages & counting
…H&R Blockinvented the industry
60,044
26,300
16,500
5044003,102
1955
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People Want H
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We Serve the Entire Category
To This Point…
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Industry
Capital Structure
Transformation
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The Future
The Tax Preparation Industry Is…
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Steady and…
Not very exciting to s
Challenges Of…
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Implementing complex
new tax lawsTackling issues affectingmillions of Americans
Navigating the assistedand DIY categories
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Challengestranslate intoopportunities
Opportunity in the Tax Preparation Industr
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135 million returns filed itax season…and counting
No one better able to help
H&R Block is the CIndustry Leader
SCALEBRAND AWARENESS
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SCALE
INNOVATTAX PROFESSIONALS
BRAND AWARENESS
Growth Potential & Stability
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Over $3 Billionin Annual Revenue
Growing Profit2011 2012 2013 2
HRB EBITD
$813M
Note: See description of non-GAAP measures earlier in this presentation.
Growth Potential & Stability
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Proven RecorReturning Cato Sharehold
Return on Invested CapitalNearing Top Decile
of S&P 500 1
ROIC
1Source: FactSet, H&R Block internal calculation
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There’sROOM TO RUN
In Assisted,We’re Bringing New Ideas
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ServeWith
SophistiSitu
We’re Bringing New Ideas
Better AlignServices to
Dynamics of theTax Season
Meet Challengeof Growing
Early SeasonClients
In Digital
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Growing Revenue & Awarenessof Our DIY Products
In International
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Fast Growing Business Exciting Opportunities inIndia and Expat Service
Tax Plus Products
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Continuing to Meet Growing Needof Our Clients
In Conclusion…
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Excited to be inThis Industry
ContinuinLead
H&R Block is aGreat Investment
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KATHY PICKERINGVice President, Regulatory Affairs &Executive Director of the Tax Institute
Fr aud’s Impact on t he Tax Pr epar at i onIndust r y and t he Way For w ar d
The Impact of Fraud & the Lackof Standards
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EITCImproperPayments
ReturnPreparerStandards
StoIden
Refund
of Standards
Two Key Themes
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Opens the Door to Tax Refund Frau
Lack of ConsistentStandardsAnonymity
of DIY
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Why Should You Care?
Why Should You Care?
Solutions being implemented for upcomingtax seasons
Will impact the industry…
…especially our competitors
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The Amount of Fraud & DollaRepresented are Staggering…
EITC Improper Payments
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~22-26%
$65.6BILLION
Worst among allprograms
EITC IMPROPER
Source: Department of the Treasury Agency Financial Report
Return Preparer Standards
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Unique Insight on Competency
Potential Acquisitions Must Meet Block’s Crite
Number of Returns Professional Appearance Computer Systems
H&R Block Reviews Actual Tax ReturnsAccording to Our Standards to Assess Qualit
Return Preparer Standards
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1 in 2Prospects has
Non-Compliance Issues
1 in 4Committing Fra
The Results Are Shocking
Stolen Identity Refund Fraud
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Problem Growing Worse
Source: Treasurer Inspector General for Tax Administration, March 2015
Federal Tax ID Theft Cases
440K1.1M
1.8M
2.9M
?
?
201520142013201220112010
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Why is theStolen Identity Refund Fraud (SIR
Problem Getting Worse?
Stolen Identity Refund Fraudd i hi “ i i i ”
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H&R Block is leading the way forward for the indu
Fraud is reaching a “tipping point”
Must be addressed effectively…
…or else it puts the entire taxadministration process at risk
The Impact of Fraud & the Lackof Standards
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EITCImproperPayments
ReturnPreparerStandards
StoIden
Refund
Anti-Poverty Program for Working FamiliesEITC Overview
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$6,242
Bills RentCar Repair
EITC Eligibility
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Children must live withtaxpayer for at least 6 moTaxpayer must have earnincome
Blended family complex
What is an Improper Payment?
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Right Household,Wrong Person AcLack of Documentation
EITC Fraud and Improper Payments
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In Tax Season 2015:
~22% to
~26% of EITC payments were improper That amounts to $14-17 billion
There is a history here… Between years 2012 – 2015, Treasury estimated atotal of ~$60 billion in fraud and improper payme
Source: Department of the Treasury Agency Financial Report
Driving Change to Reduce Fraud
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We Need Practical Measuresto Reduce Fraud
Protect the Program for Tit was Meant to Benef
EITC by Number of Children & Filing Statu
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$2,000
$4,000
$6,000
$20,000 $40,000 $60,0
CreditAmount
Income
EITC by Number of Children & Filing Statu
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$6,000
$2,000
$4,000
$20,000 $40,000 $60,000
CreditAmount
Income
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EITC Fraud Migration – Many Factors at Pla
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Increasing Availabilityof Technology DIY Software
IncreasingReturn P
Ghost Preparers DIY CompetitiveOffers
Free / Free
TS16 Changes: Pl d TS17 Ch
EITC: Some Good News
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Pilot test in DIY to learnthe impact of additional
questions
Gov’t-Industry ProgressTS16 Changes:
Retail clients no longersubjected to certain
invasive questions
There’s More to CPlanned TS17 Chan
Consistency in Eeligibility cross cha
Legislation:Reduce refund
for unsubstantiatEITC claims
Will This Stop EITC Fraud?
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In the short term, no, but…
This will reduce EITC fimproper payments
It will get fixed
It’s just a question of wh
The Impact of Fraud & the Lackof Standards
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EITCImproperPayments
ReturnPreparerStandards
StoIden
Refund
No Federal Minimum Standards in the IndustryIRS’ return preparer program
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IRS return preparer programoverruled in court in 2014
Some states responding with own minimum standards
Others considering starting
minimum standards programsOregon: GAO report found stpreparers more accurate 1
1Source: Government Accountability Office, 2008
All the IRS is Able to Require is…
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• Name, SSN, DOB
• $50 fee
• Explanations if you owe taor have a felony record
PTIN – Preparer Tax ID Number
H&R Block SetsHigh Standards
60 hours of bincome tax tr
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gfor its 80,000 Tax
Preparers Competency
18 hours of coeducation ann
Background c
Internal comp& ethics prog
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The Impact of Fraud & the Lackof Standards
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EITCImproperPayments
ReturnPreparerStandards
StoIden
Refund
Stolen Identity Refund Fraud 101
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Name, SSN,DOB
AnonymousTransaction
FunnelM
The Nature of Fraud is Changing
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Self describe“The Queen o
Tax Fraud
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Understand the tax code and the holes in tax administration systems
Employ computer programmers, write scripts & submit returns in vo
Reverse engineer IRS and state fraud filters
Target HomeDepot
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Anthem
p
A small percentage of success means a huge p
Relatively low risk of getting caught, very high
Why We’ve Seen an Increase inStolen Identity Refund Fraud
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Accessibility ofStolen Identities
Rise inAnonymous
UnauthenticatedAccounts
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Team ofDedicated
FraudAnalysts
RequiredAccepted
Federal ReturnBefore State
AutheIde
for our
Emer
Stolen Identity Refund Fraud Needs to beAddressed in a Cohesive and Unified Way
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Public-Private Partnership
Federal Government State Tax Industry
Everyone Can Agree…
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And a Common
Fighting Frauda Unified Def
for 2016 & Be
We Have a Common Enemy
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How are Government & InduLeveling the Playing Field?
The DIY online filing process is virtually anonymous
Key Reasons SIRF Has Increased
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e o e g p ocess s v tua y a o y ous
IRS and the states can’t always see the tax filer behavi
- Devices being used
- Location of IP address
A th ti t li fil id t
For 2016, All Software Providers Must…
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Authentication
Authenticate online filer ident
Implement strong security pro- Stronger passwords- Security questions
Not a heavy lift for H&R Block
Each tax preparation comp
Also for the 2016 Tax Season…Information Sharing
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required to conduct fraudmonitoring and analysis
Report leads to the IRS in amanner
Secure infrastructure that r
taxpayer rights and protectpersonal information
Not a Heavy Lift for H&R Block
Key Changes for 2017 & Beyond
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SecurityTechnology
CentralizedInformation
SharingFinaPro
What These Changes Mean
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H&R Block is well-positioned
Our solid relationships with the IRS and Statbetter protects our programs and products
Our competitors have to catch up with us.
What These Changes Mean for Competitors
Assisted Independent Competito
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Assisted Independent CompetitoWithout an IT staff, the risks are much gre
Smaller DIY CompetitorsMany have not had centralized fraud deteand compliance capabilities
DIY
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Again, H&R Block isWell-Positioned
A H li i P bl
A Good Start
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More Needs to be Done in
A Holistic Problem…
Only Solved by Working Together
Standards Technology Investment Legisla
Final Thoughts
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None of the steps individually solve the problem
But together—IRS, States and Industry—we are makpositive difference
It’s the right thing to do…- For taxpayers- For the tax industry
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Fuel i ng New Cl i ent Gr ow t hi n Assi st ed Tax Pr epar at i on
LAURA SCOBIE Vice President, Client Insights
Growing Assisted Tax
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Segmentation Early SeasonGrowth New B
Lau
We Understand Tax Filers
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135 million tax season filers
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SIMILAR NEEDSGROUP INTO SEGMENTS
SEGMENTA
SEGMENTB
SEGMENTC
All about the moneySEGMENTA Refund is their biggest payday of the year
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SEGMENTB
SEGMENTC
High touch, year-roundBelieve their situation is complexWilling to pay for more expertise
Believe they are capable of preparing own tax
We Have a Way Forward
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For How to WinAll Types of New
We Have a Way Forward
SEGMENTA
All about the moneyRefund is their biggest payday of the year
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Works 60 hours a week as a waitress
Single mother of 2
Receives the Earned Income Tax Credit
1 of 33 million eligible
TS15 RETURN COUNT BY DAY - H&R BLOCK SEGMENT
Segment A Files Early in the Season
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LATE SEASON
JANUARY FEBRUARY MARCH
MAR
EARLY SEASON
H&R Block TS15 ResultsEarly Season Focus is Critical
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JAN FEB MAR APR
H&R Block TS15 Results
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JAN FEB
EITC makes up2/3 of client loss
W ll k b d
H&R Block Has Historically Done WellWith EITC Clients
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Well known brand
Respected
Products that benefit thSkilled at handling comp
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We Know What Really Matt
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We Know What it Takto Win Them Back.
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A POWERFUL
EARLY SEASON
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EARLY SEASONMARKETING PROGRAM
Positive Differencein Our Clients’ Lives
Stand Out inMarketpla
TARGETED MARKETIN
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TARGETED MARKETIN
LikelySwitchers
CustomerRelationshipManagement
(CRM)
BilingualMessaging A
A Targeted Multi Year, Multi DimensioPlan to Win Back EITC Clients
TARGETED MARKETIN
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TARGETED MARKETIN
CLIENT EXPERIENCE
GOVERNMENT RELATIO
CLIENT EXPERIENCE
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CLIENT EXPERIENCE
MoreBilingual
Associates
More Quality
Tax Pros
Person
Inter
GOVERNMENT RELATIO
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GOVERNMENT RELATIO
EITCImproperPayments
ReturnPreparerStandards
StoIden
Refund
A Targeted Multi Year, Multi DimensionaPlan to Win Back EITC Clients
TARGETED MARKETIN
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GOVERNMENT RELATIO
TARGETED MARKETIN
CLIENT EXPERIENCE
Added level of expertiseSEGMENT
B
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Partner year-round
Believe their situation is complicate
Same person every year
Get to know their personal situation
Premium started
H&R Block Premium
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Experts at navigatingcomplex taxsituations
Premium started
1982
Deliver onSegment B clieneeds year after y
Historically Prem
Transitioning Premium
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We’ve decided to giveit more attention
Historically Prem
lacked focus
Created a new brand business mo
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INTRODUCING….INTRODUCING
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1 in 5 are Small Business Owners
Block Advisors Will Offer
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PAYROLL BOOKKEEPING BU
PERSONAL TAXES
Two Businesses, Two Types of Clients,Two Avenues For Growth
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Tax is a financial event
Skilled tax professionals
Accurate Return + TaxProducts
We get you every dollar youdeserve
Tax is about a refund
Tax is a year-round
Tax + Planning + SmBusiness
Team of tax advisor
Customized tax plan
Tax is part of a fina
Different Consumers
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Different ConsumersDifferent Needs
Different Value Propositions
Launching With…
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287 Locations Converted PremOffices
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www.blockadvisors.com
H&R Block’s Winning Formula in DIY
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JASON HOUSEWORTH
President, U.S. Product Strategy & Development
H&R Block s Winning Formula in DIY
F
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Fr
Value / PConve
DIY TrendsShaping theDigital Category
H&R Block’sWinningFormula in DIY
H&R Block’s Formula in
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“I’ fid t I t
The Do-It-Yourself (DIY) User~40% of all tax filers
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SEGMENTC
“I’m confident I can prepare my own tax re
“I want control of the tax process.”
“It’s convenient to do taxes when I want.”
“If I do it myself, I’m going to savemoney for the time I invested.”
Product Innovation: Int ell igence as a serv ice
‘Multi-Screen’ Focus
Brand:& Tax
H&R Block’s Winning Formula in DIY
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Consistent Product Innovation
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TS2013TS2011
TS11
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TS13
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TS16
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TS16
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>8 Million
MyBlock
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RegisteredClients
>8 MillionR i d
MyBlock
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RegisteredClients
Product Innovation: Int ell igence as a serv ice
Tax Return
DIY Results Over 4 Years
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7%Tax Return
9%Revenue CA
Note: Period covered includes FY12 – FY15, excludes FFA returns
Designed For All Types of Devices
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‘Multi-Screen’ Focus
DIY Results Over 4 Years
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+30 pts Mobile Improve
Brand: Awareness& Tax Services
DIY Results Over 4 Years
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+16 pts AwareGrow
Product Innovation: Int ell igence as a serv ice
‘Multi-Screen’ Focus
Brand:& Tax
H&R Block’s Winning Formula in DIY
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(Continue) Industry Leading, Proactive & Secure Anti-Fraud Platform
Fr
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DIY TrendsShaping theDigital Category
H&R Block’sFormula to Win Value / P
Conve
8%9%
8% 8% 7% 7%
12%
9%
Florida Return Fluctuations
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7%
-8%
5%
TS12 TS13 TS
US Unemployment Florida Unemployment IRS DIY E-File Growth FloridaSource: IRS Weekly E-File Reports from May/June 2010-2015 and Bureau of Labor Statistics
Our View:
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Federal filters caused fraud to originatein other states via online filings
“So far in this year’s tax filing season [TS15]
State e-File Fraud
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So far in this year s tax filing season [TS15],Intuit seen between three and 37-fold increases in unlinked,
state-only returns. Convinced that most of thoserequests are fraudulent, the company now blocks usfrom filing unlinked returns via TurboTax.”
- Indu Kodukul a , Chief Information Security Officer at Intuit(February 15, 2015)
IRS e-File Rejects
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The rate of rejects should be similar acroDIY software providers
It is not
Valid reasons exist for e-Files to be rejected
69
58
8% E-file Growth
92% E-file Growth
65%
High IRS Reject Rates Correspond WithHigh e-File Growth
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H&R Block DIY Turbo Tax Tax Act Free Tax USA 1040.com
TS13 % TS14 % TS15 %
22 212217
22 22 24
9% E-fileGrowth 26
44
1716 14 13
IRS REJECT % RATES
0% E-fileGrowth
Source: H&R Block analysis of IRS Third Party Data Sort e-file data from 2013-2015
Fr
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DIY TrendsShaping theDigital Category
H&R Block’sFormula to Win Value / P
Conve
DIY
Value/Premium Convergence
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Value DIYer:Competitors loseability to compete
on price alone
PremiCateraising simple
HRB is well-positioned for the future
Free Federal Charged up to
Simple DIYer Complex DIYer Result
Tax Season 2015
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Free State $40 more
+3 pts deskto
+1040 onlin
Category Leader +1040EZ sh
Free Federal
$9.99 State
No price
increase
Source: H&R Block estimates, companies’ 10-Ks
IRS e-File
+6.3%
Revenue
+12.3%
Result
Sustainable G
Tax Season 2015
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+6.2%
-1.2%
+9.2%
+13.4%
Revenue from1040EZ Volum
Revenue from
Category Leader
Source: H&R Block analysis of IRS Third Party Data Sort e-file data , companies’ 10Ks
Product Innovation: Int ell igence as a serv ice
‘Multi-Screen’ Focus
Brand:& Tax
H&R Block’s Winning Formula in DIY
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(Continue) Industry Leading, Proactive & Secure Anti-Fraud Platform
ACA Updat e
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MARK CIARAMITAROVice President, Taxes & Healthcare Services
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DESIRED OUTCOMES
Expanded Health
OBJECTIVES
Driving Consistent
MEC
“Individua
The Affordable Care Act
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Insurance Coverage
Reducing HealthcareCosts
Quality
ImprovingAffordability
Expanding Access
Health Plan
Health Insu“Marketpla
Expanded
“EmployerCadillac Ta
ACA tax impact on filersis pervasive and complex
ACA tax impacOpportunities for tax i
1 2As an Investor, Why Should You Care?
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H&R Block isbest positioned to capitalize
Still in early stag
opportunitywill take time to dev
3 4
ACA Agenda
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WhatHappened
in 2015
Going FImplicaExpec
What’s NewFor 2016
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TS15: What Happe
Percent Uninsured in U.S. by Quarter
16.4 16.617.5 18
17
Lower Uninsured Rates
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Source: Gallup Healthways Survey 2015; Kaiser Foundation
16.1 16.1 16.3
2009 2010 2011 2012 2013 2014
~17 million gained insurance coverage
Tax Filers Experienced New ACA Tax Form
89621095A Penalty Worksheet
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Premium TaxCredit (PTC)
Reconciliation
Insurance CoverageVerification
Shared ResponsibilityPayment (SRP)
3M
2.3%Premium Tax CrReconciliation
2M1.4% Did not properly file
ACA-Impacted Filers
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Source: IRS June 2015 ACA Press Release
8M
5.5%Shared RespPayment (SR
25MACA- Impacted
Households
Percent ages above r epr esent p ercent of IRS base of ~135M ta x season ret urns
12M8.7%Exemptions
ASSISTED DIY
Channel Mix Among ACA-Impacted Retur~40%~60%
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54%
60%
65%
Exemption
PTCReconciliation
Penalty
The Most Significant Impact Faced by ACA Filers
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Many were caught o…was on their refund
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Premium Tax Credit Reconciliation
$9.6B total claimed Form 8962
ACA Refund Impacts
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$2,998 average received
3.1M impacted
51% owe back….average >30% refureduction
Source: IRS ACA Factsheet Publication Date 7/30/15
Extended without 896
16%
Made math errorsor should not have paid
17%
ACA Tax Filing Mistakes
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2.2MTax Filing
ErrorsFailed toproperly file 32%
Filed Incwithout 835%
Source: IRS June 2015 ACA Press Release
Not filing properly can mean losingaccess to Premium Tax Credits
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H&R Block Results
TRAINING
~7 Hours ACA certification training
I l d b b d d Bl kW k
H&R Block Readiness
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Instructor led, web-based and BlockWorkssoftware practice
Included over 50 case studies
Invested and deployed extensiveACA support resources
RESULTS
Invested 600k total hours of ACA-specific training
T i d 80k 10k ffi
H&R Block Readiness
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Trained > 80k tax pros across 10k offices
Higher average Net Promoter Scores
Tax professionals capable ofhandling full range ofACA situations
$More Likely to be…
Profile of ACA Impacted HRB Client
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Early SeasonFiler
New, Assisted 1040A or EZ ResidenceNon-Expansi
CA
Lower Average Income Single/H
% HRB Clients Impacted by ACA Tax Forms
Similar to Overall Tax Category16.6%
Majority of
16.4%Premium Tax Reconciliation
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Majority ofACA-impacted filers,claimed exemptionsor paid a penalty
Exemptions
Penalty Works
Average Shared Responsibility Payment Amount(Per Return)
$178$201
HRB Clients Saw Lower Penalty Payment
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70% DIY
Significant # of tax filers impacted…especially lower income households
2015 Key Learnings
Add d t l it l d t fili g i f
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Added tax complexity led to filing issues for many
HRB’s % of returns impacted by ACA tax forms was similar to overallcategory…retail clients impacted at a higher rate
ACA related tax refund impacts were a surprise & in some cases significantmany filers…and some delayed filing
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ACA:What’s New in TS1
NEW:
New Coverage Verification Notices
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1095-A continues as“must have”
filing document
1095-B & C notices sent to all covered houWill generate lots of questions
…but in most cases not required in order
Why…because IRS will now hALL household coverage data
Expect Increased IRS Enforcement
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Refunds for Marketplace enrowho don’t properly reconcile tPremium Tax Credits will be h
IRS ACA Notices
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Expect millions to be sent in 2016
$695/Adult
or 2.5%
$325/Adult
or 2%
Increased ACA tax penaltiesnon-coverage
Higher of 2% or $325/adult for
Average penalty will increa~$400-$500
Shared ResponsibilityPayment Rates
Increasing ACA Penalties
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20162015
$95/Adultor 1%
2014
Increased motivation to secqualified coverage
More interest in exemptions
Even higher penalties for 20Higher of 2.5% or $695/adultAverage Penalty
~$200 ~$500 ~$800
Source: IRS.gov, Internal HRB estimates
Must file using form 8962
Thi l i i b h i d
More “Reconciliation”
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This complexity impacts both prior and a newgroup of enrollees
Expect number of impacted filers to double
Marketplace Enrollment Growth Uncertain
DRIVERS
• Increased Shared Responsibility P• Increased IRS enforcement• Targeted enrollment outreach effo
• Easier Marketplace sign up & Au• Medicaid Expansion some state
20-25M
14M
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Medicaid Expansion …some state
2015
11M
2014
7MLIMITERS
• Growing employment coverage• Premium & Out of Pocket Afforda• Proper documentation/HHS enfor• Stalling Medicaid expansion• High enrollee churn
Source: HHS October 2015 release; Kaiser Foundation
Upper Limit2016 Est.
New 2016Enrollment Dates
penfo
New Marketplace Enrollment Dates
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Continuing Our Enrollment SPartnership With
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Going ForwACA Implications & Ex
2016 Implications
Client confusion with new 1095 notices
Higher penalties will impact filers
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Higher penalties will impact filersIncreased IRS enforcement
Greater interest in exemption expertise
Continuing tax refund surprisesOverall… more ACA-impacted tax clients
Premium TaxCredit (PTC)Reconciliation
Exemption
KEY DRI• Growing Mar
enrollment
• Higher penalt
Expected ACA Tax Form Mix Changes
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Now
Exemption
PenaltyWorksheet
Future 1
• Higher penalt
• Increased IRSenforcement
• Exemption Ex
1HRB estimates
16.4%
20-25%
IMPLICA
• Client growt
• Client retent
Growth in ACA-Impacted Clients Expecte
…Over Time
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Now Future
Client retent
• Higher taxpreparation
WhatH d Going FI liWhat’s New
What We Covered
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WhatHappenedin 2015
Going FImplicaExpec
What s NewFor 2016
H&R Block is best positioned as ACA tax impaccontinues to expand because of our….
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TRUSTEDBRAND
TAXEXPERTISE
NETWORK
INVESTMENT& ASSETS
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LookQ2 OverviewHRB & the
Tax Industry
What We’ll Cover
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Financials Outlo
Look
Looking Out
Q2 Overview Tax Industry
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Q2 Overview
Actual Ad
(in millions, except EPS) Fiscal Year2016
Fiscal Year2015
Fiscal Year2016
Revenue $ 128 $ 135 $ 128
EBITDA $ (181) $ (148) $ (169)
Q2 FY16 Summary – Continuing Operation
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EBITDA $ (181) $ (148) $ (169)
Pretax Loss $ (238) $ (201) $ (226)
Net Loss $ (143) $ (113) $ (135)
Weighted-Avg. Shares - Diluted 266.3 275.1 266.3EPS $ (0.54) $ (0.41) $ (0.51)
Note: Adjusted amounts and EBITDA (earning before interest, taxes, depreciation, and amortization) are non-GAAP financial measures. Please refer to ourDec 7, 2015 earning release for more specific information.
Sand Canyon Corporation (SCC), H&R Block’s legacy sub-prime mortgage loanbusiness has been in wind-down, including its remaining obligations underrepresentation and warranties (R&W), since it ceased originating mortgage loanDecember 2007
SCC has neither issued nor securitized mortgage loans in the past 7 years
SCC remains engaged in bulk settlement discussions with the counterparties from
Limited Mortgage Exposure Expected
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g g pwhich SCC has received a significant majority of its asserted claims
Accrual for representation and warranty claims of $154M at October 31, 2015
SCC is, and has always been, operated as a separate legal entity from H&R BlocH&R Block believes its legal position is strong on any potential corporate veil parguments
Formally exitedbanking system
Simultaneously enternew banking relatio
YTD Highlights
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Announced new
capital structure
Executed key par
capital structur
Initially chartered to offer banking products tounbanked/underbanked tax clients
Dodd-Frank Act of 2010 imposed restrictive capitalrequirements on H&R Block Inc as the holding com
Why Exit the Banking System?
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p prequirements on H&R Block, Inc. as the holding comof H&R Block Bank
Capital requirements didn’t make good business senseunder current business model
Post Regulatory Approval, We Moved Fas
31
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Closed divestitless than 30 d
Regulatory approvalof H&R Block Bankdivestiture
31
No longer regulated as a savings and loan holdicompany
Successfully transitioned operations to BofI
Successful Bank Transition
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Currently offering Emerald Advance, ready tooffer other products in the upcoming tax season
Seamless client experience
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Share RPr
Added $1B of long-termdebt in two tranches:
$650 million, 4.125%notes due 2020
$3.5B reprogram rJune 2019
Complete
Long Term DebtLine of Credit
Upsized from $1.5B to$2.0B
Covenants in line withnew financial structure
New Capital Structure
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Note: Details regarding the bank divestiture and related agreements, capital structure transactions and share repurchase program can be found in previously filedpress releases issued, as well as Forms 8-K filed with the Securities and Exchange Commission in September and October of 2015.
$350 million, 5.25%notes due 2025
Offer Oct
~40.5 milrepurchasper share
Current shoutstandin
Provides seasonalliquidity for next 5years
l dl
The leading global consumer tax compan S t r a
t e g y
Capital Structure Now Aligned With Our
Strategy and Business Model
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Strong free cashflow generation,
high margins,
& quick cashconversion cycle
Low capital needs,primarily technology
& officeinfrastructure,
… approx 3-4% ofrevenues a year
Seasonacapita
due
offseason B u s i n e s s
M o
d e
l
Current long-term credit ratings of BBB stable/Baa3 stable aS&P and Moody’s, respectively
Investment grade ratings metrics assume adjusted gross debt
to adjusted EBITDA ratios of 2.5 to 3.01
Debt Capacity
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As of Oct. 31, HRB’s adjusted gross debt to adjusted EBITDratio is approximately 2.2 – 2.5 based on outstanding long-term debt as of Oct. 31, historical EBITDA levels and possibfuture average line of credit draws
1 Adjusted gross debt to adjusted EBITDA is based on a rolling 4-quarter average of out standing short-and-long-term gross debt and includes adjustments to gross debtand to EBITDA for items such as operating leases. Refer to SEC filings for additional information.
$250 $280 $200 $315 $1
$451 $467$409
$532
$219 $220 i l l i o n s
$1,
$1
Not
Substantial Return of Capital to
Shareholders
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1 Represents dividends paid and share repurchases through December 7, 2015. Refer to press releases issued and SEC filings from September and October 2015for additional information.
$201 $187 $209 $217 $219 $220$
FY10 FY11 FY12 FY13 FY14 FY15 FY
$ m
% of Net Income–cont ops
99% 119% 118% 114% 44% 45%
$
$200 $315 $1,500
$409
$532
$219 $220
$1,610
$1500
Not at scale
Si nce May 2 011 :
Repurchased ~7(~25% of shares
Raised the divide i l l i o n s
… Especially the Last 4 ½ Years
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$209 $217 $219 $220$110
FY12 FY13 FY14 FY15 FYTD16
$110
Returned a total oof capital
$ m
ShareRepurchaseDividends
Paid
Note: FY2016 represents dividends paid and share repurchases through December 7, 2015. Refer to press releases issued and SEC filings from September and October 2015 for additional inform
H&R Block & the Tax Indu
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We are here for the long term.
We invented this industry.
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g
We will be successful.
80
100
120
140
160U.S. Tax Filings (in millions)
Large, Resilient Industry That Grows
With Employment
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0
20
40
60
U.S. Tax Filings Non-Farm EmploymentSources: IRS and Bureau of Labor Statistics
Industry Pricing is Inelastic
Taxes are non-discretionary
Complexity-based pricing model
Approximately 75% of all tax filers get a refund 1
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pp y git’s their most significant financial event each year
Foundedthe industry
680+ millionreturns
since 1955
Largesttax prep
providero
We Know More About Tax Preparation
Than Anyone
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Large amountsof data;
understandcustomer needs
File ~1 in 7
U.S tax returns
Ability tacquire best prep busines
in industr
We only compete in onespace…TAX
No distractions with nbusinesses
We Are All In
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Help from one end of thepreparation spectrum to the
otherASSISTEDDIY
44%9%
5%
1%
Intuit
Independent
Branded Assisted PreparersOther DIY
U.S. Industry Tax Preparation Revenue
HRB is Well-Established & Positioned to Gro
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26%
15%
$20 BillionMarketH&R Block
Independent
CPAsCPAs
Sources: IRS data, competitor public filings, competitive intelligence data
We provide a lifetime experience forour clients
We are not solving for a quarter.
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our clients.
Maintaining longer-term focus is critical.
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Looking
Brand Says it All
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Br
1Source: Millward Brown
Consistent and Stable EarningsHigh MarginsSignificant Free Cash Flow
Seasonal Liquidity NeedsStrong Capital EfficiencySuperior ROIC
Affordable Care ActCRM
DigitalInternationalTax Plus
Invest in Strategic Initiatives2
Provide Adequate Funds for Operational and Liquidity Needs1
We Have the Capital to Make Things Happen
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CRMInformation SecurityOffice Footprint
Block Advisors
Tax PlusFranchise/Independent A&D
213 consecutive dividends; current ~2.2% yield; 46% div. payout ratio in FY1
Support Quarterly Dividend
Ceased being regulated as a savings a loan holding company
Strategic Returns of Capital
3
4
Unmatched Distribution
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H&R Block Premium was an underutilized assewith a history of revenue growth
Rebranded and redesigned to better meet clients’ needs
Investment within targeted capital
Block Advisors
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Longer-term strategic opportunity
expenditure levels
Looking
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IncreasedStandards areInevitable
Quality
Fraud
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Q yShould be a baselinein the industryTaxpayer protectionis paramount
Impacts all
It will be fixed
Value DIYer:Competitors loseability to compete
PremiCategoryprice to f
DIY
HRB Well-Positioned for DIY Changes
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y pon price alone
p
Healthcare is Here to Stay
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H&R Block is best positioned as ACA tax impaccontinues to expand because of our….
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TRUSTED
BRAND
TAX
EXPERTISE
NETWORKINVESTMENT
& ASSETS
Premium TaxCredit (PTC)
Reconciliation
Exemption
High
v e
C o m p
l e x
i t y
Expected ACA Tax Form Mix Changes
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PenaltyWorksheet
NowLow
R e
l a t i v
Future 11HRB estimates
16.4%
20-25%
Growth in ACA-Impacted Clients Expecte
…Over Time
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Now Future
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Financials
PRICE VOLUM
Four Key Components of Revenue
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MIX ATTAC
PRICEPleased with resultsStrategic vs. tactical
approach
VOLUM
Four Key Components of Revenue
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MIX ATTAC
PRICE VOLUMDisappointed with assresults, mostly early se
Multi-year solutio
Four Key Components of Revenue
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MIX ATTAC
PRICE VOLUM
Four Key Components of Revenue
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MIXPleased with improvement
Focus on lifetime value ATTAC
PRICE VOLUM
Four Key Components of Revenue
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MIX
ATTACPleased with attach Strong product offe
Tar get Range of 28% t o 32%
28%
26%
30%31%
Strong EBITDA Margin Outperforms Pee
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1Source: BloombergNote: All numbers represent continuing operations
S&P500
119% 19% 19% 19%
2012 201420132011
C a p E
x % o
f R e v e n u e
91 89 92116
1601
5%
4%
Peak Year: FY2020
D&A($M)
C E
Capital-Light Model
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2%
3%
4% 4%
FY12 FY15FY14FY13FY11
Future Range: 3% - 4%
CapEx% of
Revenue
FYE
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Independents
Acquiring quality businannual basisAttractive rate of returnExpansion into key cliesegments
Franchise Buybacks
Repurchasing offices previouslysold to franchiseesPurchased 341 offices in FY15,expect ~260 offices in FY16Attractive rate of return
Franchise Buybacks Winding Down;Independent Acquisitions Continue
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Arbitrage opportunityFewer available qualitybusinesses going forwar
Company-run to franchise splitexpected to be approx. 65%/35%Likely minimal buybackopportunity after Tax Season2016
20.5%
14.4%
24.6% 25.4% 24
ROIC
Consistently Strong ROIC
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9.8% 8.9% 9.4% 9.1% 9.WACC
Source: Company calculation
FY13FY12FY11 FY14 FY
High-end of corp. tax rate
40%39%
41% 41%39% 39%
38% 37%
40%
34%35%
HRB Effective Tax Rate
FY2004
FY2012
Cleaned up compliance/accouThen Now
A Focus on Income Taxes
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High end of corp. tax rateDriven by distribution modelTax compliance/accounting
issues
p pActive planning and focusExecuted a number of strateg
one-time and long-termEstablished efficient structurenon-U.S. cash
High-end of corp. tax rate
40%39%
41% 41%39% 39%
38% 37%
40%
34%35%
HRB Effective Tax Rate
FY2004
FY2012
Cleaned up compliance/accouThen Now
3-Year Savings of ~ $100 million
A Focus on Income Taxes
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High end of corp. tax rateDriven by distribution modelTax compliance/accounting
issues
p pActive planning and focusExecuted a number of strateg
one-time and long-termEstablished efficient structurenon-U.S. cash
Future Expected Base Tax Rate: ~ 35-36%
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Outloo
Market Outlook FY 2016 3-Year Expec
IRS Tax Filings
Assist ed
DIY
Increase 1 - 2%
Increase 0 - 1%
Increase 4 - 5%
Increase 1 - 2%
Consistent growt
Digital expected
Market Outlook
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Annual Impact, $M Revenue Expense/OtherEBITDA/
Pretax Inc. C
BofI Management AgreementEconomics
$(12)-(15) $18-20 $(30)-(35) Trans.-basCard and Rparticipati
Lost Interest Income on AFSSecurities
(6) - (6) Securities
New Accounting Treatment (9) (9) - Reclassifireflect non
Financial Impact of Bank Divestiture
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Total Annual Impact $(27)-(30) $9-11 $(36)-(41)
Net Impact FY16 v s. FY15 ~(1)%decrease~0.5%
increase~1 pt drop inEBITDA
margin
Note: See description of non-GAAP measures earlier in this presentation.
HRB Outlook FY2016 3-Year Ex
Impact from Bank Divestiture
1% reduction of overall revenue5% reduction in pretax earnings1 point reduction in EBITDAMargin
Co
One-Time Bank Transaction &Capital Structure Costs
~$22M
Foreign Exchange 1% reduction of overall revenue~$0.01 EPS decrease Not provid
Inflationary increase
HRB Outlook
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Compensation & Benefits Inflationary increaseFY15 training costs offset byfranchise and independentacquisitions
Inflationa
Adjusted EBITDA Margin 29% - 30% 28
Interest Expense $66M - $69M Not provi
HRB Outlook FY2016 3-Year Ex
Capital Expenditures ~3% – 4% of revenue ~3% - 4%
A&D/Franchise Buybacks
Independent acquisitionsconsistent with prior yearsFranchise buybacks: approx.260 officesTotal acquisitions ~$90M-$100M
Franchise bwinding dow
Depreciation & AmortizationAmort. – Acquisition Related
~$175M - $180M~$58M - $60M
~$180~$60
HRB Outlook
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Amort. Acquisition RelatedD&A – Non-Acq. Related
$ $~$117M - $120M
$~$120
Tax Rate Effective Tax Rate ~33% - 34% Base Tax Rat
Weighted Average DilutedShares Outstanding
250M - 255M Not provi
Predictable
and GrowingCore Industry
Long TSignifican
SoDigitalE i
“Tax Plus”Product Attach
Favorable MacroConditionsHealthcare
Reform
Growth
HRB Investment Thesis
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R
InternationalGrowth
Expansion
Consistent
Management
Limited Mortgage Loan
Exposure Expected
Stability
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