hrb h&r block dec 2009 presentation

8/14/2019 HRB H&R Block Dec 2009 Presentation

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Community Conference ,

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Scott DudleyVP Investor Relations

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Todays Program

Russ Smyth President & CEO

Company Overview:

MarketingTax Network

Tax Services Support

Break Financial Review: Becky Shulman CFO

Q&A

Lunch with Management

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Safe Harbor Statement

This presentation and various comments made in connection with it include certain estimates,projections and other forward-looking statements. The words will, plan, estimate, approximate,project, intend, remain, expect, believe, and variations thereof and similar expressions areintended to identify forward-looking statements. These statements speak only as of the date on which

.those expressed, implied or forecast in the forward-looking statements. Some factors that could cause

actual results to differ include:

The uncertainty that the company will achieve its revenue, earnings and earnings per share expectations for fiscalyear 2010, or subsequent fiscal years, or any quarter thereof, and that actual financial results for fiscal year 2010, orsu sequen sca years, or any quar er ereo , w a w n e gu ance prov e y e company

Potential litigation and other potential liabilities arising from past mortgage operations

Uncertainties in the residential mortgage market and its impact on loan loss provisions

Uncertainties pertaining to the commercial paper market and credit markets , ,

Litigation involving H&R Block, Inc. and its affiliates

Potential termination of the alternative practice structure relationship between RSM McGladrey, Inc. and McGladrey& Pullen LLP

The uncertainty of the companys ability to purchase shares of its common stock pursuant to its Board of Directors

Other risks described from time to time in H&R Blocks press releases and Forms 10-K, Forms 10-Q, Forms 8-K andother filings with the Securities and Exchange Commission

H&R Block undertakes no obligation to publicly release any revisions to forward-looking statements toreflect events or ex ectations after the date of the resentation. H&R Block rovides a detailed discussionof risk factors in periodic SEC filings and you are encouraged to review these filings.

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Russ SmythPresident and Chief Executive Officer

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Robert TurtledoveChief Marketing Officer

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Kate FultonGovernment Relations& Public Policy

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Brian WoramGeneral Counsel

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C.E. AndrewsPresident,RSM McGladrey

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Sabrina WiewelChief Tax Network Officer

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Phil MazziniTax Services Support

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Becky ShulmanChief Financial Officer

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Rich AgarChief Information Officer

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Tammy SeratiHuman Resources

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Ken TreatFranchise Development

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Joan CohenChief of Staff

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-sustainable growth

A look at this tax season

renew client focus and

mprove execu on

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Update on RSM / M&P Negotiations

Final arbitration ruling was issued on 11/24

Arbitration ruling is confidential

Negotiations are ongoing; optimistic well have resolution withinthe next few weeks

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Multi-Year Growth Plan

2010 2011 2012

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External Environment

Impact

IRS Filings

AssistedDIY Migration

Complexity

Assisted Price Value

Tax Professional Regulation

Profitability of Tax Financial Products

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Market Share Opportunity

H&R Block and Competitor Share of Tax Industry

H&R Block H&R BlockRetail

11.9% H&R BlockDigital4.3%

11.2%4.6%

H&R BlockDigital

50.4%

14.5%

Other DIY 50.6%

11.7%

Other DIYAssisted 18.9%

All otherDigital

21.9%

All otherDigital

Assisted

*

* Excludes one-time Economic Stimulus Act FilersShare based upon tax season 2008 & 2009 estimates (Jan. 1 - Apr. 30)

132.0 Million 131.6 Million

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Fully leverage our size and the strength of our brand

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Internal Barriers

Economy not the root cause of last seasons performance

Economy put magnifying glass on our challenges

Clients say experience has not improved as price has increased Weve failed to focus on full end-to-end client experience

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Becoming a Client-Focused Company

Listened to what clients were telling us

Most complaints were related to service breakdowns

Get back to what we do best provide tax relief

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Market Opportunity

Taxpayers*

Awareness ~110 MMDont consider

ons era on am ar

Future Consideration

H&R Block

~3 MM

Walk in to Office

ons er us udont check-inTrial

~2 MMFront Desk Contact/-

~1 MMStart Transaction

Meet with Tax Pro

ec - n udont startWalk-In

dont finishService Finish Transaction

Pay for Service ~4 MMFinish but

* Based on 131.6 million filers in tax season 2009 (Jan. 1 - Apr. 30)

dont returnetent on Return Next Year

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Organizational Focus and Alignment

Removed layers of management

Improved strength and experience of management team

Stopped activities not supporting client attraction and retention

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Changes in Mindset and Approach

Serving clients the way they want to be served

Network optimization will lead to improved client service, betterexecution and cost efficiency

Franchising is a client growth strategy; not a financial strategy

Efficient and effective organization while reinvesting for growth

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Market Opportunity

Taxpayers*


ons era on am ar


H&R Block

~3 MM

Walk in to Office


~2 MMFront Desk Contact/-


Meet with Tax Pro






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Robert Turtledove

25+ years of expertise working with some of theworlds most well-known brands

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Robert TurtledoveChief Marketing Officer

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Opening Thoughts About H&R Block

A pioneer brand

An emotional category

A good business to be in

Rich Brand history and DNA

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Brand Consideration Opportunity

Define Reality

Define Opportunity

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The Approach

Fresh eyes and a client lens

Three voices:

Customer

ar e

Brand

Honest, pragmatic, candid assessment

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Brand Stethoscope

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Perceptions Have Slipped in Core Areas

Understands tax law changes

Tax Pros are knowledgeable and well trained

Provides expert tax planning

Realities:

10 million hours of annual tax training

H&R Block Tax Certification looks great on a Resume

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Perception of H&R Block vs. CPA

Get my refund fast

New products/services for my needs

Good value for my money

Help i f I am audited

Well-trained, knowledgeable people

Does what is best for me

Is ri ht for me

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Top 10 Client Issues with Taxes

Im annoyed by thewhole tax process

The tax ruleschange every year

I don't understandever tax term

IRS laws arewritten in legalese

The IRS has rules, butIts impossible to figure

you can gure em ou

There are fees

There's still a ton of tax jargon

for everything

that goes over my head The price was too high

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Not Getting Our Fair Share in Digital

Tax Cut is #2 in software sales

Tax Cut is #3 in on-line sales

46% are not aware of our digital products

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H&R Bl k Ad N Al Eff i


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H&R Blocks Ads Not Always Effective

66%

40%36%

16%

Enjoyed Made the company Main idea Makes you

appealing

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C id ti f H&R Bl k


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Consideration of H&R Block

16% Consideration

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B d Cl l H H lth Vit l


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Brand Clearly Has Healthy Vitals

#1 in the market

~12,000 locations

100,000+ tax specialists

99% brand awareness

55+ years of experience

Category begging for simplification Done it 500 million times

Strong financial health

$43 billion in refunds last year

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This Brand is Not Sick Just Out of Shape


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This Brand is Not SickJust Out of Shape

Great DNA and Great Genes

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And When We Address the Opportunities


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And When We Address the Opportunities

Consideration

Brand Perceptions

Digital

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Increased Consideration = Growth


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Increased Consideration = Growth

Taxpayers*


ons era on am ar


oc

Walk in to OfficeTrial

Front Desk Contact/-

Start Transaction

Meet with Tax ProWalk-In

Service Finish TransactionPay for Service


etent on Return Next Year

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Brand Consideration Plan


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Brand Consideration Plan

Considerationand Trial

Commit to Digital

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Changing Minds Is Not Easy


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Changing Minds Is Not Easy

Listening

Make them think

What we do and what we know

Why were different

Give them options

We Need A Wa In

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We Know For Sure


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We Know For Sure . . .

People have questions . . .lots and lots of questions!

And people are confused . . .very confused

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Our Trojan Horse to Get Behind the Wall


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Our Trojan Horse to Get Behind the Wall

Questions

Plain English

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Commit to Digital


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Commit to Digital

TaxCut now H&R Block At Home leverage the might of the brand

Significant product improvements

Dramatically improved Web site:

Brand integrationNavigation

Tax calculators

Latino Web site

Community Web site

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45 State Web Sites


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45 State Web Sites

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Marketing in Digital


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g g

Significant Marketing commitment:

Dedicated Digital Creative

rong mar e ng presence

TV, search, on-line, social, direct Free is a key gateway

Ubiquitous Click, Call or Come Over

Reach out to Millennials

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Reaching Out to Millennials


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g

Introducing Dollars & Sense by H&R Block

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The Tax Institute: A Valuable Brand Asset


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The Tax Institute is anational leader in providing

,and interpretation of federaland state tax laws

A trusted objective source ofcredible information for

consumers

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The Plan


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Considerationand Trial

Commit to Digital

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From Consideration & Trial


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Taxpayers*

Awareness

am ar


Consideration &Trial

Walk in to Office


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To Client Experience


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Taxpayers*

Awareness

am ar


Consideration &Trial

Walk in to Office

Front Desk Contact/

-

Start Transaction

Meet with Tax ProClient

Experience

Finish TransactionPay for Service


Return Next Year

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Sabrina Wiewel

Chief Tax Network Officer

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Client Waterfall Opportunity


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Taxpayers*

Awareness

Dont considerons era on am ar


H&R Block

Walk in to Office


~2 MMFront Desk Contact/

-


Meet with Tax Pro


dont finishService Finish TransactionPay for Service ~4 MM

Finish but



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I walked into the office and left before starting with atax pro because I did not feel welcome.

2 million potential clients walked out before starting with a tax professional

I started m return with the tax rofessional but didnt a .The price just didnt make sense.

1 million left before paying

I called the office with an issue with my return you prepared,and I never got a call back.

.

You make me feel like a number.4 million clients wont return to the office

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Phil Mazzini

Tax Services Support

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Our Four Opportunities


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The Look The Welcome

The Tax Desk Experience The Follow-Up Service

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Office Look and Feel


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Professional

Clean

Comfortable

Secure

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New Office Concepts


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Time Square NYC Office


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Warm Welcome


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Warm Greetings


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Invest in more coverage

Recruit stronger people

Train for service

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Competence & Confidence at the Tax Desk


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Identify our best (for the 1st time)

Serve more clients with our best

Hire fewer new Tax Professionals

Better mentor and train them as an apprentice

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Choices


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Online

Best of BothOffice

Software75

Digital: Focus for 2010 and Beyond


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Focus on increased share, retentionand profits

Close product gaps

Simplify the customer experience

Leverage H&R Block brand

Seamless integration between

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Value Equation


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QualityExperience

=(Time + Money)

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Taxpayers*

Awareness



H&R Block

Walk in to Office


Front Desk Contact/

-


Meet with Tax Proec - n u

dont startWalk-In





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Price Confusion


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Retail Client Loss


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Shrinkage and share loss in low AGI client segments

Total Market Share Change

TS07-09

HRB Growth

TS07-09

< $10k $10k-20k > $20k < $10k $10k-20k > $20k

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Retail Client Loss


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and young age brackets from TS07-TS09

Total Market Share Change

TS07-09

HRB Growth

TS07-09

< 18 18-45 > 45 < 18 18-45 > 45

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Taxpayers*

Awareness



H&R Block

Walk in to Office

dont check-inTrial

Front Desk Contact/

-

Start Transaction

Meet with Tax Proec - n u

dont startWalk-In





83

Contact Center Improvements


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Less Dropped Calls

Expand Voice Response System

More Staff

95% Service Levels

Better Functionality

Make Appointments

Problem Prevention

Leverage Live Agents More Effectively

Resolve Issue on 1s Call

Improved Client Satisfaction

urn en s w erv ce ssues n o voca es

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Putting Clients First


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Becky Shulman

Chief Financial Officer

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Agenda


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Client growth opportunities

Optimization of costs and reinvestments

Other competitive advantages

Settlement products

H&R Block Bank

Financial position and flexibility

Capital allocation

Guidance

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Balancing our Business Levers

O b i i t f l i


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Our business is not formulaic

Several paths to Great Results the Right Way

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Client Growth Opportunities

1 t i t i i id ti


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1 percentage point increase in consideration

132 million tax filers

1.3 million tax filers consider H&R Block

500,000 incremental H&R Block returns

$80 - $120 margin per return

$40 - $60 million in pretax earnings

percen age po n ncrease n re en on

15 million retail clients

,

$80 - $120 margin per return

12 - 18 million in retax earnin s

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Client Growth Opportunities

Digital


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Digital

Key source of future client growth and client profitability

Monetization and migration

Unique positioning

Price / Value

Low single digit revenue growth

ggress ve pr c ng or targete c ent segment

Competitive advantage

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Cost Reductions and Investments

Cost Savings FY10 Savings


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Cost Savings

Stopped activities

FY10 Savings

$20-$25 mm

Renegotiation of leases

Optimizing the network footprint

$6-$9 mm

$15-$16 mm

Driving out costs within field operations

Utilizing sourcing function for vendor savings

$10-$12 mm

$7-$10 mm

Investments FY10 Investment

Client facing field staff

Under penetrated markets

$10 mm

a cen er

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Expense Management


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**

* Excludes Tax Services variable labor expense and HRB Bank provision for loan loss. Includes interestexpense from acquisition debt and other income, net (see non-GAAP reconciliation in appendix).

** FY06 excludes $70 mm of expense related to RAL legal settlement.

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Superior Settlement Product Position


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H&R Block* Advantage Retail Competition

Account Fee No change

increase

Bank Finance Fee** No chan eReduced by SBBT

an epu c

Other Fees No change $20-$60

Tax Preparation PriceIncrease

No change 2%-4%

RAC pricing No change Incremental fees

*Assumes refund loaded on debit card

**APR rates are generally lower due to extra day in calculation

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H&R Block Bank

Key strategic asset creates competitive advantage


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Emerald suite of products

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Emerald Products

Continued Emerald Card growth


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Continued Emerald Card growth

Emerald Advance expected to be similar to FY09

Emerald Cards Emerald Advance(units in millions) ($ in millions)

Fiscal Year Fiscal Year

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H&R Block Bank



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Emerald suite of products

Increases financial flexibility via access to traditional

banking vehicles

Federal Reserve/FHLB

Settlement roducts Piloting in-house RAC

Platform for future product and service innovation

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Financial Strength

Funding in place for($ in millions)

Cash


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Funding in place forworking capital, bankYoY Change $409 $738

repurchase

Strong balance sheet

YoY Change $289 $238

YoY Change ($817) ($698)

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Capital Allocation

Targeted capital structure


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g p

Sufficient liquidityCapital Allocation Waterfall

Maintain investmentgrade ratings / access to capital

markets

Maintain targeted capital structureand existing div idend levels

CLOC net worth covenant

Share repurchases

Timin and amount are

Reinvest in exist ing businesses tosupport organic growth

Select investments ali ned with

dependant on:

Available liquidity

strategy

Increased dividends &

Stock price

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Return to Shareholders


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Dividends Share Repurchases($ millions) ($ millions)

$1.5

$2.6billion

billion

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Taxpayers*


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+1%-

Awareness

am ar


Walk in to Office

Front Desk Contact/

-

Start Transaction

Meet with Tax Pro

+1%$12-$18mm

Finish Transaction

Pay for Service


Return Next Year

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Compound Financial Opportunity

($ i illi )Potential outcomes


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($ in millions)

Annual Significantly higher annual

Improvement(consideration /

retention)

Pretax

Earnings*

Pretax

Earnings*

c en grow ra es o -driven by:

Consideration increase of 5-10

1% / 1% $50 $300percentage points

Retention increase of 5-10percentage points

2% / 2% $100 $600 Incremental cash flow for sharerepurchases

* Assumes $100 pretax earnings per client

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Summary

Leveraging strengths


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g g g

Brand

Tax preparation expertise

Scale

Products

Financial position

ress ng oppor un esClient focus

Price/value

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Wrap Up

Confirming Street guidance:


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Low single digit revenue growth

Margin improvement of 100 bps over the next two fiscal years

EPS $1.60 to $1.80 per share

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Appendix

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Non-GAAP Reconciliation Expense Growth

($ in millions) FY05 FY06 FY07 FY08 FY09

Operating expenses continuing ops $2 284 $2 729 $3 059 $3 377 $3 245


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Operating expenses - continuing ops $2,284 $2,729 $3,059 $3,377 $3,245

-

Other income, net (28) (23) (23) (28) (2)

2,318 2,755 3,083 3,351 3,244

Less: RAL legal settlement - (70) - - -

Less: Tax Services variable labor expense (463) (481) (518) (550) (551)

Less: HRB Bank provision for loan loss - - (4) (42) (76)

Adjusted expenses - including SouthwestFranchise Acquisition

1,855 2,204 2,561 2,759 2,617

Less: Southwest Franchise Acquisition - - - - (30)

Adjusted expenses - excluding Southwest

Franchise Acquisition

$1,855 $2,204 $2,561 $2,759 $2,587

Expense growth 18.8% 16.2% 7.7% -5.1%

Expense growth - excludingSouthwest Franchise Acquisition

-6.2%

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H&R Block Bank Mortgage Portfolio

Substantially reduced risk over time


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Substantially reduced risk over time

* Excludes unamortized deferred fees and costs

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Sand Canyon

Repurchases remain low and reserve is considered adequate


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epresen a on arran y(Repurchases and Indemnification Payments)

*Payments made to Third Parties, excluding EPD repurchases

Sold LoanReserves $243 $238 $225 $213 $207 $202 $201($ mill ions)

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hrb h&r block dec 2009 presentation

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