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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*
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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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*
Awareness ~110 MMDont consider
ons era on am ar
Future Consideration
oc
Walk in to OfficeTrial
Front Desk Contact/-
Start Transaction
Meet with Tax ProWalk-In
Service Finish TransactionPay for Service
* Based on 131.6 million filers in tax season 2009 (Jan. 1 - Apr. 30)
etent on Return Next Year
49
Brand Consideration Plan
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Brand Consideration Plan
Considerationand Trial
Commit to Digital
50
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
53
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
54
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
56
Reaching Out to Millennials
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g
Introducing Dollars & Sense by H&R Block
57
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
58
The Plan
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Considerationand Trial
Commit to Digital
59
From Consideration & Trial
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Taxpayers*
Awareness
am ar
Future Consideration
Consideration &Trial
Walk in to Office
* Based on 131.6 million filers in tax season 2009 (Jan. 1 - Apr. 30)
60
To Client Experience
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Taxpayers*
Awareness
am ar
Future Consideration
Consideration &Trial
Walk in to Office
Front Desk Contact/
-
Start Transaction
Meet with Tax ProClient
Experience
Finish TransactionPay for Service
* Based on 131.6 million filers in tax season 2009 (Jan. 1 - Apr. 30)
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
Future Consideration
H&R Block
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 TransactionPay for Service ~4 MM
Finish 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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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
65
Our Four Opportunities
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The Look The Welcome
The Tax Desk Experience The Follow-Up Service
66
Office Look and Feel
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Professional
Clean
Comfortable
Secure
67
New Office Concepts
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68
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
74
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
76
Value Equation
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QualityExperience
=(Time + Money)
77
Client Waterfall Opportunity
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Taxpayers*
Awareness
Dont considerons era on am ar
Future Consideration
H&R Block
Walk in to Office
ons er us udont check-inTrial
Front Desk Contact/
-
~1 MMStart Transaction
Meet with Tax Proec - n u
dont 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
78
Price Confusion
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80
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
81
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
82
Client Waterfall Opportunity
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Taxpayers*
Awareness
Dont considerons era on am ar
Future Consideration
H&R Block
Walk in to Office
dont check-inTrial
Front Desk Contact/
-
Start Transaction
Meet with Tax Proec - n u
dont 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
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
84
Putting Clients First
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85
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Becky Shulman
Chief Financial Officer
86
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
87
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
88
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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
90
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
91
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
92
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.
93
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-$60
Tax Preparation PriceIncrease
No change 2%-4%
RAC pricing No change Incremental fees
*Assumes refund loaded on debit card
**APR rates are generally lower due to extra day in calculation
94
H&R Block Bank
Key strategic asset creates competitive advantage
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Key strategic asset creates competitive advantage
Emerald suite of products
95
Emerald Products
Continued Emerald Card growth
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Continued Emerald Card growth
Emerald Advance expected to be similar to FY09
Emerald Cards Emerald Advance(units in millions) ($ in millions)
Fiscal Year Fiscal Year
96
H&R Block Bank
Key strategic asset creates competitive advantage
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Key strategic asset creates competitive advantage
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
97
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) ($698)
98
Capital Allocation
Targeted capital structure
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g p
Sufficient liquidityCapital Allocation Waterfall
Maintain investmentgrade ratings / access to capital
markets
Maintain targeted capital structureand existing div idend levels
CLOC net worth covenant
Share repurchases
Timin and amount are
Reinvest in exist ing businesses tosupport organic growth
Select investments ali ned with
dependant on:
Available liquidity
strategy
Increased dividends &
Stock price
99
Return to Shareholders
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Dividends Share Repurchases($ millions) ($ millions)
$1.5
$2.6billion
billion
100
Client Waterfall Opportunity
Taxpayers*
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+1%-
Awareness
am ar
Future Consideration
Walk in to Office
Front Desk Contact/
-
Start Transaction
Meet with Tax Pro
+1%$12-$18mm
Finish Transaction
Pay for Service
* Based on 131.6 million filers in tax season 2009 (Jan. 1 - Apr. 30)
Return Next Year
101
Compound Financial Opportunity
($ 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
102
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
103
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 $1.80 per share
104
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Appendix
105
Non-GAAP Reconciliation Expense Growth
($ 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%
106
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
107
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)
108
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