H & R Block Inc (HRB) 2015 Q2 法說會逐字稿

Good morning, everyone. If you could take your seats really quickly, we will get started here. Good morning, everyone. Thank you for braving the New York weather and coming to join us today. We are obviously based in Kansas City, where it is a balmy 55 degrees and sunny today, so I apologize for not bringing that up here with us.

My name is Colby Brown, I'm the Vice President of Investor Relations, and on behalf of the entire H&R Block management team, it is my pleasure to welcome all of you here, as well as those of you participating via the webcast, to H&R Block's December 2014 investor conference. We have an informative and exciting day planned, and are glad you are able to join us. Before we get started, we have a few housekeeping items to take care of:

Yesterday, we released our FY14 second quarter results. That release, as well as today's presentation, includes certain non-GAAP financial measures we have reconciled the comparable GAAP and non-GAAP figures in the schedules attached to the press release, and you can find both the release and the schedules on our investor relations webpage at HRBlock.com.

I'd also like to remind everyone that today's presentation and various comments made in connection with it will include forward-looking statements, as defined under the securities laws. Such statements are based on current information and management's expectations as of this date, and are not guarantees of future performance. Forward-looking statements involve certain risks and uncertainties, and assumptions that are difficult to predict. Thus, our actual outcomes and results could differ materially.

You can learn more about these risks in our form 10-K for FY14, and our other SEC filings. H&R Block undertakes no obligation to publicly update these risk factors or forward-looking statements. Shortly after this morning's presentation is concluded, we will post the slides on our website, and later this week, as a reminder, our webcast will be available for replay.

To give you a sense of the agenda for today, opening presentations will run until approximately 10:00 Eastern, we will then take a 15 minute break, refreshments will be available throughout the morning, and a quick logistical note, restrooms are out the door and to your right. We then expect Q&A to begin around 11:30 Eastern. So again, welcome everyone, and we are excited that you are here, thank you for coming, and we hope you enjoy the presentations.

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Good morning everybody. I want to thank CNN for my star turn, my little 4 minutes of fame, but I want to welcome you to this year's investor conference. We are pleased to have you join us. We'll review our FY14 performance, and share with you where we see our opportunities for this coming tax season and beyond.

So today, we will share with you a recap of our performance in FY14, the opportunities we see going forward, and why we believe we are well-positioned to drive value for our shareholders. But first, I want to address the elephant in the room, so to speak, and that is a few words about the bank.

So we've had some people ask, why are you even doing an investor conference this year? The thinking being that the bank divestiture is incomplete, and we would have nothing else to talk about. Now, we did think we'd be done in time for this tax season, and as you know him we're still waiting for a decision from the regulators. But to be absolutely clear, we remain committed to divesting our bank, and we expect B of I to be a solid partner.

The regulators said that they needed more time. Like I said back in October, we can scratch our heads all we want, but they have been very thorough, extremely professional, and we are going to take them at their word. But we still believe that on its merits, this transaction will be approved.

So the truth is, we are holding this conference because we have a lot of great things to tell you. And at the end of the day, if anything is crystal clear, I hope it's what I firmly believe to be true, that no one understands taxes like we do, no one understands the industry like we do, and most importantly, no one understands the behaviors and needs of our clients like we do.

So with that as a foundation, I'm going to start out with an overview, and the other presentations will provide the deeper context. As most of you already know, we're the world's largest tax preparer. We're entering our 60th tax season here in the US. We had over $3 billion in global revenue in FY14, which is more than all of our branded competitors, assisted and digital, combined.

Since 1955, we've filed over 650 million tax returns. This past season, we filed over 24 million returns worldwide, and that's across more than 10,000 offices, globally staffed by tens of thousands of tax professionals and associates worldwide. Clearly, Americans know us, use us, and love us. We file one in every seven US tax returns. In fact, if you count all the branded tax preparers who signed their clients' tax returns, H&R Block tax pros signed 7 out of 10 of all of these.

Why? Because Americans know, we are the most knowledgeable, the most accessible in the industry, and we'll do their taxes right, and that value is delivered by our tax pros and associates, who are the best in the industry. Our tax pros have an average tenure of eight years, and over 450 hours of training. We have over 7,500 enrolled agents, the highest credential awarded by the IRS, we have CPAs, we have attorneys.

Over a third of our tax pros have achieved certification as an H&R Block Master Tax Advisor, which is our highest internal credential. Our tax pros are experts who go well beyond just simply answering tax questions. They are advisers to our clients. They prepare and sign our clients' returns, and that's a very personal connection.

And while our history is founded in assisted tax preparation, we are also making quite an impact on the DIY side. We've come a long way from our earlier DIY products, to today's innovative and redesigned software, that positions us well for the future. And while we are proud of our accomplishments here in the US, we are also proud of our global operations. This coming season, we are celebrating our 51st year in Canada, and at the end of October, we completed our 44th tax season in Australia, including the launch of a new DIY product there.

And as many of you know, we entered India and Brazil a few years ago. We also have an emerging expat business. And a point you may not be aware of, we have 28 tax offices on or near US military bases around the world, serving our armed forces. None of our competitors can say that.

So now let's take a closer look at our performance this past fiscal year. Strong execution in 2014, based on our Tax Plus revenue growth strategy, drove increased revenue, productivity and profitability. Total revenues rose $118 million, up 4%, to over $3 billion. Complementing this revenue growth, EBITDA increased 8% to $940 million, which is an improvement of 24% since FY12. In fact, EBITDA margin grew 1 point to 31% of revenues in FY14.

Overall, we continue to focus on driving profitable growth in assisted and digital, and in our adjacent Tax Plus products. In assisted, we maintained our strong focus on clients. We prepared and filed 13.6 million US returns, which was 17% of the assisted category.

In digital, we saw double-digit growth in revenue, and although our growth in return count slowed, our strong execution in conversion and monetization led to this growth, marking the fourth year in a row now we've gained revenue share. And in a rapidly maturing industry, we think that's a very important measurement.

And we saw continuing progress with our Tax Plus strategy, which improves client service by offering integrated adjacent products. In 2014, revenues from our Tax Plus products increased 11% to $432 million. I'll talk about the performance of our Tax Plus products in more detail later this morning, but two key points here are that the tax preparation business and adjacent financial services products are clearly synergistic, which keeps our cost of acquisition low. Plus, these best-in-class products enhance the relationship with our clients, many of whom have come to trust and rely on these products year after year.

All of this translates into driving value for our shareholders. In FY14, free cash flow before dividends increased 73% to $663 million. Earnings per share last year increased 5% to $1.67.

And in January, we will pay our 209th consecutive quarterly dividend. That's over 52 years and counting. And since I took over as CEO in May of 2011, we have returned $1.2 billion to our shareholders in share repurchases and dividends. This, despite, as many of you know, being prohibited from buying back shares since the summer of 2012.

So we are pleased with our performance in 2014. Our direction is even clearer now, as we've shed non-core businesses, and are focused on tax preparation as our core competency. And as the number one player in the tax preparation industry, it's also our role to lead the industry. To advocate for and to lead change that best serves the interest of taxpayers.

You've heard me say that we don't take partisan positions on the tax code. Our job is simple: do everything we can to ensure our clients receive the maximum refund to which they are entitled, and to keep them out of trouble. But that doesn't mean we shouldn't, as the industry leader, educate policymakers on tax administration.

And there are two tax administration issues that need to be addressed: The first is the issue of improper earned income credit payments. In its most recent report this year, the IRS estimated that there was $16 billion to $19 billion in improper EIC payments, either as a result of fraud or complexity due to honest taxpayer mistakes. $16 billion to $19 billion.

And we know this improper payment rate, as a percentage of total EIC filings, has been over 20% for the past 10 years, and estimates for 2014 range between 24% and 29% of total EIC filings. We also know that among those applying for the EIC, there has been a significant migration from assisted to digital.

This graph shows that the percent of those applying for the EIC, who prepare and file their taxes digitally, has grown from 28% in 2008 to 42% this past tax season. Why? I suspect, for some at least, it's because they don't have to answer as many questions to document their eligibility, and we know there are some unscrupulous paid preparers who use off-the-shelf software to avoid the added scrutiny of answering additional questions, and their potential liability, because they don't have to sign the return.

It makes no sense to have different documentation requirements. No sense at all. So we think that across all channels, all EIC filers, whether assisted or digital, should have to answer the same questions. Doing so would significantly reduce fraud and criminal activity, and we have told the Treasury Department that it needs to take action, because the current policy makes no sense.

The second tax administration issue is the lack of minimum standards for paid tax preparers. Currently, there are no federal standards in place, and only four states have such standards. In August of 2011, the IRS proposed new testing and continuing education requirements for tax preparers, but that's now on hold until it finds its way through Congress.

So this year, the IRS implemented a new voluntary program. While we would have preferred a mandatory program, we welcome the voluntary program, and we'll support Commissioner Koskinen's efforts for legislation to regulate tax return preparers. But we continue to believe strongly that America needs genuine certification, that includes mandatory testing and continuing education of all paid tax preparers.

I have said it before. Cutting hair requires certification in all 50 states, so it surely makes sense that certification of paid tax preparers should be required in all 50 states, too. And while H&R Block continues to lead the way on these two issues, the silence of others in this industry is deafening. Frankly, I cannot understand why only H&R Block is talking publicly about these issues.

Most of the competition isn't, and you should wonder why. It's either because they don't know, or they don't care, or is it because that doing the right thing will hurt their businesses?

So now, let's get onto our line-up of speakers, and the topics they are going to discuss this morning. First up, Kathy Collins, our Chief Marketing Officer. Her team has done extensive new research on consumer tax filing behavior, which she will share with you.

Next up and playing hurt today -- these 40-year-olds who are in great shape, they just can't get it together, but with a very -- a severely sore neck, Jason Houseworth, our President of Global Digital and Product Management. He'll talk to you about the opportunities in the digital category.

Then, Shawn Moore, our Vice President of Development and Franchise Strategy, will break down the structure of the assisted tax-preparation category. You'll get a better understanding of just how fragmented this industry is, and Shawn will provide our insights. After Shawn, I'll be back to talk to you about investments in our core retail business, in technology, the look and feel of our offices, and what's next for our Tax Plus products.

We'll then take a break, and near the end of the morning, we'll have the two percentage you are probably most anxious to hear. Mark Shermetaro, our Vice President of New Business and Innovation, is one of the most knowledgeable people in the country on healthcare. He'll talk to you about the impact of the Affordable Care Act on taxes. I believe we've committed more resources to this initiative than anyone in the tax industry, and Mark will show you what we know, what we anticipate, and what we're doing in this space.

And then finally Greg Macfarlane, our CFO, will talk to you about our overall financial outlook. Greg will synthesize everything you hear today into a cohesive investment thesis for Block, so that's our lineup.

I'm going to close now with something that speaks to the essence of who H&R Block is, and I think it's truly the most important thing I've done since becoming CEO. And that's to define what guides us, our purpose, our vision and our values. Simply put, our purpose is to look at your life through tax and find ways to help.

It all begins with taxes, and how we look at life through the lens of tax. Only H&R Block does this. From there, our vision. The carefully chosen words of our vision make clear that we are the leading global consumer tax company, bringing tax and related solutions to clients year-round.

But to have purpose and realize the vision, we also have to be grounded in values. We do the right thing. Simple and clear. I hear it echoed in meetings across the organization, as teams address opportunities and challenges, and to do the right thing means we believe in our people, we take care of our clients, and we deliver for our shareholders.

We pride ourselves on doing the right thing. And that includes our absolute commitment to creating additional value in this Company. We're proud of our track record. Since May of 2011, our market value has more than doubled, free cash flow is up significantly, and share buybacks and dividends have exceeded $1.2 billion.

But we believe more value creation is on the horizon. And that horizon includes exiting our bank. And on that point, I do want to thank everyone here for your patience.

I'm sure this hasn't been easy for you, I know it hasn't been easy for us, but we remain confident we're going to get this done, and create even more value in this great company going forward. So with that, let's get on with the rest of the presentations.

Good morning. I'm Kathy Collins, I am the Chief Marketing Officer at H&R Block. And today I'm going to share an evolved perspective of the tax industry through the eyes of the consumer, and how our understanding of that perspective is reshaping how we approach the market today.

As I thought about our approach, I wanted to start by addressing key questions floating around the tax category. Is consumer behavior changing? Has the complexity of the tax code changed how we think about filing our taxes? Are people moving to DIY as mobile devices become a way of life, or to save money? Is the H&R Block retail model still relevant?

As the leader and the tax-preparation industry, we know this category better than anyone. In fact, we spent a great deal of time trying to truly understand the issues and questions that I just mentioned. So I plan to spend the next few minutes sharing with you our perspectives, and what we have learned as we have studied the answers to these and other questions.

First, let's set the stage. The tax prep industry is one of steady but slow return growth, around 1% to 2% per year. And as you know, there is great diversity in competitors throughout the tax prep industry, with a large number of competitors in the retail category, and fewer participants in the DIY category.

Shawn and Jason are going to spend more time on the structure of the categories a little later, but I really want to focus on the consumer. H&R Block is by far the largest brand, participating fully in 100% of the tax market. From assisted tax prep, to do-it-yourself and anything in between, we serve clients the way they want to be served.

Now what we've learned about the industry over the years may surprise you. For one, we have learned that decisions around tax prep are highly emotional for consumers. For many, it is the largest financial transaction of their year. In may trigger excitement or nervous reluctance, but typically, a high level of anxiety.

So as a brand, we must understand the needs that drive their behaviors, so we can deliver flawlessly for consumers. But who are these consumers? What is driving their behavior? And how can a brand like H&R Block continue to grow in a slow-growing, seemingly un-innovative environment?

As the leader in tax, we took it upon ourselves to take a fresh look at the industry. We embarked on a long-term consumer research journey, which included a very large in-depth qualitative and quantitative analysis of over 8,700 tax filers' behavior, attitudes, and needs. Why did we do this? Well at H&R Block, we love our data. But I wanted to leverage that data to an evolved level, to a level where we knew what the client's next move would be, maybe before he knew it himself.

For starters, we really need to understand what outcomes consumers desire. What exactly do they want from their tax preparation provider? How do they then cluster together into viable marketable segments, based on their needs, and then how do we market to them according to those needs?

Before launching this research, we took pride in knowing a great deal about all tax consumers. Everyone wants expertise. Everyone wants convenience, and everyone wants a low price, right? Every piece of research that's ever been done will validate those points. But because of our experience, we knew that there was more to it.

At H&R Block, we invest to better understand the entire spectrum of tax filers. Our digital competitors are focused on those who do it themselves. CPAs and independents simply cannot look at the whole category to this level of detail, and our branded retail competitors -- they just haven't. But H&R Block has, with the simple objective of uncovering what drives growth in this industry.

All of this began with one simple insightful question. What tax jobs are consumers trying to buy? The number one job that consumers want to buy is getting the largest refund.

It may be surprising to you, but about 86% of all H&R Block clients, across all income levels, receive a refund. In fact, getting a refund does not depend on income level. Now, it's obvious, the lower income filers are almost certain to receive a refund, but even at income levels up to $180,000, nearly half of H&R Block filers receive a tax refund. This is why last year's ad campaign Get Your Billion Back America, featuring one of our own tax pros, Richard Gartland, was so effective for us.

It was a broad message. It impacts everyone, regardless of age, income, or even needs-based segmentation. Within just four weeks of that campaign, starting that campaign, over 75% of American taxpayers knew the tagline. 90% of them tied it instantly back to H&R Block. Once again, because the idea of the largest refund unites all taxpayers.

There are other uniters. Everybody wants accuracy of return, security of their tax documents, being treated with respect. These outcomes are universal. They are important to everyone. But it's the differences among taxpayers that lead us to more targeted growth ideas.

So let me tell you about what some of those drivers are: The first true differentiator among consumers when it comes to tax prep is whether or not they want to buy help. That is, whether or not they want assistance with their tax prep. Our study showed that 65% of all tax filers do want assistance when completing their taxes.

This is a number very consistent with actual return data. The entire universe of taxpayers, not rushing out to do it themselves. Far from it.

The perception of one's own ability is one of the most discriminating factors in our learnings. It had the most variance. While some are confident in their own abilities to file their own taxes and get the largest refund, most are not, and this number really has not changed all that much over time.

In fact, historical filing patterns over the past 15 years show that nearly 60% of the market utilizes assisted tax prep, while right around 40% does it on their own. But 90% of the total tax category revenues come from assisted tax prep, while just 10% from DIY programs. Bottom line, the research tells us there is great consumer demand for assisted tax prep. The H&R Block business model is alive and well.

It also reinforces that we need more targeted approaches based on consumer needs, so this is where the real work begins. Think about the universe of tax filers. 135 million tax season filers. A closer look at them revealed a variety of segments. Each of these segments cluster clients who are looking for the same outcomes.

Each segment is based on specific needs of consumers. Some of those needs are being met today, some are not. Now it's important to remember that H&R Block fully participates in every segment of the tax prep market. Our competitors likely participate in one or two of these segments.

And while I'm not going to walk you through all of the segments and all of the detail, I am going to highlight some of the behaviors that influence tax filers, and some key learnings from our work. So let's start with Jose. Jose is representative of the client who values speed and convenience above everything else.

So Jose desires a shorter appointment length, with little need for the relationship aspect of tax prep. He may be more cash-strapped than other consumers. We can then customize the interview for Jose, and the offering. First of all, we schedule Jose for 30 minutes, as opposed to an hour. If we are running at all behind, we shoot him a text message to keep him updated.

We welcome him, and jump right into the interview. We eliminate any tax planning tips, and we save those for his summary statement. And finally, we remind Jose of our no out of pocket payment option, which allows his tax prep fees to be deducted from his refund. So Jose walks out of the office, having all of his needs met: convenience, maximum refund, tax expertise, and paying nothing out of pocket.

Now those filers that tend to complete their taxes later in the season are even more differentiated. Let's assume that Laurie and Dan are in this later season segment. They are among the few who owe money to the IRS, as opposed to expecting a refund.

Their situation is more complex. They're waiting for financial statements, and gathering all of their paperwork, up until the very last minute. In their minds, only an enrolled agent will do. They view their situation as being too complex for just anyone to handle, and there is no way either one of them will tackle this challenge on their own.

Consumers like Laurie and Dan expect their tax preparer to know everything about them. If anything material has changed in their lives, he will know that. They expect him to call them, pass on any reminders, and find a time that one or both of them can come in and drop off their stack of documents.

So Laurie will walk in the office. She'll answer a few questions, hand over the goods, and wait for the call that says they're done. Now, she will anticipate some forward-looking tax tips from her tax guy.

Let's look at one more filer, who is part of a group clearly differentiated by confidence and convenience. Stephanie is the DIYer. She is confident in her own ability to complete her tax return. She doesn't mind the challenge, and feels that it is worth the time and effort.

After all, for Stephanie and others like her in this segment, it's all about the lowest price. She simply believes that it is too expensive to pay someone else to do her taxes, and she wants to invest as little as possible to get this job done. She also doesn't believe that the risk of preparing her own taxes is any greater than having someone else do them. She loves the sense of accomplishment she feels when she does complete the task.

Now we know that Stephanie may reach a point of uncertainty while completing her own taxes, so we may pop up some sort of a window with a relevant tax tip, or an invitation to chat with a tax professional during her interview process. And while there is a lot of inertia in the tax prep category, about 86% of all filers return to the same tax prep method they used the year prior.

People do not always stay within one segment. There is some movement. Even the largest DIY player in the industry sees about 25% of their clients leave every year. That movement is typically the result of a life event or a life stage change. In the most general terms, complexity sparks uncertainty, and uncertainty may drive filers to a tax professional.

So let's see how this all plays out over the life of a taxpayer. A 21-year-old starting out often times looks for assistance from his parents for the right tax prep method. After a few years, he may try DIY, trusting in his own abilities to get the job done. As that young adult ages, life gets more complex, by 40 they have marriage, kids, homeownership, oftentimes new jobs or even their own business.

By 60, they may have divorce or death of a spouse, and they've hit their peak income. They likely have some investments. Their tax complexity is still high, but will soon start to drop off. So taxpayers may switch segments a couple times throughout their lives.

So you as investors may be saying, so what? Here's the so what, in all of this. At H&R Block, we understand client needs unlike anyone else in the industry. We have all this data. We know what people want, and now we have to bring it to life.

Consumers expect more today, so we must use tools and practices to reach them directly, the right way. So the beauty of having all of this data, this in-depth understanding of our clients, is that we have now typed our database. What does that mean?

It means that we have assigned a segment designation to every consumer in our database, based on a proprietary algorithm. From there, we are able to customize every client experience, as well as our marketing initiatives. And what's even more powerful for client growth, our algorithm can be applied to people who are not yet our clients, as well.

Previously, we were only able to use those records to identify clients based on age, income, or tax forms filed. He's a 1040. She's a younger 1040EZ. The problem with that, demographics and forms are not indicative of behavior.

To complement this consumer intelligence, we have also invested significantly in our own new CRM customer relationship management system, through both campaign management, and real-time decision-making. So with every person in our database, we maintain a golden record of that person, who he is, what segment he falls into, how he has responded to marketing stimulus, et cetera.

So for those who have opted in for a more personalized approach to marketing, we are excited about some of the new capabilities that are brought to life in the following examples: Our targeted marketing initiatives become in some cases as simple as a single keystroke, where for example, clients will receive a product offered via e-mail at a discounted price the week they receive their W-2s, all based on past behavior. We can then tie those consumer segment needs right back to our marketing plans.

So here's how I look at our marketing structure at H&R Block. First, we have our national strategy. We build our story around what we can own, and what is most relevant to our consumers.

We call this air cover, which is primarily broadcast, as well as screen cover, our interactive marketing initiatives. These two, air cover and screen cover, are our version of mass marketing. Last year, our air cover was around getting the greatest refund. Get Your Billion Back America. It's about who we are as a brand, what we can deliver, and what makes us better.

The second level of marketing is what we call Win the Block. This is our local marketing approach, that focuses on single-mindedly driving consumers into our local offices. And the final level is what I've been talking about today. We are now able to leverage the data, with a more customized direct-to-consumer approach.

We target our clients with the right message and the right channel at the right time. So for example, Laurie and Dan that I spoke of, we know they are late-season filers. We shoot them an e-mail newsletter that speaks specifically about relevant tax tips. We can go even deeper and target those being impacted by a new tax code change, with a very specific message about what it means to him or her.

Another example for the Joses that I told you about, we will introduce geo-targeted mobile advertisements and alerts, because we know this segment is most reliant on their mobile devices. And let's look at my earlier example of Stephanie, our DIYer. She files in early February each year, and if we notice that she hasn't filed by February 10, we can send her an e-mail, possibly a discount offer, to remind her that we are the right brand for her, and we have the product that best meets her needs.

H&R Block invented and has evolved the tax industry, which is alive and thriving 60 years later. What I've talked about today -- it's a work in progress. It's an evolution. But we will continue to innovate. We will test and learn, and by understanding of more about our clients than anyone else, we're positioned to do just that. Thanks for your time.

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Good morning. I'm Jason Houseworth, President of Global Digital Tax Solutions and Product Management. My role is to create great experiences for our tax clients, starting with our digital tax business, as well as leading the client experience for all of our tax products in my dual role as Head of Product Management. Today, I plan on providing you with a brief scorecard summarizing tax season 2014, before discussing the evolution of the DIY category, finishing with my perspective on what it will take to lead in digital.

So let's begin by walking through our scorecard for the digital business in tax season 2014, a year highlighted by double-digit Tax Plus revenue growth, which was our primary objective for the year. But one in which we did not move the needle in terms of top of the funnel awareness that H&R Block makes tax software, and therefore, we saw little client growth.

Growing awareness continues to be our number one opportunity as a business, and as discussed at last year's investor conference, we launched year one of our product redesign last season. The first in a wave of changes that will literally change every one of our 6,000 page federal and state online products. Obviously a big undertaking, but one that I believe couldn't have gone better. We improved conversion, and we saw our contact rate, or the percentage of contacts per registered unit, materially drop.

But the most important result of the redesign was the monetization we saw, driving our double-digit revenue growth. I mentioned last year during our investor conference that we believed the redesign would improve the value perception the user has within the experience, and we saw this result as a validation of our product innovation and testing process.

However, it was only phase 1. While mobile usage continues to explode, phase 2 will ensure that every single page will be responsive. That is to say, it will appear as if it was designed for the respective smartphone or tablet device. This is clearly an opportunity, given our conversion on both of these devices dramatically trails our desktop and laptop results.

I'll talk more about the importance of adapting all of our pages to be responsive later, but first, I'd like to talk to you about the do-it-yourself or DIY category. And as Kathy just referenced, this is the 40% of the overall tax market that says I'll do it myself. And that's versus the 60% or assisted filers who prefer having someone help prepare their taxes. Now, the DIY category is where I'm focused on serving, and unlike assisted, is one that has evolved significantly over the past 20 years.

Today, I'm going to review how DIY as a category has evolved, where we've been, and where we are headed, along with what it will take to lead going forward. I'm going to start back when DIY was nearly all pen and paper in 1992, a time at which the category had roughly 55 million tax season returns. Desktop was the first major shift, and its emergence for use in tax preparation was recognized by Intuit and H&R Block, with Intuit buying Chipsoft, the father of TurboTax, and H&R Block acquiring TaxCut.

Desktop software not only created the ability for DIYers to electronically file a return, it also simplified tax form completion, through an interview-based approach rather than direct form entry. And as a result, by 1995 it had over 5 million users. As the Internet, emerged tax filing shifted to follow. TaxAct was the first tax software to be primarily available online, and it was the first to leverage freemium, the try before you buy it model, which gave even the reluctant DIYer the ability to go in at least double check their work online for free.

In 2002, companies in the tax software category formed what is known as the Free File Alliance, or FFA, in order to provide low to moderate income taxpayers the ability to file a federal return for free through the IRS.gov website. This also had an unintended consequence of giving rise to a number of dot-com sites that are what I'll call pen and paper on a web form. Sites that were able to spend just $26,000 for an FFA membership, by creating the most basic tax software. You've got form entry, automated the arithmetic previously done by hand, E-filing, but little else. Even though the federal preparation was free, these sites monetized the service by charging to file a state return.

By 2004, online had surpassed desktop with 10 million returns filed using online, versus 8 million via desktop. And over the next decade the growth of online continued, fueled by growth within the DIY category, primarily from pen and paper, but also from desktop users as online moved from the software of choice to the method of choice for the majority of DIYers by 2006.

In the past few years, the growth in online has accelerated, due to the shift of earned income filers from assisted to DIY, and Bill mentioned this earlier, driven by the inconsistent documentation requirements for assisted versus DIY filing for this credit. In online, the requirements to verify are nowhere close to the stringent requirements that are forced on tax preparers, driving what the Treasury's own data has reported as a $16 billion to $19 billion in improper EIC payments.

Which leads us to the DIY category today. Now, at 55.9 million DIY tax season returns, online is the overwhelming choice, encompassing what I would call traditional online laptop or desktop users, with the growing pure mobile and then you've got the multi-channel mobile users, or those who use some combination of mobile and traditional screens. This combined group of online users now contains 40 million returns, or 4 times the amount of desktop software returns, leaving only 5 million of the most ardent pen and paper returns.

This number is a stark contrast to the 55 million pen and paper returns present in 1992, but it's still roughly the same number of returns for the total DIY category. Despite over 20 years of change, including the introduction of desktop software, online or SaaS-based filing, free and freemium online, as well as mobile and multi-channel filing. H&R Block has participated in the rise of the DIY category, nearly since the beginning, but we admittedly came late to innovate in the online space.

In 2009, I would argue that we were like many of the small FFA tax solutions I mentioned earlier. We were simply pen and paper on a web form, with supporting calculations and electronic filing. However, in 2010, we effectively relaunched our online product, not just with a new name, changing TaxCut to H&R Block, but refocusing our online product on streamlined filing, including W-2 and 1099 import, adding audit support representation for all free and paid products in 2011, becoming multi-channel in 2012, by releasing eight new mobile apps, establishing MyBlock in 2012, in part to allow users to move seamlessly between assisted and DIY, through a technology solution, to keep their data and relationship with H&R Block, regardless of channel.

And finally, last year we introduced the first of a two-year redesign to begin a path to personalization to ensure that the product adapts to each user as they prepare their taxes online. These changes, to refocus our digital business on winning in online have dramatically improved our registration to conversion by 5 points, and resulted in a 17% CAGR in online revenue since 2010. We've repositioned ourselves in preparation for further evolution within the DIY category.

Looking forward, I believe we will see DIY evolve in two important ways: The first is how the small value competitors created through the FFA will lose their ability to compete on price alone. Our view is that even when value DIYers expect more than what I would call pen and paper as a web form, given that price is no longer a differentiator, and they'll begin to move upstream.

The second is that the market leader, who is now using price to level the playing field with the value competitors, is continuing to fund its simple filer pricing by raising price on its most valuable high net average charge clients. Schedule C and other more complex forms have been moved from basic to deluxe SKUs into premium and home and business SKUs, making this consumer pay $50 more each year.

I believe H&R Block is well positioned to take advantage of both of these shifts. Our rebuilt online offering puts the expertise and tax services of the most trusted tax advisors, together with innovative easy-to-use tax software that is built to lead for what's next in the evolution of the DIY category.

In order to win going forward, tax software or digital category providers will need to acquire and excel at three core components. First, product innovation. Or what I'll more specifically explain as the delivery to the consumer of intelligence as a service. Second, a multi-screen focus to design first for the smartphone and tablet device, and third, a brand that has awareness and can support the full set of integrated tax services consumers expect.

When I look at where tax will evolve, it is important to start by understanding how technology and software innovation will change in applications used every day by our DIY clients. In these applications, consumers will see software that leverages my data that is in the cloud, as well as information from the network, or a shared set of knowledge that exists, that many refer to as big data.

In order to deliver intelligence as a service, to answer much more complex questions, and a simple example is how Google is going beyond search by proactively offering content, like driving time to an upcoming appointment I have on my calendar, weather for the location I'm at right now, and providing me scores for sports teams that I've recently searched. This synthesis of custom algorithms as they apply in my situation, to an abstract set of shared information, will not only create meaningful solutions to more and more complex consumer problems or questions, but it will also anticipate how and when to do it.

The delivery of intelligence as a service will have many applications, and in tax software, it will drive the software to become more personalized. In our case, the personal data is as rich as it gets. It's the individual's tax return and related data. And our shared knowledge is our internal CRM or client database that Kathy mentioned, which has everything from the high-level segment to the detailed clicks that each user takes, that provides us with an even more dynamic user typing.

Intelligence as a service advancements will make each user feel that the software was not only designed for them, but is always a step ahead. Tax season 2015 will launch year two of our product redesign, and delivers an example of this by creating a personalized navigation for every returning user. We recognize our unique situation from using the data that they had last year, and then we build an interview that only contains the relevant topics. But this is only scratching the surface when it comes to our usage of intelligence as a service. With our redesign complete, we have now created a technical foundation for a number of these innovations that you'll see released later this year, as well as in the next few tax seasons.

In addition to developing intelligence as a service, leaders in tax software will need to design the delivery of their software to be multi screen. We like to say that the rise of video on demand has created consumers with an expectation of play, pause, and resume. Or it's an expectation that your solution should be one that I can begin at work on my laptop, continue on my tablet at home when I have a few spare minutes, and do portions on my smartphone.

Another way to look at it would be from a negative perspective. Which we saw last year, when we still had screens in our program like this example, that were not designed for a mobile device. Here you see the same screen, ready for tax season 2015, designed from the beginning for a mobile or one column screen format.

For consumers who experienced screens that were sub-optimal we saw a 20 point drop in conversion versus those that spent 100% of the online experience in a full-screen browser. I'm happy to report that in the upcoming tax season, all 6,000 of our federal and state online product pages will be only responsive to all devices. Our product will make this look and easy, and meet the play/pause/resume expectation of consumers, but our view is that enabling this and keeping up with the pressure to be multi-screen will be something only the leaders in tax software will be able to do seamlessly.

Finally, with the online category continuing to consolidate value and premium, with price no longer a differentiator, I believe that all DIYers, not just those seeking more premium online tax provider, will have a shared expectation. That tax expertise and related services, like help from a tax advisor and audit support, are delivered part and parcel at a great value.

And as I said before, we are well-positioned for this. Our software is consistently ranked number one in this area, because of our support of live tax experts during the preparation process, and the worry-free audit support and in-person representation all clients receive after filing.

Finally, both value and premium consumer expectations will demand these tax services be built upon a great brand. We believe that with our product improvements in place, our greatest asset and yet our greatest opportunity, is our brand. Awareness that H&R Block makes tax software currently stands at 60%, a number that dwarfs the value competitors, because it has taken significant investment to achieve, but by increasing, still represents the largest opportunity to challenge the market leader.

So I hope as you leave, in addition to taking some of the free tax software that's in the back of the room, that you take away the following: the DIY category continues to evolve, driven by online as a multi-screen web experience. The set of online solutions is also evolving as value and premium collapse. Creating a sweet spot for H&R Block tax software, given we have the traits necessary to lead going forward. Thank you.

(video playing)

Good morning. My name is Shawn Moore, and I'm responsible for identifying competitors that fit into the H&R Block brand, and acquiring and integrating those businesses into the H&R Block network. I would like to provide you a unique perspective on the competitive landscape within the assisted tax preparation category, that you likely have not seen before. Then I will share with you that same landscape translates to an opportunity for H&R Block.

But first, let's talk about the overall tax industry. It's a $19 billion market, where assisted tax-preparation makes up the lion's share. And as Kathy detailed earlier, it's a stable market, largely driven by consumer behavior. Tax filers tend not to change providers, unless there's a significant life event, which leaves the player in this industry space to literally complete on a client-by-client basis.

But against whom are we competing? As you can see here, there are only a few branded competitors in the category. We certainly pay attention to what they're doing, but quite frankly, they are not the greatest threat to our market share.

The CPAs and independents combined have 78% of the assisted market. Clearly the largest share, and thus representing our greatest competition. And if you break it down even further, although our brand can stretch to capture share from CPAs, our true competitors are the independents, the mom and pops of the industry. This is where we invest a lot of our time and energy, so let's talk a little bit more about just who these independents are.

You may not have noticed this, but you see these types of offices every day as you drive down the street. As you know, there are very low barriers of entry to the tax preparation industry. Combine that with the fact that it's lucrative transaction, and it is no wonder the independent market has a multitude of owners, and is highly fragmented.

Many of these offices will pop up and only operate from January to April. Keep your eyes open this tax season, and you'll see that income tax sign in the window of the strangest places. The reality is that our primary source of the competition is thousands of small businesses, in which the owner is likely completing a large portion of the work themselves, and operating in offices just like the ones you're seeing now.

So how do the independents compete? Essentially, there are four competitive variables in the tax industry: Building client relationships and scaling their businesses; developing a recognized brand, that consumers will trust; as in almost all business models, price is a competitive variable, either through the structure of the pricing model or the actual price point, and potentially both; and the last variable is quality, both real and perceived.

So now let's take a deeper dive into each of these variables, as they pertain to our true competitors, the independents. Most independents develop their businesses through relationships. These are likely people filing their returns for their family and friends on the kitchen table. Once they tap out of those relationships and referrals, they're challenged to attract new clients. Thus as illustrated in the graph, nearly half of the independents are completing less than 100 returns annually.

These owners find out that it is very difficult to scale, because they need to establish infrastructure such as marketing, technology, and even furniture. This is why you see only 5% of the market completing greater than 1,000 returns. Developing a brand takes time and a significant amount of investment.

Obviously, these mom-and-pops have a presence in their local community, but they do not have the marketing dollars or the resources to differentiate themselves and compete on brand recognition. Often, independents don't convey the fact that they do taxes, instead pointing to their primary businesses, as you can see in these pictures of typical independent offices.

For most tax filers, this is their biggest financial transaction of the year. And who they have complete their taxes matters. A brand matters because it carries with it reputation and trust. The reality is, independents have names, not trusted brands.

Pricing is another lever that is often used in the industry. The question is whether it's actually a differentiator in the assisted category. Before I give our point of view on that question, it's important to understand the three most common pricing models in the industry: first is charge by the hour, which is used commonly within the CPA category, where the clients are more complex and tax-preparation is only one of the many services provided.

The second is fixed pricing, which is sometimes used as a bait and switch strategy, with additional junk fees added to the return. Junk fees are charges included on a client's bill that are hard to justify, such as processing fees and technology fees. And finally, there is a variable model, that is based on the complexity of the return. H&R Block uses a structure which generally acts as a standard for the industry, including independents.

However, as you can see, prices vary widely in the independent category, exemplifying the low price elasticity within the market. Owners can and do charge whatever they want. Those at the high end of the range may be including hidden and or junk fees, and those at the low end of the range represent those preparing taxes at the kitchen table, and family and friend pricing.

With such a varied approach to pricing, it's clear that independents do not use price for differentiation. They use it as the primary means of making money. And to reinforce that point, H&R Block is actually below the median of the market.

So with a relationship, brand, and price not being differentiators, that leaves us with quality. In fact the biggest differentiation in the independent category is quality, and quality varies in the industry as greatly as price. Due to the small size of the independents, most need other sources of revenue to ensure they can pay their operating expenses for the full year.

Therefore, it's not as surprising that 70% of the independents expand beyond tax preparation and provide other products and services. However, these services vary widely, and some are not even adjacent to the tax-preparation. We've seen everything from bookkeeping, to notary, to insurance, to wedding services, you name it.

Many owners are just trying to keep cash flow high enough in the off-season to survive, which makes perfect sense. Or doing taxes is just a way to supplement their primary income. In either case, the multiple service offerings actually creates a lack of focus on tax preparation, translating to less training, less expertise, and a lower quality of return.

In most industries such as food, transportation and healthcare, quality is a legitimate high-end variable; however, as I mentioned earlier, for some taxpayers the term quality may not refer to the level of service, but instead the level of refund. Unfortunately, it's often low quality that attracts these filers. And what I mean by low quality is that the size of the tax refund certain owners provide is greater because they are not completing returns accurately.

How do we know this? Through our prospecting of independents, we have completed due diligence on hundreds of independent business owners. Our review consists of comparing our local H&R Block office returns to that of the independent, including EIC and other tax credits.

We also go on site and review the documentation of the key refund-generating tax credits, and look to identify any unusual patterns. For example, we reviewed several businesses earlier this year that had the exact same business expense deduction at the same exact dollar amount for every client. Finally, we talk to the business owners. It's surprising what they're willing to share with us.

It becomes evident fairly quickly whether we are working with someone who has a quality mindset. In fact, we are finding that nearly one in every two prospects we review have some form of non-compliance, and one in four are knowingly committing fraud. What this tells us is that many independents are differentiating their business by providing inflated refunds through fraudulent activity.

I do this for a living, and the level of fraud in the industry continues to be shocking to me. Sadly it's only getting worse. Let me share one more example: How many of you know who the fourth largest provider in 2013 in the assisted tax preparation category? It was Instant Tax Service, and it was not a small player.

They had 150 locations and filed over 100,000 returns. However Instant Tax was shut down due to a egregious acts of fraud. Not just one or two franchisees, but the entire network was shut down. Often you will hear of fines or suspensions or both, but completely shutting down a business is almost unheard of.

I want to share a couple of quotes. First from the court ruling, where the Court stated that Instant Tax prepared false tax documents, filed false documents with the IRS, and encouraged others to do so. And the Assistant Attorney General of the Justice Department's tax division stated that Instant Tax, quote, grew large through abhorrent means, end quote. This included things such as filing returns without customer authorization, and forging customer signatures.

And what is terribly unfortunate is after this happened, the franchisees didn't stop doing what they're doing. In fact we've seen prior franchisees from this brand replace their signs, switch their names, only to continue their past ways. However, though fraud and low-quality is pervasive in this industry, there are honest good businesses out there.

We have had some initial success already, and believe through acquiring good independents, or having independents join H&R Block as franchisees, we can achieve an attractive rate of return. Also, consolidating the independent space allows us the ability to expand and enter into new client segments. Stretching our brand into areas in which we may not have been as relevant, such as ethnic and/or expertise markets.

Lastly there's an arbitrage opportunity for us to take advantage of, as well. We are able to acquire independents at a 3 to 4 times EBITDA, when we are trading close to 10 times EBITDA. Now, I mentioned the fragmented nature of the independent market earlier.

Our focus is squarely centered on the independents that are completing greater than 100 returns, which provides us a candidate pool of 67,000 independents locations, and 34 million returns, representing $5 billion in revenue. We feel like this is a great opportunity for H&R Block, especially since we also know that the independent population is aging. In fact, with 63% of the independents 55 years of age or older, it's likely these owners will soon be seeking succession plans.

However, these are not the easiest businesses to sell. Prospective buyers are challenged to find financing due to little to no fixed assets attached to the business. Additionally, these are relationship businesses, and owners want to take care of their clients and staff. And finally, almost any sale will require one or two-year trailing contingency payment. Therefore owners need to be thoughtful on who is purchasing their book of business.

For these reasons, opportunity exists in this space for H&R Block, as we are a reputable capable buyer. Another advantage for us is the synergies we bring to the table that others don't have. First, we are able to offer high-quality financial products, on which we earn strong margins. Many independents don't even offer these products today, and if they do, they make little to no margin.

Second, our field management is the best in the industry. We have decades of experience in operating a company and franchise network. Next, with our footprint, we are able to provide flexible creative solutions by consolidating locations, selling offices, and other hybrids.

And finally, we have an operational infrastructure that is second to none. Exceptional training, technology, software, and CRM capabilities that can be leveraged for any acquisition or conversion. And the independent space is not the only opportunity in which we are focused.

There is another opportunity right in our own backyard. Currently, our network in the US is comprised of over 10,000 offices, of which 60% are company operated and 40% are franchised. Generally Company-owned and operated are in the urban and suburban markets, while we prefer to franchise the rural areas of the country.

And while we're not looking to materially change that balance, we are working to reacquire 650-plus core urban offices we sold to franchisees, essentially reversing a short-term refranchising strategy that was executed prior to 2012. This year, we bought back a significant number of these offices. Unlike other capital-intensive businesses, this will be a long-term win for our Company, as we are able to iterate favorable earnings and positive cash flow to H&R Block's financials, from offices that are Company owned versus operated as franchises.

So in closing, independents constitute 48% of the revenue in the assisted category, and are our true competitors in the assisted market. Fraud within the category is astoundingly widespread, and many of our independent categories are leveraging it as their key value proposition. And lastly, the independent space is highly fragmented, and our ability to successfully bring the best of the independents into the H&R Block brand presents an opportunity for us. Thank you for your time today.

(video playing)

As I mentioned in my opening comments, I'm going to talk to you now about how we are investing in our retail business, and what is next for our Tax Plus strategy. The investments we're making underscore our deep commitment to remaining the leading player in the tax preparation industry.

We are the industry leader primarily for four reasons: Number one, our brand awareness, at 98%, we are well ahead of any competitor. Number two, our scale. We have the fifth largest retail footprint in the country. At over 10,000 offices in the US, no one in this industry comes close to our reach.

Number three, the quality for which we are best known, our tax expertise. We have the best, most highly-trained people in the business. And number four, what keeps us highly relevant, our innovation. And these factors all combine to give us a huge competitive advantage.

But we know we have to continuously improve to maintain the very high relevance of this brand. To invest in key areas, to make sure we continue to meet our client's expectations. And we are doing this in four areas: Our technology, our people, our offices, and our Tax Plus products.

Let's start with technology. You may not realize this, but H&R Block is as much a technology company as we are a retailer. We have to be. Our clients are digitally savvy, and use digital channels. Further, we understand that an effective distributed network must be reliable, safe, and secure, which goes toward our larger efforts of continuously enhancing the user experience.

The first technology area I'll highlight is MyBlock, a great example of how we're enabling client interface, not just during the tax season, but every day of the year. You should think of MyBlock as the client's virtual filing cabinet. MyBlock enables the client to upload and share documents year-round with his or her tax pro, to check Emerald Card transactions and balances, to schedule an appointment.

And MyBlock also allows us to content market to clients, with product offerings, news, and other information that is personal and relevant to them. In essence, it's the glue that binds us to our clients all year long. Today, fully 5 million of our clients are using MyBlock from both retail and digital, and that number is growing.

So our competitors often talk about big data. Well, we are focused on a whole lot of little data, client data. And MyBlock is a remarkable capability that provides convenience, information, and security. It's another example of serving our clients anywhere, anyway, and any time they want, and from all platforms.

And this isn't just a nice thing to do for our clients. MyBlock is having a real impact. Here are a couple of facts. We've seen a 350% increase from 2013 to 2014 in the number of documents that our clients are uploading. And during the peak filing period this year, some 200,000 of our clients were logging into MyBlock daily.

Now we've also made great bar graphs with office technology integration. We've invested strategically in our multi-channel approach for locating offices, finding tax pros and setting appointments, and obtaining client feedback. And our clients are empowered, too. As an example, in retail appointment setting, clients are now scheduling over 25% of these appointments through HRBlock.com, and the dot-com app.

Another example is our recently redesigned tax pro finder. Clients are now empowered through a simplified experience, and this new responsive design enables clients to easily navigate, to find photos and information on thousands of tax pros. And they can access local tax office pages too. So whether it's in the office, by mobile, through the web, or phoning our call centers, our office integrations are matching expertise to client needs across all platforms: laptops, tablets, mobile.

Now in another significant improvement this year, we are also moving to a new private cloud-based core tax platform that we call BlockWorks. This is a huge step forward in the technology our tax pros use to prepare and submit returns. In our 60-year history, we've gone from doing returns with pen and paper, to a single automated system, and now to a common tax engine, as part of our multi-year simplification strategy. Simply put, investing in our tax preparation program enables us to innovate faster, and further enhance the client experience.

To be clear, we are not changing everything this year. We are phasing in Block Works over time to ensure a seamless transition. This includes ensuring redundancy and protection of our compressed revenue model, and executing a rigorous training and certification program for our tax pros.

My discussion of technology investments wouldn't be complete without talking about enterprise data security. Data breaches seem to be in the news just about every day now. It's on everybody's mind, and we are taking specific actions, such as continuously monitoring for threats, and proactively defending against them. I'm not going to go into details here, but I can assure you that we have taken very important measures, such as hardening our network, and training our people to mitigate threats.

Now in addition to these investments in technology, we're also investing in our people. Enhancing the client experience all starts with our people, so we set aggressive client satisfaction targets, and over the past year, we increased our Net Promoter score more than 3 points. We are now at almost 75%, which is a great rating, but we aren't satisfied.

Our ultimate goal is a Net Promoter score of 80%, a truly world-class level of service, and one that will place us among the top retail brands. To that end, we're also investing in our bench strength, hiring more first-year tax pros and more Spanish-speaking tax pros. We've also conducted extensive training for this coming tax season, on BlockWorks, on the tax implications on the Affordable Care Act, and other complexities of the tax code. That's 2.5 million hours of training, which is triple what we did last year.

Another key part of enhancing the client experience is the physical environment of our offices. You heard us talk in detail last year about our multi-year plan to improve the look and feel of our offices, and I'm happy to report that we've made significant progress since then. Today, over 87% of our Company offices have undergone a makeover, all with new signage, giving us the best-looking, most professional, offices in the industry. And we anticipate completing the remaining 13% of company offices, and all franchise offices within a few years.

Finally, we're investing in our array of Tax Plus products. Before, during, and after the tax event, which we believe present a unique value proposition to our clients. As I said in my opening remarks this morning, we were pleased with our performance this past tax season. In particular, we saw an 11% increase in revenue from our Tax Plus products to $432 million. We delivered with a singular focus on the client experience.

The Emerald Advance line of credit is an unsecured line of credit of up to $1,000. This product is unique. No one else in the industry has anything like it. It's offered to clients from November through January. We rolled it out November 24, and we're getting a great response.

Though the Emerald Advance has not been a direct source of revenue growth over the past few years, it does offer our clients value, as it meets their specific credit needs when they need it most. In turn, over 92% of Emerald Advance clients return to have their taxes done. And because we have a relationship with our clients, and have access to their information, we know who may benefit the most from the Emerald Advance.

Now, with the refund transfer, our clients have an easy and convenient way to pay for their tax preparation fees, with no out-of-pocket expenses. And it enables clients without a bank account to receive a direct deposit of their refund. We sold 5.5 million units in FY14, so this has proven to be a very important product for a significant portion of our clients. Revenues from the refund transfer increased 15% to $181 million, and the take rate increased 180 basis points.

Now the crown jewel of our Tax Plus products is the Emerald Prepaid MasterCard, which continued its strong performance in 2014. This best-in-class product continues to win awards for its combination of low fee structure, exceptional features, and convenience. A leading consumer advocacy organization just named it the number-two best prepaid card in the industry, for the second straight year, and it won Best In Category Top of Wallet at the 2014 Paybefore awards.

This past tax season, we issued 2.4 million Emerald Cards with a total of $9.2 billion in deposits. Revenue was up 5% to $104 million, and cardholder engagement continues to improve, as evidenced by increased reload activity. Total unique reloaders were up 14% in FY14, which is a critical metric for our year-round usage strategy. This translates to the top line, with 2014 revenue per card growing 13% over the previous year.

Our Emerald Card strategy remains straightforward: More cards, with more usage. And we're doing several things to increase its appeal like expanding our reload network, and getting lower reload fees for our clients. And our clients can now also get joint cards, in which they can add one person to the primary card account holder's account, family, relative, friend, as long as they are of legal age.

And I'm very excited to introduce, new for this tax season, a sleeker more contemporary Emerald Card. It's no longer prominently branded H&R Block. And its more contemporary look better captures its status as one of the best prepaid cards in the industry, so I'm very pleased to unveil it for you today, the new Emerald prepaid MasterCard for 2015. I would like to thank our design consultant, Brian Kaufmann from Viking Global Investors, for his inspiration on the new design.

Now our fourth Tax Plus product, Peace of Mind, is a well-established warranty-like product that helps clients who are concerned about the potential of an IRS audit. Anybody who has ever received a letter from the IRS knows that feeling. Now PoM guarantees our US clients that we will represent them if they are audited, and it also guarantees that Block will pay up to $5,500 of additional taxes owed, if it was our error. And this isn't just for sophisticated filers. 1040EZ clients accounted for the largest percentage increase in PoM take rates last year. Overall, take rates on PoM increased 4 points to 24%, as we improve the offer flow during the tax interview, and engagement by our tax pros.

Now before I conclude, I'm pleased to announce that we've added a new Tax Plus product to the mix this year, and with what we're seeing in the tax-preparation industry right now, this product could not have been more timely or relevant. It hasn't hit the street just yet, but I wanted to give you a preview of it here today.

As you know, identity theft is a huge and growing problem. Javelin Research, which tracks the industry, reported 13 million identity theft victims in 2013, a 30% increase just since 2010. And of course, we have all heard about the major retailer data breaches.

And that leads us to the growing problem of tax identity theft, where criminals use personal identity information to file a fraudulent tax return, and steal taxpayer refunds. Over 3 million taxpayers have been impacted since 2010. 3 million. How has this become such a pervasive problem?

It's because the IRS system is built around the Social Security number, and in most cases, the IRS doesn't have a way to expeditiously compare and verify taxpayer identity with W-2 information. The established system is clearly vulnerable. Just watch this clip from a 60 Minutes episode that aired in September:

(video playing)

So that 60 Minutes segment covered a lot of ground. So what you saw was a highly condensed clip of the original segment, but it captures the essence of the tax identity theft problem. So what exactly can consumers do now to prevent tax identity theft? Truthfully, not much.

They can file their taxes as early as possible in the hopes of beating the bad guys to the punch, but that doesn't work if they're waiting on key tax documents. They can work hard to protect their personal information, but that's often beyond their control. They can pay for general identity theft monitoring and alerts, which may be a good idea. But the truth is none of these currently protect consumers against tax identity theft, which is where H&R Block comes in.

We're doing something about this growing problem, and that's why we're introducing our newest Tax Plus product, Tax Identity Shield. We've worked hard over the last year to develop this innovative, affordable and effective solution to tax identity theft. Tax identity Shield is exclusive to H&R Block, and we think our clients will welcome this solution to a growing problem.

Here's what our product does: One, a pre-tax season scan to provide awareness of tax identity theft risk. Two, custom advice on how to reduce the risk. Three, a proactive defense to help protect future tax returns. Four, early detection of any fraudulent returns submitted by H&R Block with an tax e-file notification. And five, expert guidance and support with our restoration services, in the event of tax identity theft.

Another interesting point in this product is that we have partnered with Equifax to enable key capabilities such as the pre-season tax identity theft risk assessment. We are very excited about Tax Identity Shield, and really about being able to fill a need in the market. We'll be launching Tax Identity Shield in January nationwide.

So to wrap up, you can see that we continue to make significant investments in our technology, our people, our offices and in our Tax Plus products. And this is all geared toward maintaining our high relevance in a competitive market, to making sure we are well-positioned for the future, and that H&R Block remains the market leader. We're now going to take a 15 minute break. Please return to your seats by 10:20. Thank you.

Everyone, if you can take your seats, we will get started in just a minute. You need to take your seats. Thank you. I forgot to practice the handshake.

(video playing)

Good morning. I'm Mark Shermetaro, and I lead our new business and new product initiatives, including our enterprise focus on the Affordable Care Act. Since the Patient Protection and Affordable Care Act was passed in 2010, the nexus of the law has been to enable health insurance enrollment for uninsured households.

Going forward, however, you will soon see that the tax consequences will play an equally important role. In fact, the reality is that the Affordable Care Act has ushered in the biggest change to the federal tax code in decades. With the upcoming tax season, millions of households will experience a new intersection between two highly complicated consumer arenas: healthcare and taxes. This intersection will take the form of new coverage requirements, tax credit reconciliations, potential tax penalties and associated exemptions, new tax forms, and just an overall increase in tax complexity.

Last year, when we discussed ACA, we outlined the law's overall objective to increase coverage quality, affordability, and access, using a number of tax based carrot and stick mechanisms including both the individual mandate and premium tax credits. We also provided a preliminary view that a significant number of H&R Block tax clients could be directly impacted by ACA. At the time there was, and unfortunately still is, pervasive consumer confusion regarding the tax implications of this law.

We also introduced our intentions to provide marketplace consumer enrollment assistance via our partnership with GoHealth. Because the impact of the Affordable Care Act on the tax code is so pervasive, we believe that the combination of ACA with taxes will create new growth opportunities for H&R Block. We also believe that we are well-positioned to capitalize, both in the tax category and with new related services. However, we are in the early stages with potential changes to the law on the horizon. Therefore, it will take time for this opportunity to fully unfold.

One of the biggest potential changes concerns the ongoing set of legal challenges to ACA. As many of you know, there has been a history of litigation around ACA, both at the District Court and Supreme Court levels. With regard to the upcoming Supreme Court case, King versus Burwell, a decision for the plaintiff this coming summer could substantially disrupt the ability for millions of households to receive premium tax credits, in addition to undermining other key ACA provisions. There is an enormous amount of talk and chatter on this topic, but frankly, no one knows what the outcome will be. What we do know for sure is that regardless of the decision, there will be a significant tax impact into 2016.

So here's our game plan for today: We will start by reviewing the coverage results from 2014, with an eye towards understanding the magnitude of people that will be directly impacted by the tax consequences of ACA. We will also share findings from a recent survey of our H&R Block tax clients regarding this new law. Then we will quite literally dive into a more detailed explanation of the major ACA tax impacts, and use a few consumer scenarios to illustrate the emotional dimension of these impacts. Next, we will lay out where we have made substantial investments in order to serve our tax clients and capitalize on this unique opportunity to demonstrate our tax expertise.

We will then provide a brief update regarding our enrollment services partnership with GoHealth, and we will close with our thesis regarding what we believe to be the headline opportunities that you as shareholders should care about. Let's start with 2014 coverage status. The technology issues associated with last year's launch of Healthcare.gov have been well-documented.

While enrollments were initially slow, by mid-April, over 8 million consumers had submitted applications nationwide. The latest Health and Human Services reports indicate that as of November, 6.7 million enrollees were paid up with their major medical plans, with about 85% receiving government assistance through advanced premium tax credits. It's important to keep in mind, however, that the total number of enrollees does not equate to the total number of tax returns, because multiple family members could be included in a single application.

Back in April, the Congressional Budget Office projected 2015 enrollments would climb to $13 million, and eventually to $24 million, but more recently Secretary Burwell's staff provided their forecast of 9 million to 10 million paid enrollees for 2015. HHS now believes it will take four to five years for the 24 million enrollment target to be achieved. The real take-home message to you, however, is that as marketplace enrollment numbers climb, so too will the specific tax impacts faced by tax filing households, which is one of the reasons we believe it will take time for the full effects of the Affordable Care Act to become evident.

Beyond marketplace enrollment, there are other important ACA provisions that are influencing household coverage levels, namely the impact of expanded Medicaid in about 27 states. In fact, a recent study indicated that in addition to the approximately 7 million who gained coverage via the marketplace enrollment process, another 3 million to 4 million gained coverage via Medicaid, for a total of approximately 10 million. Recent Gallup Poll results reflected this impact, with a reported drop in the overall uninsured rate from 18% to 13.4%.

At the same time, CBO and the joint committee on taxation issued a report that indicated, even with the growing marketplace on Medicaid enrollment, about 30 million people in America will likely continue to be uninsured. Thankfully for them, the majority should be eligible for exemptions, which would leave about 4 million people potentially paying penalties.

While these studies provide a useful context around the magnitude of the ACA impacts, we wanted to gain a deeper insight into how our current H&R Block tax clients were affected, so we fielded a research study in August among a large sample of both our retail and digital tax clients. We also weighted our results by age, income tax forms, and filing method, to ensure a representative sample.

The results from our study indicated that approximately 25% of our current clients, including both assisted and DIY will directly confront ACA tax impacts, either due to the need to reconcile premium tax credits, calculate penalties, or qualify for exemptions. Most were impacted by potential penalties, or likely to be eligible for exemptions.

But this survey provided and other important insight. Most experts who study ACA tend to see households in black-and-white terms, that is, either fully covered or uninsured, but our survey revealed a much messier reality: That almost half of affected households have much more complicated, and frankly, uneven coverage situations. In fact, we found that only half of households who were covered under the same health plan, with many experiencing coverage changes throughout the year. I'll discuss this implication later, but in simple terms, it means many households will face multiple simultaneous tax impacts associated with the Affordable Care Act.

Finally, our survey again exposed massive consumer confusion, despite the law being in effect now for almost a year. You might ask, what's all the confusion about? Well, many are simply overwhelmed and mystified by all the information, and frankly misinformation in the media. And those who are enrolled through the market place and receive tax credits didn't even understand they received government assistance.

As a general rule, virtually everyone is confused about the reconciliation process. For those without a minimum essential coverage, many still don't understand how penalties are calculated, let alone the exemptions process or tax form filing requirements. Probably the most important takeaway we heard was that now, more than ever, our tax clients are counting on us to help them understand first if they are impacted by ACA, and second, if so, what that means to their personal tax situation, both now and in the future.

With that background, let's move onto providing a more detailed understanding of the major ACA tax impacts for the coming filing season. My intent here is to give you a deeper appreciation for what a typical impacted household might face, come tax time. There are some in our industry who would simply claim the Affordable Care Act is no big deal. Well, that may be the case for 75% of our client base, who have employer or government health coverage, for the remaining 25%, well, you can judge for yourself.

Strap on your seatbelts, because as Han Solo famously said in Star Wars, we are going in. We are going in deep. Last year, we told you what we thought the tax impact would be, based upon our reading of the law, but we now have an even deeper understanding, based on the first wave of formal IRS tax forms and instructions released in September.

I say first wave, because we continue to work with the IRS around a number of areas, where we still have important questions. Based on these instructions, we can now confidently take a deeper view into the specific tax implications of ACA. We have provided each of you with handout containing these forms and instructions, just in case you have trouble sleeping at night.

In basic terms, there are six tax impacts related to the Affordable Care Act for filing households. First, there will be new tax documents that provide critical information regarding health plan coverage, and in some cases, premium tax credit payments. Next, all taxpayers will experience new questions regarding the status of each household member's insurance coverage for each month of 2014. As we discussed last year, there will be a defined process for reconciling the premium tax credits households received when they enrolled via the marketplace portal, based upon their actual household income.

Those who were uninsured for all or part of 2014 will face a new set of worksheets, designed to calculate their shared responsibility payment, or what we call the ACA tax penalty. Along with the penalty comes a complicated maze of exemptions that many will likely qualify for, provided they file the proper forms. And finally, ACA-impacted consumers will have to deal with new tax form filing requirements, among the most notable being restrictions around the use of the 1040EZ base tax form. Let's start with the new tax docs.

First, we have the 1095A, which for those that enrolled in either federal or state marketplaces is a critical document, that indicates each household member's coverage status and premium tax credit payment. The 1095A is actually a part of a new series of notices commonly referred to as the 1095 series.

These notices come in the form of either an A, B, or C. A notices will be issued by the federal and state health insurance marketplaces, and you will see in a few minutes that they are a must-have filing document. The 1095 Bs and Cs will be issued by health insurance carriers, the military, the government, and employers. These notices are voluntary in 2015, but will become mandatory next year in 2016.

As with other similar notices, such as the 1098 or 1099s, this information is not just provided to the household, it's also provided to the IRS for cross-referencing. For this year, consumers should receive their 1095A notices from the marketplaces by late January, and we have been told electronic versions will also be available. The 1095A contains key information needed for the premium tax credit reconciliation process, such as coverage family members, monthly tax credit amounts, and especially the premiums for the benchmark second lowest-cost silver plan in the filer's rating area.

Let's now talk about how tax filers will verify their insurance coverage. As I mentioned, for the first time this coming tax season, each and every filer will be asked about their insurance coverage status. The good news is that households fully covered through an employer, qualified private insurance, or government plans, will simply need to attest to this coverage. What this means is they will not have to provide evidence of insurance coverage such as an insurance policy, and most will be able to simply check the box.

Additionally, tax professionals will not be accountable for any special IRS due diligence requirements associated with verifying coverage for family members. However, understanding the type of coverage and who in the household was covered would be critical, because if even one household member was not covered for any period of time, this check box cannot be used. Next tax season, this all changes, as all filers will need to provide coverage documentation.

At this point, some of you may be thinking, okay. What's going to prevent someone from lying about their coverage status? Well the short answer is, probably nothing at the time of filing. However the IRS has indicated to us that they have every intention of enforcing ACA tax provisions, and they certainly have legal recourse to go back and take a deeper look in the case of suspected fraud, for up to 10 years.

The more practical answer you'll see in a few minutes is why bother with lying, when the vast majority of uninsured filers will be able to qualify for legitimate penalty exemptions? Before talking about these exemptions, we will first turn to the reconciliation process. When 8 million-plus consumers enrolled via federal or state marketplaces, most qualified for advanced payments of their premium tax credits. Come tax season, it's true-up time.

In order to fully understand reconciliation, however, we have to take a step back and talk about the premium tax credit, which is essentially government financial assistance intended to reduce the cost of insurance premiums for qualified households. To qualify for a premium tax credit, a household must not currently have or have access to affordable qualified health insurance. By the way qualified means it meets the government's 10 minimum essential coverage requirements. The good news is most employer, government, and private plans currently meet these requirements.

Secondly, the household's income must be between 100% to 400% of the federal poverty level. The actual credit they received ladders up or down based on income, family size, and zip code, because it's indexed to the second-lowest cost silver plan premium in the applicant's rating area. Now historically, tax credits are typically claimed retroactively at the time of filing. However, in the case of ACA's premium tax credit, it's prospective, because the credit is estimated upfront and then actually advanced directly to the insurance company for each month the applicant is enrolled.

Finally, anyone who receives premium tax credits must, by law, file a tax return. If they don't, they may lose the option going forward to qualify, according to HHS. Now here are the typical federal poverty level income bands that households must fall into to qualify for premium tax credits. It surprises many when they see how high these income bands go, for instance, up to $94,000 for a family of four.

Also, household income for purposes of the premium tax credit is actually modified adjusted gross income, which is essentially your AGI plus tax-exempt Social Security, tax-exempt interest, and unearned foreign income. It also includes a taxable income from all family members, not just of the primary tax filer.

In case you're interested, here's the actual formula used to determine the household's advanced premium tax credit amount. Essentially, it multiplies a forecast of the enrollee's household income, times an applicable percentage ranging from 2% to 9.5%, and then subtracts that total from the premium of the second lowest-cost silver plan in the household's rating area, matching the applicant's age, family, and composition.

Got that? Don't worry, we do. Well now we're ready to go a little deeper into the actual reconciliation process. Starting this year, tax filers must adjust the premium tax credit based upon their actual 2014 household income, using a new form called the 8962. This process essentially follows four steps.

Step one involves the determination of the premium tax credit the household was entitled to, based on their actual modified adjusted gross income on their tax return. Step two compares this determination to the advanced payments actually received by the household, which if you recall, comes from their 1095A. That's why it's a must-have document. Step three then, adjust a tax refund or taxes due, based on the difference, either with the repayment of the premium tax credit, or an additional credit amount.

Finally, for those of facing a repayment, the law also created a tax liability limitation table. The table works like this. For those between 100% to 400% of the FPL, there is a cap for any premium tax credit liability owed, based on the household's filing status and income. However, households whose income exceeds 400% of FPL will need to pay back the entire premium tax credit they received, which in some cases can amount to thousands of dollars. My guess is that you will hear lots of stories about these situations, once tax season begins.

This reconciliation process has even deeper levels of complexity. For instance, there's a specific interview and allocation method for spreading the premium tax credit across separate tax filing households, such as for divorced couples, and there's an alternative process for handling those that got married during the year. And for filers whose household members changed, or got employer coverage but didn't notify the marketplace, well, the 1095A issued to them is actually not correct, and a special approach will be required.

But the law is unambiguous on this point. Any household that received advanced premium tax credits must file a tax return with the 8962, and if they're married, they must file a joint return, and if they don't their tax return will be held by the IRS, delaying access to their tax refund. Remember, as I said earlier when I talked about the 1095A, the IRS knows who received tax credits, and is therefore expecting the 8962 with their return. If they don't file a tax return, they may be disallowed eligibility for future premium tax credits, and then finally, as I said, households near the 400% FPL level need to pay close attention to avoid paying back their entire premium tax credit.

Let's turn now to tax penalties. As you know, the Affordable Care Act created a new mandate which will institutionalize a new system of tax penalties for households without qualified health insurance coverage, which is applied on a per-month basis. Our consumer research validated that while most households are aware of the penalty, unfortunately, the awareness was focused on the individual flat fee amount of $95, versus the percentage of income method.

The percentage method most often ends up with a higher penalty amount, and for that reason, is probably the one people should be paying attention to. Why, you may ask. Well, let's take a look at an example.

Under the flat fee calculation, a three-person household uninsured for all of 2014 with a taxable income of $50,000 would have a flat fee penalty of $285. However, under the percentage method, their calculated penalty is actually closer to $500. The IRS then takes the higher outcome of the two methods, and the $500 value gets carried from the worksheets into the tax return, assuming that household does not qualify for an exemption.

In sum, there are a few key things to remember regarding tax penalties. You will sometimes hear the term, as I said, shared responsibility payment, when referring to the ACA tax penalty. That's its official name. Next year, those penalties will double to 2% of household taxable income, or a flat fee of $325 per adult.

By the way, the maximum penalty is capped to the cost of a national average premium for an applicable bronze level plan, which is currently around $2,500 for an individual. There's been quite a bit of urban mythology around whether the IRS will even collect the tax penalty, but from what we know, the IRS has indicated it has every intention to fulfill its collection duties, even with some legal limitations, and if a household happens to incorrectly calculate the penalty, they will receive an IRS collection notice.

Now, let's pivot and talk about exemptions. There are varying estimates that 20 million to 25 million people will be theoretically subject to tax penalties in 2015 due to non-coverage. The not-so-secret reality is that most should qualify for an exemption to lower the cost of their ACA tax penalty, or even eliminate it altogether, provided they complete and file using a new Form 8965.

However, from a tax filer perspective, the devil is in the details, as the challenge here is to find, calculate, and document which exemption they qualify for. Why? Well, because there's over 20 exemptions, and if you include the 14 hardship exemptions, the number is well over 30, and each exemption type has different qualification requirements.

There's two broad buckets of exemptions: Those that can be claimed on the tax return, and those that require a separate marketplace waiver application, before the exemption can be claimed. The first bucket relates to the exemptions that can be claimed directly on the tax return, and covers a wide range of circumstances, including unaffordability, short-term coverage gaps, government programs, residency status and special group membership. By the way, those below the filing threshold are actually not required to file to claim an exemption.

We don't have time this morning to go into depth on each, but you can quickly see how many circumstances are actually addressed. The affordability exemption is an example of one that, while potentially applicable to many households, is actually pretty tricky, because it requires the filer to document that the monthly premiums of either the marketplace plan or employer health plan available to them in 2014 exceeded 8% of their taxable household income.

The second bucket of exemptions includes those granted by the marketplace, and these actually have to be applied for separately before they can be claimed. Generally, households that are members of particular religious sects, or those who experienced one of the long list of financial, family, or personal hardships, may potentially qualify for marketplace exemptions.

Within the hardship umbrella itself, there are 14 distinct definitions, ranging from eviction, foreclosure and utilities shut-off to family hardships, to government program eligibility issues, all the way to the infamous other category. This is all well and good for deserving households, but the marketplace exemption process has two major issues from a consumer standpoint. The first is, simply lack of awareness, since many of the amateur households who experienced hardships would not have even gone to Healthcare.gov to learn about them and apply.

The second issue is the antiquated paper application process. Yes. I said paper. A few key points to remember for marketplace exemptions is that each impacted household member needs to complete a four-page paper application, which we've included in your handouts. There are specific documentation requirements for each hardship category, for instance, copies of eviction notices or medical expenses, would need to be attached to that application. That time period and family members the exemption applies to also depends on the type of hardship.

Lastly, hardship exemptions are not permanent, and need to be reapplied for each year. Here's a simplified flow diagram outlining the steps involved in applying for a marketplace exemption. After completing the four part application, it needs to be mailed to an HHS service center in Kentucky.

At the present time, that marketplace is claiming a two-week processing time, but we expect once tax season begins, that the processing time will take much longer, even up to 60 days, depending upon whether that application was properly completed. Provided the application is approved, the applying household would then receive a letter containing a specific exemption certificate number, or ECN. This number then has to be properly inserted onto Form 8965 and filed with the IRS, in order for the tax filer to claim the marketplace exemption.

Let me just state the obvious. This whole process is going to be confusing and frustrating for many tax filers. Ordinarily, clients who come into our offices without an ECN hand would be looking at what we called the file now and amend later approach, however there's some good late-breaking news, that the IRS will permit filers without an ECN in hand to claim their full refund, using a pending code on Form 8965. This would avoid the inconvenience and expense of needing to come back and amend the tax return, in order to claim the penalty exemption.

However, the paper application would still need to be mailed to HHS. Given the complexity of the entire process, exemption process, and the fact that few tax filers are even aware they may qualify, we believe that helping our clients find and properly claim penalty exemptions is one of our biggest value-added opportunities for this coming tax season. In many cases, the value created by finding an exemption can exceed the entire cost of the tax return.

The sixth and final impact concerns new ACA-driven form driven filing requirements. The most prevalent changes are that the 1040EZ based form cannot be used for those filers who need to reconcile their premium tax credits. These filers will instead need to bump up to a more complicated 1040, or 1040A. The good news is that while the EZ cannot be used in conjunction with the premium tax credit, it can be used in situations where the filer is just verifying coverage, paying a penalty, or claiming an exemption.

Finally, I want to leave you with one last thought around ACA tax impacts. While discussing these impacts, you might have gotten the impression that each impacted household would face one of these tax consequences. Ah, if it was only that simple. On the contrary, we expect many tax filers will experience multiple simultaneous ACA tax impacts.

How can that be? Well, you might for instance have a household that enrolled in a plan via marketplace in January, and then dropped coverage in July. Or you might have some uninsured family members that qualify for exemptions, and some that do not. As a result, there can be many combinations of ACA forms and worksheets that may be needed.

Understandably, your heads may be spinning at this point, so let's take a deep breath and summarize these key headlines. First, virtually all of the 8 million or so who are enrolled in a health plan via federal or state-based marketplace will receive a new 1095A tax doc this year. Next, every tax filer will be asked about their household's coverage status, with those that are covered with either an employer or government plan needing only to attest using a checkbox. Anyone who received premium tax credits when they enrolled on the marketplace must file, and when they file, they need to reconcile the credit using Form 8962. Uninsured households will face either a tax penalty, or if they qualify, they will need to file for an exemption using Form 8965, and ultimately, we believe many families will confront multiple ACA tax impacts.

While we have talked a lot about forms, checkboxes, calculations, and formulas, there is another important dimension around these ACA tax impacts. I'm speaking to the confusion, frustration, and range of emotions that consumers will experience this coming tax season, as they confront this new law. We felt that the best way to convey this would be to walk you through a few real-life scenarios, through the eyes of our clients, that will illustrate the typical range of ACA situations that are likely to occur, either at the tax desk, or in front of the computer.

Let's start with Dan and Lucy Green. Dan works as a retail store manager for a small employer that doesn't provide health insurance. Dan and Lucy filed using a 1040EZ in 2013. When they heard about the new marketplaces, they were excited to be able to get affordable insurance, especially because Lucy is pregnant with their first child. When they enrolled on the federal marketplace, Dan was the sole earner in the household, and he estimated their household income for 2014 to be $38,000, because that's his annual salary. On that basis, the Greens qualified for advance premium tax credits that reduced the cost of their monthly insurance premiums.

Now let's fast-forward to January 2015. When the Greens receive in the mail a 1095A document from the marketplace, that indicates they received advanced tax credit payments of about $2,700. When the Greens get their taxes prepared, they learned that because they received advance premium tax credits, they will now need to reconcile the credit based on their actual household income for 2014, and because they received a tax credit, they also learned that they can no longer use the 1040EZ form, and must now use a more complex 1040.

Because the Greens' year-end household income, however, ends up the higher due to Lucy getting a part-time job, their reconciliation results in actually a $1,200 repayment to the government, which will be now taken out of their tax refund. This was a refund that they were planning to use to buy a much-needed used car for Lucy. Both Dan and Lucy are surprised and frustrated, because they now have to put that purchase on hold.

Now let's talk about Clyde and Vicki Mason. Clyde's an independent contractor, and is currently uninsured, however, his spouse Vicki is covered under her employer's plan. Together, the Masons' household income is about $65,000. Even though Clyde heard about the individual mandate, he does not believe the government will enforce it, and if they do, it's only going to cost him $95.

When the Masons come in to get their taxes prepared, they learn that because Clyde was uninsured for 2014 and he does not qualify for any exemptions, he will have to pay a shared responsibility payment to the government. Clyde is surprised he will have to pay, but even more surprised when he learns that the tax penalty will be almost $450.

Clyde had never heard about the percentage of income method of calculating the penalty. The Masons also learned that next year, if Clyde continues to be uninsured, their tax penalty will double to $900. As a result, Clyde is rethinking his plans for future insurance coverage.

Here's our last case study. Michael and Tina Alvarez have a household income of about $23,000. Michael and Tina have two children and live in Texas, which is a non-expansion Medicaid state.

Tina's mother lives with them as well, but does not have valid immigration documentation. Both parents and Tina's mom are uninsured, but their two children receive coverage assistance from the government's children's health insurance program, or CHIP. When the Alvarez family comes in for their taxes, their tax pro indicate that because both of them and Tina's mother were uninsured for 2014, they could face a $285 tax penalty, which scares them, because they frankly need every penny of their refund to pay needed household expenses. However, after some digging, their tax professional indicates that they will qualify to receive a penalty exemption right at the tax desk, due to their low income level, and because Tina's mom is not subject to ACA tax penalties.

As we walk through these scenarios, hopefully you saw some common themes play out. Confusion and strong emotions, especially frustration borne of lack of awareness, or misperceptions. Increased tax complexity, with new tax form filing requirements. Surprised refund impacts for those filers who count on the refund each year for critical household expenses, and the reality that, while calculating a tax penalty is painful, finding an exemption represents a true value-added hero opportunity for the tax professional.

Hopefully, it's now evident that for millions of filers this coming tax season, it's going to be a whole new ballgame, and it's a new ballgame for H&R Block too. And addressing these new ACA tax impacts has required us to make some key investments in our core operating and client support model. Let's cover these in a little bit more detail. These ACA related investments fall into five categories: Training and support, BlockWorks and DIY tax software, our GoHealth partnership, operations and support, and finally, marketing programs.

With ACA, we are looking at the biggest change to the federal tax code in decades. Fully preparing our tax professionals to effectively navigate the new ACA tax provisions is of paramount importance. Plain and simple, we are committed to making sure our tax pros have access to the most comprehensive ACA training in the industry.

In fact, all told, our tax professionals will receive over 600,000 hours of ACA-specific training prior to tax season, including tax theory, client experience, and extensive case study work designed to prepare our tax pros to competently handle the full range of situations they are likely to face, and then some. Additionally, we created a multilayered network of support tools and resources, to ensure our tax professionals are kept up to date on new developments, and get quick answers to their questions, especially around deeply complex areas of this law.

Earlier, Bill introduced you to BlockWorks, our new private cloud-based tax office software. BlockWorks will also play a critical role guiding our tax professionals through all of the possible ACA client situations. With BlockWorks, our tax professionals will have access to a state-of-the-art tool, with built-in guardrails and navigation designed to identify the optimal path for each and every client. In addition to our office tax software, we also have enhanced our do-it-yourself tax products, to address the full range of ACA forms, including reconciliation, penalties, and exemptions, as well as including the best help in the industry for user questions that may emerge during the tax and review.

While H&R Block has enormous expertise around taxes, we don't have a lot of experience or expertise around health insurance. That's why we've partnered with GoHealth. GoHealth is a privately-held health insurance services software and outsourcing company, with extensive experience with developing and managing consumer-based insurance exchange platforms. They have deep relationships with 200-plus insurance carriers, and have fully integrated call center capabilities, including agents licensed to sell throughout the United States. From a business standpoint, we split commissions with GoHealth for any enrolled client.

ACA will also impact our day-to-day retail operations. Clients who are directly impacted by ACA will likely take more tax preparation time, as well as frequent reminders to bring in the proper documentation. For clients setting appointments this year, we're going to be asking them a few new questions upfront to determine if they are impacted, and if so, we will be automatically adjusting their appointment times.

We also plan to closely monitor key performance metrics and operational issues tied to ACA, such as average wait times, and tax returns that are on hold waiting for the client to bring in the needed documentation. Finally, given the overall consumer confusion and angst around the tax impacts of the Affordable Care Act, we intend to aggressively promote our brand, and our powerful ACA value proposition to America.

Our plans include employing a wide array of marketing elements and media at national scale, including advertising, direct mail, search, office signage, digital assets, local marketing and PR events. In other words we are not holding anything back when it comes to ACA as we believe, now more than ever, consumers will be looking for tax expertise that they can trust.

Now let's talk about enrollment support. Compared to last year, thankfully Healthcare.gov and the state-based marketplaces have operated much more smoothly. Nevertheless, the enrollment process continues to be daunting for many eligible households, especially with respect to finding, comparing, and enrolling in the right health plan, with the right doctors at hospitals, with the right deductible level, and with the right prescription drug formulary. That is why we are continuing to offer enrollment assistance via our partnership with Go Health.

Open enrollment began November 15, but compared to last year, the sign-up window is about half as long, lasting only until February 15. Besides the shorter time period, there's another issue with the February 15 end date, as practically there will be many later filers who won't find out they are facing large penalties until later in the tax season. And as it now stands, they won't be able to enroll in a health plan unless we meet special enrollment qualifications.

That is why we have formally requested that HHS consider extending the open enrollment period for those facing penalties, through the end of the tax season. And just as we did last year during open enrollment, we will continue to provide free remote assistance by phone or online, from licensed insurance agents, who will walk clients step-by-step through the government application, help them with health plan selection and comparisons, officially enroll them in a plan, and in some cases, even collect the first month's premium payment.

I'm going to conclude by talking about the opportunity thesis for H&R Block. I stated at the outset that we believe this new intersection between ACA and taxes will create growth opportunities for H&R Block across multiple areas, and over time. One of the immediate and direct opportunities ties to added tax form complexity for ACA impacted filers, and even more explicitly, the added revenue that could be generated from these forms.

Let me be clear in saying I'm not going to share specific ACA form fees with you this morning, for competitive reasons, but we do want to share a bit around our approach to ACA tax form filing: First, our pricing philosophy, as it is with all forms, is value-based, typically tied to form complexity, and the time it takes to complete it. In the case of ACA forms, fees will be charged to impacted clients directly versus trying to spread fees across our entire client base.

And by the way, by law, we cannot charge fees for assisting clients with the marketplace waiver application. However once a client receives the ECN, they will need to use a fee-based form 8965 in order to claim that exemption. A key point is that while we believe generating incremental form-based revenue we are absolutely focused on creating added tangible value, via our retail experience, and our tax expertise. Practically, this means addressing client questions and concerns, finding tax penalty exemptions, helping them enroll in health plans, and providing each client with information around ACA there's how ACA could impact them, now and in the future.

By virtue of increased tax complexity, and the overall confusion for a large swath of tax filers, we think the opportunities presented by the Affordable Care Act are significant. Including the opportunity to drive new client growth, whether that be from other tax preparers or DIY consumers, who may be facing a more complicated tax interview that impacts their tax refund.

We also see the potential to drive loyalty and retention and referrals, by helping each of our clients understand if and how the Affordable Care Act impacts them in plain English, combined with the immediate benefits of identifying valuable exemptions. And finally, we believe our enrollment assistance services extends our brand into new relevant consumer pain points, that can provide Block with additional revenue growth opportunities.

In closing, while many of you are focused on the impact of ACA and the upcoming tax season, the truth is that large-scale impacts of this law will unfold over time, and key interim changes could substantially alter the outcome. Likely coming in June, will be the Supreme Court ruling. But there are other impacts that we need to keep an eye on as well, including increases in marketplace enrollments both this fall and next year, which will drive reconciliation activity. New coverage documentation requirements for all tax filers, the doubling of the tax penalties due to non-coverage, and the impact of the employer mandate, both on businesses and employees.

We believe that H&R Block is set up to win with ACA. Because of our unrivaled brand strength, we will be the go-to trusted source for all things ACA. Because of our deep tax expertise and our industry-leading knowledge training and support.

Because of our large pool of tax professionals operating out of an expansive national network, of over 10,000 offices. Because of our unique ability to serve a wide range of consumers across multiple channels and methods. And finally, because of our commitment to invest where and when we need to, in training, technology, client service and marketing, to serve our clients better than any in the industry. Thanks for hanging in there with me today, and for your time.

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So I have watched Mark do that presentation several times, and I have to tell you, I learn something new every time, and it continues to amaze me. The complexity that this country is going to be going through in the near-term. The other thing I should point out, before I begin my presentation is, I think this is the first time that all of you have come to an investor meeting, we're actually giving you tax forms to take with you, so you can thank us later for that.

Anyway I'm Greg Macfarlane. I'm really here to take my time with you to wrap up everything together from what you've heard today. We've gone through a lot of material with you, but we do have an organization and a theme to it that I will share with you.

Before I do that, though, I do want to talk about our second-quarter results that we released last evening. A lot of you had a chance to read that, so with that, I'll start here with revenue. So revenues for the first quarter were $135 million. They were up slightly from the prior year.

We had higher tax prep fees during the off-season in the United States and Australia, where in Australia, we just completed our 44th tax season, and delivered another strong year so congratulations to our Australia team. We also continue to prove our off-season usage of the Emerald Card, building on the Tax Plus momentum that you heard Bill talk about extensively earlier today.

Next, adjusted pretax loss from continuing operations was $202 million, which was an increase of $19 million compared to the prior year. This increase in revenue was offset by an increase in operating expenses. This was primarily due to higher depreciation and amortization from acquisitions, and planned office and technology upgrades. Additionally, compensation and benefits were higher, driven by the investments in people Bill spoke to earlier today.

A common theme you've heard throughout today's presentation is that we are investing back into our business. To capitalize on the opportunities that we have discussed earlier, we are investing in our technology, our people, our offices, and our -- into Tax Plus. For the same reasons you are all attracted to the stock, we think these are good investments, which will drive significant return on investment. I will speak to more about that later.

On an EPS basis, our seasonal adjusted net loss from continuing operations was $0.45 per share, or $0.03 higher than the prior year. While our losses are trending modestly higher year-to-date, in a business as seasonal as ours, it is difficult to read too much into the off-season results. As many of you know, tax season performance during the fourth quarter represents a substantial majority of revenues and earnings for the year.

So with that, let me turn to discontinued operations. This includes the results of Sand Canyon. Here, our second-quarter net income of $1 million compared to a loss of $2 million in the prior year. Sand Canyon remains engaged in bulk discussions with the counterparties from which has received a significant majority of its asserted claims.

Just last week, Sand Canyon entered into a settlement agreement to resolve certain of those claims. Due to the timing and accounting rules around this, you will see a disclosure in our second-quarter 10-Q later this week, but the actual accounting itself will not be included until the third quarter 10-Q. Importantly, the payment amount under the settlement agreement was fully included in the liability recorded at October 31, 2014 of $194 million. This represents progress for Sand Canyon, and though there is still work ahead, and it may take some time, Sand Canyon continues to make important strides to wind down its efforts.

With that, I now want to turn and talk more broadly about H&R Block. When I talk about H&R Block, for me, there really three things that come to mind. First is we represent a great growth opportunity for investors. Second, we do that in a value environment, and third, we consider it to be a low-risk environment.

Throughout today's presentation, you've heard a number of examples of those, but in summary, this is how we think about the growth opportunities. It is nice to work in an industry where we show up, and every year there is 1% to 2% more returns. This gets combined with the fact in our industry we have real pricing power, and we know how to use it. In terms of the favorable macro conditions, the economy continues to get stronger, homeownership percentages continue to get better, and this is a nice tailwind for this Company.

Healthcare reform, after that presentation by Mark, you are now more understanding of healthcare reform in United States than 99% of the people. If you don't understand the opportunities that present itself, then we need to do the presentation over for you. Fourth, is our Tax Plus. This has been a major part of our focus the last several years, and we've seen good progress here. Importantly, building our successes upon last year, we move up from 20% to 24% attach rate, the continued progress in Emerald Card, we're introducing a new product to market this year, the Tax Identity Shield, which we are very excited about.

Jason Houseworth earlier today talked about our digital strategy in a great amount of detail. Block is well-positioned here, we invest real capital into this business, in fact we overinvest in this area, because we believe as this industry continues to evolve, that Block will naturally benefit.

Lastly is international growth. It represents a little bit less than 10% of our overall revenues, but actually it's growing at a greater rate than the rest of the Company, and we expect that trend to continue. On the value side, this Company is a very profitable one.

We generate a lot of cash here. It is the number one metric that we worry about, is our ability to generate cash from the system. Importantly, an increasingly, we're going to be talking about that, as an efficient user of capital. Return on invested capital, ROE, is an important metric for us, and we generate a high level of return on the cash that we have.

Next is our dividend track record in repurchase track record. We pay a healthy dividend, we've been paying a healthy dividend for more than 50 years. We also have a good track record of buying back shares smartly. As you all know, we've been in a period here for a couple of years, where we've not been able to increase our dividend and/or buyback shares.

In terms of the low risk, we do have this mortgage issue that we are dealing with. I have just shared an update with you on Sand Canyon's progress there. My perspective, our perspective, this is a time bounded issue. It will take time to resolve itself. But with this latest announcement, it is a good example of that forward progress that we were expecting.

And lastly but probably most importantly, is really stable management. For many of you investors, and people that know this Company as friends of ours, that have been coming to these things for many years, I think it is good sign when you see many -- the same members of management here on the stage, with a consistent view year-to-year, in our strategy and our execution. In the business model that executes only one time a year for most of our clients, it is important to have a few a view of the medium and long-term.

So with that, I wanted to go into a bit more detail with you. This is a tax industry view back to 1952, and what I'm showing you here is the number of returns that get filed here in the United States. This same graph, by the way, is the same in Canada and Australia. Obviously, the X axis would be different. There is a 97% R-squared correlation to non-farm employment. This an employment-driven industry.

It is nice to be in the business, that despite recession and wars and economic cycles, is pretty resilient at 1% to 2% growth. I mentioned just in the last page, this concept around pricing power. We measure pricing power on the assisted side at 0.1, and what that means is for a 1% change in price, we would expect only a 10 basis point impact on volume. This is one of the realities of our business model, and something that Block has invested a lot of effort into. It is a strategic opportunity for us to take that 1% to 2% base level volume growth, and be able to grow on top of that.

This is a graph that shows you how people like to get their taxes done. We have shown this to you before, there's nothing new here. 60% of Americans like to get someone to help their taxes, and 40% like to do it themselves. The emotions that drive that are listed on the right-hand side. These are very pervasive.

This is very big deal for people. It is a very clear categorization of people think about taxes. The only thing that has really changed by the way, is in the DIY space. I think Jason did an exceptionally good job of actually walking back through the history of this industry, to show that when it started, all pen and paper, to what it is today, is almost exact same number. What has changed is those individuals used to go to the post office, pick up the tax forms, kitchen table, shoe box, pencil, and did their taxes. Those people have chosen to outsource the calculations to software.

Initially done through the DIY desktop, which was software in a box, but increasingly as internet is more pervasive, and people are more comfortable with the cloud, there are SaaS-based offerings, which is the online.

The ability for that industry to grow is slowing down quickly as the remaining amount of pen and paper people are almost nonexistent. The only changes that we've seen in the last years is the number of people doing DIY are driven by fraud. If it wasn't for the issue around fraud, specifically the EIC migration based on the unlevel playing field between assisted and DIY, the DIY industry would have actually shrank.

The overall industry we operate in is a very big one at $19 billion. The vast majority of revenues here actually go through the assisted site. You've seen that from us several times. Only 10% go through the DIY space.

If you look at it by competitor, though, the map changes a lot. Although Block is the largest competitor in this space, we only have 50% of the share. All the other branded competitors, which include both the assisted and software, are a little bit less than we are in total.

Our biggest opportunity as time goes on, is to continue to address the issue that we see in the independent side. They represent 44% of the market, and Shawn did a really nice job talking to you at a very practical level about how we see that industry unfolding, the issues within that, and the opportunities that we see in the short term, and of course in the long-term, as we believe that standards will go up.

Block knows taxes better than anybody. Not only did we invent this industry, but we have been the source of every major innovation this industry has seen from day one. This is an industry, as you think about it playing out over the next 10 years, you have to think about how each competitor is going to shake out of this conversation, and we believe that Block has the best position.

One of the reasons we say that is that we have a brand that's unmatched in this space. We have a brand awareness of 98%, which is on par with major well-known consumer brands across the country. This is a direct result of billions of dollars of investment in marketing, over decades. It is the direct result of us doing hundreds of millions of people's taxes successfully over decades. If you want to compete in the tax preparation space, you have to automatically understand how you're going to differentiate versus Block, because we are the name in taxes.

Next is our reach. As all of you know, here in US, we have about 10,400 locations, roughly 40% are franchise run and 60% are Company run. That number is not going to change a lot. What we have been through in the must recent years is a specific downsizing effort, with our investment into Sears and Walmart. We are finished with that now, and if you went back before that, there was a period in which Block expanded very quickly our footprint, which was a mistake, we're past that now.

As we look forward, we expect to grow our footprint modestly year-in and year-out, which will be a source of growth for us. This is based off of our understanding of our customers, our data models, and our ability to execute an operational model that understands that with $40,000 or $60,000 to open up a new store, we know how to make that run successfully. The population is shifting in the United States, the competitive environment continues to shift, and we have identified pockets of opportunity that will lead to some consistent growth over the next few years.

Our tax professionals -- this is, by the way, from my perspective, I've been with Block for 2.5 years, this is the most amazing part of this model. For our client that comes into our offices and sits down to do their work with us, H&R Block is the tax professional across the desk from them. The vast majority of those individuals are seasonal employees.

This is Richard Gartland, he's the face of H&R Block. He's not just another pretty face. He's actually a tax professional, works for us in Glendale, California.

I don't know if you know this, but he actually does a couple hundred returns per year. In fact, all the requirements we've been putting on him the last couple of years in terms of our shooting and ads and TV appearances and stuff is actually getting in his way of serving his clients, which he's by the way pretty upset about.

We hire, train, develop, supervise, place, compensate, and execute tens of thousands of seasonal people in a very fast time period. It is this time of the year that we are actually in the middle of it, and me, who gets to sit in the sidelines, to see an organization that goes from coast to coast, to find these people and ramp them is really amazing. This is the biggest barrier for any competitor in this space, to find, and be able to place seasonal tax professionals that execute with quality, and Block does it better than anybody.

Retention is another nice benefit about being in this industry, simply because most Americans, including yourselves, will likely only change the way they do their taxes three or four times in their lifetime. The main reason that if someone changes the way they do their taxes, is because of a change in life event. You moved, you bought a home, you retired, you had a child, you got divorced. These are triggers in which you may want to reassess how you get your taxes done.

But putting that aside, the average tax preparer knows, with some degree of certainty, 60% of their clients are going to come back next year, which is not a bad business to be in. As you can see here, Block actually does 70%, which is a full 10 points higher than our other branded competitors. This is a direct result of all the investment we make in our people and our brand, and how we execute with service. It is something that we are very proud of.

In the DIY space, we are investing a lot of money here. You saw a lot of the specific examples of that today, as our journey continues here. We are going to continue to over invest in this area, because we believe that Block is a very good alternative for many Americans to do their taxes.

As a reminder, we are the only Company that actually says, we just want to be here when you do your taxes. We are agnostic to how you want to do your taxes. Now me as a CFO, of course, there's an economic difference between the two, but we are in this for a lifetime, and we think it is important to have a solution that starts in the DIY, and goes all the way over to assisted, and all the spaces within -- between them.

We believe that over the next few years, that competitive environment you see in the circle chart on the right-hand side is going to change, and you're going to have think to yourself, who will be the winners and who will be the losers. We obviously think that Block will be one of the winners.

One of the main things happening in this industry is this introduction of pricing. So for the first time, last season, we saw the main competitor in the industry turn to pricing as a competitive differentiator, and we believe that has short-term and long-term implications for this industry.

Historically, within this segment there has been a value subsegment and a premium subsegment. That is now going to collide, and we think turn into one segment. Block is well-positioned for that. On the higher end, these are the people that have the more sophisticated returns that typically pay more for their software, what we've seen from the industry leaders, they're planning to price up fairly materially in certain areas, to be able to afford dropping the price in the low end. We also think that Block will benefit, not just our DIY potentially, but even some of our assisted clients. Assisted may be more of an alternative for some DIY clients.

Next is international, so I reported earlier on Australia, so I'm not going to touch on that too much. In Canada, we are about to start the same tax season roughly in Canada as we do in the United States, and we've been seeing good growth from that team. The main focus for Canada in the medium and long-term is really to become a presence in the DIY space within Canada. You probably don't know this, but Canada has been for Block about a 1% market share in the DIY side, with the main competitor here in the US being the largest provider in Canada too. That's over, so Block is now entering the software DIY space in Canada, and it's a medium and long-term investment for us.

There's other opportunities that we presented here, both in Brazil, India, and expat. And for us, these are smart long-term investments. As I said before, the best time to plant an oak tree was 100 years ago, or today.

We've been in Brazil and India now for several years. We continue to invest money there, because we think there's long-term investment, or long-term return. The amount of money that we are talking about, however, is fairly modest, and measured in a few million dollars per year. Those economies are changing quickly, and we think that Block has a long-term solution, that will help its citizens and the government navigate an increasingly complicated tax system.

Tax Plus is a very important part of our overall strategy, and it really starts with the foundational nature of our relationship with our client. Most of our clients will come into our offices and spend up to an hour with a tax professional, sharing with them intimate financial information about their life. It is a trusted relationship. 85% of our clients walk out with a big smile on their face, because they are getting a refund.

We have learned over the years that if you have the right financial products, you can add value to the client's life and make some money at the same time. We've had good success in the last few years as we focused on Emerald Care and Peace of Mind in particular, but never forget that Emerald Advance and refund transfer are very important ways that we add value to our clients' lives. We are happy to report this year that we have a new thing that we can add value to their lives on, which is the Tax Identity Shield. This is an important product that's dealing within a very specific issue. Last year, as you saw from a chart in Bill's section, there were over 3 million individuals whose identities were stolen, and someone else filed their tax return on their behalf. This is a problem, and we have a solution.

Next, specifically is the Emerald Card, and I've always believed, and I think as you heard from Bill, that this is really the crown jewel within the Tax Plus suite of products. The number one reason I believe that is because there has been fundamental shifts really, since the 2008 crisis, in how Americans need to get financial services. Many banks are looking at their client base, and saying that we can now longer make money on these individuals, we're restricted on the fees we can charge them, and they're pushing them out of the mainstream system.

Block's clients, about half of them in total, are considered either under-banked or not banked at all, and yet these are individuals that still need to have access to buy airplane tickets and paying utilities and living their lives, and that's why this debit card product has been such an explosion in the last several years, and Block has the third-largest program out there. That's been a GreenDot or One and Two here.

We have worked really hard to improve the features and functions of this product, to make it appeal to clients, so that they can use that as their year-round card, and we've had some good success here. As you can see in the bottom right here, we've moved our revenue per card two years ago from $36 a card per year, to last year at $44. That's almost a $10 increase in two years, and we expect that trend to continue. We don't know if we'll ever get up to entitlement, so if you look in the table above that, the revenue per account that a GreenDot or Netspend gets, which are in the low $100s, it's unlikely we'll get into the low $100s, but I think it's very realistic to expect $50 or $60 or plus, as we continue to develop this product.

So next I want to talk about the bank, I know that Bill talked about this right up front, but I wanted to make a few things clear to you. One, we are going to exit the banking system. We are focused on getting that done. We believe, second of all, that the transaction we presented to the OCC, with our partners at BOFI is a good transaction, and on its merits, will be approved. We have to be patient. At the point at which we have more information, as we have done to date, we'll get on the phone and have a conversation with you. We can not predict what the regulatory timeline is, because that's not the way it works.

The ACA and taxes in the United States are at an intersection point this year, so I actually think the graphic here is perfect, because we're standing right now in the middle of that. Up until this past year, ACA has been a notion, it's been an idea, it has been a concept for most people. But for the first time, when someone sits down to do their taxes this year, will be when they have to sit down and face into the realties of their situation, as it relates to healthcare. This situation will only get more complicated, as the next few years unravel. People have new documents, they're going to have more questions, they're going to have more forms to fill in, and this is a great opportunity for H&R Block to demonstrate the value that we bring.

We are investing real money in this area. You heard a number of examples from Mark, but as a CFO, I will tell you that this costs real money. And the reason we are saying investment is very specifically, this is not an expense for us. This is something that we believe will have short term, medium-term, and long-term return for us. As you know, for those who have followed us the last few years, we've also invested money last year and the year before, and we thought that was a good investment then, and we think it's a good investment now.

When this investment pays off, what we think about will translate are these following factors: New client growth. Based on the description you heard from Mark, do you think it is likely that people who go to other assisted tax preparers, especially a lot of the ones that you saw from Shawn in those pictures, are not going to be satisfied with the level of understanding that tax professional may have? The fact that their return changed a lot? We think some of those people are going to come talk to us.

We think of a number of people who are going to sit in front of their computers, because that's what they are normally used to doing, and are normally used to handling their taxes and changes in tax law that way, for the first time, they say, my return changed in a more amount -- larger amount than I ever expected to do, and I don't understand why, because for me, I was counting on that money. So maybe, for the first time, I'm going to talk to somebody about that. We want Block to be well-positioned for that.

Of course there's a third pool of people, which are those who have not been regular filers, who are now, because of the rules of the healthcare reform, required to file. For what it is worth, we don't think there's a lot of those individuals, but there's some individuals that will fall under that category. All the investments that we're making, and all the different areas I just talked about on the previous page, will have benefits. We think our current clients will see that, and will become more loyal. We think as we attract new clients who may be sampling us just for one or two years, may see the value of H&R Block, and so we think that over time, there will also be loyalty and retention benefits.

We are a value-based pricing system, what you can also think of as a form-based pricing system. We showed you a number of new forms, we will be charging for them this season. We will not be telling you how much that is, because the reality is, a lot of the competitors are listening to this call right now, want to know what we are charging, and they will take the position off of that. There is pricing opportunity here for us for sure.

And lastly is enrollment services. A number of people are very confused by the complexity of selecting healthcare. If you have ever had a chance to go on and look at the healthcare sites, you only need about five minutes to realize, this is a very daunting thing for many people. Should I go with the silver level? Should I go with the bronze level?

What did I spend last year? What am I going to spend this year? What's my copay amount going to be? I don't understand why there's so many options here.

We think that Block is a trusted source, and we have validated that through our research. Our ability to introduce clients as additional value-add is a way for us to help them, and of course make money, and this is the partnership with GoHealth that we are very positive about. GoHealth has been a good partner, and we expect to have a lot of opportunities as we look forward.

With that, let me switch more to the financial overview of the Company. It really starts with some of the basics. This is just a graph that goes back to 1996, and what you're seeing here is our pretax earnings. Generally a good story, especially in the last few years that we continued to work on this. Last year, we increased our pretax segment earnings from 2012 to 2014 by $162 million. It is a good story.

Our EBITDA margin, which is something I got a lot of questions on, I thought I'd address that, but everyone knows we did last year, we reported 31% EBITDA margins, which was up from the year before, and dramatically up from the year before. As you can see, from 2012 to 2014 we have increased EBITDA margin by 5 full points to 31%.

If you actually take that number and compare it to the S&P 500, or we've also shown here the Consumer's Index, we say we have envious margins for a reason. These are the average S&P EBITDA margins, which are reported at typically in the high teens, 19% or so. Not a bad business to be in.

The other thing I talk about is an expected range of margin with you, and up until this past year, I've talked about a range of 27% to 32% as range. We have done a lot of work on that, and unfortunately or fortunately out of that, there's been a minor change to that model. We're now going to say 28% to 32%, for what it is worth. This page shows free cash flow, and so the total graph actually shows operating cash in total, and from that, you have CapEx.

As you all know, we've been spending a little bit more in CapEx. Our normal expected range in CapEx is 2% to 3% of revenues, that's ticked up specifically, and I'll address that here on the page. Once we get past CapEx, of course we have a dividend that we are very proud of paying, we take that out. But even then, we still had a lot of free cash flow. Free cash flow is a very important metric for Block, and one that Bill and the management team are very focused on.

Next I want to talk actually specifically about our CapEx investment. We do, as I said, expect CapEx historically to be about 2% to 3% of revenues, which reflects a mature business model, that also is a service-based model, whose main investments typically are furniture and computers and software, but nothing in the material sense, like many other industries. We do expect CapEx again this year to be about 5% of revenues. But having said that, and I will talk this at the end to confirm it, we expect that to tick back down to a normal range.

Now at some point, as you all know, there is a difference between the way that cash gets spent, and the way it gets accounted for. So the other line shows you depreciation and amortization. I want to be clear that we expect a big step up in depreciation and amortization this year. Last year was $116 million, this year, we are expecting at $165 million.

In addition to the elevated levels of CapEx in the last few years, there are two other reasons why that's going up. Secondly, is the fact that the nature of the assets that we are buying have a shorter lifespan. So as you can expect, the amortization and depreciation tables are a little bit more accelerated. The third, and actually probably larger driver then the second one, is the fact that we have been actually buying back a number of our franchisees during the last year. In fact, this year, by the time it is finished, we'll expect to have invested over $100 million in buying back former Company territories that we refranchised, and are now buying back.

We believe that's a good solid investment, but it has a depreciation and amortization impact in the short term. I mentioned this earlier, and it's a topic that you'll be hearing from us increasingly as time goes on, which is return on invested capital, we think is a better metric, but it is very similar to obviously ROE here. We have shown you back to 2009 per year, what our ROIC is, so last year, we reported 25% return on invested capital.

By the way, this is with a well-capitalized bank, and in fact, we've been building up capital. It is a number that we are focused on. When you make -- and you continue the story, and really talk about what's the inherent cost of capital, and of course we do this math on a regular basis, this is one of the things I get paid to do, is worry about how to optimize our cost of capital, you can see us typically right around 9%. This is a very good investment on return for people, and something that we are very focused on.

Another thing I wanted to do on ROIC is provide some context for you here. So this slide actually shows you Block, we're in the green bubble, so 2013, and we're going to have to do this on calendar year, not fiscal year, is 25%. The red circle represents the average ROIC for the S&P 500, and the bar, the top bar is the 75th percentile, and the bottom bar is the 25th percentile. We actually will now talk about us having enviable ROIC margins, and this the basis for that conclusion. This is a good investment, it is a good efficient generator -- use of capital, to generate the returns that we do.

Next is dividends. As you all know, in the last two years, we've actually been prohibited from increasing our dividend. Right now, we pay $0.80 per share per year, which represents, based on today share price, roughly 2.3% yield. Historically, we've always been higher than the S&P 500, which I don't think is a bad thing for a mature Company that generates this level of cash flow. At the point at which we exit the bank, will be a chance for us to re-examine our dividend policy.

Next, which is a little bit of building on concept of dividends, it is also the concept of share repurchases. For the same reasons we've been prohibited from increasing the dividend, we've also been prohibited from buying back shares. Really, for the last two years. If you put that aside though and really look since 2012, between dividends and share repurchases, we've actually returned to you $1.2 billion. Which, for a company that has a market capitalization of $9 billion is not a bad number.

The other thing I like about this chart is we've indicated on the bottom line the average price we bought those shares back, so if you look back in the two last windows in 2012 and 2013, when we were buying back shares, we typically bought them back about $14 or so. Given the share price right now sits in the low $30s mid-$30 range, that wasn't a bad investment. Importantly, at the point in the future, when we may have the ability to buy back shares, we will always look to intrinsic value is a guideline about efficient capital, and ways of optimizing value for you.

The broader concept of capital allocation is a simple model. I've shared this with you before, but just to reiterate, job one for us is to make sure we pay the bills. This is a very profitable business, and we need to make sure that we continue to invest back into it. So step one is to making sure that we fund the operational liquidity needs of the tax business. Once we get past that, we do think it is a smart investment to invest in the future. Today was a great example of a number of those investments in real life.

I want to be very clear with you though, from a financial perspective. Many of these investments, in combination with the fact that we get to do business once per year with many of our clients, have multi years to pay back. They are smart investments, they have multi-year paybacks, but they do cost money in the short term. Once we get past the strategic initiatives, we of course then support our dividend. Our dividend payout ratio is approximately 45%.

After that, we've always had cash left over. We have historically traditionally bought back shares, but obviously -- the other thing is at this point with the bank, it really is a moot point from what we would do at this point. Job one for us, really from a capital perspective, is to effectively close this bank transaction, and then we can talk about what level four will be.

Another idea that I get a lot of questions on, so I thought we'd put a slide in today, is really just talk about how we align value with you, our shareholders, with the management team you see here on this stage. We are a medium and long-term based business model because of the nature of what we do, and we have tried to work hard with Board to really understand what the right way to compensate is. On the left-hand side, you see the way that the CEO gets compensated, and the right is myself and my colleagues. There is a bias here towards the long-term, and I think that's a good thing.

Now in closing, I have two last slides for you specifically. First is a market outlook, and then the second one will be an H&R Block outlook. On the market outlook, we do not know when the tax season will start this year. The IRS has not yet communicated that, but we do expect it to be late January, which is in line with the last two seasons.

For many of you who have followed tax season for a long time, the tax season has traditionally opened in the middle of January. It's really just been in the last two years that it's shifted to be the end of January. We think that's likely to stay more permanent in nature. Why that matters for us is because our fiscal third-quarter ends the end of January. So the implication of this is the majority of our economics and accounting will now be in the fourth quarter.

The next thing we want to talk about is what our expectations are of tax filing increase. It will be 1% to 2% in the industry this year, really based off of employment growth. However, within the two subsegments, we think the assisted site will grow somewhere between 0% to 1% and the digital side will be 4% to 5%. For the next few years past this year, we continue to expect 1% to 2% overall. We think assisted will continue to be around 0% to 1%, but the digital will continue to moderate, as the pen and paper filers continue to disappear.

Lastly on this page, it's really about complexity and tax law changes. This year is the heart of complexity when we deal with ACA, that will of course unfold over the next few years. We also talk a lot about immigration reform and some other pieces of legislation. We also, by the way, have to worry about state levels, who increasingly are using the tax code as a way to generate additional income, without actually increasing taxes. We think complexity is likely to continue, not simplify. How much, it's hard to tell.

So with that, let me turn more specifically to H&R Block, here, and I will do this line by line with you, because I know a number of you like this from a model perspective. First, our compensation and benefits. A lot of the investments that we're making that you heard about today is really about people.

We are increasing the number of people working for us, and we are paying them more. You saw that a little bit here in the second quarter, and that trend will continue. We expect this year for a dilution of roughly $0.04 a share. Once we get past this year, which is really the height of some of these investments, it will then moderate back to typical wage inflation, which would be 2% to 3%, and we wouldn't really speculate at that point in time.

Secondly is training costs, as you heard from the ACA, but also this new system we are putting in BlockWorks, we are expecting and are seeing a big increase in our training budget, which again is an investment in our future. That specifically will be a dilution this year of about $0.05 per share, that will moderate over the next few years to $0.02 to $0.03 of dilution. Those two things, in combination with a number of other things, which includes of course cost from productivity work that we are doing, will result in a drop of our EBITDA margin from last year, or about 31%. We expect it to be about 30% this year. Just to be clear, the compensation and benefits and training costs I've outlined are included in that number.

Once we get past this year, we continue to believe that EBITDA margin percentage will be somewhere between 28% to 32%. I want to be very clear on a major point here. Our objective is not to have EBITDA margin continue to grow by itself. Our goal is to get revenue to grow at a greater than 4% rate, and we are prepared to invest productivity back into getting that number to be more sustainable over time. That will then have natural margin expansion at that point in time. A lot of what we're doing is the costs we're taking out of the Company, we are reinvesting back into the top line growth we think we'll pay back over the next few years.

Next is CapEx. I talked about this earlier, but just to confirm, we expect this year to spend about 5% of revenues on CapEx, but that will go down here very shortly to 2% to 3% to 4% of revenues. The depreciation, to confirm the number for this year, we think somewhere between $160 million to $170 million, that number will stay elevated because of the three reasons I mentioned earlier, all the way through FY19. This is one number that we see several models a little bit out of sync on, so we wanted to be very explicit with you today.

Next is interest expense. Many of you know that we had a medium-term note that was due here this October, at a principal amount of $400 million. We chose to pay that down. That will result in interest savings for us this year.

This ultimately of course gets wrapped up into what does our capital structure look like, in a world where we don't have a bank. We don't have the answers for that, right now. We felt, given the fact that we have an abundance of capital available to us, refinancing some debt just to say we refinanced it wasn't a smart thing for you, our shareholders, and that's why in the short-term, we chose to pay it down. It's not by any means, you shouldn't read that as a permanent change in our capital structure.

Next is our tax rate. This year, we're expecting our tax rate to be somewhere between 35.5% to 36.5%.That is now going to be three years in a row, where we've been in and around that range. Importantly though, this year, and the previous two years, that was really driven by a number of one-time events we were able to structure, and realize, which had good economic impact. It also allowed us to repatriate cash for the US in a very smart way. Having said that, our long-term objective is to focus on our base tax rate of 39%, and bring that down. We do have a number of things we are doing to bring that down, and at some point in the future I will talk to more specifically about that.

Lastly, just to confirm, I think the obvious here, because of our inability to buy back shares, we expect the number of diluted shares outstanding to be about 278 million, which is no real big change, and as we look out past this year, it is really going to be contingent on the bank sale and the capital allocation. Hopefully that helps from a more model perspective. But really just in closing, I think it's important to summarize what we talked about with you today. We think that Block represents a great growth opportunity, provides real value to you along the way, and generally, we think this is all done in a low-risk environment.

Thank you again for braving the weather, spending your time with us this morning. We're going to take a very quick break, put some chairs up here, and then open up for Q&A. So again, thank you.

As we are set up here, and we'll get started in just one second, just wanted to quickly remind everyone that the slides for today's presentation will be posted to our Investor Relations website, later this afternoon, and the transcript will be posted Monday. As we come around, so we will have microphones for all of those of you who are asking questions. We'd just like for you to state your name, your Company and then ask your question. We will call on you at that time. If you have a question, just raise your hand, and we will come around and get you. Scott?

Thanks. Good morning. Scott Schneeberger Oppenheimer. I guess we will start off with the news of last evening, with regard to Sand Canyon. Greg, could you just elaborate a little bit more on, I don't think it's understood what the development is that you reported last night, so any further color would be helpful, thanks.

Yes. So it is an awkward timeline because it happened after the end of the quarter, but before we released the quarterly report. But that doesn't really matter. What matters is obviously Sand Canyon is obviously making forward progress on this issue.

We are restricted in actually the specifics in which we can talk about, so I unfortunately have to be a little bit vague, but specifically, there was a material development from a settlement with a counterparty that was involved, from a rep and warrant claim in our view, in a positive way, I can't quantify other than to say it was a material amount of the reserve, and the actual reserve in itself was fully contemplated in the reserve, so there's no broader implication of the reserve amount.

Just to follow up, I'm not sure if you can answer this, but it represents past claimants, and those who may still be pursuing, should we infer that this would cover all as of this date, who are putting forth claims, and therefore, could be a permanent solution, or would there still be incremental opportunity for others, once this agreement is concluded?

Yes, let me backtrack a little bit, if that's okay. When we had shared this with you, which is probably about a year and half ago, the six-year statute of limitations, which is what we believe is a matter of law has well expired at this point in time, so any new claimant that may show up at this point would have a very difficult time, and the reality is there have been really no new claimants to talk about. So really what this issue with Sand Canyon has focused on is a limited number of counterparties that have asserted claims that Sand Canyon felt was productive to enter into these tolling arrangements, which was a way to stop the clock, and what we have announced yesterday was really one of those situations resolving.

Good morning guys. So, there's been a lot of chatter in the investor committee about immigration reform, and the potential benefits to you. You didn't touch much on it. Can we just get a little more thoughts on that? Thanks.

Yes, so a couple things on that. First of all, the President amount with that speech a couple of weeks ago, there's a lot of conversation about that whole area, so we are still watching that, to see what that is. What I would say is I think we are really well-positioned here, because we are the number one, we are the leader in terms of the number of Latino returns that we do today. We've made a big step up over the last two years in terms of the number of bilingual tax pros we have, and I think similar to ACA, we had anticipated that something like this would come. I do think this will happen, I think it's to the benefit of frankly both parties, that something happen before 2016, but specific to the proposal that came out a couple of weeks ago, we are going to and see where that settles out, but we think in general this is going to be a net benefit to us.

If you look at the details of the announcement, it is hard to understand how there would be a direct benefit this tax season, specifically.

Then follow-up, so on the bank sale, there's been some chatter that the increased scrutiny of prepaid debit cards by the CFPB, and maybe some other regulatory changes is what's slowing down the process. Can you answer that comment, or those thoughts?

Greg, help me out if I don't phrase this right, but I don't think it has any impact on that. That's the CFPB, and we're dealing with the OCC.

The CFPB guidance just came out. Obviously, we looked at it in detail, and the good thing about our product is we're pretty much in full compliance right now. There has always been broader concerns in general about debit cards, but specific to our application, we think they're independent.

There's no increased scrutiny on any of your other financial products, or you think any changes in regulatory frameworks that could have an impact?

I couldn't hear the question.

Just in terms of changes in the regulatory process on your other products, and on Emerald Advance, and Emerald -- and I guess refund transfer. No changes in the environment that should be slowing down the process?

These have been regulated for a number of years. We are operating the bank, obviously we're operating on those products, so no, I don't see any change to the structure of our products, or that this has any impact on the pending bank transaction.

Just to be clear, I completely agree with Bill. We don't think there's an issue, but we have said very clear to the regulator if there is an issue, you need to tell us, because we'd be happy to change the product very quickly to accommodate that.

The regulators have said anything to you?

There's been no request to do anything.

Okay, thank you.

As a reminder, if you don't mind stating your name and your company before asking the question, that would be hopeful.

Rich Wesolowski, Neuberger Berman. Good morning. Could you discuss the decision-making factors and the relative economics between buying an independent, taking in the franchise, and adding in new store, first? The secondly, can we assume that following 2015 tax season, you will have commensurately more excess capital relative to the $850 million to $1 billion that you discussed previously?

Greg, why don't you -- I realize it's in Shawn's area, but I think this is more a financial question. So why don't you take that, and Shawn, if there's anything you want to add at the end, why don't you let Greg lead?

Specifically, the first part, you've got, do we open a open a new store, or do we buy an independent or buy back a franchise. All three represent compelling financial returns from our perspective, and one thing about us right now is we have an abundance of capital. So realistically, on the second of the -- items two and three, it's really -- I should say really on the independents, it's really a quality issue, so we work hard to find a limited number of deals, because quality is such a big issue for us.

The franchise really is a one-time opportunity. This was a refranchise strategy the Company pursued several years back, that was mistaken. We're fixing that, are we're pretty much fixed at this point, so that's closed as an issue.

In terms of opening up new stores, what we have learned from our history of opening up stores is slow and methodical is better than fast and hasty. Because the operational structure, the quality of tax professionals, the supervision of the district managers are very important, so we're going to be methodical and slow in that area, and as we continue developing this as a muscle, we'll talk about maybe going a little bit faster.

But if the Company is within 5 miles of 85% of the population, is it fair to say that acquiring independents is a higher priority than opening new stores?

It is going to be a combination of the two, and this is actually when Kathy did a really nice job of talking about how we taking our data and understanding it a much level greater of detail, with better analysis. We are able to identify sides of the street, street corners, what part of town, we are able to extrapolate projections of population shifting, and have a much more finite view of opportunity, and when we identify opportunity, you have, do we grow a new store, do we buy a local entrepreneur, or some combination of the two.

The other thing is, in the retail business, trade areas change and the like, and with the large footprint we have, you're correct. We are in a lot of locations, but we also want to be where populations expand. We certainly, with the changing demographics of country want to be in certain locations, so there's still opportunity for us to grow the footprint. But I think Greg's point is the right one, which is, we don't see -- we don't have a dramatic I'm going to come out with a number and make sure you hit that number.

I think it is better, I think we have really evolved, similar to what we talked about in Shawn's area, with the, what we call the acquisition and development process, our real estate process is really much more sophisticated now as we go forward. I think we have a good sense that there are good incremental opportunities, obviously from a net perspective, we pulled out of Sears and Walmart, and we think that was the right decision on every level. But I think to call it slow and steady is probably the right way to think about it.

And any thoughts on the excess capital part?

The $850 million to $1 billion.

Yes, so we have outlined previously that it was our original expectation that we complete the bank transaction in time for this tax season, and if that had happened, we were expecting about $850 million to $1 billion of extra capital, so that's the number you were talking about. Since we announced the fact that we're not going to be able to get completed by this tax season, we have not updated that number at this point. But there is no reason to think it is anything other than that.

Thanks.

Gil?

Gil Luria, Wedbush Securities. In terms of your vision for how the digital market is going to evolve, you talked a little bit about the fact that Intuit is bifurcating, it's lowering the price on the low-end, raising the price for a new chunk, new type of filings. But I think your commentary was that you expect in the future for the categories to converge. Can you explain why you think that would happen, and if it doesn't, and if the category gets even more bifurcated, how does that impact your vision?

It's definitely based on the idea that price is no longer a differentiator, because if you look at the value competitors, there's very little to them, except price. And that was why, I think I said it three or four times, and I said these are really tax forms as a webpage. There is very little more than that. So, you might say that is a value to me if it is the lowest price, but if price is no longer something that differentiates, then my view is that those consumers have the same expectations at that point as the premium consumer.

Then to your point about the bifurcation of the market leader's pricing strategy, that pricing strategy last year was a used in online, to both have a lower entry-level price for simple filers, and then to charge more for the more complex. And we are seeing it again in desktop this year. The desktop SKUs have already launched, they are in some stores, but they are already online. And if you look there are multiple changes in the basic and deluxe product SKUs for the market leader, but the basic is probably the most pronounced, and it's example that I will give you.

But that product was $29.99 last year. This year, it is opening at $14.99, but it is only 1040EZ and 1040A. The Schedule A and the 1040 was taken out of the basic product. So I go and buy that, I may see it as a good value, but there's a lot less there. At $14.99 now, if I'm a Schedule A user, which 30% of DIYers are, then I'm forced to upgrade to the $59.99 deluxe product. So that's really why I believe that both the value and the premium, that there are changes going on that leave us really well-positioned, Gil.

Last year, the result of Intuit taking this strategy was that they had a double-digit volume increase, but revenue per filing for them, and by definition, for the industry, came down. Aren't you concerned that's the trend going forward if they continue on this strategy?

I think Bill said we look at our own metric around growing. Tax Plus revenue is our primary objective, we have gained share in revenue four years in a row. Where I view the categories going, is you have got to do both. I think in order to lead in this area, you are going to have to do both, and price is a lever, is really only a one-time shot.

Thank you.

Anj?

Anj Singh from Credit Suisse. This is for Greg and Shawn. I think I heard you say you're looking to acquire 650 franchised urban centers. I was wondering if you could discuss what sort of pace you anticipate that rolling out? And if you can quantify a revenue opportunity there? More importantly, I was wondering, were these stores originally company-owned, then franchised, and now company-owned again? Sort of what are the decisions that have driven that back and forth?

Why don't you start, Greg?

I will give you a bit of the history. Block, as it began to expand 50 years ago, really said we're going to control the cities and the suburbs, and franchising is the right solution for rural development. And there's real good reasons for that. Our average franchise only has one or two stores, because the distance between them is 40, 50 miles, husband runs one, the wife wants the other one. We find real synergies of management and control by being suburbs and cities.

As time has gone on, obviously the suburbs continue to expand. Four or five years ago, there was a decision that in some of the smaller markets like Raleigh, North Carolina, Scottsdale, Arizona, Springfield, Missouri, to take that city and its suburbs, and sell them to franchise, as a gain on sale opportunity that obviously we didn't think created real value. That was a mistake from our perspective, our franchisees do not run the stores better than we do. We believe that we can actually run them a little bit better than they can, we don't have to put a lot of capital into it.

So we are going back and looking at all those sales, and saying, we think there's opportunity for us to create value here. This past 12 months, we've actually gone back and taken care of most of those refranchising that happened, and so as we go into this tax season, not all of them, but the majority of the ones that were franchised four or five years ago are now back part of the H&R Block Company system. That means there is very few of this transaction to go next year. We're not going to quantify much more than $100 million for now. I think at the end of the tax season, we will give you some more information on that.

Got it, and as a follow-up, I'm not sure if I missed it, but at this juncture do you have any better thinking around the incremental leverage opportunity that you've talked about, or is that something that's still too early to discuss?

You're talking about leverage for the whole Company?

Yes.

Yes, the answer is unfortunately going to be similar to what we've talked about before. We're a low investment grade rating rated Company. We spend a lot of time thinking about that. We've announced publicly that we think there's value in maintaining that investment-grade rating, we haven't given very specific guidance what exactly that means, other than we want to maintain that investment-grade rating, post the bank transaction.

But we have said that upon completion of that, the Board and I have agreed that we're going to -- we will be taking on incremental net debt, so we have talked about the excess capital and the incremental net debt, and that's really the position we've taken at this point.

Okay, thank you.

Michael?

Thank you. Michael Millman from Millman Research Associates following up on some of the questions, particularly the franchisee. Can you give us an idea of what the free cash flow is for a franchised system as opposed to an owned system?

You're talking about from the Company perspective?

From a Company perspective.

Well, the economics are different. Right now, Block, on a franchise agreement, typically has 30% royalty off revenues. We do incur costs around that, so it is not -- just doesn't go right to the bottom line. In fact, we spend a fair amount of money on supporting our franchise.

When it comes into the system, there's an initial outlay to buy that, but the ongoing fixed assets are relatively modest. We've seen 2% to 3% of revenues is the right model to think about. So we are trying to balance revenue growth at appropriate levels of margin, which translates still to superior ROIC, and so when we are well above our cost of capital, we think that's a compelling return for investors of excess capital.

I think the other thing I would add in terms of this decision, in the simplest terms, we do think that there is operating efficiency, that having franchisees focus primarily in rural areas, while the Company focus is urban and suburban does create a lot of efficiencies of management in the system. And on top of that, with the margin structure we're fortunate to have in this Company, the ability to get 100% of the revenue from a Company perspective yet still return -- have a very healthy return at the bottom makes it pretty attractive for us, equally to glean to the Company side versus the franchise side.

Having said that, 30% royalty rate with efficiencies of them operating in small towns and communities, really is a great combination for us. A lot of times, people ask about the mix. We think the mix will stay generally how it is today.

And to change the subject a little bit, price. Can you talk about what you see over the next few years as your revenue per return, excluding some of these extras that we discussed today?

You want to take that, Greg?

Yes, we've talked about this. We have pricing leverage and it's interesting, one of the benefits, we talked about the price elasticity number, what we have realized in the last years at Block is greater than rate of inflation. We're not going to give specific guidance for competitive reasons. But you should expect greater than the rate of inflation for pricing going forward, just all things being equal.

Thank you.

Back to Scott.

Thanks, Scott Schneeberger again from Oppenheimer. Two, if I could sneak it in. One on Identity Shield. It's new, it's differentiated versus your peers. I'm curious, what type of revenue opportunity, I know you may not want to speak to this year, but over the longer-term, sounds like it might be a akin to your warrantee product, which is about a $35 price point. $90 million of revenue a year. Is that the way to think about it? Trying to sell into the population, and grow it as such?

Yes, let me kick it off, and then if Jason or Greg want to add anything. The context for this is the growing problem in the country, that tax identity theft has suddenly emerged as bad guys have figured out, wow there's $4,835 according to the 60 Minutes segment that I can get, what seems to be in pretty simple terms.

Part of this is tied to what steps are taken to combat this particular issue. If it continues the way it is trending right now, we think it will be a very good addition to our Tax Plus strategy. But terms of revenue projections, or exactly what the pricing is, we are not prepared -- we're not ready to go into that right yet. I don't know if anybody has anything to add.

I think we are really excited about this product. What it gives the consumer is it gives them prevention, protection and remediation, in case this happens. It's a growing problem.

We're excited because we've got a great partner, who knows a lot about the identity space and the identity theft space, but not specifically tax identity, which is really where we specifically see this hitting. And it's similar to PoM in that it will really go out and be something that consumers like at all segments. The ones that Kathy mentioned earlier.

Just a separate topic altogether. Bill, I'm curious, usually Latin market gets a lot of lip service every year at Investor Day, and from all companies across the business. We saw it spackled across the presentations. Could you tie it together, perhaps with regard to this buying back, this expansion of office strategy, and the hiring numbers you provided, and if you could just put a bow on what the approach is this year, and how you think you'll be differentiated there?

Yes, and then I'll let Kathy add some information from the segmentation perspective, but I think that you've got the thesis. We have invested in our offices, and a lot of those are in -- we have something called Latino designated offices, where we have a number of bilingual tax pros. We have a lot of materials that are bilingual. We are hiring more tax pros, we're training them, they are becoming more experienced. Then, there is certainly a marketing investment

Interestingly enough, when we looked at the segmentation results, what we saw is that Latinos were spent equally across all the segments. Again, because the segmentation is based on needs, and it's not a demographic segmentation. We saw that there were Latinos very equally distributed across all of those segments, which really helps us, again, in our marketing efforts to those people, knowing who they are, what is relevant to them, and how to best reach them.

In our marketing efforts, you saw that we have Jose, who's the emblem in the general community, we buy national media in Univision and extensive redo efforts.

We have our Latino air cover, just like we have our general market air cover.

I think there's time for another question, down in back there.

It's [Steve Rogers] with Citi. It was hoping you could talk more about the simple filer tax market, and if people would file a 1040EZ or 1040A, and talk about how do you win there, and how do you see the market dynamics currently?

You want to start with that, Kathy, and then maybe Jason or Mark, if you want to add something, because obviously Mark brought up the point that the 1040EZ market probably by definition almost will shrink this year, because of, you won't be able to file if you're in the marketplace. Why don't you start?

So again, you look back at the segmentation, and I mentioned this, but behavior, or I guess I should say form type or demographics do not really -- are not indicative of consumer behavior. So what we've seen again is that regardless of age, regardless of income, and regardless of form type, consumers behave different ways. So we are able to really reach them more on how we think that they are going to behave. You will see that we have effectively, with our one-to-one marketing, we've been able to identify who those early-season or those 1040EZ filers may be, and reach them with the right message and the right offer at the right time, just to make sure that we're hitting them when it is most relevant. Most timely.

And really, when we think about designing our products, we do think first in terms of the needs-based and what jobs do consumers want. And so for instance, we don't just think about an EZ, we think about all taxpayers who are DIY, and their interest primarily in getting a refund. So for instance, this year, we have a new feature. It is called refund reveal.

This will be unique, a product innovation that's unique to Block in the marketplace, and it not only shows the consumer what their refund is, but it shows them how it was calculated. Because this is really -- that box in the upper left quarter that the user watches, they see it go up and down, but what we found during our research, was there is a mystery about how it goes up, what makes it go up and down, and so that was one of the insights as we think about the needs-based approach, as opposed to a forms-based approach, that led us to that innovation.

I would just also say, don't confuse simple forms with what consumers' perception is about their taxes, and just because you are using a EZ doesn't necessarily mean you see your taxes as simple. And with the Affordable Care Act, Bill already mentioned, obviously some of those EZ clients are no longer going to qualify for those forms, and that number is going to go up, as more people enroll in marketplaces eventually. If it hits the HHS number of 25 million, you're going to see a substantial shrinking of the EZ market.

But more importantly, even EZ clients are going to be faced with potential refund defects from either penalty calculations, verification of their insurance coverage, or exemptions. And so that's going to confront them, even though they may be using a what we call a simple base tax form. And so we expect some of those do-it-yourself people that are confronting with that, are going to have questions and need answers, because their refund is going to be affected.

Okay. One more in the back.

This is Jesse Rosenthal from CreditSights, just a very quick question for Greg, follow-up on the leverage issue. I appreciate that you are just getting through the bank deal first, but I was wondering if you had any preliminary discussions with the rating agencies or any plans to discuss with them, once you get to the point where you're trying to dimension exactly where you want to be?

Just to be clear, the rating agencies joined us today, although I think I saw Ed sneak out, but anyway, we have regular conversations with the rating agencies. It is part of just our relationship with them. We have good open dialogue with them, we're proactive in sharing our ideas and thoughts with them, but we're not going to talk about specifics at this point.

Okay. If there are no other questions, just want to say once again, thank you so much for coming out. We do appreciate your involvement today. You all have a great day.

Thank you.