Automatic Data Processing, Inc. · NASDAQ:ADP
Automatic Data Processing — Proxy Contest (September 2017)
60 slides from Automatic Data Processing's proxy contest presentation, Sep 25, 2017
Slide 1: Pershing Square's Response To ADP's September 12th Investor Presentation
Pershing Square’s Response To ADP’s September 12th Investor Presentation September 25, 2017
Slide 2: Disclaimer
Disclaimer The information contained in this presentation (“Information”) is based on publicly available information about Automatic Data Processing, Inc. (“ADP” or the “Company”), which has not been independently verified by Pershing Square Capital Management, L.P. ("Pershing Square"). Pershing Squ
Slide 3: ADP's Response and Transformation Plan Are Arguments For The Status Quo
On September 12th, ADP responded to Pershing Square and released its “Transformation Plan,” which: Is an affirmation of the status quo Fails to address critical deficiencies and the magnitude of the opportunity for improvement Selectively focuses on certain, often incorrect, data points and ignores
Slide 4: ADP's Response Misses The Point
ADP’s Response Misses The Point
Slide 5: ADP's presentation describes progress but fails to address the opportunity
ADP’s presentation qualitatively describes significant business progress underway across many work streams Much of ADP’s analysis, however, fails to address the substance of our arguments or the magnitude of the opportunity for improvement
Slide 6: ADP Highlights Relative Labor Productivity Gains
ADP Highlights Relative Labor Productivity Gains The Bigger Picture Points Ignored by ADP ADP’s net operational labor productivity of $162k massively trails competitors’ labor productivity metrics which average $223k ADP’s claimed ~1% labor productivity CAGR significantly trails PAYX’s ~5% labor pro
Slide 7: ADP Labor Productivity Trails Competitors Significantly
ADP Labor Productivity Trails Competitors’ Significantly – a Fact ADP Ignores Entirely Why is ADP’s labor productivity a fraction of its direct competitors’ despite its significantly larger scale? Net Operational Revenue per Employee(1) ________________________________________________ Note: Based on
Slide 8: ADP Touts its Service Alignment Initiative
ADP Touts its Service Alignment Initiative ADP quantified for the first time the benefit of its Service Alignment Initiative. However, the “0.5-1.5%” “operational” margin uplift targeted suggests little benefit from this initiative Note that the stated uplift includes 20bps of duplicative costs depr
Slide 9: Legacy Technology Spend Has Increased Since FY 2011
Legacy Technology Spend Has Increased Since FY 2011 ADP’s legacy technology expense has actually increased since FY 2011, despite ADP having “retired / divested 13 major legacy platforms”(1) over the same time period ADP’s legacy R&D spend alone is a multiple of most competitors entire technology bu
Slide 10: ADP Claims to be Refreshing and Engaging Talent
ADP Claims to be “Refreshing and Engaging” Talent None of ADP’s senior operating executives has worked at another company in the last decade, and their average tenure at ADP is ~20 years Limited, if any, outside perspectives in the senior executive ranks CEO Carlos Rodriguez’s team consists almost e
Slide 11: ADP Defends Flat Comparable Client Counts in Enterprise
ADP Defends its Track Record of Flat “Comparable” Client Counts in Enterprise ADP introduced a new metric – “comparable up-market clients” (the definition of which is undisclosed) – which it claims have been “largely consistent” Regardless of the Enterprise client count: Absolute Enterprise revenue
Slide 12: ADP's Stated Bookings Do Not Reconcile with Revenue Bridge
ADP’s Stated Bookings Do Not Reconcile with ADP’s Illustrative Revenue Bridge ADP’s reported bookings don’t reconcile with changes in annual revenue – we believe bookings include non-economic drivers We believe there is non-economic revenue included in bookings – including, but not limited to, PEO p
Slide 13: ADP's reported Bookings does not tie with revenue bridge
ADP’s reported Bookings – a non-GAAP, undefined metric – does not tie with ADP’s revenue bridge Pershing Square originally highlighted that bookings likely included some or all PEO pass- throughs. ADP management publically disagreed with our claim: ADP has now confirmed that bookings include at leas
Slide 14: ADP Defends Sales Productivity But Excludes FY 2017
Measuring productivity through FY 2016 presents an incomplete picture as 2016 was inflated by ACA-related activity, and ignores productivity declines in FY 2017/18 Reported bookings include non-economic bookings, overstating salesforce productivity ADP’s salesforce productivity trails competitors (e
Slide 15: ADP attacks our CDK case study
ADP attacks our CDK case study based on the non-sequitur that CDK’s Adjusted EBITDA adds back both stock-based compensation and restructuring charges If the goal of the comparison (at left) between ADP’s and CDK’s Adjusted EBITDA margins is to make the point that they are similar today (on an absolu
Slide 16: CDK's Performance Lagged Under ADP
ADP Attempts to Obfuscate the CDK Case Study – Any Way You Cut It, CDK’s Performance Lagged Under ADP ADP’s comparison misses the point: Whether looked at on an Adjusted EBITDA or Adjusted EBIT margin basis, CDK’s margins increased massively after it was disposed of by ADP. CDK’s underperformance un
Slide 17: ADP's Usage of Select Data Points is Misleading
You Can’t Have it Both Ways: ADP’s Usage of Select Data Points is Misleading ADP: “Compounded annual revenue growth of 7% over the last 5 years, with 580bps increase in net operational margins” ________________________________________________ Revenue growth includes PEO pass-throughs while stated ma
Slide 18: ADP's Transformation Plan: Shareholders Should Demand More
ADP’s “Transformation Plan”: Shareholders Should Demand More
Slide 19: Transformation Plan Delivers No Meaningful Improvement
ADP’s “Transformation Plan” Delivers No Meaningful Improvement – Shareholders Should Demand More ADP’s “Transformation Plan” ________________________________________________ Note: Emphasis added. Observations Management’s commitment to ~200bps of margin expansion over 3 years is slightly below to in
Slide 20: The Numbers Don't Add Up With Management's Plan
The Numbers Don’t Add Up With Management’s Plan ADP’s Self-Described SMB Transformation ________________________________________________ Note: Emphasis added. ADP claims to have doubled SMB margins while growing the topline 8% and improving retention by 320bps The company notes they “Anticipate Simi
Slide 21: Management not committing to margin improvement from platform migrations
Why is management not committing to margin improvement from platform migrations? For years, ADP has been highlighting efficiency opportunities post-migrations: ADP is set to complete Workforce Now platform migrations in the mid-market later this year, representing ~$3bn+ of revenue Despite this, ADP
Slide 22: ADP's ~500bps margin expansion claim is not true
ADP claims to generate ~500bps of operational margin expansion from FY17 through FY20, but that’s not true ADP’s cadence of operational margin expansion (300bps over 3 years) is consistent with its historical results ~30% of the total net margin improvement is driven by PEO mix-shift, NOT underlying
Slide 23: Deconstructing ADP's Long-Term Operating Plan
Deconstructing ADP’s Long-Term Operating Plan Note: Blue boxes represent mid-point of ADP’s long-term plan. Green boxes represent PSCM assumptions. Red boxes denote a highlighted output. ~300bps of net operational margin expansion ADP’s Long Term Plan ES margins expanding only ~220bps
Slide 24: Why is ADP Unwilling to Achieve its True Potential?
Why is ADP Unwilling to Achieve its True Potential? Current initiatives should be paired with a more comprehensive plan to achieve ADP’s full structural potential ADP has additional opportunities to improve performance, including: Corporate restructuring / reducing legacy silos / spans-and-layers De
Slide 25: ADP has Refused to Disclose its ES Sub-Segment Margins
ADP has Refused to Disclose its ES Sub-Segment Margins ADP directly competes with Paychex, mostly in SMB If ADP’s ~$2bn SMB business had Paychex’s ~41% SMB margin,(1) it would achieve ~$820mm of operating profit from this sub-segment alone. This would imply the rest of the Employer Services business
Slide 26: Management's SMB margin explanation is not credible
The delta in growth rate between ADP SMB and Paychex is not meaningful enough to explain a significant margin differential in SMB, and should be more than offset by ADP’s higher retention The fact that growth suppresses HCM margins is a point we made in our original presentation (pp.68-70). ADP shou
Slide 27: Margin opportunity by sub-segment
We believe the majority of the near- to medium-term earnings increase in Employer Services will be driven by SMB, Mid-Market, and International Most of this margin expansion will be driven by basic operational efficiency Much of the revenue in Enterprise may be eligible for migration to Workforce No
Slide 28: Questions ADP Failed to Address
What are ADP’s margins by sub-segment? Is ADP earning comparable margins to Paychex in its SMB segment? Why is ADP’s absolute labor productivity so much lower than peers? Why do ADP’s gross margins trail peers so significantly? Is ADP’s sprawling corporate footprint appropriate? (e.g. 6 corporate he
Slide 29: ADP's response fails to address the substance of our arguments
ADP’s response fails to address the substance of our arguments ADP is fundamentally underperforming its potential and has an enormous margin improvement opportunity ADP’s board and management either (i) don’t recognize the magnitude of the opportunity, or (ii) are unwilling or unable to take the ste
Slide 30: Analysts Recognize ADP is Underperforming its Potential
Analysts Recognize ADP is Underperforming its Potential and that Margins Can Be Expanded “[Pershing Square] did break out a number of analytically sound points that can add up to a sizeable benefit. We particularly liked the points on the level of support (vs. service); product sprawl; siloed / unne
Slide 31: ADP's TSR is Overstated and Trails its Actual Peers
ADP’s TSR is Overstated and its Performance Trails its Actual Peers
Slide 32: ADP Claims to Have Generated a 203% TSR
ADP Claims to Have Generated a 203% TSR… ADP Shareholder Letter ADP Investor Presentation “ADP’s Leadership has Delivered Results 203% Total Shareholder Return (TSR) under Carlos Rodriguez, significantly outperforming the S&P 500 and peers” ADP uses a purported 203% TSR over CEO Carlos Rodriguez’s t
Slide 33: ADP's Purported 203% TSR is Misleading
…But ADP’s Purported 203% TSR is Misleading ADP’s purported 203% TSR calculation is misleading: Wrong Start Date: Uses the day after Carlos Rodriguez became CEO as the start date of the TSR calculation, which boosts the TSR by 10 percentage points as the stock declined 3.9% on the day of the new CEO
Slide 34: Wrong Start Date Boosting Reported TSR
ADP’s Purported 203% TSR: Wrong Start Date, Boosting ADP’s Reported TSR by 10ppts ADP TSR calculation uses the November 9th closing price, the day after Mr. Rodriguez was named CEO, which boosts ADP’s reported TSR by 10ppts ADP Share Price (Week of Nov 7, 2011) ADP TSR Calculation Page 5, footnote 2
Slide 35: TSR Includes Share Price Increase Due to Pershing Square Accumulation
ADP Share Price & Spread in Share Volume vs. Prior 5 Year Avg. Daily Volume Pershing Square’s and our hedging counter party’s purchases from May 10th to July 27th intraday at 12:00pm represented ~13% of total ADP volume traded during that period, and 28% of July 27th volume(3) ADP’s Purported 203% T
Slide 36: ________________________________________________ In determining Pershing Square’s volume, we assume that all derivati…
________________________________________________ In determining Pershing Square’s volume, we assume that all derivatives purchased (or sold, respectively) by Pershing Square resulted in a hypothetical delta-equivalent purchase (or sale, respectively) of common stock in the marketplace. Historical av
Slide 37: Analyst quotes on stock price affected by Pershing Square
“Prior to the recent developments between ADP and activist investor Bill Ackman of Pershing Square, many investors believed in a $95- $100 outcome for ADP (as did we, with our prior $98 target)... ”- Ashwin Shirvaikar, Citi (Aug 16, 2017) “[W]e get asked all the time, how much of Ackman is in the st
Slide 38: TSR Includes CDK Outperformance
“We have done a deep dive in our organization and performed a comprehensive optimization analysis. As a result, we have developed and are in the process of implementing a compelling transformation plan to significantly increase profitability… “We will significantly expand margins. We are targeting 1
Slide 39: ADP's Form 10-K TSR (FY 2017)
ADP’s Form 10-K TSR (FY 2017) In ADP’s calculation of its TSR in its own SEC filings, it treats the CDK spinoff as a dividend, assuming it is sold by shareholders on the day of spinoff and the proceeds are reinvested in ADP stock on that day. This is the correct methodology In determining its 203% T
Slide 40: ADP's Actual TSR Relative to Management's Claim
Paychex TSR: (1) (3) (2) 138% 8% (5%) 9% 150% 146% NA 150% Spread (%): 3% 2% 23% 14% 41% 5% NA 53% ADP’s Actual TSR Relative to Management’s Claim ADP management’s TSR is 141% when measured correctly ________________________________________________ Source: Capital IQ; Dividend adjusted share price.
Slide 41: ADP's Selected Peer Group is Misleading
ADP’s Selected Peer Group is Misleading ________________________________________________ Estimated 2011-2017 CAGR. Based on Wall Street research, IDC (Payroll and HCM vendor share report) and ADP’s 2015 Analyst Day presentation. Jan Siegmund. Q2’2016 Earnings Call. February 3, 2016. Bloomberg Best b
Slide 42: Total Shareholder Return vs. Actual Competitors
________________________________________________ Source: Capital IQ; Total Shareholder Return from November 8, 2011 to May 9, 2017, prior to Pershing Square’s rapid accumulation of ADP’s stock. Dividend adjusted share price, assuming dividends reinvested (including CDK proceeds reinvested at time of
Slide 43: ADP's Recent TSR in Context
ADP’s Recent TSR in Context HCM market participants have benefited from employment growth since 2009, trends in HCM Beyond Payroll offerings, ACA demand drivers, and earnings multiple expansion Businesses which participate in attractive industries should have positive long-term performance, and thus
Slide 44: ADP Trails Its Actual Peers Over All Relevant Periods
ADP’s actual TSR of 141% is 24ppts less than its actual HCM competitors’ since Carlos Rodriguez’s appointment as CEO ADP Trails Its Actual Peers Over All Relevant Periods Since Mr. Rodriguez Was Named CEO ________________________________________________ Source: Capital IQ; Total Shareholder Return.
Slide 45: Attacking The Messenger
Attacking The Messenger
Slide 46: ADP's Advisors Roll Out Activist Defense 101
ADP’s Advisors Roll Out Activist Defense 101… We’ve Seen This Playbook Before “Pershing Square's Proposal is Ill-Conceived and Introduces Unwarranted Risk to Shareholder Value.” “We’re Already Doing This” Tactic “They Don’t Understand” “It’s Just Too Risky” “Pershing Square has demonstrated a lack o
Slide 47: Canadian Pacific: What We Said – What Happened
Canadian Pacific: What We Said – What Happened “Curves and grades is physics, and the dismissive comments by Mr. Harrison indicates a clear lack of research or understanding or both.” (4) Projected Future Share Price Existing Margins / Unaffected Share Price (1) Company Response to Pershing’s Target
Slide 48: Our Plan is Prudent and Measured
Our Plan is Prudent and Measured The vast majority of the steps required to improve ADP’s operating performance are basic improvements to ADP’s underlying management approach, organization design, and operating strategies, which will improve efficiency, client satisfaction, and long-term competitive
Slide 49: ADP Mischaracterizes Pershing Square's Engagement
ADP Mischaracterizes Pershing Square’s Engagement in an Attempt to Discredit the Messenger Pershing Square has had a 13D on file with the SEC since August 7, 2017 which provides a detailed overview of our holdings. We continue to beneficially own 8.3% of ADP’s shares outstanding. Excluding stock opt
Slide 50: Framing the Decision
Framing the Decision
Slide 51: ADP is Highlighting the Wrong Director Choice For Shareholders
ADP is Highlighting the Wrong Director Choice For Shareholders ADP already has relevant technology experience on the board and we are NOT seeking to replace these directors – the directors we are replacing have no technology experience ADP says our directors are not qualified because they are not te
Slide 52: Incumbent director observations
Director Since: 2007 Observations: Retired industrial executive Chairs the Audit committee – Company has significantly decreased its disclosures despite business simplification Has overseen ADP’s underperformance relative to its peers and its potential Oversaw the spin-out of Dealer Services (CDK),
Slide 53: The Nominees for ADP's Transformation Bring Relevant Skills
The Nominees for ADP’s Transformation Bring Relevant Skills and Fresh Perspectives The Nominees for ADP’s Transformation Incumbent Long-Tenured Directors John Jones (Board Chairman) Glenn Hubbard (Chair, Nominating & Governance) Eric Fast (Chair, Audit) William Ackman (CEO of Pershing Square Capital
Slide 54: ADP's Attacks on Our Directors are Misleading
ADP’s Attacks on Our Directors are Purposely Misleading and Intellectually Dishonest ADP’s Selective and Misleading Claims Pershing Square’s Long-Term Track Record ADP’s dishonest tactics are not in the best interest of shareholders and obfuscate the real question at hand – Is ADP achieving its pote
Slide 55: Pershing Square Has Extensive Experience Driving Operational Transformations
________________________________________________ Note: Excludes Chipotle, an ongoing investment, in its early stages. Each of the above case studies did not involve any significant change in strategy, they were premised on executing the existing strategy more successfully – driving significant margi
Slide 56: A Vote for The Nominees for ADP's Transformation
A Vote for The Nominees for ADP’s Transformation The election of The Nominees for ADP’s Transformation would add to the board: A major shareholder’s perspective Fresh perspectives Relevant expertise in business transformation and operating efficiency Directors who are ADP shareholders with significa
Slide 57: Appendix
Appendix
Slide 58: Competitor TSR in Detail
________________________________________________ Source: Capital IQ; Dividend Adjusted Share Price. Competitor TSR in Detail ADP and Competitors Total Shareholder Return ADP underperforms a market-cap weighted benchmarking of its actual competitors across all relevant time periods ADP Paychex Ultima
Slide 59: Trading Volume in Detail
________________________________________________ Source: Bloomberg. Note: July 27th represents volume through mid-day only for all years for comparability purposes. Actual volume traded on 7/27/2017 spiked to 30m shares by day-end. (1) Our investment in ADP had begun to leak to the market definitive
Slide 60: Endnotes
Endnotes Endnote 1: The companies shown on this page reflect all of the companies for which Pershing Square has filed a 13D. While the Pershing Square funds are concentrated and file 13Ds with respect to many if its investments, Pershing Square will own, and in the past has owned, a larger number of
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