Automatic Data Processing, Inc. · NASDAQ:ADP
Automatic Data Processing — Proxy Contest (October 2017)
37 slides from Automatic Data Processing's proxy contest presentation, Oct 26, 2017
Slide 1: ADP Ascending: Council of Institutional Investors, October 26, 2017
ADP Ascending Council of Institutional Investors October 26, 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: Introduction to Pershing Square
Introduction to Pershing Square Pershing Square has a strong activist track record as a long-term, value-creating shareholder Average return on 13Ds ~145% vs. ~16% for the S&P 500 index over the same periods (Source: 13DMonitor)(1) Our target holding period for our “active” investments is generally
Slide 4: Why We Invested in ADP
Why We Invested in ADP The Human Capital Management (“HCM”) business is fundamentally attractive ADP is a great business with a very large opportunity to improve its operating efficiency, product and service offerings, growth, and long-term shareholder value The case for change is straightforward: F
Slide 5: Summary of Pershing Square's Business Case
Summary of Pershing Square’s Business Case
Slide 6: ADP Has an Enormous Opportunity for Improvement
ADP’s Employer Services business (~2/3rds of ADP’s profit) is underperforming its potential ADP can significantly improve its performance and competitive position with improved operational efficiency and greater technology leadership Employer Services, currently earning a ~19% operating margin, shou
Slide 7: ADP is Falling Behind Competitors
ADP is Falling Behind Competitors
Slide 8: Growth in ADP's Employer Services is Deteriorating
Growth in ADP’s Employer Services is Deteriorating Growth in Employer Services has deteriorated in recent years and must dramatically accelerate to meet ADP’s September 12th plan ________________________________________________ Source: ADP SEC financials, financial press releases. FY 2012 through FY
Slide 9: ADP is Falling Behind Competitors, Particularly in Enterprise HCM
ADP is Falling Behind Competitors, Particularly in Enterprise HCM (~20% of Employer Services) ADP’s board and management have failed to develop a best-in-class offering for the Enterprise market, a failure which has allowed competitors to capture meaningful market share and value at the expense of A
Slide 10: Why is ADP Losing to Competitors?
Why is ADP Losing to Competitors? 40% to 50% of Ultimate Software’s wins in recent years have come from ADP “We typically get between 45% and 50% of our new units from ADP… I think our culture, product, and service -- we end up winning a lot. So, I don't know why that would change in the future, unl
Slide 11: Why is ADP Losing to Competitors? (cont'd.)
Why is ADP Losing to Competitors? (cont’d.) Why are they looking to replace their old vendor (e.g., ADP)? What factors are allowing Ultimate to win versus incumbent providers (e.g., ADP)? ________________________________________________ Source: Ultimate Software Investor Presentation.
Slide 12: ADP is Underperforming its Potential
ADP is Underperforming its Potential
Slide 13: Adjusted Net Operational Gross Profit Margins vs. Competitors
________________________________________________ ADP’s gross margins adjusted to exclude float income (-$397m) but add-back Systems Development and Programming Costs (+$628m) and Depreciation and Amortization (+$226m) to be more consistent with competitor gross margin presentation. Competitor gross
Slide 14: ADP Has a Substantial Opportunity to Improve its Labor Efficiency
Net Operational Revenue per Employee(1) (Ex-Float) ADP has a Substantial Opportunity to Improve its Labor Efficiency (2) Median: $232 Smallest Largest ES: ~$153 (2) Median: $223 Smallest Largest ES: ~$153 ________________________________________________ Note: Based on latest fiscal year end, as rele
Slide 15: ADP vs. Paychex: the Gap is Widening
While Paychex historically generated similar Net Operational Revenue per Employee to ADP (from 2008-2011), it has dramatically outperformed ADP since 2011 ADP vs. Paychex: the Gap is Widening Net Operational Revenue per Employee(1) ($’000) Net Operational Revenue Benchmarking Per Employee(3,4) ($’00
Slide 16: Paychex is Comparable to ~$3bn+ of ADP's Employer Services Business
Paychex (~41% EBIT Margins) is Comparable to ~$3bn+ of ADP’s Employer Services Business Paychex has ~35k clients and ~$0.7bn of revenue in its mid-market business (avg. 75-100 EEs),(1) comparable to the smaller client sub-vertical of ADP’s mid-market (~$1bn of ADP revenue) “Our client base in the mi
Slide 17: ADP's Sprawling and Sub-Scale Service Structure
ADP’s Sprawling and Sub-Scale Service Structure ADP has ~10 million square feet of real estate and >130 US office locations
Slide 18: ADP's Sprawling Corporate Footprint
ADP’s Sprawling Corporate Footprint ADP’s business units and corporate offices are spread across the country largely due to historical locations for each business Mid-Market (Majors) Small Business (SMB) Corporate HQ Enterprise (National Accounts) Value-Add and Tax PEO
Slide 19: ADP's Senior Executive Management
ADP’s senior executive management Executives have decades of tenure at ADP and effectively no outside experience and perspective “He’s [Bill Ackman] saying that somehow the company is insular and that people stick around forever, and the people that have worked for me have been around the company fo
Slide 20: ADP Trails Major Peers Across Employee Satisfaction Metrics
________________________________________________ Source: Glassdoor, Inc. July 2017. Note: Green stars denote Glassdoor Highest Rated CEOs from 2016 or 2017 based on U.S. employee feedback between 5/2/15 - 5/1/17. Overall Rating Approval of CEO Approve of Senior Management ADP Rank: Last 2nd to Last
Slide 21: ADP Trails Major Peers Across Employee Satisfaction Metrics (cont'd)
________________________________________________ Source: Glassdoor, Inc. July 2017. Culture & Values Recommend to a Friend Positive Business Outlook ADP Rank: Last Last Last ADP Trails Major Peers Across a Variety of Employee Satisfaction Metrics
Slide 22: ADP's Culture Needs to Change
ADP’s Culture Needs to Change ADP’s insular, bureaucratic, and staid corporate culture causes the Company to trail competitors in recruiting talent, eroding the Company’s long-term competitive position Many of ADP’s direct competitors rank amongst the best places to work in the country, according to
Slide 23: Leading Proxy Advisors Agree
Leading Proxy Advisors Agree “Pershing Square has articulated a compelling case that, despite ADP's strong historical track record and consistent delivery of incremental improvements, the Company is not performing to its full potential, operationally or financially, and is not maximizing value for l
Slide 24: CDK's Transformation Provides a Roadmap for ADP
CDK’s Transformation Provides a Roadmap for ADP
Slide 25: CDK Embraced the Views of Shareholders
Adj. Rev Growth (excl F/X): Adj. EBITA Margins: CDK embraced the views of shareholders, hired a consultant to evaluate its potential, and publicly announced a transformation plan. CDK’s financial results and share price performance have been consistently positive CDK: Dividend-Adjusted Share Price P
Slide 26: CDK Global: What Was CDK's Transformation Plan?
CDK Global: What Was CDK’s Transformation Plan? Under ADP’s Ownership / Post-Spin CDK Transformation Plan Segments Sales R&D “We’re committed to an avg. 40-50 BPS of margin improvement over the next five years” (10) ________________________________________________ CDK 8K (May 23, 2016). Q3’2016 Earn
Slide 27: By adopting a CDK-like approach, ADP can become more competitive and efficient
By adopting a CDK-like approach, ADP can become a more competitive and efficient company for the benefit of all stakeholders. This will drive increased margins, earnings, and long-term growth for ADP
Slide 28: Management's Response
Management’s Response
Slide 29: ADP Says It Is Outperforming – But This is Not True
ADP Says to Shareholders That It Is Outperforming – But This is Not True ________________________________________________ Source: Capital IQ; Total Shareholder Return. Dividend adjusted share price, assuming dividends reinvested (including CDK proceeds reinvested at time of spin-off). See pages 30-4
Slide 30: ADP Management Has Affirmed the Status Quo
Instead of Embracing the Opportunity, ADP Management Has Affirmed the Status Quo On September 12th, ADP responded to Pershing Square and released its “Transformation Plan,” which: Is an affirmation of the status quo Delivers no meaningful improvement despite the fact that ADP significantly trails co
Slide 31: ADP Is Now Attempting to Pivot Its Tone and Message
ADP Is Now Attempting to Pivot Its Tone and Message In Response to Shareholder Support for Our Views “I’m directly saying [Bill Ackman] doesn’t know what he’s talking about” - Mr. Rodriguez, CNBC (Aug 10, 2017) “[W]e strongly disagree with many of the assertions made by Mr. Ackman… [it] betrays a fu
Slide 32: ADP's recent pivot in tone and message isn't credible
ADP’s recent pivot in tone and message isn’t credible and is unsupported by the company’s plan ADP’s broader response fails to address the substance of our arguments ADP is fundamentally underperforming its potential and has an enormous margin improvement and growth acceleration opportunity ADP’s bo
Slide 33: The Nominees for ADP's Transformation
The Nominees for ADP’s Transformation
Slide 34: The Nominees Will Bring Fresh Perspectives & Relevant Skills
The Nominees for ADP’s Transformation Will Bring Fresh Perspectives & Relevant Skills to ADP’s Board To fulfill its potential, ADP’s board needs expertise in both (i) business transformation and operating efficiency and (ii) technology and the HCM industry ADP’s board already has relevant technology
Slide 35: Nominees Bring Relevant Skills vs. Incumbent Long-Tenured Directors
Director since 2007 (10 years) Has overseen ADP’s underperformance relative to its peers and its potential No technology / HCM experience beyond ADP board role Divested assets which promptly doubled margins – didn’t see the opportunity As Audit Committee Chair, has presided over significant reductio
Slide 36: Independent Proxy Advisors Support Pershing Square's Campaign for Change
Independent Proxy Advisors Support Pershing Square’s Campaign for Change at ADP ________________________________________________ Note: Permission to use quotations throughout this presentation neither sought nor obtained. Egan Jones “Dissident nominee Ackman would bring a strong understanding of the
Slide 37: To Support ADP's Transformation Vote GOLD
To Support ADP’s Transformation Vote GOLD The ONLY way to support ADP’s transformation is to vote GOLD Three highly-qualified and experienced independent director nominees: Bill Ackman, Veronica (“Ronee”) Hagen, V. Paul Unruh A withhold vote on the white card IS NOT a vote for any of the Nominees fo
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