Automatic Data Processing, Inc. · NASDAQ:ADP
Automatic Data Processing — Proxy Contest (September 2017)
35 slides from Automatic Data Processing's proxy contest presentation, Sep 5, 2017
Slide 1: ADP: The Time is Now Executive Summary
ADP: The Time is Now Executive Summary September 5, 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: Disclaimer – Overview of Pershing Square's Analysis
Disclaimer – Overview of Pershing Square’s Analysis Our analysis of the Company’s performance and the potential areas for improvement on the pages that follow are based on public information and extensive due diligence We acknowledge that we do not have perfect information, including access to detai
Slide 4: Introduction to Pershing Square
Introduction to Pershing Square Pershing Square is a concentrated, research-intensive, value investor We own high-quality businesses, often with a catalyst to unlock significant value Pershing Square has a strong activist track record as a long-term, value-creating shareholder Average return on 13Ds
Slide 5: Why We Invested in ADP
Improved: Execution Growth Operating Efficiency Margins Actions: Greater Focus on Long-term Shareholder Value Realization of ADP’s Operational Potential Increased Accountability and Aligned Incentives Result: Enduring Shareholder Value Creation Why We Invested in ADP The Human Capital Management (“H
Slide 6: Summary: ADP has an Enormous Opportunity for Improvement
ADP’s Employer Services business has an enormous opportunity for improvement Operating efficiency and margins are well below competitors’ and ADP’s structural potential Growth is below ADP’s potential and can be meaningfully increased ADP can significantly improve its performance and competitive pos
Slide 7: ADP's Past Dispositions Provide a Roadmap for Value Creation at ADP
Solera (f.k.a. Claims Services within ADP): sold by ADP April 2006 Operating margins increased 2,000bps from 20% to 40% five years post-ADP Key drivers: “attack waste,” facility rationalization, organizational restructuring, delayering the organization, improved customer relationships CDK Global (f.
Slide 8: Under ADP's Ownership, Dealer Services Delivered Only Marginal Gains
Gary Butler, ADP, Former CEO “Yes. Again, the business model there is no different than Employer Services. Again, sans acquisitions or significant investments, we would expect the core Dealer business to improve its margins 0.5 point a year as a way to think about it. So there are clearly 2 or 3 mor
Slide 9: The Steps Required to Transform CDK Present a Roadmap for ADP
The Steps Required to Transform CDK Present a Roadmap for ADP’s Transformation ________________________________________________ Source: CDK FY Q3 2017 Results, May 2, 2017. CDK Business Transformation Plan Pershing Square Emphasis Added
Slide 10: CDK Embraced the Views of Shareholders and Delivered
Adj. Rev Growth (excl F/X): Adj. EBITDA Margins: CDK embraced the views of shareholders, hired a consultant to evaluate its potential, and publicly announced a transformation plan – financial results and share price performance have been consistently positive CDK: Dividend Adjusted Share Price Perfo
Slide 11: By adopting a CDK-like approach, ADP can become more competitive
By adopting a CDK-like approach, ADP can become a more competitive, efficient, and profitable company for the benefit of all stakeholders.
Slide 12: ADP's Employer Services Has Not Achieved its Potential
ADP’s Employer Services Has Not Achieved its Potential We believe ADP can significantly improve its operating margins while simultaneously accelerating top-line growth ADP has enjoyed a decades-long, leading position in Payroll. The market has evolved to “Beyond Payroll” and integrated HCM Historica
Slide 13: ADP has a Substantial Opportunity to Improve its Labor Efficiency
Net Operational Revenue per Employee(1) (Ex-Float) 12 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 r
Slide 14: ADP's Labor Productivity has Been Flat
ADP’s Labor Productivity has Been Flat ________________________________________________ 2009 used as a starting point given the availability of segment headcount for Dealer Services (reported as 7k in 2009) in the 2009 Analyst Day presentation. Alternatively, net operational revenue per employee gre
Slide 15: Adjusted Net Operational Gross Profit Margins
________________________________________________ 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 16: ADP vs. Paychex
ADP vs. Paychex ________________________________________________ For both ADP and Paychex analysis excludes Client Funds and PEO pass-through costs. Paychex PEO pass-through estimated at $165m on ~$340m of gross PEO revenue. Assumes ADP has 2,500 dedicated PEO employees. Assumes Paychex has 580 dedi
Slide 17: A Comparison to Paychex is Revealing
A Comparison to Paychex is Revealing 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 earns only ~12% op
Slide 18: ADP has an Enormous Margin Opportunity in ES
By P&L Item: ADP’s ES gross margins trail competitors by ~1,600bps (~58% vs. ~74%) Additional opportunities exist below the gross profit line: corporate restructuring, reduced spend on legacy technology, and sales force productivity By Business Mix: ADP’s various ES sub-segments are all structurally
Slide 19: Employer Services revenue growth and Enterprise contraction
________________________________________________ Net operational revenues, excludes float allocations. Adjusts for currency and divestitures. Consistent with ADP’s prior presentation of “Internal Revenue Growth.” Based on ADP’s 2009 Analyst Day disclosure as contrasted against recent comments (Q3’20
Slide 20: A Plan to Maximize ADP's Value
A Plan to Maximize ADP’s Value
Slide 21: While ADP Has Made Some Progress…
ADP has prioritized platform migrations, which should be the initial step towards product consolidation and significant business simplification ADP prioritized SMB and Mid-Market re-platforming given the relative retention characteristics and the ease of building next generation platforms ADP should
Slide 22: ADP has More to Do to Achieve its Full Potential
ADP’s current initiatives, executed effectively, should lead to material improvement ADP should outline the expected payoff from these initiatives ADP has additional opportunities to improve performance, including: Corporate restructuring Service / support efficiencies Implementation automation Back
Slide 23: ADP's transformation includes two primary components
ADP’s transformation includes two primary components: Immediate operational efficiency improvements Improvements include corporate restructuring initiatives, service / support efficiencies, implementation automation, back-end technology improvements, and reduced spend on legacy platforms Will substa
Slide 24: Transformation Plan for ADP
Transformation Plan for ADP Commit to a transformation plan to achieve ADP’s potential Fix corporate structure, Business Unit silos, matrix structure, corporate inefficiency (real estate sprawl, bureaucracy, spans-and-layers) Accelerate investments in necessary product and back-end improvements Best
Slide 25: Transformation Plan – Actions and Timing
Action Item Staging / Timing Materiality to Earnings Increase(1) Improves Client Experience Materiality to Exit Growth Rate Corporate restructuring / reducing legacy silos / spans-and-layers Immediate N/M Geographic office consolidation / wage and tenure arbitrage Immediate N/M N/M Invest in automat
Slide 26: The Time is Now
The Time is Now With the vast majority of revenue no longer on legacy platforms, ADP must deliver on its long-promised efficiencies post migrations For years, ADP has been highlighting efficiency opportunities post-migrations: ADP has not demonstrated these promised efficiencies Carlos Rodriguez, AD
Slide 27: The Time is Now (continued)
The Time is Now (continued) ADP should promptly address its efficiency opportunities across the vast majority of its business where product migrations are no longer needed. This will be beneficial to clients and improve growth Small- (~25% of ES revenue) and Mid-market (~35%) migrations will be comp
Slide 28: Illustrative 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 29: Employer Services should achieve 35% or greater margins
ADP’s Employer Services business, currently ~2/3rd of profits and earning a ~19% operational margin, should achieve 35% or greater margins. Achieving ADP’s structural potential will drive enormous shareholder value.
Slide 30: ADP Has The Potential to Drive Material Long-Term Value
Results: EPS (FY 2022) $5.90 $8.70 P/E Multiple 24x 24x - 28x Value, incl. Dividends (June 2021) $152 $221 - $255 Continued ~3% – 5% growth from FY 2018 to 2022 Incremental margin improvement of +50-75bps per annum after FY’18 Continued secular growth from underpenetrated base Conservatively assumin
Slide 31: The Path Forward
The Path Forward
Slide 32: The Path Forward for ADP
The Path Forward for ADP ADP, with support from shareholders, can create enormous value Add a major shareholder to the Board and two new independent directors, with fresh perspectives and relevant expertise Form Board Committee to oversee the transformation plan Evaluation of necessary product, tech
Slide 33: ADP Should Improve Transparency, Set Appropriate Targets, and Align Incentives
ADP should provide relevant, critical information to investors: Isolate float as a separate reported line item in segment financials Revenue, Client Count, Retention, and Bookings by Sub-Segments in ES (SMB, Mid-Market, Enterprise, International), as well as the PEO Profitability by Sub-Segment in E
Slide 34: We are Focused on ADP's Long-term Potential
We are Focused on ADP’s Long-term Potential and are Open-Minded About the Best Path Forward We are long-term shareholders seeking to assist ADP in achieving its long-term potential Board Composition A proxy contest will require us to replace three current directors Alternatively, we have proposed a
Slide 35: The Value of a Large Shareholder on the Board
Perspective of a large shareholder in the boardroom Pershing Square’s analytical resources would be available to the full Board and Management Would allow for greater focus on long-term value creation Would enable the Board to test ideas privately with a large shareholder Greater credibility with sh
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