Automatic Data Processing : ADP Investor Day Transcript -2021 1115

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EDITED TRANSCRIPT

ADP.OQ - Automatic Data Processing Inc Investor Day

EVENT DATE/TIME: NOVEMBER 15, 2021 / 2:00PM GMT

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NOVEMBER 15, 2021 / 2:00PM, ADP.OQ - Automatic Data Processing Inc Investor Day

C O R P O R A T E P A R T I C I P A N T S

Alex Quevedo Automatic Data Processing, Inc. - President of HR Outsourcing

Brian L. Michaud Automatic Data Processing, Inc. - President of Smart Compliance Solutions

Carlos A. Rodriguez Automatic Data Processing, Inc. - CEO, President & Director

Chris D'Ambrosio Automatic Data Processing, Inc. - Chief Strategy Officer

Danyal Hussain Automatic Data Processing, Inc. - VP of IR

Deborah L. Dyson Automatic Data Processing, Inc. - President of National Account Services

Don Edward McGuire Automatic Data Processing, Inc. - Corporate VP, CFO & President of Employer Services International Donald Weinstein Automatic Data Processing, Inc. - Corporate VP of Global Product & Technology

John C. Ayala Automatic Data Processing, Inc. - President of Employer Services North America

Joseph DeSilva Automatic Data Processing, Inc. - President of Small Business Services, Retirement Services & Insurance Services Laura G. Brown Automatic Data Processing, Inc. - President of Major Account Services & ADP Canada

Maria Black Automatic Data Processing, Inc. - President of Worldwide Sales & Marketing

Virginia Magliulo Automatic Data Processing, Inc. - President of ES International

C O N F E R E N C E C A L L P A R T I C I P A N T S

Bryan C. Bergin Cowen and Company, LLC, Research Division - MD & Analyst

Dan Dolev Mizuho Securities USA LLC, Research Division - MD & Senior Equity Research Analyst

Eugene M. Simuni MoffettNathanson LLC - Analyst

Jason Alan Kupferberg BofA Securities, Research Division - MD in US Equity Research & Senior Analyst

Kevin Damien McVeigh Crédit Suisse AG, Research Division - MD

Mark Steven Marcon Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

Ramsey Clark El-Assal Barclays Bank PLC, Research Division - Research Analyst

Samad Saleem Samana Jefferies LLC, Research Division - Equity Analyst

Tien-TsinHuang JPMorgan Chase & Co, Research Division - Senior Analyst

P R E S E N T A T I O N

Operator

Good morning, and thank you for joining us. Please welcome Vice President, Investor Relations, Danyal Hussain.

Danyal Hussain - Automatic Data Processing, Inc. - VP of IR

Welcome, and thank you for joining us for ADP's 2021 Investor Day. We're excited to have you here today, but more importantly, we're excited for the years ahead here at ADP.

For our agenda today, we're going to start with 3 main presentations. Carlos will kick it off with a big picture and talk about where we stand today; Don Weinstein will update us on our product and innovation journey; and then Maria Black will talk about how we're taking it all to market. After a short break, our Chief Strategy Officer, Chris D'Ambrosio, will facilitate a discussion with our business unit presidents about how we're driving

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NOVEMBER 15, 2021 / 2:00PM, ADP.OQ - Automatic Data Processing Inc Investor Day

growth in each of their respective business units. And then, we'll wrap up the prepared portion with Don McGuire, our new Chief Financial Officer, as he talks about how it all translates to the financial outlook.

At the end, of course, we'll have Q&A. Now we have folks in the room with us today. And of course, they'll be able to ask their questions. However, the majority of our attendees are joining us virtually today. And so for those of you joining virtually, we ask that you submit your questions through the Q&A box, which should be in your webcast platform. And then during the Q&A portion, I'll be able to ask those questions on your behalf.

And of course, we'll be making forward-looking statements today. These statements come with risks, and we encourage you to refer to the Form 10-K filed with the SEC for more information on these risk factors. We'll also be referring to non-GAAP measures today, and you can find in the appendix of today's presentation a discussion and a reconciliation of these non-GAAP measures to their most comparable GAAP measures.

And with that, let's get started.

(presentation)

Danyal Hussain - Automatic Data Processing, Inc. - VP of IR

I'd like to now welcome our President and CEO, Carlos Rodriguez.

Carlos A. Rodriguez - Automatic Data Processing, Inc. - CEO, President & Director

Thanks, Danny. Appreciate it. I don't know if it was a hint from my team, but there was no seat for me. Everyone else has assigned seating, but it's great to have everybody here, both the people in person and the people here virtually. Hopefully, this is a sign of time, things to come in terms of a little bit of normalcy. I didn't think I'd ever be excited about a presentation or an Investor Day, but this is pretty exciting, especially to have some of you here joining us in person. So thank you for being here.

Let me start with really the beginning, right, which is what is it that ADP does. And all of you know this, but as usual, there are subtle hints in our words and the way we describe what we do is that we're about providing technology and solutions. You heard in the video the term expertise, but we always try to make that differentiation that we definitely are a software builder and provider, but we also provide expertise and solutions. And you'll hear a lot about that today, both the technology and the solutions.

And the other thing that's changed or evolved over the last several decades with ADP is instead of just doing things for clients, we do things for clients and for the workers of our clients. And you'll hear a lot about that today and some of the opportunities that presents for us. But one of the things that's always true about ADP is that we're constantly trying to help both the clients and their workers adapt to the changing world of work. And boy, is it changing, obviously, today right around us.

It's been going on forever. So change has been a constant for decades for employers and for employment in general. The latest examples, of course, were all the legislative changes during the pandemic, which were all intended to help. You think about the PPP loans, the tax credits, so many things done across multiple governments all over the world to "help." And I believe that help they did -- and I think history will judge, I think, our governments well.

But in their attempt to help, it created a lot of complexity for employers. And we're here to help with that, and we've been helping with it. But this is just kind of the latest example of something that I've been saying for a long time, which is that employees are really an instrument of public policy. And we saw it here during the pandemic in full display where government saw it as a way to really achieve the health objectives that the government had.

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NOVEMBER 15, 2021 / 2:00PM, ADP.OQ - Automatic Data Processing Inc Investor Day

So whether it's -- you would go back to the golden old days of ACA or the most current legislative changes around the pandemic or just kind of routine day-to-day regulations, change is obviously something that employers have to adapt on a regular basis, and it creates a lot of opportunity for ADP.

And the legislative changes are not the only changes that our clients and the world of work are facing. The whole HCM industry is changing as well. When you look at it from the product side, obviously, now we're all going to be working in a world where everything is hybrid. If you look at this meeting, we have people that are participating virtually. We have people in person. The same thing is going to happen with work. People are also demanding more flexibility in their pay. They want early access to their pay. HR leaders are demanding employee-centric solutions, and they're demanding things like AI and other machine learning in order to make better decisions.

And on the tech side, it's no longer okay to stitch together a bunch of different platforms. People want consumerization with great experience. They want platforms with apps, and they want everything in the cloud. And then when you go to the purchasing cycle, well that's changing as well. We're seeing it in some of our businesses where there's greater demand for transparency around pricing and ease of pricing.

There's a desire for multichannel interactions with us, whether it's virtual salespeople or live in-person salespeople. And more importantly, and this maybe applies a little bit to what we're doing around digital marketing, everyone is doing a ton of research just like we do as consumers before they engage in any kind of buying decision.

And on the service side, there's an equal amount of change there. You've heard a lot about some of the digital transformation that we've been undergoing, you'll hear more about it today. Here again omnichannel is important. People want to get help and contact us however they want, whether it's through chat, phone, e-mail, you have to be prepared for all of those. The most important thing is to have great user experiences where people have the ability to use self-service so they never have to contact us to begin with.

And lastly, on the service side, the one thing that's constant for us is the expertise. Fortunately, it's something that we've always been able to deliver on. The expertise we have around compliance, also around HR and around the various processes that we provide.

So the bottom line is the message here is change is good. That's why I'm talking so much about change. It's good for ADP, and I think it's an important reason why you should be excited about ADP. Change equals opportunity for us. And thank goodness, we've been, for 70 years, able to figure out how to change with the landscape, not just because of the pandemic, because of ACA, because of recessions. There's been a number of major changes in the HCM industry and the economy and the global markets ADP has had to adapt to. But the underlying theme is that these changes are actually opportunities for us. And it's probably why the HCM industry is growing faster than GDP.

Now I've really always appreciated being in an industry that has kind of underlying tailwinds. And when I read about some of the challenges that other industries have, I feel really blessed. And so when we go through something like we've just been through, where employers need our help and there's a huge acceleration of change, I count my blessings yet again.

And the one thing that's constant besides the fact that things are changing is that the market that we operate in is huge. You guys call the TAM, the total addressable market. We talk about it in terms of being around $150 million -- sorry, $150 billion and growing around 5% to 6% per year, which again, is a little bit faster than GDP and provides a little bit of tailwind for the industry.

But when you think about what's happening in the short term, the tightness of the labor markets, we talked to a few of you at the beginning of the meeting here about what's happening with turnover, the "Great Resignation." So it's not just about legislative changes. It's about the environment, which, in the short term, is going to create even more pressure on employers and I believe a favorable backdrop for our industry. So we can consider it a $150 billion industry with 5% to 6% growth. But I think we can debate maybe some of the questions, how do we calculate that number is probably a little bit bigger than that, but that's the way we look at our addressable market.

And the other message around that market is that there's plenty of space for us to grow. There's no shortage of opportunity. That's really not the problem for us. It's not the size of the market or the opportunity. We think we have about 10% of this $150 billion because we're obviously $15 billion today. And one of the other interesting things that we believe is that we exhibited really good resiliency during the downturn.

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NOVEMBER 15, 2021 / 2:00PM, ADP.OQ - Automatic Data Processing Inc Investor Day

When we look at ourselves on a relative basis in terms of our performance versus some of our competitors, we believe that we outperformed some of them. I recognize that some of them have higher growth rates than us. As a result, in some cases because of size differences, but when you look at the relative growth rates, we have, I think, some evidence that says that we were able to outperform the market and some of our competitors.

And not exactly sure why that is. I'm not sure if it's that we had better retention. I'm not sure if it's because we had better sales. I'm not sure if it's because our pays per control dropped less than some of our competitors. I don't know because our competitors don't, in most cases, provide that kind of information. So it's very hard to tell.

And we've gotten to where we are today and being able to deliver on this resiliency and adopt to this change in part because of the strategic framework that we adopted 10 years ago, which I think has allowed us to create opportunity for us to extend the success that this company has had for so many decades. And we call this simplify, innovate and grow.

And many of you have heard this before, but let me just talk about a couple of the ideas and the points. First one on the simplification part was our belief that [complexity] (corrected by company after the call) was getting in the way of our growth and getting in the way of our client service. We decided that we needed to simplify in order to unlock innovation. We talked a lot starting about 10 years ago about the need to innovate at a faster speed and complexity was getting in the way. So that's the idea behind simplification.

You saw us do some -- take some tangible actions around that to consolidate platforms. We went from having platforms that had hundreds of millions of dollars, which is still pretty good to now having platforms where we have billions of dollars on single platforms.

We also simplified on our service and implementation side. You've heard a lot about our digital transformation. You'll hear more about it today. There's been a huge effort, not just with things like what we communicated several years ago around our service alignment initiative, which was to consolidate some of our smaller locations, but it's really to apply technology also to the implementation and to the service side and to really simplify on that front as well.

And really, the simplification was the underlying requirement to the innovation. And in the innovation, you're going to hear a lot more about from Don, so I don't want to steal some of his thunder, but we've invested in some of the innovation labs that some of you have visited. We've increased our R&D spend. We've brought in talent from the outside to supplement the great talent that we already had in ADP, and we've generally modernized our infrastructure. And I think Don will give you a lot more of that flavor, and we can answer any questions that you have related to that in the Q&A.

So the bottom line is, this whole simplify, innovate and grow framework was really intended to strengthen the underlying parts of ADP. And I believe that's what we did. And the reason we did it and the reason we will continue to do it is because we're playing the long game at ADP. Unlike others, we don't have the luxury of starting from scratch. We don't have the luxury of a do-over. You've seen it in our results. We'll talk about the results in a minute. We've been doing this while we've been still growing, delivering margin improvement and delivering to our shareholders. And building the strong foundation was an important part of making sure we could do that over the last 10 years, but more importantly, you'll hear we've been doing on the innovation side to make sure that we can do it for the next 10 to 20 years.

And so where have we gotten to or where do we stand, give us some proof points of what we've achieved through the strategic framework. Well, we talked about the innovation labs. We have 7 of those labs now. We talked about our increased R&D spend, and we have some stats to share with you on that as well. We've also modernized our sales organization. We have 7,500 sellers now with modern sales tools. They can sell virtually. They can sell in person. They can sell through chat. They can use Webex. They can use Zoom, whatever it is, they have all the tools they need to be successful.

And on the service side, we've also modernized. We've used AI and BPI to eliminate low-value transactions. We've been talking about that for a long time. Every year for the last 4 years, we've reduced the number of non-value-added service calls, which allows us to, yes, part of it is a margin play, but more importantly, it's so that we can focus on high-value transactions with our clients.

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