Where: CNBC's "Mad Money with Jim Cramer"
When: Today, Monday, August 21, 2017
Following is the unofficial transcript of a CNBC EXCLUSIVE interview with ADP CEO Carlos Rodriguez on CNBC's "Mad Money with Jim Cramer" (M-F, 6p–7pm ET) today, Monday, August 21, 2017. Following is a link to the interview on CNBC.com: https://www.cnbc.com/video/2017/08/21/adp-ceo-ackman-needed-leverage-over-board.html?play=1.
All references must be sourced to CNBC.
JIM CRAMER: What do we make of the ongoing saga with Automatic Data Processing? The nation's largest payroll processor that also provides cloud based human capital management software and its tussle with Pershing Square, the big hedge fund run by notorious, or some could say, famous activist, Bill Ackman. Last week Ackman presented a 168-page presentation about how ADP is underperforming. He outlined the steps the company could take to turn itself around. Then this morning we learned that ADP's board of directors had unanimously voted against the three-board members nominated by Pershing Square, which by the way owns 8% of the company. The general consensus among the analysts who follow the stock is that while most of Ackman's points make some sense, many are actually being worked on right now. The whole thing has gotten a little more than contentious. I think Ackman raises a number of points that do need a rebuttal, cause they seem pretty serious. And if addressed properly, maybe some of them could lead to a higher stock price. Although other accusations amount to what some would call violations of SEC disclosures rules. And I think those have had at the least deleterious impact on the stock itself. Why do I say that? Because the stock's been falling ever since the presentation came out. So what the heck is going on here? Let's take a close look with Carlos Rodriguez. He's the president and CEO of Automatic Data Processing and hear more about how his company's doing and how this tussle with Bill Ackman's unfolding. Mr. Rodriguez, welcome to Mad Money. Good to see you, sir.
CARLOS RODRIGUEZ: Thank you for having me. Appreciate it.
JIM CRAMER: Well, first of all, I am as I should fully disclose a-- I'm an Automatic Data customer. Usually at Bar San Miguel. And I've had-- I checked with my manager just this weekend. We've had three years. And it's been terrific relationship. So I put that out there--
CARLOS RODRIGUEZ: Well, thank you.
JIM CRAMER: --if someone says, "Hey, listen, you work with them?" "We-- do indeed. We do indeed." Now, one thing-- I've got the presentation. And it took a little while to read. And I spent most of yesterday doing it. But one thing's clear is that Mr. Ackman spent a lot of time on the actual presentation. Wouldn't it be good to have someone like that on the board helping you reach better decisions?
CARLOS RODRIGUEZ: Well, he definitely put in a tremendous amount of effort and a lot of research into the company. I think he did come to some-- wrong conclusions. I think one of the things that I would have I think appreciated was the opportunity to have a discussion about some of the conclusions that he reached and some of the data he used to come to those conclusions.
JIM CRAMER: Well, then let's understand that-- this was sprung on you, then. You did not have a back and forth about the many of the 176 pages worth of things that he feels you're not doing right.
CARLOS RODRIGUEZ: That was the first time we saw the presentation was the same time you saw the presentation.
JIM CRAMER: Okay. So then therefore when he talks about the underperformance that you concealed, he says, and you overstated your growth and the client count is misleading and commentary on client loss is misleading, had you sat down with him, do you think he would have reached different conclusions about those charges?
CARLOS RODRIGUEZ: I think so. As an example, one of the things that-- I think it was the central thesis to his presentation was that our sales results were overstated which as you just mentioned-- around SEC disclosure et cetera. We—kinda take offense to the implication that we are-- I guess playing with numbers or not disclosing information that we should be disclosing. But as an example, on our new business bookings-- number, apparently they've come to the conclusion that we somehow included the pass-throughs of our PEO business in the bookings results which is not accurate. And there's a couple of other examples--
JIM CRAMER: Professional-- different end PEO.
CARLOS RODRIGUEZ: Correct. It's one of our lines of business. I think other examples are— they were using a client count number from I think it was 2009 from a presentation in our up-market business which included some of our stand-alone clients. So we have a core HCM payroll business. And then we've got—
JIM CRAMER: human capital management.
CARLOS RODRIGUEZ: Right. And we also have these-- stand-alone clients. Like, we do taxes for some companies even though we don't do payroll. Anyway, long story short, we—in 2009 whoever made that presentation which was before my tenure included those clients also in the total number. And the number that he's comparing it to today is not the same number. So our client count has not gone down from 5,000 to 2,500. In fact, it's about slightly up to modestly up depending on your perspective.
JIM CRAMER: But—
CARLOS RODRIGUEZ: And then if I can one more—
JIM CRAMER: Sure, no, absolutely. It's—
CARLOS RODRIGUEZ: I appreciate the opportunity to clear the record here. There's also a comment about sales force productivity.
JIM CRAMER: Yes.
CARLOS RODRIGUEZ: And again I think if we had had the opportunity to have a conversation and explain kinda what the source of the data was, where they got the information from, we could of clarified that it was just-- it was wrong.
JIM CRAMER: So the head count up 50% sales up 50 – in other words, the numbers basically imply that the head count, you added, it didn't produce any productivity. That is not the case?
CARLOS RODRIGUEZ: That is not correct. So our sales grew from the time I started as CEO through fiscal year '16 at 10% compounded annually. In '17, as you know, we had an issue because we had a grow over with ACA. But throughout that entire time, our sales head count growth has been half – on a compounded basis – half of the growth of sales. Hence we have achieved productivity.
JIM CRAMER: Okay, I mean, I do feel in full disclosure, again, I mean, your stock has been terrific under you. So I feel like in some ways –
CARLOS RODRIGUEZ: Thank you.
JIM CRAMER: I'm asking you to defend your life against something where there are 400 other people that could be sitting in this seat who probably have much more reason to have to sit in the seat to answer these things. But I think it's an interesting and important discussion. Because he does want board seats. He does own 8% of the company. Shouldn't that put him in the room, so to speak?
CARLOS RODRIGUEZ: Well, if I can comment on the performance for a minute, because I think it is, you know, I believe in "the system," and our economic system and our country's system. And it is a little troubling because I think sometimes people in this seat, their stock has been underperforming for five to seven years. And I think they deserve to be in the hot seat. And then I feel now like if you do perform, you're in the hot seat. And if you don't perform you're in the hot seat.
JIM CRAMER: And your numbers versus the S&P?
CARLOS RODRIGUEZ: Up 200%. S&P is somewhere around 80% to 90% over the same period. And if I can add, because I think it is public information, Pershing Square's up, I think, it was 22% before fees and 7% after fees. Now I'm not sure how it's possible to have that much in fees to have your return go down by that much. But that's what the published letter is from Pershing Square.
JIM CRAMER: So we'll have to get his comment on that. But that's obvious that your performance is—
CARLOS RODRIGUEZ: Oh, it's his letter. So I'm assuming that it's—
JIM CRAMER: Ok. Well, I don't have that. So I —
CARLOS RODRIGUEZ: I have it for you.
JIM CRAMER: Okay. Well, I trust you. I mean, it is more contentious that what I'm used to in this show, let's put it that way. Okay, so we've had Paychex on a number of times. And we've had Workday on a number of times. Workday's growing at 38%. Now, it's a smaller company. But is that a comparison where I could say that Workday's growing so much more rapidly than you? Why aren't you, a cloud based company, growing as rapidly as they are?
CARLOS RODRIGUEZ: Well, listen it's a fair question. I think it's a successful company. We happen to partner with Workday in addition to competing with Workday. So in many cases, their human capital management software, which is cloud based in addition to the rest of their ERP suite, which includes financials—
JIM CRAMER: Enterprise resource –
CARLOS RODRIGUEZ: Is something that we actually-- work with in terms of we provide our payroll and other stand-alone services as part of a solution that a client might buy with Workday. So we actually have a very good relationship with Workday. They're a good company. And as you said, their performance is undoubtedly very good.
JIM CRAMER: Okay. Paychex, we've had Marty Mucci on, you know, every quarter. His margins are north of 40%. Yours are much less than that. Should you not have the same margins that he has?
CARLOS RODRIGUEZ: Well, we're slightly different companies in terms of the makeup of the company. We have an international business that Paychex doesn't have. We also have an up-market business which tends to have structurally lower margins. And we also have BPO businesses that have structurally lower margins. But they're all still great businesses because they're very low capital intensity and very, very good returns. Having said that, I have to say that again you picked another good company because Paychex is I think a great competitor.
JIM CRAMER: Now, do you have the same 40 – they're small and mid-size mostly – Marty always talks about that. Do you have similar margins of 40% on your small to mid-size?
CARLOS RODRIGUEZ: Very close. We have made a tremendous amount of product in the last five years in our down-market business. That's kind of the first business where we-- built an entire cloud based versionless software system that we then migrated all of our clients onto. Today we have over 500,00 clients on what we call run in the down-market. That's really, like, freed up enormous resources which have translated into not just happier clients and better client retention, but also very good – higher margins and better margins than we had five years ago.
JIM CRAMER: Okay, so if you're up 40% on that, wouldn't that presume that therefore your larger business would have –
CARLOS RODRIGUEZ: Jim, if I could just clarify. I didn't say 40%, because we don't segment reporting –
JIM CRAMER: You have roughly. Right. Well, okay, and that's one of the problems I've found. Is that there's a lot of things that read apples to apples in the report. But it sounds like from what I'm hearing from you, the apples to apples may not be – may be a little less clear than what the report says.
CARLOS RODRIGUEZ: Well, I think there— you— you really have to kinda get down to the details, as you know. You're gonna have to roll up your sleeves and kinda look at what's really behind the numbers. So as an example, there were comparisons in the presentation to us and other companies who exclude their stock compensation which we don't. There are other companies that actually—
JIM CRAMER: Therefore— therefore those earnings would look not— look greater than they should be—
CARLOS RODRIGUEZ: Correct. Correct.
JIM CRAMER: --if they used that kinda term.
CARLOS RODRIGUEZ: Correct. And other things like, you know, start-- u-- using an EBITDA comparison rather than what we publish as our margin is really an EBIT number.
JIM CRAMER: Right. Okay, so there's— David Faber interviewed you and he said that your— that— that basically Ackman said your company's insular. And that-- there hasn't been-- a new amount of-- a lot of change. And now look at the proxy statement, it does seem like those people have been there a lot. And at the same time— you— you called Ackman a spoiled brat which I understand, cause he shocked you with this stuff. But I'm also trying to figure out, well, ma— are— you know, is— is— is the charge that you're insular correct, and is he a spoiled brat? And what did he do given, you know, his 8% to merit that name?
CARLOS RODRIGUEZ: Well, as you can imagine I would say that we don't deserve the name-- insular. As an example, one of the things that was talked about in the presentation was how insular our technology organization was. And 20% of our technology engineers are less than a year into the company. So we've been refreshing our engineering talent. In fact-- 50% of the engineering talent is less than five years with the—
with the company. As to the senior leadership team, I think if you had other people in this seat from large companies, I think you'd see a similar picture which is a team that's relatively new to me in— in the sense that I didn't inherit the same team that is in place now, but who rose up through the company. I think that's fairly typical in a company. We have lots of talent that we bring in from outside. In fact, 25% of what we call the senior executives of the company last year that were hired from— they were hired into position were hired from the outside. So we are bringing in talent from the outside. We're refreshing the company. And-- I'm incredibly proud of the organization. And I don't think we're insular at all.
JIM CRAMER: Ok. One last question. Had there been another way to approach— had Mr. Ackman called you and said, "Look, we wanna work with you. We have a big position. Maybe one day we could have a board seat," and he gave a reasonable presentation, would that ever— the past, that he might have had a board seat? Or that he wouldn't fight— you wouldn't fight it and there wouldn't have to be a proxy fight?
CARLOS RODRIGUEZ: Well, just to be clear, I'm not fighting anything. The board of directors—
JIM CRAMER: Board of directors I'm sorry. You're absolutely right, the "you" is wrong. But would the board of directors maybe think otherwise if it had been done in a better manner? Or a manner that maybe— people would find more reasonable?
CARLOS RODRIGUEZ: -- despite what you might think, we—we are professionals and we don't take things personally. So I think the manner is less important than the facts. And I think the facts I think speak for themselves. The performance that we have versus-- Pershing Square, the ideas which have been brought up which are not new to us and not new to the board of directors or to the management team. So I think— I think it's a deeper issue than the manner and the form in which it was presented. But it was an odd way to approach a company. In fact, I had a conversation with Bill right before— you know, we, I guess, agreed to disagree that he was gonna launch a proxy contest. And I asked him, "Bill, why can't you—I know you have a vacation which is getting in the way and why you need to have an extension of this deadline. But when you get back from vacation, can we meet? Why can't we meet then or the week after that or two weeks after that?" And he— he did mention that he wasn't ready yet with his presentation. But I said, "Well, when you're ready, we'll meet, whether it's late August, September." And he said, "I'm afraid that's not gonna work because that's not the way my business works. I have to have the leverage over-- the threat of launching a proxy contest in order to get you guys to agree to the things that I wanna do with the company." And again I just add that I'm hoping as an 8% because as you know— I'm not sure if it's to conceal what— what the transactions were. But there were derivatives that were used, stock options and forward contracts. And I— I'm hoping that at this point now that he doesn't need to conceal his position any more, that he's converted his— his— ownership into true stock ownership and not just a leveraged position using stock options.
JIM CRAMER: Alright, well, what we'll do is we'll get his responses to this. I mean, I hate to play ping pong. But you were very fair to answer what I thought were a synopsis of— of the questions he asked. And I really appreciate you're coming on, sir. And— and I always say, "You are what your record says you are." And you have trounced the S&P.
CARLOS RODRIGUEZ: Well, thank you very much for having me. I appreciate it.
JIM CRAMER: Thank you. That's Carlos Rodriguez. He's the president and CEO of Automatic Data Processing, ADP. They have money and stock--.
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