2023-11-13 18:22:09 ET
Automatic Data Processing, Inc. (ADP)
TD Cowen Human Capital Management Summit Conference Call
November 13, 2023 12:00 ET
Company Participants
Jim Sperduto - President, Small Business Solutions
Conference Call Participants
Bryan Bergin - TD Cowen
Jared Levine - TD Cowen
Presentation
Bryan Bergin
Alright. Thank you. Good morning or good afternoon, and welcome to TD Cowen HCM Summit. I’m Bryan Bergin, I am joined by my colleague, Jared Levine. And we are very excited to have you and be with ADP. Really needs no introduction as a leading global payroll and HCM provider in the market. With us today, we have Jim Sperduto, President of Small Business Solutions; and Danyal Hussain, Head of Investor Relations. Thank you both for being here today.
Jim Sperduto
Thanks for having me. We appreciate it, Bryan.
Bryan Bergin
So before we get into it for the audience, this is going to be a 35-minute discussion. You can add your questions into the platform, and we’ll work those into the conversation as we go. And with that, we’re going to get right into it, Jim.
Question-and-Answer Session
Q - Bryan Bergin
I think it’s always easiest to start with the background for the group. So we understand you currently lead ADP small business solutions, which consists of RUN and Roll, insurance and retirement services, but you’ve been with the company for a bit. So can you talk about your background first and then – yes, we’ll get into the rest?
Jim Sperduto
Sure. Yes. I’ve been with ADP for about 30 years. So if you – and that’s if you count my internship between my junior and senior year college. So I ended up starting in sales in New York City in the small business space, carried a bag there in the garment center of Manhattan and worked my way up the sales organization ultimately led nationally on different occasions, retirement services, SBS, major accounts and global insight sales as well.
About three years ago, I made the leap over to running a business. So I ran the retirement services business three years ago. And then about two years ago, I was appointed to lead the entire portfolio, which you mentioned is made up of traditional payroll and HR business as well as our retirement and insurance services businesses. It’s been a great ride. I’ve enjoyed every twist and turn along the way here. And as you learn from day one at ADP, always tried to hold our clients and our associates, front and center in that journey.
Bryan Bergin
Very good. It’s a great perspective across the organization, obviously, within this business as well. So SBS, it’s been really one of the best performing portfolios within the company, certainly with new book business bookings performance. So talk about what do you think the key factors there – besides your leadership, what are the key factors there that are driving? And you talk about some of the product improvements within the marketplace, what are you seeing?
Jim Sperduto
Thanks, Bryan. I think the strong performance really comes down to three things. Great product, great distribution and great client service, which leads to great relationships. We are proud of a lot of the product enhancements. We made a major investment in the RUN user experience, and it’s been really very well received. In addition, I would say it’s a relatively new RUN mobile app. It’s been a big hit, 4.9 stars in the Apple store, and that’s with over 23,000 reviews.
So the market really seems to be like in our RUN mobile app. And in addition, I mean, there’s a lot of features and functionality I could go through, but we’d run out of time. But the one I’d like to highlight is probably our Payroll Inspector because our clients seem to love it. And that’s within the actual application, it helps to prevent errors from happening. So somebody keys in a bonus, and we know the last time that they keyed in a bonus for this person, it was x, and it looks abnormal. Maybe it has an extra zero or something in it. Payroll Inspector will pop-up, let them know that you probably, did you mean to do this and it helps to prevent errors before they happen and clients seem to really appreciate it. And as it relates to product, look, payroll could be complicated, right? Complicated. It’s in a regulatory environment. What we try to do is keep it simple, keep it as simple and as clean as possible and make it easy for our clients to do what they want to do in the app, which is get their employees paid.
Bryan Bergin
Okay. And that Payroll Inspector, that’s just functionality within the platform that you’ve had?
Jim Sperduto
Yes. That functionality within the platform as it relates to the – the other factor is, I mean, distribution is definitely another big reason for our success. We have one of the most powerful distribution engines in the world. We have thousands of field and digital sellers. And the other thing that we do is we’re able to meet the buyer where they want to be met, right? And we are able to offer buyers’ choice on how they want to interact with us, whether that’s in person, whether that’s virtually or whether they don’t want to interact. They just want it to be completely digitally or perhaps some combination of the three, but we find that you being able to have that really strong field and digital presence as well as being able to offer buyers choice on how they want to interact with us contribute to our success.
The other big factor is client service. I mean client service helps to distinguish us. We’re in this business to drive great client relationships. And our NPS has been outstanding. We’ve had a real great string of performances, and we’re near record high levels. So I think that’s strong evidence of the relationship that we have. And in all the various surveys that we do, the big constant in terms of positive verbatim is always around the quality of our associates. And that is a good thing to hear. It speaks to why we have good client relationships. So look, it’s a good thing when product and sales and service are all clicking at the same time. And when they are, the outcome is usually good for our clients. The outcome for us is that the clients trust us and they reward us with their loyalty.
Bryan Bergin
Okay. So let’s just focus right on RUN here. So it’s really going to stand out with client growth. What are the, I would say, like near-term focus areas to make sure you keep that momentum going?
Jim Sperduto
Yes. We have to keep that momentum going. And it starts with product, right? That’s the first area that I think about. I also think about channel investments. And I also think about making sure that we’re enabling our sellers to be as productive as possible. So again, starting with product, right, it all starts and ends in a lot of ways with product, right? Product is critical. And our clients they want it to be simple. They expect a consumer-grade experience, and they want journeys that are easy to navigate.
And we’re going to continue to – even though we went on a really big journey, continue that journey to refine the solution to make sure that it’s as easy as possible, as comprehensive as possible for our clients. And we’re going to deliver on this. We have now this strength, right, this emerging strength with our mobile app, and there’s a lot more to do on that front. So we’re going to continue to push the envelope there. And the goal is simple, right, to make things easy on our clients, make things easier on our associates. And I imagine that’s going to be enhanced by the Gen AI capabilities that we’ll put in the product, the Gen AI capabilities that we’ll build for our service associates and to make that service experience even stronger on top of what is right now a very strong client retention rate.
As it relates to channels, you probably know that channels are a huge part of our business. It’s something like 75% of our new units are sold with the influence of a partner. Primary ones are accounts and banks with accounts being the main one. So we’re focused on what I think is our market-leading position here. And specific to the CPA channel, we are going to continue to deliver enhancements to our Accountant Connect platform, which is a really, really important product platform for us to drive stickiness in the relationships with the CPA community as well as to drive even more referrals.
But Accountant Connect, when I was the Head of Sales, probably over 10 years ago, I remember we got all these CPAs in a room together. And we asked them a provocative question. We said, what would it take for you to give all of your referrals to ADP? And they went away in their workshops and they came back and they ultimately described something that sounded like Accountant Connect, a portal that they couldn’t live without where they could service their clients in an efficient way, in an effective way, and we listened to them.
We’ve built it, and we keep listening and we keep improving. And we’re really proud of this technology because it ultimately makes the CPA, the hero to their clients by managing them more effectively and it also helps the CPA grow their business as well. And then the last piece of what we’re focused on is really around our sellers. I mean, again, the size of our sales force, right? But we also want to make sure that we’re helping to make the sales team as productive as possible. So we’re going to leverage Gen AI technology to help our sellers be able to better target prospects, so they know who to go after as well as help them pre-call plan for an initial meeting. And when you could take this very large sales machine and drive both efficiency and effectiveness like good outcomes are usually going to happen, so we’re pretty excited about the potential here.
Jared Levine
In terms of the demand environment, how would you characterize the current state of the demand environment within the U.S. SMB market? Has there been any change in lead volumes or pace of prospective client decision-making in 2023?
Jim Sperduto
Thanks, Jared. I mean the demand environment remains healthy. I mean we’ve consistently called out that small business has been a big driver of bookings growth over the last several years, and that’s continued really into this year. And I’m pleased to say, I’ll knock on wood here, right, like we haven’t really seen any discernible changes in the lead volumes or sales cycles. I mean, for us, the sales cycles are usually pretty short anyway. And again, against this backdrop, the tenure of our sales force is actually improving due to lower turnover, right? So when you have higher tenure, you usually have higher productivity. And we’re seeing that in a lot of the leading indicators when we think about like first appointments that we’re making in the market or channel visits that we have to some of the channels that I mentioned earlier with both CPAs and banks.
Jared Levine
And then outside of payroll, what are the primary HCM modules that small business segment clients typically purchase? And how those attach rates trended over recent years?
Jim Sperduto
Yes. If you think about our offering, our offering is very consumer like, right. In the small business space, you may not see that as you move further up market. And so at the lowest end, we offer basic payroll, right, for our simplest clients. But we are finding that small businesses, right, with such a focus on finding and retaining talent as well as making sure that they’re keeping compliant. It’s led to more demand for HR and more support that they want from HR. So our top offer is something called HR Pro, and that’s really meant to address a lot of these needs. I mean it includes a bunch of stuff, the HR help desk, employee handbooks. It has job postings with ZIP recruiter, salary benchmarks, leveraging data cloud, applicant tracking, I mean, trainings and a lot of these trainings, some of which and – some of the topics are mandated in certain states. So in addition to that need for HR, we’re also seeing popular attachments of products like retirement and insurance and time and attendance. And in terms of how it’s all trended, I would say it’s generally moving higher because of that need for the additional HR support and also trending more towards retirement and insurance. And some of that’s a reflection of just the whole SMB market being resilient. And as they tend to grow mature, they move upward in our bundle continuum.
Jared Levine
Okay. And then the small business space is uniquely impacted by both the level of new business formations as well as out of business rate, what is ADP experiencing on these fronts today? And are they presently providing a net tailwind or headwind for the business?
Jim Sperduto
Yes. So look, the new business formations are still very strong. I mean they are something like 9%. And although it’s not as high as the spike that we saw during the pandemic, they’re still very healthy. And the out-of-business rates are normalizing some, but they’re still at relatively healthy levels. They’re graduating – they’re gradually getting closer to their pre-pandemic, our fiscal year ‘19 levels than these past couple of years. But overall, we’re not really worried. I mean, again, number one, because of the gradual pace of it all. But two, economic headwinds are not unusual in the small business space, right? And inevitably, there’s going to be slowdowns, right, and recessions at some point. And usually, those are followed by some tailwinds, right? The good news is that we have a great value proposition that helps small businesses, whether it’s great times or in tougher times. So I feel like we’re well positioned. And it doesn’t really change what we need to do, which is some of the focus items that I talked about earlier, which is we’re going to control what we could control and that’s building great products, providing great services and leveraging our powerful distribution engine.
Bryan Bergin
Why don’t we pivot to probably lesser known areas of the portfolio of retirement services and insurance. So we’ll start with retirement. Can you just talk about how the scale of this business – I think we understand it’s 150,000 or 150,000 plus clients that you’re serving there, but any revenue sizing or growth trajectory that you can share on the retirement?
Jim Sperduto
Yes. Well, so in Q1, Bryan, you’re right, we shared, right, that the retirement services business has over 150,000 clients. And I believe in 2022, we shared that the revenue was in the hundreds of millions of dollars. And that – the revenue and sales growth of retirement was outpacing a lot of the other businesses within the enterprises. And those characterizations are still true today. I mean, it’s a great business. It’s a great business with an even greater purpose. I mean there’s still about half of Americans that don’t have a retirement plan option that’s offered to them by their work, right? And the federal incentives as well as the state mandates, those are vehicles to help try to solve for this problem. And the legislation has certainly provided tailwinds from a sales perspective. But our solution is also fully integrated, right, with payroll and HR. But we’re also able to leverage the greater ADP and leverage our ADP’s tax credit business to help calculate and obtain that credit that is available from the SECURE Act 2.0, which, again, you put it all together, it helps to create a pretty differentiated offer with the really great purpose and against a favorable backdrop. So we’re well positioned.
Bryan Bergin
Okay. And maybe can you just dig in a little bit on the revenue model within retirement services, right you making money there?
Jim Sperduto
Yes. I’ll try to make it as simple as possible. It’s really three areas. The first is the hard dollar fees that are associated with like your normal monthly processing as well as your per participant fee, those are fees to administer the plan. The second thing is the participant fees. So that’s fees that you get from the participants. As an example, when somebody goes to take out a 401(k) loan. And the third is the revenue from the assets that you have under the administration. So it’s a pretty diverse set of revenue drivers, and it’s ultimately driven by the growth that you have with clients, participants and with assets.
Bryan Bergin
Okay. And it mentioned – it sounds like you have a big greenfield opportunity here given that penetration number, you mentioned 50% or so of total U.S.?
Jim Sperduto
Well – yes, I mean, the – so 50%, right, of the – of Americans don’t have a retirement plan available to them at work.
Bryan Bergin
Right. I imagine that would imply that the small business segment of the market is even more greenfield opportunity versus the enterprise side of that equation.
Jim Sperduto
Yes. I mean it’s – look, I would say that there’s a good opportunity here. There’s 850,000 clients that are on RUN, right? We have about 150,000 clients that are on retirement services. Now keep in mind that they’re not all on RUN, right, because some of their retirement services also goes into some of our mid and larger-sized platforms. But the opportunity is great because of really two things. One, there’s the opportunity to grow share within the base for all those clients that don’t have a plan, right?
And then second is that it’s because of our differentiated solution, right, our ability to be able to drive conversions from clients that are using another provider to administer their plans. Now in the low end of the space, you’re going to have more of what we call start-up opportunity, right? Those are the non-adopters and you’re trying to educate them on the benefits, right, having a retirement plan made available to their employees. As you move further upmarket, right, again, from one employee on up, right, you’ll start to see that it’s more common for companies to have a retirement plan, and that’s where we have to really try to educate them on why ADP versus their current providers. So yes, the addressable opportunity is big. We think of those two categories within our captive audience of clients. And we’re well positioned to continue to capitalize on the opportunity and help our clients with this really important thing, which is to help their employees prepare for retirement.
Bryan Bergin
Okay. It’s nice to have, I guess, a regulatory assist here. Can you give us – what is influencing the demand here? And what are you doing within your own strategy to take advantage of kind of SECURE Act 2.0 and the various state mandates?
Jim Sperduto
Yes. So I think of the SECURE Act 2.0 is kind of like the carrot, right? And the state mandates are kind of like the stick. And unless there’s like a dramatic change in behavior, I think the carrot, right, the federal incentives are going to provide a gradual increase over time, okay? That’s what we’ve seen with the advent of SECURE Act. The original SECURE Act and now with 2.0. The state mandates, though, on the other hand, they seem to create more of a spike in demand because you have clients that are pushing to be compliant by a certain deadline.
So on both fronts, we have an opportunity to educate our clients, educate our prospects and educate our channel partners around the need to stay compliant or to keep their clients compliant as it relates to the various state mandates and also to be able to capitalize and provide these benefits based on the incentives provided by SECURE Act 2.0. And in both cases, right, like we do see this as like a multiyear growth driver.
Jared Levine
On the insurance services side, can you give us a sense of how large is ADP’s insurance services business in terms of clients served and revenue scale and perhaps comment on its recent growth trends?
Jim Sperduto
Sure. Yes. The – we run what’s called the ADP Insurance Agency. It’s made about more than 1,000 licensed insurance agents. We have over 200,000 clients. And we’re actually one of the top agencies – top 30 agencies in the country. Primarily, we provide workers’ comp, we provide business insurance and health insurance coverage. Now the business has grown nicely and very similar to – if you think about the value prop with retirement services, right, we – it’s very similar, right? We have a fully integrated solution with payroll, which helps reduce the overall administration. We also offer pay by pay, which means that you could bill by pay period versus having to wait to be billed at the end of the year, which obviously has some impacts on cash flow. And we’ve also taken that value prop really to the next level, something we’re calling the Insurance Inspector. And that looks for changes in the payroll that could impact the workers’ compensation premium.
So because we have that really great integration, if a client adds a new state, we’ll let the client know there’s workers’ comp implications. And so we’re going to help the client update their existing workers’ comp policy and will automate the process of all the endorsements with the carrier. And that removes a lot of work, a lot of friction and creates a lot more accuracy. In addition, we’ll offer online benefit administration for both employers and employees at no added cost. And again, I mentioned the 1,000 licensed insurance agents, and it just speaks to the – it speaks to the people that we have that are also able to provide [Technical Difficulty]
Bryan Bergin
Jim, we lost you for a moment there.
Jim Sperduto
Yes. Where do you lose me? I saw frozen faces. I was like...
Bryan Bergin
It was only about 10, 15 seconds.
Jim Sperduto
Okay. As it relates to insurance?
Jared Levine
Yes.
Jim Sperduto
So I mentioned the – you heard about the Insurance Inspector, our ability to offer online benefit administration and no additional cost. And then the other big value prop there is just the license agents that we have on hand to be able to provide support and consultation with their clients as they need it.
Jared Levine
And I think you kind of touched on this a little bit, but the potential benefits of a client using ADP’s insurance services versus another third-party insurance brokerage.
Jim Sperduto
Yes. It’s really that integration, right. It’s being able to, again, very similar to retirement services that benefit of having all of the information closely connected. So that way, as changes happen, there is no manual work. Things are updated automatically. And that’s a big area of the differentiation that we have, and we try to make it even greater by adding things like the Insurance Inspector, which as different events happen, we will automatically kind of do the notifications with the carriers to make sure everything is seamless.
Bryan Bergin
And Jim, let’s pivot to kind of some of the tech trends here as it relates to Gen AI. You mentioned at a high level, some product development earlier on AI. But – and we do understand you have got Gen AI embedded into parts of the business, particularly Roll. Can you discuss maybe other plans that you have to leverage Gen AI and SBS?
Jim Sperduto
Yes, sure. We are hard at work with Gen AI and SBS. Roll, as you mentioned, this past summer, Gen AI was embedded into Roll. And again, for those that are less familiar, Roll is our mobile, chat-based AI-driven payroll app, and it’s interesting. Clients are using the chat-based interface, so they are already obviously interacting with us for payroll and HR in the chat. But now they are also asking things like how do you write a job description or give me some sample interview questions or general pointers on how to conduct interviews. So, these are just some of the real examples that Roll is able to now assist with the power of Gen AI. And the early usage has been really good. And it just points to the fact that our clients are seeing some value in it. And we are going to continue to learn more and iterate along the way to tailor the application accordingly. As it relates to Gen AI within the broader business, we are trying to help our agents, right, our client service representatives. When you think about – a lot of the reps have to enter notes, right, or summarize what happened in a particular call that they have at the client. Well, now, we are piloting this as we are able to actually have associates, have – if your call recordings have these notes automatically summarized and transcribed by ChatGPT, which is pretty neat.
Bryan Bergin
Okay. That’s interesting. And it certainly saves them a heck of a lot of time as a productivity there.
Jim Sperduto
Yes. And it’s more like to think about we have a lot of clients that interact with us via chat. And so Gen AI could suggest what that ideal response could be. And then the associate, obviously, if it’s a great response, they could send it over or they could tailor it slightly or greatly, I guess based on what the response is. And also, if you think within the product, right, where you are able to search for things, well, now you could use natural language, right, to get answers to the product questions. And if it’s how do I question, well, great, we can now answer and provide you deep links to where you need to go within that application. So, and I think there is a lot of potential here to meaningfully reduce a lot of the call and contact volumes and make it easier for our associates to focus on a lot of the more complex and higher-value type activities. So overall, there is a lot going on here, and we are very focused on improving the experience for our clients, for our associates, and we are definitely hard at work, and we are moving fast on delivering all of that.
Bryan Bergin
Okay. Let’s talk about kind of digital sales and some of the self-onboarding as well within the business. So, can you just talk about how the company is utilizing digital sales and the self-onboarding capability for prospective clients? And how long has that been in place?
Jim Sperduto
Sure. Well, Bryan, you know the backdrop here. I mean the buyers’ expectations have continued to evolve, right. They want to shop more like consumers. They are doing a lot of research on their own. They want to see the product even before the actual sales call in many cases. So, a lot of that buying process has been moved up front. And this is a trend that we have leaned into in a really big way. And it’s helped to contribute to more digital leads and improvements in our overall selling approach, right, making us more effective. What is newer for us is what you have mentioned, and that’s the ability to self onboard as we utilize machine learning to automate the extraction of new client information. And it’s about a third of our new clients now fully onboard themselves without much support from an implementation specialist. So – and once onboarded, we are going to continue, as I have mentioned, right, to place that emphasis on self-service capabilities throughout the products which empowers our clients and make them ultimately more self-sufficient. And we have been on a nice trajectory where we have had about a 20% reduction in service contact since we started this journey. And we believe that Gen AI will help us continue to accelerate that journey and make even more progress moving forward.
Bryan Bergin
How quickly can a new client get up and running by digital sales right through self-onboarding?
Jim Sperduto
So, if you wanted to get up and running today and self-onboard today, we can make that happen. So, if you have any referrals, we will take it.
Bryan Bergin
Okay. I am going to start business after lunch.
Jared Levine
In terms of a client churn, can you discuss what are the primary drivers of core business client churn, and how should we think about the mix of controllable versus non-controllable unit churn?
Jim Sperduto
Sure. Yes. As you probably know, most of our churn is due to non-controllable reasons, primarily when a client goes out of business. A small percentage of our clients leave us. And it’s a small percentage, primarily for two reasons. Number one is because we provide a really good experience, a really great client experience on RUN. The second reason is clients, they can help it, they really don’t want to switch their vendor. They would prefer not to. So, that’s really the view on churn.
Jared Levine
And in terms of that competitive churn, do those competitive churn rates differ in that down market, based on if a client also purchases HRO services or additional software modules beyond payroll?
Jim Sperduto
Sure. Yes. I mean as they purchase more services, generally, we see a retention lift, the more that the clients take advantage of. We observe it, I would say, a particular retention lift when we sell our retirement and insurance offerings because that tends to produce some of our highest lifetime value clients.
Jared Levine
And is there anything you can do to reduce those competitive churn rates even further in the future?
Jim Sperduto
Yes. Again, it’s a smaller percentage of clients that we lose to the competition in the small business space. And we are going to do everything I said earlier about innovating and improving our product to further reduce that attrition. And in addition, we have to throat [ph] that competitive pressure with really great service. And – sometimes we are in the heat of the battle and we have to try to save a client that’s thinking of leaving us. And our associates are really well trained to showcase the value differentiators between our solutions and our competitors. And they know how to react to try to save our clients. And sometimes, unfortunately, we do have clients that leave. I would also tell you, though, that we are really great at bringing them back and leveraging our digital sellers in that regard.
Jared Levine
Okay. I know we are running up on time here. But in terms of where you source new clients in the Small Business segment, what is the mix of business formation versus competitive takeaways versus other sources in terms of where you get those new clients from?
Jim Sperduto
Yes. Look, it’s – let’s talk about some of the new business growth, right. It’s safe to assume that new business formation is, it’s a meaningful percentage of our clients, but it’s balanced with competitive takeaways. I mean the new business market is robust, right. There is – or the business overall, there is about 5.3 million businesses in the U.S. with less than 50 employees. And high-propensity business applications are running at around 160,000 a month or so. So, look, we have to be like, if you are in this business, you have to be successful and taking advantage of that opportunity. But we also have to be successful at driving competitive takeaways in the field and digitally. And we rely on our strong brand, our digital marketing strategy and the really tremendous reach that we have from our sales teams to ensure that we have this balanced success.
Bryan Bergin
Alright. Jim, I know we are kind of on time. Just one of the – one or two top things you are focused on over the medium-term here to drive the business and then any important thoughts?
Jim Sperduto
Yes. I mean I would just say that there are some of the trends that are out there. First of all, there is a lot that happens in this space. It’s dynamic. It keeps me on my toes. It makes it fun. But with respect to some of the things that we are seeing embedded, payrolls obviously have been a hot topic. And we are seeing in the marketplace SaaS providers offering an embedded application, right, responding to this demand that SMBs have to have an all-in-one application. We haven’t seen any providers take any meaningful share, but it’s certainly something that we are monitoring. And I would just say two questions that a SaaS provider should contemplate as it relates to offering payroll. Number one, how would you service the customer on payroll effectively because you have this core business and you don’t want to be able to track from that core business? And two, you have to make sure that you have the ability to attach or up-sell payroll effectively. So, as we pursue this additional channel opportunity, we are going to keep these two questions top of mind and feel that we are going to be best positioned to help our potential partners succeed here on both of those fronts.
Bryan Bergin
Alright. Very good. Jim, we appreciate your time. Great discussion and we appreciate your time as well. Thank you everybody for joining us. And we are going to be back at 12:45 with an AI panel with Eightfolds and Sartun. Thanks again.
Jim Sperduto
Thanks Bryan for the opportunity. Hopefully, we conveyed some of the strong business momentum that we have and the opportunity to continue our growth forward. We are certainly excited about the future.
Bryan Bergin
Very good. Thank you.
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Automatic Data Processing, Inc. (ADP) TD Cowen Human Capital Management Summit Conference (Transcript)