HP Inc.

Good day everyone and welcome to the second quarter 2020 HP, Inc. Earnings Conference Call. My name is Ilie and I'll be your conference moderator for today's call. At this time, all participants will be in listen-only mode. We will be facilitating a question and answer session towards the end of the conference. Should you need assistance during the call, please signal a conference specialist by pressing the star key followed by zero. As a reminder, This conference is being recorded for replay purposes. I would now like to turn the call over to Beth Howe, Head of Investor Relations. Please go ahead.

Good afternoon. I'm Beth Howe, Head of Investor Relations for HP, Inc., and I'd like to welcome you to the Fiscal 2020 Second Quarter Earnings Conference Call. With me today are Enrique Lórez, HP's President and Chief Executive Officer, and Steve Feiler, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is being webcast. A replay of the webcast will be made available on our website shortly after the call for approximately one year. We posted the earnings release and the accompanying slide presentation on our Investor Relations webpage at investor.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to forward-looking statements that involve risks, uncertainties, and assumptions, including the potential impact of the COVID-19 pandemic. For discussion of some of these risks, uncertainties, and assumptions, please refer to HP's SEC reports, including our most recent Form 10-K and Form 10-Q. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported in HP's Form 10-K for the year ended October 31, 2020, and HP's other SEC filings. During the webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with a corresponding year-ago period. For financial information that has been expressed on a non-GAAP basis, we've included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today's earnings release for those reconciliations. And now I'll turn it over to Enrique.

Thank you, Beth, and thank you, everyone, for joining. Let me first say that I hope you and your families are healthy and safe. Our thoughts are with all of those affected by this global pandemic. I especially want to thank all the frontline workers who are showing incredible courage. I speak for all of HP when I say we are grateful for all they are doing. The world has dramatically changed since our call in February, and we have a lot to cover today. I will start with a brief update on how HP is responding to COVID-19. I will then discuss the near-term impact from the pandemic and our Q2 performance. And I will provide updates on our strategy and our previously announced value plan. Steve will then take you through the details of the quarter and provide updates on our balance sheet, liquidity, and outlook before we open the lines for Q&A. So let me start with our response to the pandemic. We like to say that tough times are when HP's culture shines brightest, and that's exactly what we have seen in recent months. I am proud of the way our teams have stepped up to support our partners, customers, and communities. Our top priority has been and will remain the health and safety of our employees. From the start, we quickly pivoted the vast majority of our people to work from home. For those in manufacturing and other critical functions that cannot work remotely, we implemented social distancing along with additional safety and cleaning protocols. And as significantly, we have taken meaningful actions to remain close to our customers and partners. Specifically, we have implemented a variety of relief initiatives to help them navigate their operational and financial challenges. We believe these investments will further strengthen our relationships and support our value creation strategy over the long term. But a crisis of this magnitude demands that we do more than simply protect our business. we must also protect the communities we serve. Our teams took immediate actions to deploy our technology and resources to address a range of urgent needs. I will share just a few examples. HP and our partners have now produced roughly 2.3 million 3D printed parts for face shields, respirators, and other items for distribution to hospitals. And we are now ramping up production of 3D printed nasal swabs with partners to help in the effort for mass testing. Because up to 60% of people currently working from home are using personal machines, we made short-click security software freely available through September to protect against cyber threats. And with almost 90% of the world's students out of school, HP and HP Foundation are donating millions of dollars in technology and grants to enable remote learning. As all our teams have adapted to new routines, I am proud of the way they kept the needs of our customers and our communities front and center. Turning to our results, There is no doubt that COVID-19 is impacting our business. While some areas performed very well as people shifted to work from home, others suffered, and we faced supply chain disruptions. Despite these challenges, we delivered non-gap earnings per share of 51 cents. Revenue was $12.5 billion, down 11%, driven by macroeconomic and supply chain challenges associated with the pandemic. Let me provide some context on the impacts we are seeing on both the supply and demand side, as well as the actions we are taking to mitigate risks. I will start with supply. Both print and personal systems experienced manufacturing and supply chain disruptions during the quarter. As we noted on our February call, Manufacturing in China remained shut down after Chinese New Year before beginning to ramp in late February. Starting in late March, we also experienced disruptions to operations in Southeast Asia and other parts of the world as the pandemic spread. We took swift action to adjust to this development, and our manufacturing capabilities were largely back to full capacity by early May. We will continue to monitor the situation for any other potential disruptions. Moving forward, we are evaluating plans to improve the resiliency of our supply chain, including increasing our levels of owned inventory to help mitigate the risk of future outbreaks. On the demand side, there is no question that the lockdowns around the world have created new and different demand dynamics in the market. This presents both tailwinds and headwinds across our portfolio, and I want to walk you through what we are seeing. As people work from home, operate their businesses remotely, and complete the school year online, we are playing an even bigger role in their everyday life. The current environment will have a lasting impact on the way we live and work, and it will further increase the importance of technology. For our business, this presents some attractive near and long-term opportunities, as well as some challenges that we will talk about. In personal systems, we saw increased demand as organizations of all types and sizes focused on keeping people connected, productive, and secure. This strong demand combined with a constrained supply resulted in an elevated backlog, which we expect to work down during Q3. Customers all around the world have been reminded of the essential role the PC plays, and we're taking action to capitalize on this opportunity. During the pandemic, we have introduced some incredible innovation aligned to customer insight. For example, companies need to rapidly and securely deploy new devices to workers who are either at home or on the front lines. To meet these needs, we launched new enterprise Chromebooks, and mobile theme clients. We also launched a new range of ZBook by HP mobile workstations and Envy notebooks that empower creators. And just this week, we introduced the next generation of Elite PC and ergonomic monitors. We also launched dedicated services to improve employee experiences, and help workers connect to the cloud and collaborate with colleagues. And with people spending more time at home, the PC also continues to emerge as a hub of entertainment. Gaming is the best example, and earlier this month, we launched a new lineup of home MPCs and displays. In printing, we are facing near-term challenges driven by both supply and demand issues. In commercial print, including office and graphics, we saw a significant slowdown in late March as offices closed and large events and trade shows were cancelled. While we believe that office and graphics usage will rebound once businesses fully reopen, we expect that Q3 will be similar to April. And thus, we expect that our financial results will be more negatively impacted in Q3 than Q2. In consumer, we saw increased demand for hardware and ink supply as countries went into lockdown and customers set up home, office, and school environments. However, we were not able to fulfill all of the orders given the manufacturing disruptions. On the positive side, we also saw a surge in instant ink and now have more than 7 million subscribers, accelerating the shift to services that we have been driving. HP's leadership across both consumer and commercial print markets makes us uniquely well positioned to weather the near-term challenges and emerge from the crisis stronger than the competition. Let me now move to our go-forward strategy and value creation plan. We are continuing to execute the strategy that we outlined at our security analyst meeting last year. and we remain confident that it will deliver significant value over the long term. As a reminder, our strategy is focused on three key priorities. Advancing our leadership in personal systems and print. Disrupting industries with our technology and intellectual property. And transforming the way we work across HP to get closer to customers and reduce our costs. We continue to make progress against our plan, and we are rapidly adapting to the new realities of the current environment. In personal systems, we are advancing our leadership with a continued focus on high value categories and cost efficiency. As the PC plays a more integral role in people's lives, we see attractive opportunities to innovate with new hardware, services and solutions, including security and sustainability. In print, we are evolving our business model with greater focus on driving more balanced system profitability over time while also taking significant costs out. We see the opportunity to accelerate the shift towards services. For example, we believe instant momentum and the broader shift to contractual will continue as work remains more mobile and location agnostic. even when the pandemic fades. In addition, our diverse portfolio across consumer and commercial affords us unique opportunities in the changing landscape. We also remain focused on disrupting industries where our innovation and AP give us sustainable competitive advantages. While some of these businesses in graphics and 3D have been hard hit by the economic slowdown, we believe they will recover post-COVID and they remain significant long-term opportunities for our business. Supply chain flexibility and resilience will be a priority topic for all companies going forward, and we expect digital manufacturing will be an important part of these discussions. This pandemic has shown the benefits of 3D printing, specifically speed, agility, and localized production. This has led to deeper, more strategic engagement with customers as they evaluate their supply chain and consider more distributed manufacturing models. As an example, in April, one of our customers, Smile Direct, quickly pivoted during the pandemic from making dental aligners to producing personal protective equipment. To deliver on our priorities, we are executing our transformation program to become a leaner, more digitally-enabled company. And the current crisis will actually help accelerate several initiatives. We are making significant progress in this effort. Through the first half of the year, we are tracking ahead of our first-year target to generate 40% of the total $1.2 billion in gross analyzed fund-raise structural cost savings. We are also taking additional actions to mitigate the short-term headwinds from COVID-19. This starts at the top, with temporary reductions in executive and board compensation. We are also restricting external hiring and making further short-term reductions in discretionary spending. As we navigate the current environment, we remain committed to the principles of the value plan we outlined in February. This includes the multiple levels we have to drive profitability, our revised leverage target, and our disciplined approach to capital allocation, including returning significant capital to shareholders unless higher ROI opportunities emerge. As it relates to the value plan target, we are committed to the long-term goals we have set. Given the extraordinary and highly dynamic environment in which we are currently operating, the timing to achieve these goals may change. As we have greater visibility on the macro environment, we will be in a better position to provide a long-term financial update. We believe this is the most prudent approach as we act in the best interest of our shareholders and other stakeholders. Before I turn the call over to Steve, I want to provide some closing thoughts. HP has always been fueled by innovation, collaboration, and a purpose-driven culture. These are core strengths of our company that position us well in our market and drive our optimism about the future. And although there are challenges right now due to COVID-19, we never lose sight of the big picture. it is clear that the pandemic shot can also be a catalyst for change at the intersection of the digital and physical world. From the increasing relevance of PCs in people's lives to the growing interest in 3D and digital manufacturing and the importance of playing across consumer and commercial printing. We continue to see significant opportunity for HP to drive long-term value creation. And we believe our structural advantages, disciplined cost management, and a very focused on the customer position as well to navigate the current headwinds while capitalizing on new opportunities across our business. With that, I will turn the call over to Steve to take you through the financial details.