HP Inc.

Good day everyone and welcome to the fourth quarter 2022 HP earnings conference call. My name is Emma and I will be your conference moderator for today's call. At this time, all participants will be in a 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 Orit Keenan-Nahon, Head of Investor Relations. Please go ahead.

Good afternoon, everyone, and welcome to HP's fourth quarter 2022 earnings conference call. With me today are Enrique Loris, HP's President and Chief Executive Officer, and Marie Myers, HP's Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is a webcast, and a replay will be available on our website shortly after the call for approximately one year. We posted the earnings release and 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. For a 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 obligations 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 SEC filings for the years ending October 31st, 2022 and 2023, and the quarter ending January 31st, 2023. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. For financial information that has been expressed on the 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. With that, I'd now like to turn the call over to Enrique.

Thank you, Orit, and thank you, everyone, for joining the call today. I'm going to focus my remarks on three key topics. First, I will recap our Q4 and full year results. Then, I will discuss actions we are taking to position our business for the future, including a new three-year plan focused on structural cost reductions that will drive the next phase of our digital transformation and reinvestment in our growth businesses. And I will close by talking about our outlook for 2023. But let me start by setting some important context. It has now been three years since I became CEO. From the day I took over, my top priority has been to deliver long-term, sustainable, profitable growth while transforming our business for the future. And we have made important progress. We started by launching an aggressive plan to unlock value. We implemented a new global operating model that brought us closer to customers and helped us significantly reduce structural costs. We initiated actions to rebalance profitability in our print business. And we began to diversify our portfolio to capture more value per customer. We expanded into adjacent growth categories such as peripherals. We extended our services and solutions offerings, and we shifted more of our business to subscriptions and contractual models. These changes helped us to improve our operational performance. They also positioned us well for the disruption caused by the pandemic, which we were able to use as a catalyst to accelerate our transformation. And our track record over these past few years provides a window into what you can expect from us moving forward. We have proven to be resilient in the face of changing market conditions. We delivered strong free cash flow, controlled our costs, and scaled our growth businesses. At the same time, we will continue challenging ourselves to do better regardless of the external environment. And there are areas where we need to do better. When we see things that aren't working, we will fix them. And we will embrace every opportunity to improve our performance because our customers, shareholders, and other stakeholders deserve nothing less. You can expect us to take the same approach in 2023 and beyond. Let me now turn to our results for the quarter. Revenue was $14.8 billion, down 11% nominally or 8% in constant currency. This reflects macro headwinds in the market and is very consistent with what we described last quarter. We continue to focus on what we can control. We managed our pricing, mix, and costs to deliver non-GAAP EPS of $0.85. which is toward the high end of our previously provided outlook. And we delivered strong free cash flow of $1.8 billion, while returning $1 billion to shareholders. Very importantly, we also maintained our momentum in our growth portfolio. In short, we did what we said we were going to do last quarter. Turning to our Q4 business unit performance, personal systems revenue was $10.3 billion. That's down 9% in constant currency year over year, but up 2% sequentially, or 4% in constant currency, including two months of POLY results. The POLY integration is going well so far, with the business performing better than expected. We continue to receive very positive feedback from the market about the opportunity ahead. We are well positioned to accelerate our peripherals growth and we expect fully to be accretive to non-GAAP operating profit and EPA in fiscal year 23. Our PS operating margin was 4.5% in the quarter. below our long-term target range due to increased competitive pricing, particularly in EMEA. Still, we remain confident in the long-term trajectory of PES as we navigate near-term volatility in the market. The PES stand remains above pre-pandemic levels, and we are making progress against our long-term strategic priorities. This includes shifting more of our mix to high-value segments. In Q4, our commercial business continues to account for more than two-thirds of our overall PS revenue. However, we are not satisfied with our PS market share results this quarter. We know we can do better, and we will. We see many opportunities to improve our execution and gain share in key segments of the market. In print, revenue was $4.5 billion. That's down 7% year-over-year or 6% in constant currency, largely due to continued softness in the consumer market, both hardware and supply, and supply constraints. That said, our operating margin of 19.9% was well above our target range, reflecting disciplined cost management and pricing. Our commercial business made a good recovery during the quarter, with office hardware revenue growing double digits year over year and sequentially. This was offset by declines in home and supplies, both of which were in line with our expectations. We also made progress against our plans to rebalance system profitability and further reduce our reliance on transactional supplies. HP Plus and Big Tank printers continue to become a larger portion of our portfolio mix, representing about 55% of our printer shipments. And we had another good quarter in industrial graphics and 3D, both of which grew revenue year over year and sequentially. Now, turning to the full year, our Q4 results capped off a solid 2022 in the phase of task market conditions in the second half. Fiscal year 22 revenue was $63 billion. That's down 1% nominally and up 1% in constant currency. We exceeded our full-year revenue target for our key growth businesses, each of which delivered double-digit organic growth. Collectively, they generated more than $11 billion in revenue. That's a billion dollars above our target and reflects the strong momentum we are building. We delivered non-GAAP EPS of $4.08. That's up 8% year over year and within our target range. We generated free cash flow of $3.9 billion, and we returned $5.3 billion to shareholders in the form of share repurchases and dividends. We also continued to advance our sustainable impact agenda. This is a key differentiator for our brand, and I am proud of the work our teams are doing to make it a competitive advantage. This year, we were the only technology company globally to receive an A rating from CDP, one of the world's leading NGOs dedicated to environmental sustainability reporting. And almost all the new printers, laptops, notebooks, displays, and workstations we launched in 2022 included recycled materials. Sustainable impact will remain a key strategic priority moving forward. Fiscal year 22 also marked the completion of our three-year value creation plan, and we exceeded all the key targets we set. In addition to delivering on our financial commitment, the plan draws important investments in our future. Most notably, we invested in our digital infrastructure to begin re-platforming the company. And we invested in both R&D and M&A to accelerate the growth of our businesses. These investments have strengthened our resilience and positioned as well for the volatile market ahead. I now want to talk about what comes next. Because while we have delivered on our value plan, we are not done. And we have initiated the next phase of our transformation. Our ultimate goal is to create a future ready HP. Future ready is our strategic framework that we are driving across the company. It has two primary objectives. One is to develop the portfolio and operational capabilities needed to drive sustainable growth. The other is to further reduce our cost. Marie will talk more about the cost side of this transformation. Today, I am going to walk you through three key elements of our Future Ready plan. Digital transformation, portfolio optimization, and operational efficiency. They are also the major drivers of savings of the plan we are announcing today. I will start with digital transformation. We are continuing the process of digitizing the company. We plan to capitalize on the infrastructure investments we made over the past three years to simplify and accelerate many processes through automation and end-to-end management. For example, we are launching end-to-end initiatives that will enable faster conversion from lead generation to free cash flow. Our digital transformation will also drive productivity. speed and quality of our execution across supply chain, customer support, and go-to-market. In addition, our new digital backbone will enable us to scale key growth businesses by delivering new customer value propositions such as personalized services and solutions that allow us to capture more value per customer. The second area of focus is on optimizing our portfolio. In the current environment, I believe it's essential that we zero in on businesses where we can drive significant competitive advantage and market leadership. We have an opportunity to create a more focused and more growth-oriented line of businesses based on innovation that meets the changing needs of our customers. We also have opportunities to simplify our portfolio. For example, in personal systems, there is an opportunity to significantly reduce our number of unique SKUs. And we plan to significantly reduce complexity and cost in businesses where we don't expect to achieve growth but can drive value. A significant portion of the savings we generate is expected to be invested to drive innovation in our key growth businesses to increase the lifetime value of our customers. I will give you some examples. In hybrid work solutions, we intend to leverage the combined strengths of Polly and HP to drive a touch while expanding in software and services to deliver differentiated hybrid work solutions for meeting rooms and home offices. In gaming, we see significant opportunity to drive better collective experiences through both software and hardware, and we will create seamless experiences across PCs, displays, and peripherals. Through our newly formed workforce services and solutions business, we will simplify IT management for customers through new device-as-a-service offerings tailored for hybrid ecosystems. We will also expand our consumer services offerings beyond instant ink to include new areas such as paper and print hardware. In industrial graphics, we will continue to lead the industry in innovation that drives that analog to digital transformation. And in 3D, we will continue to invest in our own 3D end-to-end printing applications and in our metals portfolio. And we expect these businesses collectively to continue growing organically double digits next year. The third area of focus I am going to cover today is delivering operational excellence. We plan to continue to optimize our performance by driving efficiencies, simplifying organizational structures and removing unnecessary costs. This work will build on our previous transformation initiatives to unlock new structural savings. we will be taking actions across the company to reduce our variable spend and structural costs. For example, in our print business, we will further reduce our core fixed cost structure and align it to post-pandemic market sizing. And our consumer subscription offerings will allow us to be more efficient in simplifying our portfolios. The core actions of our future ready plan will generate at least $1.4 billion in gross annual run rate structural savings by year end fiscal year 25. They will allow us to mitigate near-term market headwinds, mitigate softness in the core businesses, and just as importantly, to maintain investment in long-term growth. As part of the actions we are taking, we will be reducing the size of our workforce over the next three years. We expect to reduce it by 4,000 to 6,000 people. These are the toughest decisions we have to make because they impact colleagues we care deeply about. We are committed to treating people with care and respect, including financial and career services support to help them find their next opportunity. But while these are difficult decisions, we are doing what's best for our business. Let me now provide some color on our outlook for the year ahead. We expect to operate in a challenging macro environment during fiscal year 23. In our guide, we are not assuming a significant economic recovery over the next 12 months. We expect our second half performance to improve, mostly driven by the cost-saving measures we are implementing. We plan to maintain our current capital allocation approach, applying the same framework we have used during the last three years. We plan to continue to return at least 100% of free cash flow to our shareholders over time, unless opportunities with a better return on investment arise, and as long as our gross leverage ratio remains under two times. Given the volatility of the market, we believe it's important to maintain a healthy balance sheet through prudent financial management. Therefore, we will temporarily reduce our share repurchase activity in the near term. We are confident in the actions we are taking to navigate current market conditions and drive long-term value creation. And today marks the start of the next phase of our strategic journey. While our growth trajectory may be uneven in the face of volatile market conditions, we remain confident to grow low single digits over the long term. Based on our track record over these past three years, you can count on us to deliver on our commitments. Let me now hand the call over to Marie to talk more about our financials and outlook.