Hewlett Packard Enterprise Company (HPE) Earnings Call Transcript & Summary

Hello, everybody. This is Tim Long, IT hardware analyst at Barclays. And along with Jessica Whitt from our Global ESG Research team, we welcome to this call with HPE on their ESG agenda. As you know, ESG is a growing topic and one that HPE has spent in an increasing amount of time and energy on over the last few years. We're pleased to have with us Antonio Neri and Monica Batchelder. Antonio is President and CEO of HPE, as you all know. He is a 25-year veteran of HP and HPE, and has held a variety of positions across the company. Antonio has managed several successful innovations across product categories at HP, and has also been pivotal in the integration of several of the important acquisitions. Monica is the Chief Sustainability Officer at HP, where she is focused on driving the business value of sustainability and solving social and environmental challenges in collaboration with key stakeholders. She's also involved in the HPE Foundation and HPE's Living Progress Steering Committee. I do want to call out that you can refer to Slide 3 of the presentation for HPE's disclosures and also can visit the HPE Investor Relations website at investors.hpe.com for more details. With that, I'm going to throw it over to Antonio, he will pass it to Monica. And then after that, Jessica and I will lead a Q&A section. So Antonio, thanks for joining us, and let me throw it to you.

Well, thank you, Tim and Jessica for having us today. Good morning, everyone. Thank you for joining our HPE's third annual ESG-focused investor webcast. And again, I want to thank our host at Barclays for this opportunity to provide an update on HPE's ESG strategy. We're always pleased to talk with you about how our ESG strategy is linked inextricably to our overall business strategy. Our discussion today comes on the heels of HPE publishing our Living Progress report in June. This report details how HPE's business strategy works hand-in-hand with creating sustainable IT solutions for what we call a data-first world. We are pursuing a wide range of ESG goals at HPE from bold emission targets and designing more efficient IT solutions to ensuring equitable talent practices and accelerating the development and progression of our underrepresented diverse team members. These efforts and commitments are important in driving our business and delivering our purpose, which is to advance the way people live and work. But if you take a step back, it is clear that the world is facing complex challenges that are driving an ongoing market shift towards ESG integration and increased demand for corporate sustainability. This renewed focus validates the integrated ESG and business strategy we have employed for decades now, further cementing HP as a leader with decades of experience innovating for a better world. So let me start with an overview of our Board governance and it's engagement in ESG issues. Our Board of Directors actively provides oversight on a range of ESG issues and initiatives and offers a guiding hand to integrate risks and opportunities into our long-term strategy. Environmental, social and government issues are woven into the fabric of how would they exercise the fiduciary duties to ensure that, first, we deliver products and solution that supports our customers' sustainability efforts. And second, ensure we foster an unconditionally inclusive culture for our team member. And last but not least, maximize, obviously, our value for our shareholders through effective ESG initiatives. HPE's Board members are thought leaders in this space, for HPE and for our industry are large. Let me give you a few examples. Pam Carter sponsored the architecture and development of HP's global diversity, equity and inclusion council. Similarly, our Chair, Pat Russo, represents HPE on the World Economic Forum's Community of Chairpersons climate initiative, which actually explores how public company Boards are tackling the issue of climate change and enhancing climate stewardship across their organizations. I am personally proud to see the HP Board in Fortune's Modern Board top 25 list as the #2 spot, which reflects the strong approach to effective oversight on all our ESG initiatives at the Board level. We're also very proud that 50% of our Board is from diverse backgrounds, which is amongst the most diverse in the industry. We know the diversity of perspectives leads to better dialogue and debate, which leads to better strategic decisions. At the management level, it is also important that our business decisions are integrated with our ESG priorities. Our Living Progress strategy council is a cross-functional team of executives who ensure best-in-class ESG performance across all our teams. We are living in a digital economy where the demands on IT infrastructure are growing larger every day. And we actually don't see it in many cases, the environment's impact on the digital economy continues to grow as well. By aligning the technology strategy with sustainability initiatives, organizations are growing stronger and more nimble, meaning they can better accelerate data-first modernization strategies. There is a clear business case for this. Companies that make digital and sustainable transformation are 2.5x more likely to be the stronger performing businesses in the future than those are that do not. As a technology company, we see HP as an essential part of this solution. We view sustainability as a catalyst for innovation, and we are uniquely positioned to meet our customers wherever they are on their journey to advance their sustainability agenda from edge-to-cloud. For example, HPE GreenLake, which is the centerpiece of our edge-to-cloud strategy, enables customers to consume IT on as-a-service basis, enabling them to scale their IT to meet their needs and reduce IT inefficiencies, which are a significant source of environmental impacts within many companies. We know that effective strategy to achieve net zero carbon emissions is a cornerstone of corporate longevity. With that in mind, we recently announced our commitment to become a net zero enterprise across our entire value chain by 2040. We have also set near-term targets that include reducing our Scope 1 and Scope 2 emissions by 70% and our Scope 3 emissions by 42% by 2030, which Monica will discuss in greater depth. Our goals without accountability don't make an impact. That's why HP instituted a new initiative designed to drive meaningful results across the organization. In March, we unveiled a new compensation metric that ties a portion of variable pay for the members of our Executive Committee to management of carbon emissions across our value chain. This builds on existing variable pay indicators related to team member engagement and workforce diversity. Of course, neither progress nor innovation are possible without an engaged and motivated workforce. Part of my commitment to build a vibrant and inclusive culture has focused on creating a supporting environment where team members feel they can build long-term careers and thrive as I did. The pandemic led people to reevaluate what they value in life. HP listened to our people and what their vision for the future world looked like. And the message was clear: balance, choice and flexibility and fulfilling careers. In response, we launched Edge-to-Office, a hybrid working model that provides the vast majority of our workforce the ability to set work arrangements on their terms, while maintaining strong collaboration and connections with our colleagues and leaders. And it is working, with 84% of the team members telling us they see value in this approach because it enables them to be effective in their roles, and 90% telling us they continue to feel connected to the HP community no matter where they work. In a world in which equity has come into intense focus, I'm particularly proud of the work, our work with the work we have done to ensure equal pay. We regularly review our global pay practices to ensure that team members in similar roles and locations are paid in line with their experience and responsibilities. As a result of these efforts, our most recent pay equity review shows that female team members in the United States, U.K. and India, as well as team members of all ethnicities in the U.S. earn, on an average, $1 for every dollar earned by male team members. The team member population in these 3 countries represent a majority of our global workforce. HP conducts a number of compensation analysis in other countries to ensure competitive and equitable pay and, where permissible, intends to incorporate similar third-party pay assessments into our existing processes. And under the leadership of our new Chief Diversity, Equity and Inclusion Officer, Aisha Washington, we have realigned our strategy to reinforce our commitment to diversity at the team member and executive levels. It is an incredible pleasure and honor to lead the company with bold ESG goals that reflect the needs of our team members, our customers and our community. And it is actually very comforting to see the validation we are receiving for different aspects of our ESG focus. But now let me introduce you to Monica Batchelder who became our new Chief Sustainability Officer in June. As another way to show the momentum in the company to promote within, Monica is a great example of that. So she will go into greater detail about our ESG strategy and priority issues. So Monica, over to you.

Thanks, Antonio. I love what you just said about the need to pair goals with accountability and action to create change. That's so important, and that's what I'm here to talk about today. Over the next 20 minutes, I'm going to share how HPE is driving action and measurable progress and how we're moving the needle on key issues we know are most important to investors, including on issues such as net zero, human capital and our human rights strategies. So let's dive right in. HPE Living Progress is our strategy to embed ESG priorities and initiatives across the value chain. Our mission is to create sustainable and equitable technology solutions for a data-first world. Our strategy and our disclosures are guided by our nonfinancial materiality assessment, and that enables us to focus on the issues that we know are most important to HPE and important to the business, to planet and society. The issues you see here are those which are covered within the annual Living Progress report. And although I won't be able to touch on all of them today, I'd like to share a few highlights from each of the 3 pillars. So let's start with accelerating net zero. As Antonio shared, HPE made the incredibly important and ambitious decision to accelerate our net zero commitments by a decade, from 2050 to 2040. Years ago, when we set our net zero ambition, it was based on best practices and backed by science-based targets. But as the science changed, we saw the need to accelerate our goals. Our climate program already has many firsts to its name. We were the first IT company to set science-based targets across our value chain, among the first IT companies to report an alignment with the task force on climate-related financial disclosures. And now we are among the first 2 global companies with a net zero target approved by the science-based target initiative. And that last one is really critical because it's the first standard of its time that lends credibility to the new wave of net zero targets coming out of corporations. We've published a roadmap outlining our path to net zero. And most notably, as Antonio mentioned, we've tied climate metrics to executive compensation to keep our most senior leaders accountable. In order to achieve the business transformation that we see as necessary to achieve net zero, we're rolling out an internal climate training program to all employees in our company, and that's going to be custom built to help team members identify how their specific organization can contribute to our climate goals. Speaking of climate goals, our new targets that Antonio laid out are outlined on the slide here. Our interim targets for 2030 include reducing our Scope 1 and Scope 2 emissions by 70% from 2020 levels, and our Scope 3 -- our absolute Scope 3 emissions goal is to reduce 42% off a 2020 baseline. And that Scope 3 target includes the use of our products by customers, upstream transportation and distribution and our production suppliers' operational emissions. Scope 3 emissions are by far the largest part of our footprint, and we'll increasingly need to rely on external partnerships in order to move the needle at scale there. So let's double click on that in the next slide. Upstream emissions comprise about 1/3 of our total environmental impacts. So to drive towards our Scope 3 target upstream, we've committed that 80% of our production suppliers by spend will set their own science-based emission reduction targets by 2030. And to ensure that targets achieved, HPE partnered with a third party called Optera to create a customized data management software platform that gives our largest suppliers access to modeled emission targets for their operations, as well as the ability to track progress and benchmark against their peers. Now the most substantial impact HPE can make is actually by having our customers reduce the impacts of their IT infrastructures, and we see a huge opportunity for HPE to engage directly with customers on their sustainability-related needs. In fiscal year 2021, sales directly related to customer engagements on sustainability metrics rose to nearly $900 million. That's a 185% increase over the last 3 years, and it reflects the increased demand we're seeing for vendors for sustainable IT credentials. Unfortunately, there's no silver bullet to reducing downstream emissions associated with customer use of our products, which comprise about 2/3 of our total footprint. But that said, HPE's commitment to offering its entire portfolio as a consumption-based as-a-service offering is already delivering sustainable outcomes for our customers. By way of example, one of our large HPE GreenLake customers, a multinational chemical company, is expected to achieve a reduction of more than 2,000 tons of carbon dioxide equivalent based on their transition to an HPE GreenLake solution. That's a staggering figure, and it represents more than a 70% reduction in electricity consumption at nearly half the rack space. Lastly, I also want to touch on our end-of-use solutions. We encourage our customers to upcycle their used assets at our HPE technology renewal centers, which accept any brand of retired or unwanted IT equipment regardless of manufacturer, and that's a very unique practice. Last year, more than 3 million assets were sent to these centers for processing, and 85% of the assets were refurbished for a second life. That generates additional revenue streams for HPE and return money back to our customers. Along with HPE asset upcycling services, we offer customers a customized circular economy report that actually quantifies the emissions and landfill savings avoided by using these services. Move on to the next slide. So I've touched on how HPE is creating efficient IT solutions, and we also focused on applying these technologies to enable the transition to a low-carbon economy. We refer to those notions as sustainable IT and IT for sustainability. So let me give you an example of each. First, take our partnership with Auckland Transport. Previously, Auckland Transport used 2,500 cameras to monitor the city for safety issues, which created an ever-increasing amount of data. Auckland Transport transitioned its video management system to an HPE Apollo Gen10 server running on HP GreenLake edge-to-cloud platform, and that resulted in a 37% decrease in energy consumption, a 41% reduction in rack space and reduced associated power and cooling costs. What I love most about that example is that they achieved those environmental efficiencies without compromising the system's ability to process data in the exabyte realm. Secondly, as the leader in high-performance computing, we're also partnering with our customers across sectors to tackle the range of climate-related challenges. Frontier, the HPE Cray EX system at Oak Ridge National Laboratory recently topped the supercomputing world. It's the first verified exascale system in the world, the world's fastest supercomputer and the world's most energy-efficient supercomputer, topping the Green 500. Frontier will solve calculations up to 10x faster than today's top supercomputers and tackle problems that are 8x more complex. That will help Oak Ridge National Laboratory speed up discoveries in critical areas like renewable energy and new materials to create safer and more sustainable products. I wish I had more time to share the incredible innovations that our team members are driving with our customers, but we recognize that it's a large measure because of the dedication and passion of these team members that we can act as a force for good. So on that note, let's dive into the next pillar of our ESG strategy, investing in our people. As Antonio mentioned, we've intensified our focus on fostering a vibrant culture that creates a superior team member experience and a highly engaged workforce. We're proud that our efforts have resulted in the highest team member engagement score on record at 84%, and we were ecstatic to have received external validation of this -- of the experience that we're creating for our teams when we ranked #19 on Fortune's Best Companies to Work For list in 2022. I know there are a lot of stats on this slide, but I want to call out just a few in particular. Voluntary retention is at 93%, which is well above the industry average, cited around 86%. And our workforce planning team is ensuring that we have the strategic skills for our business to compete, looking at both internal skilling opportunities and recruitment processes, focused on the skills that they've identified as critical to accelerating our pivot to become the edge-to-cloud company. Going back to the theme of accountability that I mentioned around climate, our workforce representation is also tied to executive compensation, and we also incorporate less traditional metrics like employee sense of culture, belonging and equity. So that brings me to the critical topic of diversity, equity and inclusion. In 2021, we realigned our DEI strategy around 3 key pillars that you see here. First, we recognized that a huge barrier to equity in the workplace is an entry, it's advancement. And we're focused on ensuring that our team members have the pathways to opportunities to advance their careers here at HPE. First -- for example, in order to further our diversity of our executive pipeline, we've aligned our talent succession planning to the Executive Committee Sponsorship program. And that's a program in which a diverse team member from each organization is selected to receive access, visibility and sponsorship from their EC leader. To that end, we also set new stretch targets in the U.S. to double our black and executive headcount by 2027 from 2020 levels, and for our executive population to be 1/3 female by 2027. I'm personally really excited to see these long-term goals that are focused on diversity at the highest levels, particularly in an industry that we know has a long way to go when it comes to representation. Next up is equity. We lead data-driven reviews to improve workforce representation, drive accountability and implement targeted interventions. In 2021, we achieved or exceeded all of our workforce representation targets. Representation of women in executive roles increased by 2 percentage points year-over-year, and representation of women and U.S. ethnically diverse team members increased by at least 1 percentage point each. Nodding to the old adders that you can't manage what you don't measure, we also go above and beyond when it comes to DEI transparency. We not only report workforce composition, which is a standard practice, we actually report attrition, hiring and promotion rates of diverse team members to ensure we're going beyond just representation. Last up on the slide is inclusion. We enable a workplace where team members feel respected and valued. We're activating our workforce to be champions for inclusion and allyship. 70% of our workforce globally has already voluntarily completed our behaviors-based training, Inclusion For All. And our Voice of the Workforce scores for 2021 revealed that 95% of team members feel they are treated equitably and with respect regardless of gender, ethnicity or other characteristics. On that note, I'd like to move on to the third and final pillar of our strategy, operating with integrity. Our culture is founded in ethics and integrity, and our corporate [ leadership ] was built into the founding principles of HPE back in the days of Bill and Dave. Beyond our walls, our long-held focus on human rights extends across our value chain. I'm delighted to share that for the fourth year in a row, HP has been named one of the world's most ethical companies by the Ethisphere Institute. And last year, HPE received the Thomson Reuters Foundation's Stop Slavery Enterprise Award for our leadership in limiting the risk of slavery in our supply chain and our operations. More impressive still, HPE is the only 2-time winner of that award. Human rights is a priority for HPE in the development, deployment and use of artificial intelligence, and we developed a set of AI ethical principles to guide the company in mitigating risks and the adverse impacts of technology. We operationalize those principles across both our own product development and the internal use of third-party AI software that supports our business operations. Our AI ethics principles are overseen by our executive level AI Ethics Advisory Board, and we rolled out an AI Ethics Training to our customers and all our employees earlier this year to improve awareness and accountability. Now alongside product development, we also recognize we have a responsibility to ensure that our products aren't used in a manner that is inconsistent with our values and culture. So last year, we strengthened and formalized our processes for identifying and assessing those risks across our value chain, and we look at areas like sales, acquisitions, products and partnerships, as well as implementing enhanced human rights screenings of sales in high-risk geographies. This year, we also launched 3 targets related to ethical sourcing in our supply chain. By 2030, all of the suppliers engaged in our supply chain responsibility program will commit to the Employer Pays Principle. And for those of you unfamiliar with that concept, it's a key responsible recruitment practice to avoid forced labor. And we're pleased to say that as of now, we currently have 100% compliance with no outstanding payments to workers. Secondly, major suppliers comprising 95% of supply chain spend will complete training on human rights by 2030, and 100% of supplier Tier 1 and Tier 2 sites will have effective grievance processes in place by 2030. Let's move on to my next slide. So I hope those highlights that I shared from the past year have shone light on a few ways that HP continues to build upon our long legacy of sustainability leadership. But you don't need to take my word for it. HPE is a leader in many of the most credible investor and customer-facing ESG ratings. In particular, I want to highlight MSCI ESG, which was just released last month and upgraded HPE from a AA to a AAA rating, which puts us in the top 4% of our industry. Our ESG performance, which informs these ratings is shared annually in our Living Progress report, which we released in June, and that's available on our website at hpe.com/living progress. So to wrap up the presentation portion of today's call, I want to reinforce how critical ESG is to the success of our company. Unless we move the needle on the 3 areas I touched on today: environmental sustainability; human capital; and strong governance, we can't succeed as a company, and we can't meet the needs of our stakeholders, including our customers, our team members and our shareholders. So I'll leave you with that. And Tim, I think we're ready to take Q&A.

Thank you, Antonio and Monica. That was an excellent rundown of all of these you guys are doing. Really good information in there. I think I'll start it off. Monica, in your presentation, feel free for Antonio to jump in here too, some really good data in there. I noticed some -- you guys are already generating some incremental revenue through sustainability solutions. How are sustainability considerations influencing your customers' procurement decisions for both services and equipment in your view?

Yes. Maybe I can start. At the HPE team, we offer numerous solutions, including, obviously, our go-forward platform that we are spending an enormous amount of time to continue to build and differentiate, which is our edge-to-cloud platform called HP GreenLake. And as Monica said, in an example with a chemical company, when they get on the platform, not only they get in a modern architecture, which is obviously a cloud architecture, a service-oriented experience that you can pay as you go, but at the same time, you actually accelerate your sustainability goals. Because the fact that you only pay for what you consume reduces the carbon footprint, and that solution gets leveraged by other clients along the way. So it is, as we said at the beginning, right, the strategy and our ESG agenda are extremely connected, but the way we are considering these value propositions is to deliver solutions with sustainability in mind so the customers can accelerate those objectives in ways they cannot do themselves. Maybe, Monica, you want to add a few thoughts on that and maybe other statistics.

Yes, our customers are increasing their mandates around sustainable and ethical IT. So we're seeing sustainability criteria weighed as much as 25% of scores in some bids. And our own research shows that vendors are looking -- or that customers are looking to their vendors to help them reduce their climate impacts, whether that's through improved efficiency, as Antonio spoke about, measurement and automation or just the minimization of energy use and materials. And so I mentioned in my presentation that we have a very unique practice in that we work one-on-one with customers to help them improve the efficiency and sustainability of their IT estates. And so as I mentioned, those direct engagements with customers generated $891 million of new net revenue for HPE last year. And we're only seeing that continue to grow.

Can I ask you a question on your goals and how they relate to remuneration. So HPE has tied a portion of Executive Committee, variable pay and management of carbon emissions across its value chain. How did you land on that incentive structure? And how do you ensure it permeates all levels of employees who will ultimately play a role in delivering against these objectives? And finally, what mechanisms are in place to create alignment and accountability around these ESG goals?

Yes. Well, we believe accountability is a key component of how we accelerate this journey to a better world, honestly. And obviously, the way we do that is by achieving these net zero commitments. But Jessica, the way our compensation work is that there is a 20% of our pay, obviously, from me down to the executive level, that's based on individual goals, which now includes ESG metrics on human capital, diversity and climate. And this year, we added climate performance to that MBO modifier. So what that means is that you have to achieve this combination of metrics in that MBO in order to compensate for that 20% up and down. And so in fiscal year '22, we launched a mandatory climate learning program for all the vice presidents and up, and Monica spoke about that, in order to start building the accountability for our climate strategy. And then it's also available now to any team members across the entire business. So we need to start with an education, put some tangible metrics that we can measure and then improve from there. And I have to say, what are really remarkable to me is that we, as a culture, are embracing it. We have 60,000 team members that are very passionate about what we do, customer-driven culture and ultimately very much connected to the communities. But in the end, we have to make it accountable for the people to deliver against those bold commitments. And this is why this managed-by-business-objective metric is a good way to flex that, and we will keep adding as we go along the way.

Okay. Maybe I could jump in here. I'd like to talk a little about another key environmental issue, which is e-waste. Obviously, in the IT world, there is -- an additional software and services, there's some equipment out there. So how is HPE going about minimizing e-waste?

So Monica, do you want to take that?

Sure. So we offer multiple solutions across our global markets to help contribute to a circular economy. So let me just give you 3 quick examples. HPE Renew is a comprehensive portfolio of products that have undergone complete remanufacturing, and customers purchasing through that program receive a minimum 15% discount along with the HP warranty on all the remanufactured products. Another example is HPE Asset Upcycling Services, which I mentioned, we provide customers with the ability to create value from unnecessary or outdated IT equipment by returning those for processing to our HPE technology renewal centers. And those centers, over the last 3 years, have processed more than 2.5 million PCs, 2.2 million servers and compute assets and close to 1 million storage devices, which will return to active use. And then the third example I want to give is HPE Certified Pre-Owned products. So similarly, it's another example of how we can extend the life of legacy systems and support business continuity, particularly in this time of supply chain shortages. So by purchasing preowned equipment, our customers benefit, both from reduced IT costs, as well as the avoided environmental impacts associated with the manufacturing of products.

Okay. Great. Maybe Antonio, 1 or 2 for you here. We do hear a lot about the war for kind of tech and skilled talent. It looks like you guys have had some real good success boosting employee engagement. What human capital programs have you seen actually move the needle on some of the key issues like diversity, retention, employee satisfaction? And what's the priority right now with regard to human capital?

Yes. I mean, Tim, obviously, today, we are living in a world with a lot of disruption. We went through the pandemic. We see geopolitical tensions, we have talked about the Great Resignation and the like. But to me, the 2 biggest risks we are dealing today, obviously, one is the supply chain, the other one is talent, talent retention and talent acquisition. And so when I think about how we're going to compete and win, it's going to come down to our best innovation and best people. And that's why we want people to be engaged. When I joined HP in 1995, 27 years ago, believe it or not, almost 3 decades, I joined in the company as a call center agent supporting customers on the phone. I would never imagine that 23 years later in that journey, I would become the CEO of a remarkable companies. And that's why you need people to stay engaged in their careers. And I will tell you right now, when we talk to people about what is the biggest driver for them to even think about changing jobs or changing companies, it really comes down to the career mobility more than compensation, although obviously, compensation is very important. And that's why we are really focused on that development internally. And this past year alone, 20% of the internal move, right, came through these programs because it's important that they understand, they can learn and progress. Now we have 5 formal career-focused conversations in a year. That's something that I'm very passionate about it. So it's not about how you're doing against your goals, which you and your manager established, but how are you doing against your career progression. And versus in the past, maybe just happened once a year. And so now team members can actually plan their next career with personalized development recommendations. We have established a career hub, which is a new source for our employees to look at what they need to do for mentoring, coaching and development. And also, of course, we are using our own technologies like AI and ML to continue to serve and run to the platform and share those best practices. So something that we need to continue to focus on, a lot of good progress, but that has resulted in a better employee engagement score. When I became CEO of the employee engagement score, what we call EEI, it was in the low 60s, and now it's in the higher 80s. That's important because that's a source to retain and acquire talent because, in the end, it's all about the culture.

Okay. Great. Maybe to further that a little bit more, just talking about kind of skill sets and skill shortages out there, particularly in areas like cyber, you guys -- does HPE have any programs that you're implementing to kind of close that skill gap, if you will?