HP Inc. (HPQ) Earnings Call Transcript & Summary

Good afternoon, and welcome to the HP Inc. Annual Meeting of Stockholders. I would now like to turn the conference over to Chip Bergh, Chairman of HP Board. Please go ahead, sir.

Thank you very much, and good afternoon, everyone. We're glad you could join us for HP Inc.'s 2021 Annual Meeting of Stockholders. The meeting is now called to order. I'm Chip Bergh, Chairman of the Board of HP. I'm joined here by Enrique Lores, HP's CEO, President and Director; and Harvey Anderson, HP's Chief Legal Officer and Corporate Secretary. The past year has truly been unprecedented in a number of ways. We, as a Board, are very pleased by the resilience, rigor and agility, demonstrated by HP to meet the needs of all of our key stakeholders, including our people, our customers, our partners and, of course, our stockholders. But our work here is far from done. And frankly, we see significant opportunities ahead to create stockholder value. Some of these opportunities are directly tied to the accelerated trends we see emerging from the pandemic, while others tie into broader megatrends we have discussed as part of our overall strategy to create stockholder value by advancing our leadership, disrupting industries and aggressively transforming the way HP works. Today's virtual meeting is a live audio cast. We believe in engaging with our stockholders and maximizing their ability to meaningfully engage with us. Virtual meetings are one of the many ways we engage with our stockholders. Today's session enables our stockholders to participate in the meeting, regardless of their location around the world. Not only can you listen to the meeting, you can also submit questions and vote your shares online before the polls close. Our director nominees, HP executive officers and representatives from our registered public accounting firm, Ernst & Young, are attending today's meeting through the webcast. They will be able to assist with questions during the Q&A portion of the meeting. We have received several pre-submitted questions, and we welcome your additional questions. Thank you again for joining us. And now let me turn the meeting over to Harvey.

Thank you, Chip. We're conducting today's meeting in accordance with HP's bylaws and meeting rules. To ensure that the business of the meeting proceeds in an orderly fashion, we ask that all participants, please observe the meeting rules. These rules are available on the meeting website. We've allocated time in the agenda later in the meeting for Q&A. [Operator Instructions] Any unanswered questions will be answered after the meeting with responses available on our Investor Relations website accessible via investor.hp.com. Some of our comments and responses to your questions during today's meeting may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties. The risks, uncertainties and assumptions that could affect these forward-looking statements include risks that are described or updated in HP's SEC reports, including our annual report on Form 10-K for the 2020 fiscal year. I'd also like to point out that the information presented at this meeting may include references to amounts that are expressed on a non-GAAP basis. A reconciliation of these non-GAAP amounts to GAAP and other information related to these non-GAAP measures is available on our Investor Relations website, accessible again via investor.hp.com. HP's agents have certified that a notice of the meeting was provided starting on February 22, 2021. To all stockholders of record as of the record date for the meeting. I have received a copy of that certification. I, therefore, declare that legal notice of the meeting has been duly given. Janice Castillo from Broadridge Financial Solutions has been appointed to serve as our inspector of election for this meeting. She is participating in today's meeting. As required by law, Janice has taken and signed a note as an inspector of election. Janice has informed me that a majority of the outstanding shares held of record as of the close of business on February 16, 2021, the record date for this meeting are represented at this meeting. A quorum is present and we may proceed with the business of the meeting. Please remember that you may vote your shares online at any time during this meeting before the closing of the polls. There are 4 items of business on today's agenda. In accordance with HP's bylaws, these are the only proposals to be voted upon at this meeting. On behalf of the Board of Directors I move these items, including the stockholder proposal, if properly presented and open the polls for voting on these items. You must submit your electronic ballot in order for your votes to be counted. The inspector of election will not accept the votes submitted after the closing of the polls. The polls will remain open until I announce their closure later in the meeting. The first item of business is a vote on a slate of 11 nominees to the Board of Directors. The 11 people who have been nominated to serve as the Board of Directors and who will be voted upon today are? Aida Alvarez, Shumeet Banerji, Robert Bennett, Charles Bergh, Stacy Brown-Philpot Stephanie Burns, Mary Anne Citrino, Richard Clemmer, Enrique Lores, Judith Miscik and Subra Suresh. Their biographies and detailed information about their experience are included in the proxy statement if you would like to review. The second item of business is the ratification of the appointment of Ernst & Young LLP as HP's independent registered public accounting firm for fiscal 2021. The third item is an advisory vote on HP's named Executive Officer compensation. A description of this item of business is contained in your proxy statement. The fourth item is a stockholder proposal regarding action by written consent. John Chevedden, the proponent of the proposal, will now briefly present the proposal. Mr. Chevedden, you will have 5 minutes to present your proposal.

Ben, can you hear me okay?

Yes, we can hear you.

Just as a point in order, I'm unable to access this meeting on the computer. I've been trying for the past half hour, and it just circles back around in the circle. So that's very discouraging. The company the size of Hewlett Packard, and last year I must have attended 50 meetings, and none of them were so difficult to access by computer as this meeting today. So that's something that needs to be taken -- and perhaps this meeting needs to be reconvened to be a proper meeting. So I'll go on with proposal 4, Shareholder's Right to Act by Written Consent. Shareholders request that our Board of Directors take such steps as may be necessary to remit written consent by the shareholders entitled to cast the minimum number of votes that would be necessary to authorize an action at a meeting in which all shareholders entitled to vote, thereon, or present and voting. We gave 51% support to this proposal topic in 2018, plus we gave 49% support to this proposal topic in 2020. The 2020 vote was in effect at 51% vote because management put its hand on the scale in regard to the 2020 proposal. Management spent shareholder money to an extra opposition statement against the 2020 proposal. Otherwise, it would have been a 51% vote. Plus management also made it less difficult for shareholders to call a special shareholder meeting in an attempt to pacify shareholders. And still, it was -- the vote was 49% in favor. And this was before the show of the right to call a special in-person shareholder meeting was eliminated by the 2020 pandemic. The failure of management to adopt this consistently supported proposal raises the question of Mr. Ben Jerry who chairs the Governance committee, deserves a vote for reelection. The Bank of New York Mellon said that it adopted written consent in 2019 after 45% support for a written consent shareholder proposal. This was clearly less than our 51% vote. And this Bank of New York Mellon action was the year before the pandemic made in-person shareholder meetings a dinosaur. Shareholders need to be able to accomplish more outside of a shareholder meeting due the on slot of tightly controlled online shareholder meetings. Within their universal use of online annual shareholder meetings, which can last only 10 minutes, shareholders are severely restricted, making their views known because all challenging questions and comments can be screened out. For instance, Goodyear management hit the mute button right in the middle of a formal shareholder presentation at its 2020 shareholder meeting. Goodyear management simply did not want shareholders to hear constructive criticism. Plus AT&T management would not allow any sponsors of shareholder proposals to speak at the 2020 AT&T online annual meeting during the pandemic. Online meetings also give management the blank check to make fall statements. For instance, management at SCORES of 2020 online annual meetings, falsely stated that there were no more shareholder questions. Online shareholders were powerless to point out that their questions were not answered. Now more than ever, shareholders need to have the option to take action outside of a shareholder meeting since tightly controlled online shareholder meetings are a shareholder engagement wasteland. This is more important since shareholders gave a 13% rejections vote to management pay and a 13% rejections vote to most of our directors in 2020. This compares to a normal 5% rejection vote. Please vote, yes, Shareholders Right to Act by Written Consent Proposal 4.

\ Thank you, Mr. Chevedden. As described in our proxy statement, beginning on Page 74, the Board recommends a vote against this proposal. In just a moment, HP's CEO, Enrique Lores, will share a brief business update. Before we hear from Enrique, I want to remind you that the polls for votes are open. If you previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed and no further action is needed. If you are a record holder and wish to change your vote, did not send in a proxy and wish to cast your vote now or have not already cast your vote using our electronic voting system, you may cast your vote by electronic ballot now or at any time until the polls close by clicking the voting button on the web portal. And now over to you, Enrique.

Thanks, Harvey. And to all of our stockholders, I want to start with a big thank you for the confidence you have placed in HP with your investments. I would like to use my time with you today to cover 3 topics. I will first provide a brief recap of our 2020 fiscal year. I will then discuss our strategy to drive long-term sustainable growth. And I will conclude by saying a few words about the strong values that will guide us forward. 2020 was an unprecedented year in so many ways. The pandemic has created hardships around the world. And we have seen countless reminder of major global challenges facing society or systemic inequality to climate change. At the same time, 2020 was a year where technological change accelerated at great speed. And this will have a lasting impact on the way people live and the way companies operate going forward. Throughout all of this, I am proud of the way HP has responded and performed. In the face of the pandemic, we have mobilized our people, technology and resources to help those in need from getting laptops and printed materials in the hands of students displaced from classrooms, to using our 3D printing technology, to produce more than 5 million parts for hospital facing shortages. We are showing the true character of our company. At the same time, we also delivered strong financial results. In fiscal 2020, we grew non-GAAP diluted earnings per share to $2.28 on revenue of $56.6 billion. We also delivered $3.9 billion in free cash flow and returned $4.1 billion to our stockholders, while continuing to invest in long-term growth opportunity. And importantly, we achieved the targets we set in the fall of 2019 despite the volatility of the past year. This is a testament to the strength of our portfolio, our execution and muscle and the continued progress we are making against our strategy. As we look ahead, we see many attractive opportunities to build on our success, and we are well positioned to capitalize on trends in our market. For example, the pandemic has fundamentally changed the concept of work. We see hybrid workplaces becoming the norm, and many offices will evolve into collaboration spaces, while a lot of traditional work is done remotely. This is going to drive the continued customerization of corporate IT and a new wave of innovation from more versatile and secure technology and peripherals to software that enhances the user experience and to new services and subscriptions that deliver the flexibility and convenience customers are looking for. And all this creates significant opportunities for us to advance our leadership in personal systems and print. In each of these businesses, we are focused on modernizing experiences and expanding into adjacency. And we are making excellent progress. For example, we are leveraging our leadership across home and office printing to create new cloud-enabled value propositions like HP plan. And we are accelerating our subscription business with Instant Ink now having enrolled more than 9 million users. In Personal Systems, the PC is now essential. And we are innovating across our portfolio to create technology, tailored for the changing ways people live, work, learn and play. And we are expanding into peripheral, highlighted by our recently announced acquisition of HyperX, as we advanced in our core business, we see equally exciting opportunities to disrupt new industry with our technology and IT. The convergence of our physical and digital world is paving the way to highly personalized solutions in areas such as 3D printing and industrial graphics, where we are market leader. Our strategy is focused on creating customized end-to-end solutions for strategic vertical markets, while also enabling more flexible and resilient supply chains through digital manufacturing. And over time, we will be able to create entirely new businesses by leveraging our microfluidics technology, which has many potential applications beyond printing. We recently created a new strategy, an incubation organization, to lead this work and drive new sources of long-term growth. To enable our progress in all these areas, we are driving an aggressive agenda to transform the way we operate. We are becoming a more digital company and continually optimizing our cost structure. We implemented new systems and a new operating model in 2020, while exceeding our cost savings target for the year. And we expect to deliver 75% of our 3-year gross run rate structural cost savings target by the end of fiscal 2021, with a full year still to go in our current plan. Our strategy to advance this gap and transform creates multiple engines of value creation and our strategy is working. We are off exceptional start to the 2021 fiscal year, delivering strong revenue, profit and EPS growth in Q1, and we are delivering strong stockholder returns. Over the last 3 quarters, we have now returned more than $4 billion or approximately 14% of our market cap. We remain committed to repurchasing at least $1 billion in shares per quarter in the coming quarters, unless higher return possibilities arise. We are performing at a very high level as a company, but it's not just the results we deliver, it's how we deliver them. Our success is no longer simply defined by the products we make. It's also defined by how we help solve the defining challenges of our time from confronting systemic racism to protecting our planet for future generations. That's why sustainable impact is a core part of our strategy. In recent months, HP has been named America's most responsible company by Newsweek for the second straight year. One of the 10 best managed company by The Wall Street Journal, and a member of the Barron's of 100 most sustainable company. The HP brand will continue to stand for a new era of opportunity where climate action, human rights and digital equity are constant areas of focus across our company and our broader ecosystem. As I look towards the future, I am optimistic about the many opportunities ahead. HP was a strong company prior to the pandemic, and I am confident that our best days remain ahead of us. By continuing to execute on our strategy and driving our high-performance, purpose-driven culture, we are well positioned to create value for all of our stakeholders. Once again, and on behalf of the entire HP Board and management team, thank you for your time today and for your investment in HP. I will turn the meeting back over to Harvey.

Thank you, Enrique. We will be closing the polls shortly. I wish to confirm, though, that our web portal for this meeting is and has been fully operational during the entirety of the meeting. Therefore, we ask that you complete your electronic ballot at this time. Please note that any votes submitted today by electronic ballot will be subject to final verification by the inspector of election. [Voting]

There being no further ballots. I declare that it is approximately 02:21 Pacific Time, P.M., and the polls are now closed for voting on the items of business.

Now we'll move to the Q&A portion of our agenda, which I will be moderating. Several questions have been submitted to the web portal. And due to time constraints, we will not be going through all of the questions. We'll cover as many as we can during our remaining time. The first question is for you, Enrique. How will you build on the current stock price rise and continue to build shareholder value?

Thanks, Harvey. As we said in our Q1 earnings call, we remain committed to returning significant capital to our shareholders, including an enhanced share repurchase plan. In Q1 alone, we repurchased almost 5% of our outstanding shares during the quarter. In the near term, we are committed to quarterly share repurchases at elevating levels of $1 billion at a minimum in the coming quarters, unless higher return opportunities arise. We believe this strategy is prudent and responsible and in the best interest of HP shareholders and all the stakeholders.

For our next question, what is HP's M&A strategy?

We will remain thoughtful and disciplined and ensure that all opportunities for uses of cash, including M&A, are compelling and create value for our shareholders. HP continues to evaluate both organic and inorganic investments for value creation through a disciplined returns-based framework. Our M&A strategy includes 3 key pillars: operational; strategic; and financial fit. Any M&A will need to meet these 3 criteria for us to consider executing.

Thank you, Enrique. Chip, we'll go to you for our next question, which concerns the Board of Directors. Could you tell us about the process for selecting directors for HP?

Sure. Happy to do that. Each year, the Board performs a full Board and committee performance assessment to ensure the ongoing effectiveness of the Board and the individual serving as directors. We review relevant skills and qualifications of our Board to make sure we continue to have the right fit for HP as it evolves. Our proactive refreshment process is driven by an in-depth skills assessment that helps us identify the characteristics we need in our directors in order to continue to have successful oversight of the business and strategy over the next 3 to 5 years. We also seek to maintain a Board with diversity of perspectives. And perhaps the best way to bring this to life is to talk about our most recent Board appointment. The most recent appointment, we wanted someone with expertise in geopolitics and we named Jami Miscik to the Board. Jami held the most senior analytical post at the Central Intelligence Agency, where she worked for over 20 years. She's now the CEO of Kissinger Associates, a strategic international consulting firm. She brings a vast understanding of geopolitical and macroeconomic landscapes and deep expertise in international affairs, intelligence and risk assessment.

Thank you, Chip. Our next question is for both of you. Could you tell us more about how management and the Board think about issues of diversity, equity and inclusion? And perhaps Enrique, we can start with you.

Sure. I can start. From a management perspective, I believe HP's continued success and innovation depends on an inclusive approach that celebrates diversity and aims for equity at all levels. Our commitment to corporate citizenship has been part of our values since our founding and was part of our first corporate objective in 1957. Diversity, equity and inclusion are key parts of leadership discussions and standard on leadership quarterly business reviews. Our executive leadership team members are evaluated, including as part of our management by objective program on their actions to support diversity, equity and inclusion. And in 2020, we took several actions to deepen our commitment to social justice and racial equality, including announcing a new goal to double the number of Black and African-American executives by 2025, and launching the HP Racial Equality and Social Justice Task Force to do our part to end systemic racism.

And from a Board point of view, the Board continues to be amongst the most diverse of any U.S. technology company. Five of our directors are female, and 45% of board is racially or ethnically diverse. We place a great value on diversity of background, skills and viewpoints, gender and ethnicity and the recruitment and nomination of new directors. Our Board, including through the HR and compensation committee overseas HP's key human capital management strategies and programs. The HR and compensation committee provides guidance and direction to our talent recruitment and retention strategies, with a focus on ensuring our leadership represents the diversity of our workforce and customers worldwide.

Thank you, both. Next, we have a question about our plans for 3D. Enrique, where is the direction of 3D printing going? And are you able to scale up this part of the business sooner rather than later?

Thank you, Harvey. We are focused on leveraging our differentiated 3D hardware and software capabilities to create high-value, high-growth businesses, evolving our current 3D transactional business model. This includes developing personalized products and customer experience through disruptive end-to-end models in specific verticals that are right for personalization adoption at scale, expanding value creation and value capture with scalable and repeatable, high potential B2B opportunities as well as continuing to build HP's differentiated capability. We have begun with our molded fiber tool B2B play. Our 3D commercial business remains very important to our strategy with a focus on our ability to capture more of the value that we create.

Thank you, Enrique, and thank you both again for your responses. We're going to conclude our Q&A session at this time. I wish to thank all of the people that participated today, including the nearly 120 shareholders and guests that joined this shareholder meeting. For questions that were not answered during today's meeting, please check our Investor Relations website at investor.hp.com, where we will be posting copies of the questions we received along with our responses. If the polls are closed, all electronic ballots and proxies are now in the custody of the inspector of election. I will now announce the preliminary results of the vote. The following results are based on the preliminary tally provided by our inspector of election. All votes are subject to final count certified by the inspector. Regarding Proposal 1, based on the preliminary vote results, I declare that all 11 director nominees have been elected to serve for the next year to hold office until their successors are duly elected and qualified. Regarding Proposal 2, based on the preliminary vote results, I declare that the appointment of Ernst & Young as HP's independent registered public accounting firm for fiscal 2021 has been ratified. Regarding Proposal 3, based on the preliminary vote results, I declare that the advisory vote to approve the company's named Executive Officer compensation has passed. Regarding Proposal 4, based on the preliminary vote results, I declare that the stockholder proposal regarding written consent has not been approved. We will report the final vote count for these proposals on a Form 8-K within 4 business days of this annual meeting.

Thank you, Harvey. It is now 2:30 P.M. Pacific Time, and I declare that the business of today's meeting is concluded. Thank you all very much for joining us this afternoon. We appreciate your interest and your continued confidence in HP.

The meeting has now concluded. Thank you for attending today's presentation. You may now disconnect.