HP Inc. (HPQ) Earnings Call Transcript & Summary

Good morning, good afternoon, and welcome to our inaugural Sustainable Impact Report Webcast. I'm Orit Keinan-Nahon, HP's Global Head of Investor Relations. It is my great pleasure to introduce you today's presentation. This is our 22nd year publishing a sustainable impact report and we are pleased to host this webcast associated with the report. We're excited to share with you the progress made towards becoming a more sustainable and just company. Before we go to the agenda, please turn your attention to this slide for some important announcements. 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. These statements are subject to certain risks, uncertainties and other factors that may cause actual results to differ. HP assumes no obligation and does not intend to update any such forward-looking statements. You can review this slide in more detail on our Investor Relations web page at investor.hp.com. Today's agenda will begin with Enrique, who will cover how sustainability is embedded in and enables HP strategy and operations. He will be followed by James, who will provide detail on our ambitious goals and progress across the 3 interconnected focus areas of our sustainable impact strategy. Finally, we will conclude with a moderated Q&A. Our full 2022 sustainable impact report can be found in the Sustainable Impact section of hp.com. And today's presentation will be available on our Investor Relations web page at investor.hp.com. With that, I'll now turn today's call over to Enrique Lores.

Thanks, Orit, and thank you to everyone for joining today. Sustainable impact is a very important topic for us, and it's deeply embedded into the way we run the company. As Orit mentioned, we recently published our annual Sustainable Impact Report, it provides a detailed look at our progress. And today's webcast is designed to give you some additional insight. To start us off, it's important to anchor today's discussion in our long-term growth strategy. Because as you will hear, our sustainable impact agenda is closely linked with our business priorities. Last year, we announced our future-ready plan to drive HP's next phase of growth. The plan builds on the progress we have made over the past few years and will help accelerate our momentum. It's designed around the changed needs of our customers. And it will help us to win in our markets by creating a future-ready portfolio, building future-ready operations and developing future-ready people. We are executing a clear strategy to achieve our objectives in each of these areas. Our strategy is geared towards delivering strong financial performance. We see attractive growth opportunities across our business, and we are taking actions to capitalize. This starts with our portfolio. Especially, we are building a more growth-oriented portfolio by modernizing our core and expanding into variable adjacencies. And we are doing it in a way that increases customer lifetime value. To enable our growth, we are becoming a more digital company. We have built a new digital backbone to enable more customer value propositions. At the same time, we are becoming more agile and efficient. And we are investing to strengthen our talent and culture, which form the foundation on everything we do. Our sustainable impact work is driving progress in each of these areas. It's a catalyst for innovation that helps us win deals and expand in our growth areas. It's enabling us to rethink the way we design, manufacture and distribute our products to better serve our customers and the planet. And it helps us to attract and retain top talent. Let me give you a few examples of how this is translating into business results. Last year, more than 60% of our total revenue was linked to sustainable products in accordance with a Corporate Knights Sustainable Economic Taxonomy. In turn, this is driving continuous innovation across our portfolio. To give you an example, more than 95% of our home and office printers, laptops, notebook displays and workstations shipped to customers last year included recycled materials. And all of this work builds on HP's long history of leadership in sustainability. From our earliest days, our founders, Bill Hewlett and Dave Packard set out to create a high-performance, purpose-driven company. For decades, we have consistently achieved technological breakthroughs and created new innovations that have changed the way people live, work and play. And we have done it while setting new standards for corporate responsibility. All the way back in the 1950s, we were among the first companies to link the long-term success of our business to the well-being of the people and communities we serve. There was no such thing as ESG back then. Bill and Dave simply believed it was good for business. More than 20 years ago, we began publishing a yearly sustainability report. And in 2021, we set some of our industry's most comprehensive target for the next 10 years and beyond. Our long track record of leadership in these areas has made HP 1 of the world's most trusted brands. And while these are all steps in the right direction, we still have a lot more exciting work ahead. We are focused on 3 key areas to guide us forward. The first is climate action. We have a vast global supply chain that ships nearly 3 devices every second. We use plastic in many of our products, and a large amount of paper is used in our printers. We have a huge opportunity to leverage our scale in ways that reduce our carbon emissions, drive circularity and protect forests around the world. We are equally focused on human rights. Inside the company, we continually foster a culture of diversity, equity and inclusion. This extends to our Board of Directors, which is among the most diverse in the technology sector. And looking at our broader ecosystem, we have robust programs to empower and protect workers across our supply chain. We are also determined to advance digital equity, because while the digital economy holds promise for so many people, it also threatens to leave billions behind. That's why we are investing to accelerate equitable access to education, health care and economic opportunity in traditionally under sales communities. As we advance our efforts in these areas, we are holding ourselves accountable. As a company, we have always believed in setting measurable calls which we track and report through a rigorous process. This slide illustrates the granularity with which we manage these programs. And James is going to talk about our progress surely. The last point I want to make is around governance. As I mentioned at the start, sustainable impact is deeply embedded into the way we run the company. Achieving our goals requires everyone to play a role. This starts at the board level. It extends to our executive leadership team as every leader is accountable for achieving specific sustainable impact goals. And we further cascade this throughout the company, encouraging all employees to set their own goals to contribute to these efforts. This approach has served us well, and I am proud of the recognition our team has governed through their efforts. HP is consistently recognized as 1 of the most sustainable, ethical and just companies. [ Holders ] like this show that we are on the right track. At the same time, they motivate us to find new opportunities where we can have the greatest impact. And as we advance this work, we will strengthen our business for the future and create value for all our stakeholders. To talk about some of the ways we will do this, I'm going to turn the meeting over to our Chief Sustainability Officer, James McCall. James joined us in 2021 after nearly 25 years at P&G, and he and his team are doing great work to advance our priorities. James, over to you.

Thank you, Enrique, and thank you to everyone joining us today. I'm here to walk you through the 3 interconnected pillars of HP's sustainable impact strategy, along with our strong progress over the last year. As a reminder, our 3 pillars are climate action, human rights and digital equity. These critical areas intersect to create an agenda that is good for people and good for the planet while being good for our business. I think what's important is that the heart of these programs is people. Whether we're talking about HP's employees, workers across our supply chain or the communities we serve, the 8 billion people that call this planet home, it all comes back to people. This intersection is where we feel HP can truly go beyond. For example, finding unique ways we can combine our forestry work with our digital equity programs. We're addressing worker empowerment and human rights while improving the circularity of our products. Instead of talking about the concept of going beyond, let me share a quick video. [Presentation]

As Enrique stressed, sustainable impact is not separate from but it's core to our business strategy. With that, we'll dive deeper into each of our pillars, starting with climate action. When it comes to climate action, we're following the science and taking tangible actions to decarbonize our business. For us, that means focusing on 3 key areas: carbon emissions, circularity and forest. To make improvements, you must first understand the key sources of carbon emissions across your value chain. Our life cycle assessment data indicates that around 63% of our emissions are linked to our global supply chain. Similar to many of our peers, these emissions stem from the raw materials, the manufacturing and the logistics associated with our products. But our customer use base is just as important. 36% of our emissions stem from the way our customers interact with our products and our solutions, including the energy that our devices consume and what happens to those devices at the end of their life. To address our total footprint, we must focus both on how we design our products and how they're produced. To help do our part in the fight against climate change, HP has set a 1.5-degree Celsius science-based target that will enable us to reach net 0 by 2040. That's a full decade ahead of the Paris Agreement. However, we also recognize that the planet, our home needs urgent action now. That's why we're striving to cut our absolute emissions in half this decade by 2030. To do that, we're first leading by example, reducing our energy consumption in our own operations, second, reducing the environmental impact of our products through sustainable design; and third, moving towards a low-carbon supply chain. As a result of this, we've received a AAA score from CDP across climate, water and forest. To help put this into context, last year, over 15,000 companies responded to CDP. HP was 1 of only 13 companies globally to be recognized with a AAA for our progress. We've also been named a supplier engagement leader by CDP for our work across the supply chain 7 straight years. Why are these types of scores important? Stakeholders like you want disclosure and transparency to better understand which companies are making an impact while also helping address climate-related risks across their business. From a results standpoint, we've cut our own HP direct emissions, our scope 1 and 2 emissions by 61%. Partnering externally, we've helped suppliers avoid 1.7 million tons of CO2e emissions by focusing their attention on improving energy efficiency, using renewable energy, and setting their own science-based targets. Together, we have reduced our end-to-end emissions over 18% in the last 3 years since our 2019 baseline. However, your environmental footprint is much more than just greenhouse gas emissions. HP ships nearly 3 devices every second. If we look at our footprint, we used over 870,000 metric tons of raw materials in our products and packaging last year. That scale presents an opportunity, but it also presents a responsibility to influence how technology can be produced and consumed in a more sustainable way. One example is our HP Planet Partners program, which has effectively recycled over 1 billion HP ink and toner cartridges, preventing a significant amount of waste while recapturing the valuable raw materials that can be used in new cartridges and other devices. But circularity requires a multipronged approach. From increasing our use of recycled content to rethinking our packaging, we're doubling down on sustainable design to reach 75% circularity by 2030. That means 75% of our products and packaging by weight would come from recycled or renewable materials. We're well over halfway to our goal. In 2022, we reached 40% circularity and thinks in large part to our use of certified recycled paper and the growing use of recycled plastic. This focus on sustainable design doesn't end with materials. We're also reimagining new business models like print and compute as a service. Let's dig into that example. We saw a customer need and turned it into an opportunity with service-based solutions that offer customers access to the latest technology with a lower upfront investment and a smaller environmental impact. Many of our customers want to focus on their business, not on their technology. Being able to provide creative as-a-service offerings enables HP to meet these needs while also closing the loop at the end of life. What kind of outcomes have we seen? Less waste, lower emissions and more value recaptured from the materials. Just as important, we're building stronger customer relationships by listening to their needs and responding accordingly. The final area of our climate action strategy is forest. As 1 of the world's largest print companies, trees are absolutely essential to our business. They're also essential to the health of the planet. Through our partnerships with leading NGOs like the World Wildlife Fund, Conservation International and the Arbor Day Foundation, we're protecting, restoring and responsibly managing forest. To put this into context, HP is WWF's single largest corporate partner in the U.S. We've committed to conserve nearly 1 million acres of forest. That's an area of 5x the size of New York City. From a progress standpoint, our initial efforts to reduce deforestation started all the way back in 2016 by first ensuring that all HP-branded paper was responsibly sourced, but we didn't stop there. We extended that to all fiber-based packaging. And since 2021, we have only sourced sustainable fiber for all HP-branded paper and paper-based packaging that goes across our home, office printers, supplies, PCs and displays. Now we're counteracting deforestation for non-HP paper used in our products and services by 2030. We're already 32% of the way there. To make our vision a reality, we're taking action in 5 key areas: efficient paper consumption, responsible sourcing, protecting, managing and restoring forests, supporting science-based targets for forest conservation and positively influencing broader industry partners. From the local communities and NGOs supporting these forestry efforts to the workers in our supply chain, people are still at the heart of everything we do. That brings me to our second pillar, human rights. Every person is entitled to human rights regardless of where they work or live. Following the UN's guiding principles for human rights, HP stance on respecting human rights across our value chain is clear and uncompromising. We embrace our responsibility, and we partner with NGOs like The Mekong Club, Bluenumber and others to monitor emerging trends while further incorporating the rights holders voices into the conversation. At HP, we start by creating a culture of equality and empowerment for our own employees as we work to attract and retain the industry's top talent. We also extend that commitment to our supply chain by establishing and reinforcing fair, ethical and responsible labor conditions and by investing in initiatives that increase knowledge, skills and access to new opportunities for workers. As a result of these combined efforts, we are ranked among the top 5 information and technology companies on human rights by both the World Benchmarking Alliance and KnowTheChain. Diverse teams are more innovative teams. HP is at its best when we can attract the brightest minds from all backgrounds. We are working to ensure we're pulling innovative talent across all demographics, including representation of Asian-Americans, Hispanic, Latin Americans and Black African-American talent to more closely represent the communities we serve. While HP is among the top tech companies for women in leadership, we continuously seek to go beyond and have set 2 ambitious goals: first, achieve greater than 30% technical women and women in engineering by 2030; and second, to achieve a 50-50 gender equality and HP leadership by 2030. Currently, almost 24% of engineering and technical positions are held by women as are approximately 33% of our director level and above roles. We are making meaningful strides, but we also have more work to do. Diversity, equity and inclusion is a business imperative at HP. Our employees are inspired by it. Our customers call for it, and we know you, our stakeholders look to it. At HP, we also believe technology can be an equalizer, creating economic and social opportunities for people around the world. That is what underpins our third pillar of sustainable impact digital equity. Literally, more than 1/3 of the world's population lacks access to the Internet and far more lack the digital tools to unlock critical education, health care and economic opportunities. We are working to accelerate digital equity by partnering with leading NGOs and community organizations to provide access to the hardware, connectivity, digital literacy and quality content that these individuals need. This isn't just about doing good. It's about creating shared value for our communities and for our business. As we enable access to technology and build skills to use it, we're increasing the number of women and minority-owned businesses. We're also empowering the next generation of innovators. And importantly, we're expanding the next generation of digitally savvy employees and customers to help grow our business. HP has already enabled better learning outcomes for over 100 million people, achieving our education goal nearly 3 years early. We didn't want to stop there. As we look to the future, we are aiming to accelerate digital equity for 150 million people, prioritizing those most impacted by this digital divide, women and girls, people with disabilities and aging populations, historically disconnected and marginalized groups along with educators and health care practitioners. Over the last 2 years, we've already reached an additional 21 million people by collaborating with key strategic partners. For example, in partnership with NABU, we're working to address the global literacy crisis by creating children's books in their mother tongue language. This not only helps the children, but also helps the local writers and illustrators who are learning valuable digital skills using HP technology to create the books. When we started working together in 2019, NABU was reaching roughly 400,000 readers. Today, they're reaching more than 5 million. Digital equity isn't the only way we serve our communities. I would be remiss if I didn't take a moment to acknowledge the generosity of our employees, 2022 was a record-breaking year for volunteering and giving here at HP with over 0.25 million hours contributed. I'm incredibly proud of the ripple effect our employees are having across their local communities. If we stop and think about it, more than 80 years ago, Bill and Dave infused a sense of responsibility into our DNA. In today's complex world, that still pushes us to go beyond the status quo. We're driving tangible progress through our climate action, human rights and digital equity initiatives, and we're confident our sustainable impact strategy provides a growth opportunity for our business and is a significant asset to our stakeholders. Thank you for joining us today. And with that, I'll turn it back over to you, Orit.

Thank you, Enrique and James. That was an excellent summary of all the actions that we're taking as part of our sustainability impact strategy and how they benefit both the planet and our business.

I'd like now to transition to ask you a couple of questions that are top of mind of our investors community and our stakeholder community. So my first question goes to you, Enrique. Given the recent debate on the value of ESG initiatives to investor, why do you believe this is still a priority for HP?

Well, sustainability has been a key part of the HP's legacy for many years, but we see this as a key strategy for us to continue to create value. It is becoming a key differentiator for us, and there are 3 very practical aspects that I want to highlight. First of all, it is helping us to win business, both in the commercial space and in the consumer space. It is helping us to bring innovation to our product categories to our services. And it is also helping us to attract young talent. New employees want to work for companies that have a clear purpose. So because of these 3 values, we really see this a key part of our value creation story.

Great. Thank you, Enrique. It's clear that this is a priority for HP for several reasons. And this takes me actually to the next question for you. Are you seeing customer preference changing regarding sustainability as part of product or solutions value proposition? Do you see evidence of customers putting their money where their [ mouth is ] and their buying choices.

The answer is definitely yes. And we see this across all segments. For example, when we talk to government, there are many governments now, especially in Europe that is starting to happen also in the U.S. that have very clear sustainability goals in terms of the products that they want to buy, probably around -- in many cases, around circularity. We also see that for large enterprise customers. Most of the enterprise customers today have sustainability goals. And when they buy products, when they buy services, they want to make sure that their vendors, their suppliers are going to help them to make their goals. And we definitely see this with consumers. Consumers care about sustainability. They want to buy products from brands that support their goals. And clearly, this is impacting every consumer in the world and consumer research shows clearly this preference. So absolutely yes, and this is why this continues to be a key priority for us.

Great. Thank you, Enrique. Let me now turn to you, James. In comparison to peers, where our sustainability efforts more clearly are differentiated and how do they serve as a competitive advantage. And what's the future opportunity that you're most excited about?

I think 1 of the nice things is sustainability is very much a team sport, right? So this is an area where we all rise together, but there are a few areas where I think HP really stands out. One of those is our forest positive program. If you look at it, many of our print partners, many of our partners around the world in the printing space are working in forestry. But what makes HP unique is that we've committed that every page printed whether it's your children's homework, whether it's your grandmother's photos, whether it's the next sustainable prints that you're doing for a green building design, we want every page printed to an HP printer to be forest positive. And so we're partnering with World Wildlife Fund, Conservation International, the Arbor Day Foundation and others to ensure that that's happening as we protect forest. I think the other area, if I go beyond forestry to really think about where are we starting to embed it across the world, is Enrique already talked in his section about the fact that we have the most sustainable PC portfolio with over 600 of our products getting EPEAT Gold globally. But if I look beyond that, literally all of the products that we launched last year, over 95% of the printers, PCs, displays, the items that are going out every day to your office into your home are made with recycled content or have some level of recycled content in them. And so to me, that shows that this is not just a niche product. This is not something that we're just putting in our high-end models. We've really started to drive this as a culture change across our design teams, and it's starting to be embedded across our product portfolio.

Great. Thank you, James. We introduced this year our Sustainable Impact report, and we've also moved to Corporate Knights Taxonomy. Can you help us understand the significance of the Corporate Knights Sustainable Economy Taxonomy and why that taxonomy was chosen versus others?

Yes. I think in the sustainability space, 1 of the key challenges we face is stakeholders want ways that they can kind of compare progress, right? Who's really making a difference, who's having tangible actions. And so as we went out and we kind of benchmarked different tools across the industry, we really felt like the Corporate Knights Taxonomy for sustainable products was kind of very well used and also very well used within the IT space. So some of our peers like Apple, Google, Microsoft, even HP Enterprise are using the same taxonomy. And so as being able to kind of look at and understand public disclosures in this space, how many of your products, how many of your services are starting to link back to a sustainable taxonomy, Corporate Knights gave us that ability to share that and to be able to do that in a meaningful way. As Enrique shared, I'm proud that over 60% of our revenue is coming from these sustainable products and services. And I think that shows our long-term shift into that space. The other nice thing about Corporate Knights is they're not really linked to any 1 region. They do a nice job kind of looking across multiple regions, multiple standards to pull in best practices and key learnings as this evolves. And so going to Corporate Knights should give us a consistent way to report year-over-year.

Yes. Great. Thank you, James. Now moving back to you over Enrique. You mentioned that sustainable impact is embedded in HP culture at all levels. Can you provide some additional color on how management incentives are tied to the long-term sustainable impact goals? And also how does the HP Board of Directors oversee the progress of sustainability goals?

Sure. We -- as I shared in my prepared remarks, we don't manage sustainability as a separate initiative. It is fully integrated in how we manage every function and every business in the company. What this means is that every executive in the company has a sustainability goal related to the work that they do, and we measure progress as we measure progress of any other business metric. Even more important than that, each of my direct reports has this as part of NBOs, which means that is directly tied to their compensation every year. And this really helps us to manage this and to continue to make progress going forward. We also have a very clear process to manage that from the Board. And I think James want to share in more detail what is the process that we follow.

Yes. So as Enrique pointed out, within the Board, we have an NGSRC, which is our Nominating Governance and Social Responsibility Committee. I go and report out to the NGSRC and to Enrique on a quarterly basis, and then we report out to the full board on a yearly basis. And I'm excited because it's not just a report out, there's really deep engagement between ourselves and the Board. Over 2/3 of our Board have previous experience in the ESG space. And I'm excited that we have 1 of the most diverse boards in tech and have for several years. And so that kind of support that kind of deep background helps us in driving and setting our overall strategy across the company.

Great. Okay. Good. But I'd like to thank you both Enrique and James for showing your insight about the important -- this important topic. I would like to let the audience know that that we will conclude the webcast. We welcome any additional questions that you may have that we didn't get to today and request that you submit them through our Investor Relations web page at investor.hp.com. Enrique, any final words you would like to close with?

So first of all, thank you Orit for organizing this, and thank you to all of our investors for having joined us today. And really, we wanted to share both how important this is for the company but especially the impact this has in our business. As I have shared before, this is helping us to win business every day and at the same time, to build a better company and to build a better world. So thank you for your time today, and hope everybody really understood our plans going forward.

Thank you.

Thank you.