Walmart Inc. (WMT) Earnings Call Transcript & Summary

Welcome to the latest in Walmart series of webinars on our environmental, social and governance strategies. I'm Brendan Morrissey, Vice President of ESG at Walmart. Before we begin, a quick legal note. Following presentation contains certain forward-looking statements based on Walmart management's current assumptions and expectations, including statements regarding our ESG targets, goals, commitments and programs and other business plans, initiatives and objectives. These statements are typically accompanied by the words aim, hope, believe, estimate, plan, aspire or similar words. All such statements are intended to enjoy the protection of the safe harbor for forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended. For actual future results, including the achievement of our targets, goals or commitments could differ materially from our projected results as the result of changes in circumstances, assumptions not being realized or other risks, uncertainties and other factors. With that, we'll flip the slide and turn to today's discussion. Walmart's holding these discussions to eliminate aspects of our ESG strategy in which we receive questions from the investment community and from other stakeholders on our ESG strategies. Our goal is to allow you to hear directly from Walmart's leaders on these topics and to get more context for the strategies discussed in our ESG reporting. Our ESG priorities include 4 themes: opportunity, sustainability, community and ethics and integrity. The issues of focus you see here were identified because of their high relevance to our business and stakeholders as well as Walmart's ability to make a difference on these issues. Today, we have the opportunity to dive into 1 of these priority issues, the dignity of people in supply chains, which you see highlighted here on your screen. You'll hear from 2 of Walmart's leaders on the topic. Kristen Albertson, Vice President, Global Responsible Sourcing; Karrie Denniston, Senior Director, Sustainability for walmart.org. First part of today's session will consist of an overview of our key strategies on this topic. We use the remainder of the time to respond directly to questions, both from the audience slide today, but then also questions that were submitted in advance with registrations. And we'll just aim to wrap up right at the top of the hour. First up is a discussion of Walmart's approach to responsible sourcing. So I'll turn it over to Kristen.

Thank you, Brendan. I'm glad to be here this morning to talk about responsible sourcing and people in the supply community because this is an area where Walmart has already invested substantially. So first, let's talk about what we mean when we talk about the dignity of people in supply chains, and then I'll get a little bit more in detail about our responsible sourcing programming. So we really think about 3 components when we talk about dignity of people in supply chains. One, sourcing products responsibly, and that's sort of the foundation of our responsible sourcing program, which I'll get into. Two, create an economic opportunity for people in supply chains; and three, collaborating with others to address systemic risks to worker well-being. And so we see all 3 of these elements as key, not only to ensuring that Walmart's code of conduct and our standards for suppliers are met and understood and upheld, but also to maximizing our positive impact for the people who make our products and for our customers. So if we can go to the next slide, let's start by looking a little more closely at responsible sourcing. So at Walmart, we expect the products we purchase for resale or purchased for our own use to be made by suppliers who act ethically, pay people fairly, provide working environments that are safe and clean and respect the dignity of workers, and these are foundational in our standards for suppliers. So our responsible sourcing team works with our merchant and sourcing partners across the globe to put these principles into place in our business practices. So I'll highlight a few key elements, which you can see on the slide here. First, we have robust policies, including the two I mentioned, our code of conduct and our standards for suppliers. But we also have targeted specific policies around related issues such as conflict minerals and global forced labor prevention. We also provide responsible sourcing training programs, both internally to our business partners in merchant and sourcing organizations and also externally to our supplier community. We have compliance associates located in 14 countries around the world that support responsible sourcing and provide ongoing support and guidance to our merchant and sourcing partners around the world so they can align their practices to our program's expectations. And then monitoring for compliance, we monitor the supply chain for compliance with our standards, including through audits and investigations, and I'll talk more about those programs in just a moment. And lastly, I would say we offer tools so that people in the community, whether they are workers and facilities or internal referrals can reach out to us through our potential -- through our global ethics helpline to make us aware of potential noncompliance issues. So if we go to the next slide, I'll get a little bit more into the details of responsible sourcing. So you'll see here some of our statistics from our last financial year, we take a risk-based approach to auditing. And so in addition to conducting an annual risk assessment, we take a risk-based approach to our auditing as well. So we assign risk levels to regions and territories based on the World Bank Governance indicators and other factors that may arise from time to time. And facilities in our lower risk areas are subject to audits on a less frequent basis, while facilities that fall into medium and high-risk areas are subject to more frequent audits and this is true regardless of the outcomes of their performance on prior audits. So to give you a sense of the scope of the program, we assessed over 14,000 of these audit reports last financial year. Each of our audit reports is individually assessed by a Walmart associate against a set of criteria that is aligned with international national labor norms. Of these 14,000 reports from last year, over 90% received a green or yellow rating, meaning that they were at a very high level of compliance or had just relatively minor issues to work through. Where we have more serious audit findings or allegations such as allegations of a serious safety concern or an indicator of forced labor. We have teams dedicated to investigating and following up on these issues, whether they arise from our audits or from internal referrals or from reports to the helpline or some other outreach to Walmart. Each case is reviewed and follow-up may include worker interviews. It may include on-site investigation, and we look into hundreds of these every year. So the next steps as a result of these reviews depending on what we find, right? So we moderate risk -- moderate risk findings may result in consequences for suppliers, whether that be what we call a strike or whether it be an Orange rating for a facility. And when these accumulate, the supplier can face serious business consequences up to and including termination of business with Walmart altogether. And our merchant and sourcing teams partner with us on these outcomes and promote the program and our business decisions. So with that, I'm happy to turn over to Karrie to talk a little bit more about what we do beyond compliance because while compliance is a fundamental expectation, Walmart's aspirations are broader than just this. And so to have a strong and resilient supply chains, we need to work with others to address systemic risks. And so Karrie is going to talk more about that.

Great. Thank you, Kristen. Really appreciate that. As you mentioned, systemic risks such as forced labor, unsafe working conditions, gender inequity, these are all ones that no one business and really no one sector can solve alone. And we know that lasting in positive change is going to require both collaboration and focused action. So on these issues that we have identified and really prioritized, we start first and foremost with where we can lead through the business. And Kristen, you already shared some examples of that work. But from there, we look to identify where do we have opportunities for collaboration with suppliers, with nongovernmental organizations, with experts and other stakeholders so that we can better understand not only root causes, but also opportunities for further action. We've committed to working with others to address risks to dignity of workers in at least 10 supply chains by 2025. And you see some of the areas in which we've already focused this work on the slide. So that includes things like apparel in Bangladesh, produce in the North American corridor, tuna and shrimp in Thailand and electronics that are being sourced into our U.S. retail market. Now our work in these areas isn't limited to just these 5 and is much broader. So I encourage you to keep watching this space. As we continue to learn, we want to make sure that we are sharing what we have learned and updating more on this area. Now I've spoken about the approach that we use to address these systemic risks. And now I'd like to illustrate it with an example of our work in responsible recruitment. As we've talked about, responsible recruitment is a key issue in supply chains like produce and seafood. And in 2016, Walmart and the Walmart Foundation set an aspiration to help make responsible recruitment the standard business practice for supply chains, and we want to do that and see that change within a decade. Now responsible recruitment, what does that actually mean? It means that workers should not pay recruitment or similar fees in order to get a job, even if it's allowed by local law. Workers should be appropriately authorized to work, including meeting local law and legal requirements around legal age and other requirements. This really matters, because paying for a job can make workers vulnerable. Workers who pay for a job may find themselves in debt before they even start work on day 1. And debt bondage is one of the most common forms of forced labor. So we know it's a serious and systemic issue. How are we making a difference? Well, we start again where we can lead through our business. Our standards apply to our suppliers, and they've long prohibited forced labor and labor trafficking. And we expanded on this a few years ago by clarifying and emphasizing that this includes ensuring that workers have not paid fees to get a job and that they fully understand the terms of employment, the conditions before they ever need to start their employment. But again, Walmart can't do this alone. So that's why last year, we launched a supplier-focused initiative that was focused on responsible recruitment, where we're inviting suppliers in a few key categories like produce to adopt and report on practices that demonstrate leadership and leadership related to these kinds of issues. So things like responsible recruiting, worker engagement and connection and transparency. In addition to working with suppliers, we extend and complement this with philanthropic investment from the Walmart Foundation, because we know that business alone isn't going to be in a place to solve some of the gaps and challenges that really stand in the way for progress on the overall system. So for example, investments might focus on better understanding the prevalence of recruitment issues and debt bondage, risk factors that are associated so we can better target action, some investments help to scale and support tools that can help with transparency and data, strengthening public policy systems or helping scale demand for responsible recruiters. Just one example. Last year, the Walmart Foundation made an investment in the global fund to end modern slavery. This investment was targeted in helping to create safe migration corridors for migrants in Malaysia. Through giving tools and knowledge and awareness of what workers should expect, while simultaneously helping to accelerate the growth of an ethical recruitment agency. Now that's just one. Through the Walmart Foundation since 2016, we've invested over $40 million in these issues, and I would encourage and invite you to check out the ESG report so that you can see our brief on people in supply chains and learn a little bit more about this work. Kristen, I think we still can't hear you.

Can you hear me now?

Okay.

The third pillar of our work on people in supply chains is building economic opportunity for people working in supply chains, including the strategies that you see outlined on the screen here. Again, these often involve business efforts combined together with philanthropy. So for example, several of our businesses have sizable supplier development and producer sourcing programs that create opportunity for farmers and other small producers through the power of our purchase orders. We also provide training and share best practices, including through our Vriddhi and Smart Initiatives in India to help small producers access markets generally. And finally, the Walmart Foundation has dedicated -- has a dedicated grant portfolio that has awarded more than $67 million since 2017 to benefit over 730,000 smallholder farmers. Programs funded, help these small holders increase their yields, access markets, incorporate sustainable agricultural practices and strengthen farmer producer organizations. So Brendan, I think we'll hand it back to you.

Great. Thank you so much for that overview, and we'll just turn to the next slide so that I can remind everybody where they can find more information about this. You can find our ESG reporting on our corporate website, which is listed here corporate.walmart.com/esgreport. And if you want to read more about our policies, which Kristen had mentioned earlier in the presentation, including our code of conduct, our standards for suppliers and other related issues, you can go to the site that's listed there. And so with that, we'll turn to the Q&A. And we were fortunate enough to get a few questions in advance from registrants. And we've seen a couple more pop up while we've been doing the presentation. So we'll start with the pre-prepared ones and then move on to a couple of the other ones that have come in. And just for everybody's awareness, we are grouping questions as well. So we have received a few that we're addressing very similar topics, and we can address it once. And so we'll do that as well.

So the first question is where are you collaborating with other brands for retailers today? And do you see other such opportunities for collaboration in the future? Kristen, I'll pass this one over to you.

Sure. So I just returned from Southeast Asia, where I was visiting suppliers in Cambodia and Vietnam. And one of the challenges that I think comes out consistently in these discussions is the challenge of building systems to increase worker safety and dignity at large. And so the need for collective action on these topics is exactly why we collaborate with other stakeholders in order to advance issues. So for instance, in Bangladesh, Walmart partners with Nirapon, an organization focused on monitoring ongoing safety compliance and maintaining the progress already made on safety in the industry to monitor safety in our suppliers' local apparel facilities. Similarly, Walmart is a founding member of LABS or the Life and Building Safety Initiative, and we probably support the great work LABS is doing to improve worker safety and apparel and footwear industries in Vietnam, India and most recently launched in Cambodia as well. So the progress of these initiatives, I think, shows what can happen when private companies and public and civil society join forces. We expect the products that we purchase and sell are made in the right way by suppliers who act ethically and create safe and fair working environments, as I already mentioned. LABS helps our suppliers meet these expectations through prevention and mediation of issues around factory safety.

Great. Sounds like a lot of good opportunities out there and some good successes as well in the past that have worked out well, both for our business as well as for the people who are impacted directly. So some potential great opportunities out there. The second question is one that we got live here, and Kristen, I'm going to just pitch it over to you because it relates directly to our responsible sourcing policies and standards. But the question was, does Walmart prohibits the charging of recruitment fees in connection with worker in our supply chains?

Yes, we do. Walmart's principles on responsible recruiting do prohibit the charging of fees and requires repayment of fees where we've discovered the same. And this is true regardless of what the local law may say about there.

Yes. Thanks for clarifying that. And you can see that, for Velika, who asked the question. You can see that in our Standards for Suppliers and otherwise in our ESG reporting as well. So on to the next question that we've received here, is Walmart testing any new technologies or strategies to get better supply chain visibility or better assure itself of good outcomes in supply chains? And so Kristen, I think I'll start with you and then Karrie, I know that we've been doing some investment from the walmart.org site as well. So perhaps, Kristen, you can start and then Karrie, you can pitch in at the end.

Sure. So this is a great question and definitely one that is top of mind. And for those of you who study innovation, you'll know that it's one thing to have a working technology and it's quite another thing entirely to get adoption at scale. So one area we're investing in for technology and innovation is relating to a core need and responsible sourcing for traceability of our supply chain. And as many here know, global supply chains can be complex and improve traceability supports our responsible sourcing program. So we're exploring technologies now that allow us to have improved visibility along our supply chain. One example is genetic testing of items that allows for testing and verification of sourcing records, both from a risk-based perspective or a proactive response as well. This will be particularly useful at the commodity level where challenges are concentrated and traceability is more difficult. So we're exploring a number of different technologies in this regard. And Karrie, I know we're also making some investment.

We are, we are. And Kristen, I think you talked about this, but one of the things that we're seeing through the investments we're making philanthropically is this question of scale and how do we get to scale? It's really key. So through philanthropic capital, we're working to test that approach. Not only what works, but can we actually get to adoption for some of these emerging technologies and get them to a place where they can become more normative. So for example, in seafood, we have a series of Walmart Foundation investments that are supporting its associated group of organizations to help advance transparency tools for vessels at sea, right? This is an incredibly hard area to be able to get information. There's a lot of complications with that and technology can play a really critical role. So an investment with the nature conservancy is helping to connect the dots between satellite monitoring, so eyes in the sky to electronic monitoring on vessels that are working to surface issues of overfishing and other sustainability concerns. At the same time, we're investing with Global Fishing Watch and the University of California at Santa Barbara, they're trying to accelerate that scale for electronic monitoring on the vessels for long-line tuna vessels in the Western Central Pacific Ocean. But the key to all of that, you have the technology and have the tools on the boat and in the sky, it's not just about having it, it's about making it practical and about making it actionable. So another investment, Walmart Foundation has made with Global Fishing Watch is actually trying to test the practice side of it. How do we engage with regulatory bodies, with industry associations. So that data is getting into the hands of people who can actually say, "This is useful, I know what to do with it, I can now target a response and I can prioritize places where action is most needed."

That's great. Yes. I mean it's just a great example of how we're taking both a business and then business approach to it and a compliance bridge to it, but then complementing that with philanthropy to change the underlying systems development nascent technologies and really help everybody benefit from our focus in the space, which is the outcome that we want to see. So I think a great illustration of work in this space and our overall approach. I appreciate those responses. Next question that we have. We've received a number of questions around human rights risk and how we kind of value -- how we approach human rights risk and supply chains. So can you speak to our corporate processes and provide some examples about how we approach human rights risk and supply chain. So I'll start with, again, business first and then probably philanthropy. So Kristen, if you can start out and then Karrie, if you can come in after that and talk about our purchase as well.

Yes, that's a great question as well. And with the supply chain and the company as robust as ours is, it's helpful to break down our thinking on human rights into a few different levels. One being governance, 1 being risk analysis and another being deep dives into specific issues. So at the governance level, we have a cross-functional human rights working group that supports Walmart teams in advancing respect for human rights throughout our business. The working group includes representatives from various functions, including ethics and compliance, global people, which is Walmart's human resources organization, labor relations, responsible sourcing, our culture, diversity and inclusion group, global responsibility, government affairs, corporate communications and our legal partners. The working group reports to the ESG Steering Committee, which is a management committee composed of leaders from various Walmart teams that reviews ESG issues and priorities here at Walmart. The ESG team as part of global responsibility coordinates this human rights working group. In addition, our Chief Sustainability Officer and Executive Vice President of Corporate Affairs; provides regular updates about our ESG initiatives, including those related to salient human rights issues to the Nominating and Governance Committee of Walmart's Board. So on the analysis piece, we use the risk-based auditing system that I've discussed already. This allows us to make sure we're focused on the most salient issues arising in our supply chain and the geographies with the greatest exposure and it allows us to target our efforts appropriately based on what we see. Walmart's responsible sourcing team conducts an annual risk assessment, as I mentioned. We utilize internal and external data to better understand social compliance risks in our supply chain and specifically as it relates to certain geographies and certain commodities. We take a risk-based approach to auditing our suppliers disclosed facilities by allocating more resources to facilities located in regions with greater potential risks, as I described earlier. So these audits focus on a variety of issues, including worker compensation, voluntary labor practices, working age laws and standards, working hours and facility health and safety standards. And in addition to monitoring our suppliers' facilities through our audit program, Walmart investigates alleged violations of our standards for suppliers that we detect through various reporting mechanisms, including internal referrals, work agreements mechanisms such as the Walmart Ethics Helpline and many other channels that we maintain for reporting. We also respond to issues that we see in NGO reporting and in the media in this way. And so substantiated findings, like I said, result in consequences for our suppliers or their facilities or both up to and including termination of business with Walmart. And I see a question, then I'll go ahead and address while we're on this topic about the effectiveness of our helpline and how do we know it's working. I would say that we have a very robust helpline and reporting process and we know it's working because we see the calls coming in each year. And last year, we opened just around 700 investigations into reports and concerns. So I think you can see from the volume that we have a robust process in place for receiving allegations and reviewing them.

Karrie, anything you wanted to add on just the end of this question on the human rights of purchase.

Sure. And I think Kristen touched on a lot of them. I'll maybe just go a little deeper on how we utilize perspectives from external stakeholders, NGOs, public reports and how we use philanthropy to extend that even more. So one of the ways that we use philanthropy is helping to invest in, I mentioned prevalent studies earlier. How do we better understand as a sector, not for Walmart, but how does the world better understand where risk is and how we can prioritize. So for example, we've worked with international justice Mission on understanding prevalence in seafood with Wilson Institute [ and produce ] in the North American corridor all focused on workers and potential risks so that we have more data to be able to target that work. We also engage with stakeholders to pull out perspective. So that includes issues identified by the workers themselves. Through the foundation, we have supported organizations like [ ITSA Institute ], Polaris, Sieto, they're all doing important work to really generate the data and understanding of prevalence and issues and give workers avenues to raise concerns that aren't about any 1 retailer or any 1 company, but are actually about the system in the sector overall. We also do this kind of deep dives into the priority topics. So Kristen touched on our work on economic opportunity and livelihoods. One of the things we know as we look at how small-scale producers are developing is that there are issues around gender equity for who is leading a farm, who is leading a business and how we can bring leadership and skill development for women producers so that they can take more of that leadership role. We have focused approach there. What are the barriers? What are the particular gaps and how do we utilize our programs and support to try to get at some of those issues? That might mean leadership development, working with farmer producer organizations where women are not only members but sitting at board level, enhancing skills and capabilities around production, focusing on things like crop management and diversification or connecting women, particularly with financial products or technology products that can help them step into some of those roles. So it's really about identifying for each of these places. Where are their particular issues? What are the tools that we can put and how do we take those barriers and really lean in and develop our programs to support them.