Good day, everyone and welcome to the Q2 2018 HP, Inc. Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] And please note that today’s event is being recorded. I would now like to turn the conference over to Beth Howe, Head of Investor Relations. Please go ahead.

Good afternoon. I am Beth Howe, Head of Investor Relations for HP, Inc. and I would like to welcome you to the fiscal 2018 second quarter earnings conference call with Dion Weisler, HP’s President and Chief Executive Officer and Cathie Lesjak, HP’s Chief Financial Officer. Before handing the call over to Dion, let me remind you that this call is being webcast. A replay of the webcast will be made available shortly after the call for approximately 1 year. We posted the earnings release and the accompanying slide presentation on our Investor Relations webpage at www.hp.com. As always, elements of this presentation are forward-looking and are based on our best view of the world and our businesses as we see them today. For more detailed information, please see disclaimers in the earnings materials relating to the forward-looking statements that involve risks, uncertainties and assumptions. For a discussion of some of these risks, uncertainties and assumptions please refer to HP’s SEC reports, including our most recent Form 10-K. HP assumes no obligation and does not intend to update any such forward-looking statements. We also note that the financial information discussed on this call reflects estimates based on information available now and could differ materially from the amounts ultimately reported on HP’s Form 10-Q for the fiscal quarter ended April 30, 2018 and HP’s other SEC filings. During this webcast, unless otherwise specifically noted, all quarterly comparisons are year-over-year comparisons with the corresponding year ago quarter. For financial information that has been expressed on a non-GAAP basis, we have included reconciliations to the comparable GAAP information. Please refer to the tables and slide presentation accompanying today’s earnings release for those reconciliations. And now I will hand it over to Dion.

Thanks, Beth. Let me start by saying it’s great to have you back on the Investor Relations team. I am quite pleased with our Q2 performance. It’s yet another quarter of strength, growth and consistent execution of our reinvention. We are creating opportunities and taking advantage of favorable market dynamics to deliver strong revenue and profitability across our segments and our regions. This was our 10th quarter since separation and you are seeing a sharp focus on innovation and execution, continued improvement on our business fundamentals, and an intense focus on long-term and sustainable growth. Our winning formula is straightforward. We are focusing on delivering operational excellence, predictable shareholder returns and prioritizing profitable growth, all aligned to our core growth and future strategy. Looking at our Q2 fiscal year ‘18 results, we added $1.6 billion to the top line growing revenue 13% to $14 billion. We grew top line and bottom line in both Personal Systems and Print. We delivered nearly $1 billion of free cash flow in the quarter and repurchased $800 million of stock and we delivered non-GAAP EPS of $0.48, an increase of 20% and at the higher end of our range. The market remains dynamic and competitive, but I am confident in our strategy and ability to continue to grow faster than the market and out-execute the competition. We are playing our own game pursuing the heat in the market and our strategy is paying off. Let me review some of the highlights. Personal Systems delivered another exceptional quarter. Net revenue was up 14% and that comes on top of 10% growth a year ago on quarter two. This is now six consecutive quarters of double-digit growth. This performance and the innovation coming out of this team is nothing short of incredible. HP continued to outperform…

Thanks, Dion. I have been privileged to serve as CFO for the past 11 years or as you noted 46 quarters, but who is counting. It has been an honor to work as part of the team with so many outstanding dedicated employees during a time of tremendous change and reinvention. With Steve taking over as CFO, I am convinced HP is in excellent hands. As many of you already know, Steve is an experienced finance and Investor Relations executive with a deep understanding of HP. He will be an outstanding CFO and a great successor. Now, looking at the results for Q2, we continue to deliver consistent results, with strong revenue growth and increases in operating profit dollars, free cash flow and earnings per share. Net revenue was $14 billion, up 13% or up 10% in constant currency. Our performance remains strong across businesses and geographies. Regionally, Americas grew 7%, EMEA was up 21% and APJ grew 13%. Gross margin was 19.3%, up 10 basis points year-over-year. Sequentially, gross margin was up 150 basis points higher than normal seasonality primarily driven by favorable rate in Personal Systems and improved mix. Non-GAAP operating expenses of $1.7 billion were up 16% driven by the addition of S-Print, along with incremental R&D and go-to-market investments to support growth. Non-GAAP net OI&E expense was $84 million for the quarter, with a non-GAAP tax rate of 16% and a diluted share count of approximately 1.6 billion shares. We delivered non-GAAP diluted net earnings per share of $0.48. Non-GAAP diluted net earnings per share primarily excludes restructuring and other charges of $57 million, acquisition-related charges of $45 million, amortization of intangible assets of $20 million, debt extinguishment cost of $126 million as well as non-operating retirement related credits of $53 million and the related tax…

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first questioner today will be Steve Milunovich with UBS. Please go ahead.

Thank you and congratulations to you Cathie and Steve. Cathie, do you expect the printer margin to rise sequentially through the next two quarters or whether that will be offset by the higher raw material costs and higher unit placements? And specifically what raw material costs are you referring to that are going up?

Sure. So, in terms of the raw material costs what we are really seeing is increases in resin, plastics as well as DRAM, because there is DRAM also in the printer. Resins and plastics are largely up as a result of oil prices increasing. So that’s where what we are seeing there. In terms of how to think about the OP rate over time, we don’t really have an explicit rate for operating profit for print in any particular period. We do long-term expect that the margins will be 16% to 18%, which we talked about at SAM, which was pretty consistent with what we have seen historically. When you think about the progress in the, I would say, near to mid-term the way to think about it is as we integrate S-Print, ramp the A3 business as well as the 3D business and execute on our productivity initiatives, we do expect that the margins will improve from the 16%, but that’s really a kind of a mid-term kind of comment.

Okay. And could you update us in terms of the buyback, I am not sure last quarter you were at that point ready to talk about the use of repatriated cash and so forth?

So in the first half, we repurchased shares for a total price of about $1.3 billion. In the second quarter, we did about 800 million of share repurchases, which is higher than what we have typically done. When we look forward to the rest of the year, we will be active in the market, but the second half will really be consistent with our capital return priorities. So, we have talked about the fact that we are going to be towards the higher end of 50% to 75% of our free cash flow this year and our buying in the second half will be consistent with that. And keep in mind that, that towards the higher end of 50% to 75% applies to now the increased free cash flow of at least $3.7 billion for the year.

And our next questioner today will be Paul Coster with JPMorgan. Please go ahead.

Yes, thanks for taking my questions. So, I will move it to one if I may. Cathie, if you can just give us some sense of what the organic versus the acquired growth rate for the printer business was that would be helpful? And Dion, I guess we are seeing some potentially transformative consolidation taking place in the printer industry, arguably part of the end game, it must be trying for opportunities and risks. Can you just talk to us about what the near-term tactical opportunities might be given some of the strategic uncertainty amongst the two players? And also how it’s changing your view of what HP will do during this end game?

So, why don’t I start? Paul, as we talked about, I think it was last quarter or maybe even the quarter before, we are integrating the S-Print business into the core HP print business frankly as fast as we can. And the reason for that is that it’s going to drive shareholder value. So as a result of doing that, there isn’t really a way to meaningfully separate what is organic growth versus inorganic growth for the Print segment. I think the best way to think about it is that Print by all means has had a very strong first half in terms of performing. We are very pleased with the top line growth as well as the unit placements, the margin expansion and frankly the supplies revenue growth as well.

And thanks Paul for the question, the print industry is no different to the Personal Systems industry. I think we have seen the Personal Systems industry consolidating over many years and it’s still consolidating today and we are able to continue to grow in the Personal Systems businesses as you’ve seen us do double-digits for the past six quarters by playing our own game. And I think the Print business is no different. There is not room in an essentially flat market for 14 players. And so I think naturally over time that market will consolidate as well, but I don’t subscribe to the fact that it has to be done through acquisition. I think we made a very strategic execution of the Samsung print business that was a technology acquisition as well as an acquisition of some incredibly talented people, but it wasn’t a market share play. As we look at the market today, we feel that from a technology perspective we are very well positioned in both ink as well as laser in A4 as well as A3 and we continue to move towards a service-orientated business. And so by adding the sprinkles of magic that we do across the portfolio, I expect that we can outpace the market. Having said all of that, I have always said that M&A is an important part of our strategy that we wouldn’t surprise anybody, any of our investors or the industry with what we would do that. When we do think about M&A, it would leave somewhere on our strategy page and would need to bolster our strategic intent and accelerate our strategy that it will be returns based and it would be weighted against other organic options and alternative uses of cash that it would come at a reasonable cost and be modest in size and that we’ll remain thoughtful and disciplined and ensure that the opportunities are compelling and will maximize shareholder value.

And our next questioner today will be Sherri Scribner with Deutsche Bank. Please go ahead.

Hi, thank you. Cathie, you mentioned the operating expenses were up a little bit sequentially related to the S-Print acquisition. Can you maybe help us think about how operating margins will trend now that Samsung is in the business? Should we seem operating expenses at these levels or do you expect to be able to bring operating expenses down somewhat as we move through the year based on the cost-cutting initiatives?

Sure. So, Sherri, what I actually said was the OpEx is up largely as a result of S-Print, but not exclusively. We are also – we have made incremental investments in R&D and go-to-market as well and I believe that those will continue. Now, clearly when you look at either the total company or specifically the print business, our S-Print business has been in investment node in the first half. And as we talked about at the total company level that it would be accretive by about $0.01 in the full year. So, we do expect it to shift to making some money, which is always good. But keep in mind that even as it makes the money, it’s going to be dilutive to operating margin rates. I think that, that’s very important when you think about the trajectory of the print operating margin rate in fiscal ‘18.

Okay, great. Thank you. And then just looking at the supplies business, it’s trending very strongly and clearly you have turned that segment around, how should we think about growth in Supplies, I think we have talked about kind of flat maybe slight growth this year, I know there is some inorganic pieces in there, but it seems like you are trending well ahead of that supplies?

So, Sherri, what we expect that kind of the sum of Q2, Q3 and Q4 on a year-over-year basis that we would say see 5% to 7% growth in constant currency. That’s what we expect for FY ‘18. For FY ‘19 we expect that supplies will be flat to slightly up. Once we have an apples and apples comparison with S-Print in both years.

And our next questioner today will be Toni Sacconaghi was Bernstein. Please go ahead.

Yes, thank you and congratulations Cathie on your tenure and all best wishes for the future.

Thank you.

I have a question and a follow-up please. First on PCs, ASPs were up about 7% year-over-year and we have seen real strength in ASPs for the last several quarters. Perhaps you can help us understand how much of it you think is coming from DRAM versus changes in your mix like gaming and accordingly sort of how sustainable once DRAM starts declining, how sustainable are ASP increases in PCs going forward or what’s sort of the right way to think about ASP changes in a more normalized environment? And I have a follow-up please.

So Tony, we saw good progress as you mentioned in ASPs both year-over-year as well as sequentially. And in both cases, the positive mix shift that we are driving into premium is having a significant impact on the ASPs and we believe that those will continue to be the case. We also saw as you mentioned we definitely saw some help from DRAM pricing or pricing that we took as a result of commodity cost increases. And depending on what happens to commodity costs that piece will obviously go up or down. And then from a foreign exchange perspective also with the tougher dollar, we could see some ASP increases as a result of currency as well.

But was the impact from mix greater than the impact from price from DRAM and I will ask my follow-up, just on supplies back to printer supplies, I think last quarter you had said that the contribution from S-Print was about 6 points and I know it’s become more monies now, but would it be fair to sort of assume that the contribution from S-Sprint was sort of in that vicinity this quarter and were there any changes to your channel inventory? I think you said you were under your ceiling, but it’s a little bit of a different commentary from prior quarters where I think you said you were within your range. So just the follow-up on the ASPs and then supplies please? Thank you.

Sure. The impact of mix on ASPs was material and greater than the pricing impact. In terms of supplies, I will go back to what I said earlier, we really have integrated the business here. So, it’s really not – we are really not able to meaningfully determine what was S-Print’s contribution to supplies versus the core, because we are rationalizing SKUs, we are now selling more HP SKUs than S-Print SKUs and therefore are those supplies S-Print supplies or are they HP supplies. So it’s just gotten. It’s not just gotten money, it’s just well-integrated, which is exactly what you want us to do, because that’s what’s going to drive the value. In terms of the channel inventory, I think we changed our commentary I want to say two or three quarters ago, when we really now are managing below a ceiling and we have been consistently below the ceiling for supplies frankly since we made the change to our supply sales model.

And Toni, I think we have consistently said and you and I have talked about it, we have this relentless focus on execution and we have a continued confidence in their predictive value of the full box model, where you can expect us to drive continued improvements across all full boxes to maintain supply stabilization in ‘19. We anticipate the headwinds that Cathie mentioned earlier. We have contemplated them. We have captured them in the expectations and we have guided that for the rest of ‘18 as well as ‘19.

And our next questioner today will be Katy Huberty with Morgan Stanley. Please go ahead.

Thank you, Cathie. My congratulations as well. I have two questions, I will just ask them together. First of all, can you bridge the $0.05 guidance increase on EPS from roughly $1.95 to $2 at the midpoint? And then secondly from a free cash flow perspective, if you look at the last couple of years over half of free cash flow came in the back half of the year, which would suggest that you could do $4 billion plus this year, why is seasonality different this year versus the past couple of years?

So, Katy since it’s my last call, I think I am going to say if I give an inch you take a mile, I am just on the free cash flow. So, when we look at the first half free cash flow, we are very pleased with the performance. It’s really based on the strength primarily of Personal Systems to use Dion’s term a double-double and a double-double is pretty significant from a timing perspective to cash flow given the negative cash conversion cycle of Personal Systems. We expect Personal Systems to do well in the second half although compares are getting increasingly difficult. So I think that’s one piece. The other piece is that in the first half we did have some one-time positive cash flow items that won’t repeat themselves. And then when you think about the bridge for the $0.05 increase that you talked about, it’s largely as a result of the share repurchases that we did in Q2 that were in excess of what we had originally expected when we provided the guide. So, you have got the follow-on effect of that as well as obviously the share repurchases that we are going to do in the second half consistent with returning towards the high-end of the 50% to 75% of our free cash flow.

And our next questioner today will be Shannon Cross with Cross Research. Please go ahead.

Thank you very much. And I echo the congrats, Cathie. I hope you get to take a nice long vacation sometime in 2019.

Thanks for saying that, Shannon in 2019.

As I say but not before that.

Exactly.

I have got a lot to do, I am not going anywhere.

In terms of the 3D print business, Dion, maybe you can talk a bit about what you are hearing from customers, how you are seeing the ramp, I know you have a few new products that will be coming out this year, so just curious as to how it’s progressing in line or ahead of your expectations?

Yes. Look, I am really excited about the leadership position we have taken in 3D printing and the segment where we operate in a very short period of time, we are on the path towards disrupting this $12 trillion global manufacturing industry. But it’s a long path, I have always said this is a 5 to 10-year journey and we are making the investments today to really secure shareholder value both today and for the future we are seeing significant sales momentum, including repeat orders from customers as well as service bureaus. We are expanding our adoption across key verticals. We are seeing more than 50% of the customer benchmarks. So these are when a customer is contemplating buying 3D printing they will give us a file and they say can you make this path for us who want to see and test this path. And we are of course checking what that path is for and then 50% of the cases therefore production applications, which is really what differentiates us with this technology. And some of the recent highlights, Forecast 3D, one of the oldest and largest 3D manufacturers in the U.S. has expanded its Multi Jet Fusion footprint. It’s upgrading its entire fleet to our 4210 solutions and as they respond to the growing demand, they are expecting to produce millions of parts on Multi Jet Fusion in the coming year. Jabil, one of the largest contract manufacturers is now deploying Multi Jet Fusion in the U.S. and Asia as part of its distributor manufacturing strategy. And this quarter, we also continue to grow unit placement across all verticals and geographies, including new customers in the automotive and electronics industry. And we officially announced our market entry into Mexico as well. So stay tuned this is a great business for the long-term. We remain really confident.

Thank you. And then Cathie, I had a follow-up on cash flow, from like I know I think it’s going to probably kick you if I ask this, but from a 50,000 foot level, this year obviously cash flow has been up year-over-year or should be and so how do we think about it from sort of recurring going forward? Obviously, PCs play into it, but when we think about more sort of the recurring level of cash flow, it should come off the model maybe you could talk about puts and takes that happened this year that will or will not repeat?

Sure. Actually, thank you for the question. I probably should have mentioned this when we were talking about cash flow. Over time, free cash flow basically grows in line with earnings. And so we do get a timing benefit when Personal Systems has a particularly strong growth sequentially, because of course it has a negative cash conversion cycle, but over time, the cash flow that it generates is going to be largely, its profit. And so there is a pull-in for cash. And so over the long-term you should really think about free cash flow being in line with earnings.

Our next questioner today will be Wamsi Mohan with Bank of America/Merrill Lynch. Please go ahead.

Yes, thank you. Congrats to you Cathie from me as well. Your margins have been pretty robust despite these commodity headwinds. Can you just talk about the commodity environment in terms of memory both DRAM and NAND I think you said that some commodities will be a headwind, but how have they changed relative to your expectation from last quarter or are you seeing any impact from extended lead times in some items like passive? And I have a follow-up for Dion.

Wamsi, we have seen an increase in commodity costs. If you think about going back to our security analyst meeting, we actually thought it was going to flatten out in Q4 of last year or towards the end of Q4 of last year. So, we have seen an increase that at that time we had not expected. But as important as commodity costs are as well as by the way the logistics costs are also going up a bit, it’s really about how you respond. What are the tools at your disposal to figure out how you mitigate those types of increases and this team has just done a tremendous job at mitigating and managing in that environment. In fact, I put my money on them in a tough commodity environment. So think about it we have used things like pricing, we have used our supply chain scale, we have leveraged our balance sheet and then to go back to Toni’s question we have done a great job of driving positive mix. And so those are the types of things that we will continue to use to kind of manage this tough environment. And I have every confidence that we will continue to be successful.

Okay, thanks Cathie. And Dion, as a follow-up to the question on the strategic changes that are happening, can you talk about the opportunity if you are seeing any that has been created for HP, particularly in managed print services and in the copier space given some of the events at Xerox and can you give an update on your Ink in the Office initiative as well? Thank you.

Sure. Look, the way I think about change in the marketplace is that change equals opportunity and so whilst these competitors that are distracted with structure and that generally presents an opportunity in the marketplace. So what we are doing is doubling down and playing our own game. If we are out in front of a customer making a call and our competitors are gathered around the water fountain, then we are out in front of the customer and that’s really where we want to be spending our time. I think we have incredible assets inside the organization. We are very focused on managed print services. There is no doubt the business model is shifting even in the traditional A4 space. It’s moving from transactional to contractual that’s happening at a different price in every country, but it is a mega-trend that we certainly want to be out in front of managed print services, we have been doing now for many years. And I think we have really mastered the art of how to manage this for a customer and the pipeline not only for managed print services, but device-as-a-service is really strong, so PC-as-a-service and increasingly customers are looking to have everything both at Print and Personal Systems and workstations and even 3D printing in the future as a service. So we remain focused on that. With regards to Ink in the Office, it’s an important part of our overall strategy. We have two incredible technology platforms. We have an ink-based platform and we have a laser-based platform. And as we talk to a customer, we don’t sell them a technology, we understand what their needs are and inside a customer, every department, every user has an individual need. So the marketing department is going to want laser-based quality. They are going to be wanting really vibrant color when they print proposals, as same with sales inside Cathie and now Steve’s organization. They are a little more frugal and so they want to be able to see red and black, but we would like to see green on headlights, that’s good too, but it doesn’t require the same high-quality, you get incredible quality with ink, but just not that glossy kind of quality. And so that represents a really unique solution. That means that when we go to a customer we can provide this mix of hybrid solutions down to a departmental and individual basis that makes our offerings very unique and compelling. So that’s what we are focused on playing our game.

And our next questioner today will be Amit Daryanani with RBC Capital Markets. Please go ahead.

Yes, thank you. Congrats on mine as well to you, Cathie. I guess two questions. First one when I think about the commentary you guys have on supplies for next year being, I think flat to slightly up? I understand you don’t want to breakdown the delta or kind of breakdown the delta between HP and S-Print, but the supplies commentary would suggest that your installed base is perhaps declining at a faster rate today post S-Print versus what it was before? Is that a fair assumption to take away from your commentary for supplies in fiscal ‘19 and if so when do you see the installed base starting to normalize as you go forward?

Amit, the core HP installed base, I don’t think is declining at a faster rate, but clearly, the S-Print portfolio will decline at a faster rate and part of that’s because of that nature of the units that S-Print put into the markets, but also because we have rationalized SKUs and that’s why it’s not meaningful to talk about S-Print separately from HP, because they are one in the same, the better job we do at integrating, the better value for our investors and the fact to the matter is you can’t separate the two.

Got it. I guess maybe I am trying to get a sense of when do you think the combined installed base starts to normalize and have the same trajectory that maybe HP did a year ago? And maybe just my follow-up by the way, how do you think about FX within your guidance for the full year given the fact you have had some fairly volatile consumables as of late?

So, I think I take you back to the security analyst meeting, where we talked about kind of what we thought was going to happen at the home, the office and the graphics level in terms of the four-box model. I think that’s probably the place to go. So, from a home perspective, we did expect that the installed base would continue to decline, that from an office prospective we thought the installed base with the addition of A3 would be flat, and that from a graphics prospective we thought the installed base would be up. And that gives you a sense of what’s happening from an installed base, our expectations from an installed base perspective.

I think we continue to successfully execute those growth initiatives, but it takes time and we had certainly expected it to take time as we enter into a new $55 billion business, the A3 business, where we have very low market share, we know that it is going to take time to develop that business, but we remain really confident that we will achieve the 12% market share that we set out to achieve by 2020.

And I think it’s important when we talk about S-Print that you separate the A3 business which was a very small part of the Samsung print business. It was really all about the future technology that future with their technology and it’s the A4 piece of the S-Print business that we talk about on the installed base coming down pretty significantly and to Dion’s point as expected.

And you might want to answer the second question on FX?

I am sorry can you remind me the question on FX?

Yes, Cathie. I was just trying to get a sense on how you think about FX and the impact of FX, which has been fairly volatile baked into your July guidance for the full year guide?

Sure. So FX has been very unpredictable and when we think about where the dollar is trading today, we think about revenue kind of the impact of revenue as a result of FX for the total year would be approximately 2 points and obviously most of that impact – the vast majority of that impact was happening in the first half.

And the last questioner for today will be Jim Suva with Citigroup. Please go ahead.

Thank you very much and Cathie you will be missed and the great results and outlook. My question is Cathie, [Technical Difficulty] investment into the Print business. Can you specify was that equal amongst S-Print and your core typical prints or more on the graphics side or the 3D print side, the supply side and maybe allocate – maybe just talk about where these incremental investments are being allocated? Thank you.

So, Jim, the biggest impact to FX was the addition of S-Print in the portfolio from a year-over-year perspective. But as I mentioned, we did make incremental investments in R&D and go-to-market and those are along the initiatives that frankly we have been talking about now for several quarters in A3 figures prominently in that, especially along the go-to-market lines. In terms of the specifics of how much is in the core, in the A3 space, S-Print, graphics, we don’t typically go into that level of detail, but I would say that you think about the initiatives that we have for growth and that’s going to help drive you to where the OpEx investments are being made.

Great. Thanks so much for the clarification and detail.

Great. Well, thank you. We are at the top of the hour. I’d like to reiterate that that I am very pleased with the results of the quarter, but as always, there is more work to do. We never stop. We remain confident in our strategy and our ability to grow. Our reinvention is paying off. And I believe our best is yet to come. And finally, I again want to thank Cathie for her incredible partnership and I look forward to having Steve here on the call next quarter and to speak to you all then. Thanks so much.

And the conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.