Good day, and welcome to the HP Inc. Fourth Quarter 2020 Earnings Call. [Operator Instructions] Please note, this 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, everyone, and welcome to HP's Fourth Quarter 2020 Earnings Conference Call. With me today are Enrique Lores, HP's President and Chief Executive Officer; and Marie Myers, HP's Acting Chief Financial Officer. Before handing the call over to Enrique, let me remind you that this call is being webcast. A replay of this webcast will be made available on our website shortly after the call for approximately 1 year. We posted the earnings release and the accompanying slide presentation on our Investor Relations web page at investor.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 related to 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 and Form 10-Q. 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 in HP's Form 10-K for the year ended October 31, 2020 and HP's other SEC filings. During this webcast, unless otherwise specifically noted, all comparisons are year-over-year comparisons with the corresponding year-ago period. For financial information that has been expressed on a non-GAAP basis, we've 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'll turn it over to Enrique.

Thank you, Beth. And thank you, everyone, for joining the call today. It remains a difficult time for so many across the world. I hope you and your families are safe and healthy. Today, I will recap our strong Q4 and full year financial results, and I will discuss the significant progress against our Advance, Disrupt and Transform strategy. Let me start with the strength of Q4, where we drove improvement relative to the third quarter in revenue, operating profit, non-GAAP EPS and cash flow. We are encouraged by the signs of improvement in our business as we continue to navigate a dynamic macro environment. For the quarter, we delivered revenue of $15.3 billion, flat year-over-year in constant currency. Non-GAAP EPS of $0.62, up 3% year-on-year. And we generated free cash flow of $1.8 billion. For fiscal '20, despite the pandemic, we delivered on the full-year non-GAAP EPS and cash flow outlook we gave at our Analyst Day last year. For the full fiscal year, we delivered revenue of $56.6 billion and non-GAAP EPS of $2.28. In addition, we generated strong free cash flow of $3.9 billion, and we returned $4.1 billion to shareholders through share repurchases and dividends while making appropriate investments in the business. Looking at our performance, 2 themes stand out that are consistent across both print and personal systems. HP's broad and differentiated portfolio and leadership across consumer and commercial markets makes our company more resilient across business cycles. And secondly, our operational execution, including our disciplined pricing, strategic cost reductions and supply chain agility, help us navigate in a very dynamic environment. Underpinning it all is a purpose-driven culture built on strong corporate values. Our founders used to say that the greatest competitive advantage is doing the right thing at the worst time. And our…

Thank you, Enrique, for the kind introduction. It's great to be with all of you today. Q4 was a strong finish against a tough 2020 backdrop. With that said, our performance reflected the company's multiple profit levers, solid execution and resiliency. Before diving further into Q4, let me quickly recap FY '20 for the full year. We delivered revenue of $56.6 billion, down 2% in constant currency. We grew non-GAAP EPS 2%, which continues our trend of growing non-GAAP EPS every year since separation. We generated $3.9 billion of free cash flow, above our full year guidance. And we returned $4.1 billion, or 105% of free cash flow, to shareholders. Importantly, we've delivered these results while investing in our business for future growth and efficiency during the global pandemic. Our foundation is strong, including our balance sheet, and we have multiple levers to create value for our shareholders. Now let's look at the details of the fourth quarter. Q4 net revenue was $15.3 billion, down 1% year-on-year, or flat in constant currency. Regionally, in constant currency, Americas increased 4%, EMEA decreased 1% and APJ decreased 6%. Gross margin was 17.6%, down 1.4 points year-on-year. The decline was due to a combination of a higher consumer mix within both Personal Systems and print hardware and lower rate in commercial print. Non-GAAP operating expenses were $1.6 billion, down $169 million. The decline in operating expenses was driven by our ongoing cost efficiency program as part of our transformation efforts as well as a reduction in discretionary costs. Non-GAAP net OI&E expense was $60 million for the quarter. Non-GAAP diluted net earnings per share increased 3% to $0.62, with a diluted share count of approximately 1.4 billion shares. Non-GAAP diluted net earnings per share excludes a net expense totaling $167 million related to…

[Operator Instructions] Our first question today comes from Katy Huberty with Morgan Stanley.

Congrats on the quarter. The recovery in printing revenue was particularly impressive, especially with supplies revenue getting back to flat year-over-year in constant currency. But the operating margin was below your long-term range, and you're talking about getting back to that 16% to 18% operating range in the first quarter. So just curious what held operating margins back in the fourth quarter? And what are the factors allowing you to expand margins sequentially going into the fourth quarter? And then I have a follow-up -- or the first quarter? And then I have a follow-up.

So thank you, Katy. So let me provide you with some color around the print OP rate in Q4. So first of all, I'd start out by saying we had strong consumer hardware unit placements, which as you know, have negative margins upfront, coupled with the softness in commercial parts of our business, such as graphics and 3D, combined with lower volumes and higher costs. We're absorbing those costs across the portfolio. Plus, there has been some volatility that we experienced in our supply chain which resulted in some additional costs in the quarter and also in areas such as logistics, where we had a mix -- a higher mix of air shipments. So the print OP rate was also partially offset by supplies volume and pricing discipline. And in summary, that's what drove that decline in the rate in the quarter. As we look forward to Q1, there are some headwinds and tailwinds on cost. And we do expect that there will be some higher logistics costs, particularly in using sort of a stronger mix of air, but we do have some onetime-related COVID supply chain costs that we expect will be lower going into Q1.

Okay, great. And then I appreciate you don't guide to revenue, but if we think about the PC and print revenue trends heading into the fiscal first quarter, what do you think those will look like relative to historical first quarter seasonality?

Katy, thank you for the question. We expect most of the trends that we saw in Q4 to continue during Q1. If you look at the comments we made during the prepared remarks, we have seen very strong demand on the consumer side of both print and Personal Systems, strong demand of notebooks. We expect this to continue. While we also expect some of the limitations that we have from a supply chain perspective, because of availability of components, to stay at least through the first half of next year. These are kind of the key trends from the revenue side.

Our next question comes from Toni Sacconaghi with Bernstein.

You commented a couple of times about a restock in printing. And I'm wondering if you can elaborate on specifically where, what magnitude and what parts of print supplies versus consumer or commercial hardware that was. It does look like the U.S. uniquely accelerated its growth rate in the quarter, whereas Europe and Asia were kind of flat to down. So was this rebuild in supply for channel partners largely centered in the U.S.? And I have a follow-up, please.

Toni, thanks for your question. Let me unpack the piece specifically around supply channel inventory. So there are a few drivers and there's a few different things going on in the quarter, so let me give you some context to you. So first of all, consumer demand, as you know, is being driven by this whole work and learn from home due to the pandemic. So it was offset by lower commercial printing. But in addition, we had better discipline in pricing in the quarter that was significant. And to put it in context, there were supply chain disruptions that we experienced earlier in the pandemic, and we've been doing some replenishment of our stock and channel partners in Q4 to help meet some of that demand from our customers. And we do expect to see that in Q1 as well. So -- and just in closing, finally, in supplies, we are below ideally where we'd like to be in terms of being below our ceiling on channel inventory. And maybe I'll turn it over to Enrique to give some context about...

Yes. Let me address your comment about geographies, Toni, because when we look both at PC and printers in both hardware and supplies, our performance this quarter was more driven by supply chain than by demand. We are still limited in some of our -- in many of these categories from a supply chain perspective and the performance differences that you saw across regions were driven by how we allocated product not by where demand was coming from. We had very strong demand on the consumer front for consumer -- for PCs and for printers for every geography of the world.

Okay. I'm going to use my follow-up to push a little bit on my first question. The supplies growth rate going from minus high-teens to essentially flat seems extraordinary. And it almost feels like in prior quarters, you drew down channel inventory. So that exacerbated how poor supply was because you didn't have availability. And this quarter, you replenished it. And all investors care about is, what is normalized supplies growth going forward? So it would be really helpful if you could speak to, specifically, how much restocking improved your supplies growth rate this quarter? And when we look to 2021, what is the realistic supplies growth rate for the year?

Thank you for the question, Toni. As you know, we are not guiding anymore on supplies, but let me give you some color that I think will help you to understand in more depth what Marie was explaining before. During Q2 and Q3, we experienced some supply chain shortages that reduced our ability to supply demand to many of our key resellers. And this definitely, during Q4, as demand has continued to be very strong on the consumer side and sellers have replenished their stock, this has been a tailwind for us in the business. We expect this to continue in the early part of 2021 because we continue to see very strong demand on the consumer side of supply. This consumer demand is really driven by people working from home and kids learning from home, which we also think is going to continue still for a few quarters, which is one of the reasons why our guide for Q1 was stronger than what market was expecting, because we expect to see this to continue happening. And finally, another element of the performance in supplies this quarter was the discipline in pricing that we drove. You probably have noticed that given the availability issues, we have removed promotions. There are very few promotions happening with HP supply. And this, combined with very disciplined pricing across the world, has also had a positive impact on revenue -- on supplies revenue this quarter. And again, some of it will continue -- we expect to continue in Q1.

Our next question comes from Amit Daryanani with Evercore.

Congratulations on a nice print, quite literally, from you guys. I guess my first one is on free cash flow. The performance here, I think in October quarter, is certainly much better than what most of us had modeled. So I'd love to understand, how did October quarter free cash flow stack up versus your expectations? And I guess when I think about the underlying levers behind the free cash flow, was there any pull-in from the early part of next year that sort of helped you guys out? So I would love to understand the levers beyond the free cash flow strength and any sense on how we should think about qualitatively or quantitatively about fiscal '21 free cash flow.

Sure, Amit. Look, first, I would start-up by saying, look, we're really pleased with our results here and what we saw in the quarter. As you know, we drove $1.8 billion free cash flow in Q4 and $3.9 billion in FY '20. And it was a record actually in a single quarter since the split. So that cash flow strength that you saw was really stronger-than-expected due to higher earnings, and frankly, the benefits of working capital, particularly in inventory and AP. And as you know, as we look forward into '21, just keep in mind that typically, our Q1 cash flow is usually lower, given normal seasonality.

But the key -- as Marie was saying, the key drivers of free cash flow in Q4 were the strong earnings that we had and the benefit from working capital that is really, in many cases, driven by the strength of our Personal Systems business that we have commented before. And we are very pleased not only with the results of Q4, but really with the results of the full year where we have delivered the cash flow -- the free cash flow that we expected to see before the pandemic and that we shared with all of you in our investor meeting a year ago.

Got it. And then if I could just follow-up on the supply side, obviously, the performance is much better than what I think, what you're seeing in the industry or your peers are seeing. But I'd love to understand, I mean, is there a bigger share gain dynamic or even a better mix dynamic because you've talked about consumer and SMB a fair amount, and I would imagine they tend to skew more ink-heavy, which might be much better for HP versus not. So could you just maybe talk about, is the mix shifting and that's perhaps giving you better sustainability for supplies as we go forward? I would love to just get better sense over there.

Yes. Let me explain the dynamics that we are seeing in the print side. When we have 2 strong businesses in print, commercial and consumer, and our consumer business is getting a lot of benefit from people working from home, keep learning from home, and this has driven a strong demand for printers and strong demand for supply. Usage is above the expectations that we had before the pandemic started, and this is clearly having a positive impact in our business. On top of that, you know that our competitive position is relatively stronger in the home side, we have higher share of printers, higher share of supplies, higher share of pages. So as more demand goes to consumer, and to home, we clearly get a benefit from that. On the commercial side, we continue to see the impacts of the pandemic. The printing volumes continue to be significantly below where they were before the pandemic. Through the quarter, we have seen some improvement. But clearly, on the commercial side, still the pandemic is having a strong negative impact.

Our next question comes from Jim Suva with Citigroup.

Congratulations on the results. I just have one question, and you can just answer it any manner you want. But the average life of a PC and also printers, it used to be kind of pretty consistent, I believe, around 4 years. Now that we're in a world of coronavirus and splitting time from school-at-school and school-at-home, and work-at-work and work-at-home, any thoughts about the average life of the PC? Will it be longer or shorter because you're using it in 2 different locations? Or how should we think about that as we go forward?

Let me answer both, or what are we seeing for both PCs and print. In the case of PCs, more than the life of PCs changing, what we are seeing is a significant increase in the demand of PCs. PCs have become essential. People need it for working, for learning, for gaming, for entertaining for communicating. And the trend that we see is that for every person to have their own PC, and this is really driving significant demand on the PC side. On the printer side, what we see happening is both, we are seeing the additional demand for home printers as people and kids are learning and working from home, but we have also seen an extension of the life of printers because as people need to print, they are taking printers that have not been used for a while, and they are buying supplies for them, and they are using them. So you could position this as an extension in the life of the printers, which for us, of course, is a very positive impact because it means we allow people to enable people to print without having to invest in them buying a new printer.

Right. But my question is, once the -- everyone has a PC at home and a PC at work. After this has passed, any thoughts on the life of the PC after that essential purchase has been made? Do you think those kind of will still be the same length, or shorter or longer?

I think we are still far from that position, Jim. We -- far from everybody having access to a PC in every -- in each of the countries where we do business. So we -- this is why we are confident that the demand for PCs is going to remain very strong during the next quarter. At the same time, in some areas, as you are saying, we are seeing there is so much need for PCs that PCs are being refurbished. Old PCs are being used. So we too could position as an extension in the life of the PCs. But we see this as a more short-term effect. What is really driving demand, and there is a long way to go, is the demand for every person to have their own PC.

Our next question comes from Shannon Cross with Cross Research.

I wanted to ask about your graphics and 3D printing business. I think you mentioned on the call that it was remaining weak, which was one of the impacts to operating margin in the printing business this quarter. How are you thinking about a rebound there? What are you hearing from customers in terms of willingness to take capital equipment or make capital equipment purchases? And perhaps maybe an update on your 3D printing business in general. And then I have a follow-up.

Sure. So yes, we shared during the prepared remarks that both our industrial graphics printing and 3D printing overall continue to be impacted negatively by the pandemic. We have seen companies slowing down their investments in capital equipment and in industrial equipment overall, and this has impacted both businesses. What we have seen though is in many of the strategic areas that we have defined for those businesses, significant growth. We are seeing significant growth, for example, in labels and packaging, where both in flexible packaging and corrugated packaging, pages or, let's say, square feet and [ liters ] of ink are growing double digit year-over-year, which is a great confirmation that both that this business has a long-term opportunity, even if in the short term, it's been negatively impacted by the pandemic. And I would make similar comments for 3D. The investment in printers is being impacted by companies reducing their investment, but we continue to see the long-term opportunity. And we mentioned in our prepared remarks, a very important introduction for us this quarter, because we have shared in the past that we see in the future the need to complement our business in printer and supplies with the ownership of some end-to-end applications for high-value applications. And with the launch of our solution to create tooling for molded fiber, we are starting to move in that direction, which will allow us to capture more value as customers will be able to do with 3D printing, things that were not possible to do in the past.

Okay. And my second question is with regard to your new print model, the HP Plus brand, which you just started to roll out. I realize it's early. But I'm curious as to how the conversations are going with Staples? Any initial conversations you've had with anyone, what you've seen on hp.com? And I think there's a call with -- in next week or in a couple of weeks, but I'm curious what you can tell us.

Yes. Let me start from that. Since we know this is a topic that -- where there is a lot of interest. We have organized a special session with one of the teams where they will go in a lot of detail both about the model, the progress we have made and the plans that we have to roll it out across the portfolio and across the different countries during next year. But let me give you a few highlights now. First of all, we continue to be very excited about the opportunities that this new business model is going to create. We -- as you said, we launched this solution a couple of weeks ago in Staples. We launched 2 -- 3 printers, 1 laser printer and 2 ink printers, where we are starting to show the incremental value that it brings to loyal customers. So far, it's early to say what the reaction is, what we are encouraged by the initial responses, but we need to wait and see how it goes. But we continue to be very excited about the value this will create.

Our next question comes from David Vogt with UBS.

Maybe a little bit of a different topic. Can you give us an update on your structural cost reduction program? I think you mentioned on the call that you had exceeded your first year target of roughly 40% of the gross savings. What does that mean for year 2 and year 3 from a timing perspective and a magnitude perspective? And then I have a quick follow-up.

Sure, thanks. So as you know, that's actually my other role. And I would say, look, we're just very pleased with the progress and the program is very much on track. In terms of FY '20, we're ahead of schedule and higher, actually, than the 40% cost reduction plan that we'd originally highlighted. So I just would like to note that the OpEx reduction that you've seen this year were both a combination of structural and temporary reductions in areas like travel, events, et cetera, where we've been opportunistic because of COVID. So we are committed to staying on track and hitting our plans, and we do expect to achieve at least 75% of the $1.2 billion goal in FY '21.

Great. That's helpful. And then maybe just as a quick follow-up. In terms of your cash flow dynamics balanced by sort of the macro uncertainty that you talked about in your prepared remarks, has there been any change in thought in terms of how you would think about deploying your balance sheet, whether it's a change in maybe your target gross leverage ratio? Or I know you raised your dividend? Or is there any other sort of potential changes in your thought process from a capital allocation perspective?

Thank you. We continue to remain true to the principles that we outlined in the value plan. Let me remind them to -- everybody, so to make sure we -- everybody is on the same page. We increased our leverage -- our target leverage ratio between to 1.5 and 2. We have committed to return 100% of our free cash flow over the long-term, unless higher return on investment opportunities show up. And this is what we plan to continue to do in the future. In the short term, we have increased the amount of shares that we buy every quarter. We bought this quarter $1.3 billion of share. We have announced that we plan to continue to buy at least $1 billion of shares every quarter during the following quarters. We have additionally increased dividend by 10%. And what we have also decided is given the uncertainty that we still see in the world, we're going to remain, for the foreseeable future, in the low side of the leverage ratio because we think it's the right thing to be prudent at this time given that many things could evolve in the world in the last 2 -- in the next 2 or 3 quarters.

Our next question comes from Rod Hall with Goldman Sachs.

I wanted to come back to supplies and see Enrique, if you could talk a little bit, you mentioned that you removed promotions, and that's had a positive pricing effect. I wonder if you could talk about how much of a pricing effect that's had on a year-over-year basis. And then I have a follow-up to that.

Yes. We don't disclose the specific details. I can tell you, this has been one of the key drivers of the revenue improvement that we saw in Q4. And as I said before, we expect it to continue to happen in Q1 and the early part of next year. And also, I would say that from a share perspective, we are meeting -- if we put aside the geographical differences, we are also meeting our share goals that we announced a few months ago. And the combination of usage, higher pricing, good results and good progress from a share perspective and some of the onetime effects that Marie was talking before are driving the performance that we see in supply.

Okay. And then my follow-up to that was the other side of that equation, the unit declines in supplies. I wonder if you could talk about whether those were similar to Q3? Or were they lower than Q3?

I guess, you mean the number of pages in commercial?

Yes. Yes.

So let me give you some color...

Not commercial. Total supplies units, however you want to quantify that.

Yes. So let me give you some color on what we have seen. During Q4, if we look at Q4 compared to Q3 and the number of pages printed, there is an improvement between Q4 and Q3. But if we look at the evolution month by month, during the month of -- the 3 months of Q4, usage has been fairly stable, similar to what we saw at the end of Q3. So improvement quarter-on-quarter, but not much improvement since the end of Q3. In fact, what we have seen during the last few weeks, and this is more a Q1 comment, as with the pandemic growing and the number of cases growing in many countries, we have seen, again, a slowdown in the number of pages printed in commercial customers. And this is something that, of course, is already -- is built in our guide and built in the projections we have made.

And our last question today comes from Matt Cabral with Crédit Suisse.

Yes. You mentioned on the PC side that you're seeing some elevated backlog exiting the quarter. Just wondering if there's any way to quantify that and talk about how big of a drag that was on the quarter. And then thinking about the supply constraints from here, just if you can comment on where you're seeing the biggest bottlenecks? And how long you think it will take to reach supply-demand balance going forward?

Sure. Let me take the question. And I'm probably going to sound like a broken record because during the last 3 calls, I have been talking about the limitations that we have been facing because of supply availability. Let me tell you, this quarter, we faced significant. In fact, the backlog that we have at the end of Q4 is the biggest we have ever had. So it's not that the difference between supply and demand is being reduced, it's actually been increased. But it's all driven by increases of demand. Demand is easily driving. It continues to grow. And we expect that this situation will continue at least through the first half of our fiscal year 2021. So it's happening and it's here to stay at least for a couple of quarters.

Got it. And then speaking on PCs, it seems like there's a lot of moving pieces around margins heading into 2021. just wondering if you could talk about the puts and takes into Q1 and beyond on the PC side, and how we should think about things like the impact of Chromebooks versus desktops on mix and the impact of component costs going forward?

Matt, it's Marie. Maybe I'll take your question. So let me give you some color around the PS Q1 outlook. So we do expect those margins to be similar to Q4 back in the 3.5% to 5.5% range. But I think a couple of points. First of all, the trends around work and learn from home are going to continue, and that will definitely continue to drive that mix to notebooks, and particularly into like those lower end ASP products. But we expect that to be somewhat offset by pricing discipline. And then from a revenue perspective, it will be slightly below normal seasonality given those supply constraints that we talked about, and our backlog will continue to remain elevated. So I think finally, supply chain is normalized, but there are some constraints around panels and CPUs, and this may impact our ability to meet that demand for notebooks. Thank you.

So thank you, everybody, for joining the call today. Before I wish you a great Thanksgiving for those of you living in the U.S., let me close with a few thoughts. What you saw during Q4 was the strength of the portfolio that we have. And the fact that we have a leading portfolio, both in consumer and commercial has really allowed us to deliver these results and to navigate the pandemic in a very strong way during the last quarter. We have also showed that the teams have really executed in this difficult time and they deserve a lot of credit in terms of their ability to identify opportunities, pivot the company and drive the maximum value that we could from those opportunities. We are very confident about Q1 and the guide that we provided today. Fiscal year '21 though, we have still a lot of uncertainty given where we are in the pandemic, but we know how to navigate the situation, and we know that -- and we are confident that we will continue to create value for our shareholders during next year. Thank you.

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